Knight Transportation “insources” most of its own maintenance. Do you recommend that to the fleets you consult with?

Bruce Beck: “That depends. We have established some very precise benchmarks – based on our own experience – for what maintenance costs should be.

“When we consult with a fleet, we compare their costs to these benchmarks, to see how well they’re doing. If they can reduce maintenance costs by outsourcing, we might recommend that. Or, we might recommend ways to get their internal costs under control.

Bruce Beck is president of Knight Management Systems, a subsidiary of Knight Transportation, Inc., one of America's most successful fleets. For years, Knight Transportation has consistently achieved operating ratios in the los 80's and has been named one of America's best and fastest-growing companies. Beck provides management consulting services to fleets that would like to benefit from what Knight Transportation has learned.

”What causes internal costs to get out of control?

“One of the most important factors is the level of involvement by top management. For example, if a truck loses a tire on the road, a clerk might simply tell a driver to get it replaced, wherever and at whatever price necessary.

“Someone at a much higher level might ask, ‘Why don’t we use the tire bank we have set up, which is just a few miles from where the breakdown occurred?’”

Isn’t there a danger of micromanagement? Shouldn’t top people be looking at the “big picture”? “There is, but it’s important to remember that trucking is very capital-intensive. Profit margins are not large. Competition is intense. Costs, for labor, fuel, tires and maintenance – are high. “While ‘big picture,’ strategic thinking is important, if you look at nothing but the big picture, you may find your operating ratio creeping upward, a little at a time, until you’re out of business.” How can a fleet decide whether tire and maintenance outsourcing is appropriate? “Basically, the question is whether you can get the services at a cost that is appreciably lower than you’d have to spend to perform them yourself. And if, by outsourcing, you might be able to avoid borrowing, or divert capital to expanding your core business.”

If a fleet decides to outsource, what kind of agreements does it need with vendors?

“You need very detailed contracts that spell out all services to be performed, and provide for regular reviews of vendor performance.

“You will have to carefully track the work the vendor is performing, constantly comparing your costs with benchmarks. Once again, the key is in managing the details, since no single factor is likely to have a large effect. Taken together, the results can be huge.”

Editor’s note: Knight Transportation was profiled in Real Answers in Volume 4, Issue 2. Click here

When should a fleet consider outsourcing?

Lance Bertram: “We’ve done surveys, drawing on data from our affiliates, and they show you really can’t effectively do your own maintenance unless you have at least 106 trucks to maintain.”

Wade Lucas: “You need a certain number of people to do the work, and keeping them busy with meaningful work can be a problem.

“For example, a tire guy is generally going to be just a tire guy, and not be very knowledgeable about other maintenance areas. Without enough tires to work on, he can become a very expensive floor sweeper, because that’s what he ends up doing while waiting for a tire job.

Wade Lucas is vice president, service and equipment for Idealease and architect of it's comprehensive "Best Practices" maintenance program.

Lance Bertram is vice president, marketing for Idealease, which has over 400 affiliates nationwide, offering full-service leasing and maintenance.

”But isn’t doing it yourself still cheaper than having someone do it for you?

Wade Lucas: “Not necessarily. “The trouble is, if trucks are on the road all the time, there’s a good chance they won’t be available to work on when that mechanic is available.

“Or that when a job comes in, it may take up too much time.”

"Smart trucking companies know the key to profitability is equipment utilization. Fleets that keep their trucks on the road hauling freight make money."
-Wade Lucus, Idealease

Can you give us an example? Wade Lucas: “We can send an engine to the manufacturer to have it rebuilt, and they’ll charge us less than 30 hours, plus give us a warranty on the work, and the option to buy an extended warranty. “Unfortunately, I’ve seen too many shops where if they do a rebuild in-house, they’ll assign two guys, and take a week and a half to finish it. And, there’s no warranty on the work. “It looks like a bargain, because the in-house guys’ hourly rate is lower, but when you really figure out the cost, it’s a lot more expensive.” What if the cost is the same? Lance Bertram: “Let’s say you decided to paint your house yourself, and priced out all the materials, discovering it was going to cost $1,000. “Then, just as you were about to go buy the paint, a professional painter knocked on your door and offered to paint your house for $1,000. “Now, you could do the work yourself, or have the professional do it. Either way, the cost is the same. But is painting your ‘core competency’? It’s not mine. “Besides, there are lots of things I’d rather be doing besides painting.” Wade Lucas: “Lance brings up a crucial issue. A professional is probably going to do a better job than a do-it-yourselfer. “Today’s trucks are incredibly complex technologically. Educating technicians – and keeping them educated – is expensive. The diagnostic equipment is costly and changes constantly.”

But don’t education and equipment pay for themselves?

Wade Lucas: “Only if you have full utilization. The trouble is, many fleets don’t have the financial expertise to really know their true maintenance costs.

“We’ve done the homework, and we have a pretty good idea what it takes to make it work. That’s why we generally recommend outsourcing for fewer than 106 trucks.”

Lance Bertram: “After all, most fleets have some number they believe represents their cost per mile. But no two of them calculate that number the same way.”

"The second worst thing is when a fleet says it doesn't know its cost.
The worst thing is when they say they do -but they're wrong."
-Lance Bertram, Idealease

How quickly should outsourcing produce results?

Wade Lucas: “It depends on how well things were being done beforehand. Many times, we find we have to do a lot of work to bring a fleet’s equipment up to our standards, and that may make the first year or so pretty costly.

“So we recommend a contract be for a minimum of three years, with regular evaluations.”

Lance Bertram: “We give fleets the option to cancel each year. Our records show that way over 90 percent of them renew, and those that cancel rarely do so because they’re unsatisfied with our performance or cost.”

Editor’s Note: We profiled Idealease in Real Answers, Volume 3, Issue 1. Click here

Mike Morgan is vice president of operations stategy for Overnite Transportation Company, and responsible for maintenance of over 27,000 pieces of equipment coast-to-coast and border-to-border.

You outsource some services and insource some others. How did that arrangement come about?

Mike Morgan: “Until recently, we concentrated most of our service in the East. When I came here in 1996, for example, I found a very successful, paid-for, retreading plant at our Charlotte location.

“It made great sense to ship tires to Charlotte for repairs or retreading. The trucks were out there and the Charlotte plant did a top quality, very cost-effective-job.

“For repair and maintenance, we already had established shops – again, paid-for, and fully staffed.”

But now you outsource quite a bit of tire work? Mike Morgan: “Primarily in the West. As we expanded our service areas, our costs to ship tires back to Charlotte rose. Eventually, we decided that the cost to ship those tires was eroding our margins. “It made good sense to find local vendors who could handle tire repair and retreading for us – to our standards – in our service areas in Denver and west of there.” Why not set up your own shops out west? Mike Morgan: “We could, and we might – eventually. It’s a matter of economics. There are three major factors: facilities, equipment and people. “When we look at the cost of building a new facility, we find that it’s pretty staggering. Same with acquiring the equipment. “We do a rigorous cost-benefit analysis before we’ll make those kinds of investments. Just recently, we purchased over $161,000 worth of engine diagnostic equipment. You’ve got to be very careful before spending that kind of money.

”You also mentioned people.

Mike Morgan: “Absolutely. If we set up shops in the West, we’ll need qualified technicians.”

All three of those things – facilities, equipment and people – cost money, and we have to look hard at the return on that investment.

“It really is a matter of working the numbers. For right now, it’s very cost-effective to have local, independent shops provide services for us.”
-Mike Morgan, Overnite

“Chances are, we’ll continue to mix insourcing and outsourcing, for some time to come.”

Our profile of Overnite Transportation appeared in Real Answers, Volume 4, Issue 4 Click here

Our thanks to Bruce Beck, Wade Lucas, Lance Bertram and Mike Morgan for sharing their experience with us.