A recent conversation with a client led us to an interesting question and strangely honest admission: “I don’t know how exact we are.”
If a non-transportation company has its own fleet of trucks/vans, does that company look at all possible ways to optimally use these expensive and fast-depreciating assets? Should it expand its fleet or shrink it? For clarity of this post, let’s exclude companies that outsource their fleet needs to third parties.
From that conversation, it became clear that challenges arose due to two things: How a company accounts for its costs and whether it clearly understands if owning such assets makes commercial sense.
When it comes to a company maintaining its own fleet, there are two schools of thought:
According to one, a company contracts a specialized transportation company and uses its own fleet to handle contingencies or demand overflows at peaks. In that scenario, the assets sit in the transportation yard and wait. They could idle for hours, days or weeks. Clearly, they tie up working capital.
According to another, a company has its own fleet to serve all internal transport needs and calls on a third-party transportation company to handle contingencies and demand spillovers at peaks. Even if the cost of calling someone else’s fleet in emergencies is not prohibitive, this approach includes the risk that the third party may not have equipment available at the time the service is required.
Our conversation with the client revolved around the lack of precision in the analysis process and the lack of appropriate tools to aid decision-makers. Having given it some thought, I would recommend three steps to answer these questions: What model of usage to implement? How to maximize the fleet model once it is running? And should the model be changed because some usage patterns have changed? As for the tools, don’t be misled. The tools are there and they can do fantastic job for your company.
First: Model both fleet scenarios
If you insist on building your financial model in Excel, so be it, but your scenario optimization capabilities will be limited. In my opinion, you are better off considering a logistics optimization tool with a built-in capability to create and compare unlimited scenarios, both prior to and following optimization. Whatever you decide, your cost structure should consider every known cost aspect of each asset (each truck can look different in that sense) as well as other costs occurring in your network (e.g. warehouses, cross-docks, yards, etc.)
The advantage of using a logistics optimization tool is that it does not only consider known costs, but creates scenarios with less predictable costs like future increases in maintenance costs as the vehicles age, drivers’ salaries and benefits, on-road expenses, and many others. A logistics optimization tool is not only useful for analysis, but also for the day-to-day running of operations.
Unlike transaction-centric transportation management applications (TMS), a planning and optimization tool allows you to look outside of your transaction history and take into consideration other financial and non-financial factors. Do keep that in mind, as many clients mistakenly believe that their TMS can act as planning and optimization tool.
Second: Don’t compare the scenarios without evaluating their impact on performance KPIs
Every time you change a cost or utilization parameter in your model, the KPIs will reflect that change and show the trade-offs you are making. It is not a zero sum game: What you give up in one KPI, you will not recover in another. The more competing KPIs you have, the more difficult it is to evaluate each scenario.
Doing this manually will take you a lot of time. You can always cut corners and consider limited number of fleet usage scenarios, limited number of costs (by using aggregates rather than detailed costs), and limited number of KPIs. There are benefits to choosing an advanced planning tool with an integrated analytical engine. You will be able to see the change to KPIs in real time every time you make a planning decision or adjust one of the parameters. As you observe the impact, you will quickly discover if your KPIs need some adjustment to better reflect your performance.
Third: Plan and execute as a continuous process, with one feeding off the other in a closed loop
Whichever scenario you ultimately choose, you should closely observe usage patterns, utilization and costs. I would not recommend using Excel for this. It helps to arm yourself with tools that combine the ability to forecast based on available data, feed the forecast to operational optimization and then feed the optimal plan factors back to the forecast. The combination of data forecasting and network optimization functions can ensure optimization of all the assets in your network using the most probable demand plan. In turn, the optimal plan produced by a network optimization tool is used by a demand planning function to better fit the strategy to the forecast.
The larger the fleet you are considering, the more valuable the preparation and the technology tools that are aiding your advanced planning. The use of a singular platform to do your scenario planning and execution will ensure the most efficient selection of your fleet strategy. You will be assured that your decisions are based on facts instead of hopes and assumptions.
If you found this topic interesting, leave a comment below. I look forward to hearing what you think.