Debunking the ‘economies of scale’ myth
‘Economies of scale’ is a phrase I hate. I don’t think it has any place in a service industry, especially ours. Obviously, it fits the manufacturing sector.
Set up tooling to constant settings, use the same mass-purchased raw materials and change nothing for prolonged periods and efficiencies will follow. I don’t believe our industry enjoys the same benefit. Shippers often want discounts for same-destination multiple loads.
What does the ‘multiple ‘factor matter? The truck or driver works no cheaper just because there are multiple trips. I equate the same thinking to long-haul, because almost always, the customer wants a lower rate per mile, the longer the trip is.
Why? I can send a truck twice from Ontario to Columbus, Ohio, or to Columbus, Ga. once, and aside from bridge tolls, the operating cost is the same. So why should the Georgia load pay a lower mileage rate?
One previous customer, a high-volume shipper, provided freight rates with a varying rate per mile, based on distance traveled from the point of origin. Imagine the frustration of owner-operators hauling 620 miles who were paid £12 less than others running 580 miles. I question the accuracy of this phrase when we discuss the manner in which it affects small versus large carriers.
No insults intended, but it’s a generally established fact that usually, larger carriers work cheaper than smaller ones because of this ‘economies of scale’ theory. Do the large carriers really enjoy true economies of scale compared to smaller companies? Trucks, trailers, parts and fuel are purchased cheaper when bought in volume.
Now, dig deeper. Taxes and utilities on our 900 sq.-ft. office and 2,000 sq.-ft. shop are less annually than a typical large carrier spends per week. Look inside the buildings.
How much staff-per-truck exist? The large carrier will have at least as many as us, likely more. Besides the foot soldiers (dispatchers, accountants, etc.) there are managers for every title imaginable, from maintenance and purchasing, to dispatch, to titles that don’t exist at smaller companies.
You’ll also find maintenance staff circling the yard performing pre-trips, since far too many of their drivers don’t. How about drivers? Some small carriers would hire lower-quality drivers, if their insurance company allowed them to.
Based on my personal experience with drivers I’ve rejected, those drivers still find employment, usually at the large, self-insured carriers. Tally up that cost. Poor fuel mileage, freight and equipment damage and lower productivity are predictable results of unsatisfactory drivers.
Some large carriers have several reportable equipment damage incidents in a day. In the event of a large crash, the ambulance-chasing lawyers pursue even larger settlements from the large carrier’s coffers. Even if the settlement is covered by insurance, premiums will soar.
Next, equipment inventories. Our spare trailer inventory is, at most, one of each trailer type. Most large fleets report trailer numbers of almost triple their power units.
You can only pull one or two behind each truck, so there’s obviously a huge equipment investment that will rarely earn full revenue. Some of the extra trailers are dropped at the shipper or receiver’s facility for pre-loading or temporary warehousing. A large customer requiring so much spare equipment availability is usually the one providing you the lowest profit margin, even if they are actually paying extra for the added trailers.
There are always accounting experts able to financially justify everything. But fundamentally, when the numbers are all thoroughly crunched to net level, does the economies of scale theory really fly in the trucking industry? I’m not convinced that it’s not just, as I’ve previously called it, a numbers game.
Lots of trucks earning peanuts still produce a lot of peanuts. To a little operator like me, that sounds awfully risky during a slow economy. ***
Bill Cameron and his wife Nancy own and operate Parks Transportation.
Bill can be reached at [email protected]