The massive supply chain disruption caused by the pandemic made many organizations rethink their transportation strategy. This has led to an increase in the use of private fleet transportation, as companies look to gain control and de-risk their supply chain in the event of (inevitable) future disruptions.

Whether they use third-party carriers or dedicated transportation within the for-hire market or take a private fleet approach, companies have traditionally viewed supply chain and transportation as a cost center, a business expense that doesn’t contribute to the bottom line.

But that view is changing. More forward-looking organizations are realizing an optimized supply chain, including the ability to drive cost absorption within transportation management, can be wielded as a competitive weapon. This is especially critical in the current inflationary environment, with costs spiraling upward at a greater rate. And as in many other functional areas, technology is the path to leveraging transportation assets as a differentiator and success factor.

Cost absorption in transportation management involves distributing expenses across operational activities in order to reduce them. This improves cost efficiency, particularly during inflationary periods, through optimizing logistics and resource utilization.

Within private fleet transportation in particular, companies have greater control over — and responsibility for — cost absorption. It means finding ways to reduce their controllable costs through more efficient routing, scheduling and loading.

Mat Witte, chief executive officer of ORTEC Americas, says while traditional metrics like cost per mile and cost per stop are important indicators of a company’s ability to harness transportation cost absorption, delivery failure rate is also a critical KPI.

“If your deliveries are failing at a 10% clip every day, for some larger companies that means incurring significant costs for redelivering products that should have been delivered right the first time,” Witte says. “Addressing that is true cost absorption.”


Focus On Controllable Costs

Mike Mulqueen, partner and strategy practice lead at JBF Consulting, says companies need to focus on what’s controllable as part of a cost absorption strategy. “I'm very leery about cost per mile when putting together metrics to measure the efficacy of a fleet,” he says. “That’s because they're going to naturally go up and down based on externalities that are outside the control of an organization.”

The current inflationary cycle has had a significant impact on transportation costs, such as fuel, labor and fleet maintenance. Drivers include supply chain disruptions, increased consumer demand and geopolitical conflicts. The past few years have seen inflation rates reaching levels not observed in decades, affecting all sectors of the economy. And fleet managers are challenged to find cost-effective solutions in order to improve efficiency and maintain service levels. 

Inflationary pressures are actually creating separation in the market between fleet operators that are able to gain efficiency and absorb costs, and those that can’t, Mulqueen says — and the former see it as a competitive weapon.


Supply Chain Costs as Strategic Advantage

One area of cost absorption that can yield significant benefit for private fleet operators is in reducing empty miles, a perennial issue across trucking.

Major retailers, food service giants and CPGs leverage their vast freight networks and technology to increase backhaul miles, either internal or external via load boards. Mulqueen says there are opportunities in both primary and secondary networks, but it requires tight synchronization of inbound and outbound transportation. A modern routing software solution can utilize algorithms to analyze load patterns and identify backhaul opportunities.

When it comes to mitigating inflation, Witte says fleet operators need to look to cost absorption strategies. With inflation impacting everything from fuel to insurance to wages and new asset purchases, fleets have to run leaner and meaner. 

Sometimes, Witte says, the data will point up the need to make hard choices, like giving up unprofitable routes or dialing back where you’re over-serving accounts.

As for fleet transportation as a cost center, Mulqueen says that’s not necessarily a bad thing; it can be used as a competitive weapon if run efficiently. For instance, major food service fleets exist to provide a high level of service. The objective becomes minimizing costs but within the customer’s operational constraints. This can include metrics like percentage of delivery windows hit, adherence to vehicle restrictions and the efficiency of driver execution.


Seeing Cost Absorption Success

Witte points out two route optimization solutions as examples of cost absorption success stories.

The e-commerce arm of a multinational grocery retailer was looking for a way to optimize routing on its 85,000 delivery stops a day. The company was running 950 trucks over 415,000 miles weekly to 29 fulfillment centers. As demand for e-grocery exploded during the pandemic, they needed to improve routing, yield management and time-slotting technology. With tech-infused cost absorption planning, the organization was able to meet its requirements for dispatch and execution, daily optimization, appointment scheduling and more.

Within seven months of implementation, the company was able to earn back 200% of the projected savings, shaving off $1 per order on average. Metrics such as orders per hour and miles per order both improved significantly.

A worldwide dairy producer and distributor faced challenges in a northern European country, where it operates 300 vehicles and delivers dairy products to 3,000 customers daily. The company needed a solution that could help it meet tight customer delivery windows and provide them with transparent schedules.

With the implementation of tactical routing technology, the company was able to reduce total kilometers driven by 8%, provide accurate ETAs for customers, and lower time spent calculating new tactical plans by 50%. In addition, the overall improvement in delivery quality led to fewer customer complaints and support hours logged.


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Read the full report for additional insights from from supply chain optimization expert Mathew Witte and logistics strategy specialist Mike Mulqueen. They discuss how technology provides a path to leveraging transportation assets as a differentiator and success factor. They also share insights on strategies for cost absorption in private fleets, including optimizing routes, enhancing driver productivity, mitigating empty miles, and targeting the right KPIs. With deep analysis of historical and real-time fleet transportation data using algorithm-driven tools, patterns emerge leading to keen insights and better-informed decisions.


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