Fleet Ownership vs. Fuel Costs

This summer’s record oil prices would have been enough of a transportation management challenge for most converting plants. Add to that the effects of Hurricane Katrina, and this period will go down in history as every transportation manager’s worst nightmare.

What’s a converter to do? Raise prices and you risk losing customers to competitors who manage to hold back any increases. That’s why creativity and smarts are the transportation manager’s most valuable assets — especially if they work for a paper mill or a sheet plant.

Packaging Corp. of America restarted an idle paper machine at its Filer City, Mich., semichemical corrugating medium mill ahead of a planned shutdown of a similar machine at its Tomahawk, Wis., semichemical medium mill. The start-up of this machine, which had been idle since July 1998, was an effort to optimize the company’s rail-truck balance and save $3 million to $4 million annually in transportation costs.
That’s an impressive number, but what can an independent corrugated producer do to achieve bottom line results even half as dramatic?

“There’s no good way to pass rising fuel costs on,” admits Dave Crawford, plant manager for Carton Sales, a division of TimBar, Miami. “Our strategy has been to ship more volume on a per-truck basis. What helps is we have our own fleet. Our freight costs are typically less than anybody who uses over-the-road carriers because all I’m trying to do is ship and cover costs, as opposed to an independent transportation company that’s in it to make profit.”

Crawford has found that, even when figuring in maintenance and labor costs, running a fleet beats hiring carriers in the long run. His fleet consists of 15 tractors, two straight trucks and 20 trailers. He also leases as many as 30 additional trailers.

“We have a skilled diesel mechanic on staff who does all the maintenance for us, up to and including engine rebuilds,” he continues. “Occasionally we have to go to the dealership on a perplexing problem or for computer diagnostics, but we can do probably 90 to 95 percent of our own maintenance.”

Crawford is familiar with the ways of integrated plant operations, having worked for Union Camp’s Pittsburgh facility. This company also had its own truck fleet, although Crawford admits that most of the major integrateds now ship via over-the-road carriers. What happens more these days is partnership with major regional and local carriers, giving converters access to people as well as services.

“We put one of their people in our shipping department and they’d be our dispatcher for a dedicated contingent of tractors and trailers,” Crawford explains. “We have explored that here at Carton Sales, to augment our fleet during peak periods, but we found that our costs would go up much higher than what we can do internally.”

Crawford believes having his own fleet gives his operations more flexibility and lets his company offer a higher level of customer service. Ultimately, that’s his product. Staffing drivers who double as lift truck operators also helps.

“If you have six outside truck drivers at your dock and two of your own guys in the shipping department are being overwhelmed by the amount of product coming down the line, the truck drivers will go drink coffee,” he says. “Our truck drivers get on lift trucks and load trucks.”

Crawford says that although his absolute costs, including fuel and maintenance, have gone up on a per-unit-of-product-shipped basis, costs are down three percent compared to last year thanks to their volume, truck utilization and the number of customers located near Carton Sales.

The company is installing a $300,000 software system to control and track plant product flow and that will enable Carton Sales to invest in truck loading optimization software so it can build more cost efficient loads. This will be a must if they’re going to expand shipments from their present 60 million sq ft a year to the 100 million sq ft they expect to reach within three to five years.

Getting More in a Load—Rick Agar, shipping manager for Royal Containers Ltd., Brampton, Ontario, is also a believer in the value of private fleets. Royal’s includes five tractors, two straight trucks and 12 trailers. Royal also employs seven drivers. These resources give this converter the flexibility to pick up product from its sheet suppliers once deliveries are made. Just as with Carton Sales, truck usage is key.

“With the computer system we have I can monitor the square footage that goes out on a trailer, load by load, but that’s a broad guideline because so many customers have so many different requests on the truck,” Agar explains. “We have customers with height restrictions, so it’s filling the trailer the best we can under those customer receiving restrictions.”

Even with those challenges, Agar can’t see the value in using outside carriers. “You take so much responsibility for product quality, and to hand that off to a carrier, I just don’t think it’s something Royal Container’s business mentality would consider unless it was absolutely necessary,” he says. “Everyone’s watching shipping department costs closer than in the past. When you talk about a fluctuating rise in fuel costs between 30 and 40 percent over the last 12 to18 months, that’s big.”

No Fleet for Me—William Shew, manager of Greif’s Massillon, Ohio, paper mill, says he’s not ready to consider fleet ownership as a means of dealing with unpredictable fuel costs. He agrees these costs have made things difficult, but for the moment he’s just grinning and bearing it. Adding the effects of driver shortages and Hurricanes Katrina and Rita doesn’t make that any easier.

“We know from our corporate logistics department that there aren’t a lot of drivers in queue like there were years ago,” he acknowledges. “That decreases the number of loads out of different plants. And with the impact of the hurricanes down south, a lot of drivers are chasing that real high-dollar opportunity because the government is paying their way and they can get three or four times more for a load.”

Shew says Greif managed its own truck fleet five years ago, but the maintenance and benefits got too expensive.

“Health benefits, labor and overtime, repair costs, plus over-the-road issues with the PUCO, became too costly,” he says. “And until this energy crunch we were doing very well, and we’re still doing fine, we just have to work a little harder on a day-to-day basis to find those loads to get moved. An entrepreneur with 15-20 trucks might come in occasionally and do a sales pitch saying, ‘I’ll dedicate my fleet to your mill for so many loads and so many dollars,’ and that’s becoming more attractive, but as far as having our own fleet again, that’s not attractive to me at all.”

Another option Shew is considering is the use of intermodal containers. However that could be a double-edge sword. Because these containers are smaller than a normal van, they can’t carry the payload of a full truckload. That leaves dealing with truckload carriers as Plan A. And barring passing along those higher fuel costs that the carriers are passing along to them, Greif remains a proponent of “tough love.”

“We tell carriers ‘This is a cost of doing business, suck it up and quit crying. Things will taper back off and stabilize,’” Shew concludes.

His independent and integrated colleagues in paperboard converting are hoping he’s right.

<i>How Are Customers Coping?

According to a WERC Watch report, “Transportation Capacity Issues,” from the Warehousing Education and Research Council (WERC), more than half (55 percent) of respondents representing the consumer products, food/beverage, industrial products and other manufacturing and wholesaler companies surveyed indicated they’ve changed carriers to deal with transportation challenges such as high rates and poor service.

Sixty-six percent added carriers to their “approved” list, and in some cases, the new carrier was a private fleet. And since so many warehouses have discontinued rail service — going so far as converting rail doors to truck doors — the only viable alternative to truckload is intermodal, which was selected by 27.8 percent of respondents.

While only 10 percent of respondents have adopted private fleets, several agreed that this option gives managers better control over transportation operations. One large retailer added a private fleet to accommodate 65 percent of its volume, while others did it out of desperation.

For more information on this report, contact WERC at 630-990-0001, or visit www.werc.org.</i>