July/August 1993
There are several ways to meet your trucking needs, including owning, leasing, and contracting out. This look at the options can help you select the best approach for your company.
BY KENT KISER
Kent Kiser is associate editor of Scrap Processing and Recycling.
If Hamlet had been a scrap recycling executive, his most famous quote might have been, "To own, lease, or contract out? That is the trucking question."
But what is the answer? That depends on a slew of company-specific variables, including past trucking practices, current trucking needs, and financial strength, as well as business conditions, interest rates (or, as scrap executives say, "the cost of money"), and more. Some recyclers swear by one trucking approach exclusively, while others combine several options.
Sorting through these factors to choose the right approach can be critical. After all, transportation accounts for a significant portion of the controllable costs of most scrap businesses and can influence supplier and consumer satisfaction, product cost, profit margin, and more. Before you answer the trucking option question for your company, therefore, you should know the pros and cons of all the choices.
Trucking ABCs
First, a little background: Most recyclers divide their trucking activities into two categories: short haul, which typically encompasses all pickups from industrial suppliers as well as deliveries of processed material to nearby consumers, and long haul, mainly the transportation of finished scrap to distant consumers. In terms of equipment, scrap is usually picked up using roll-off and lugger-type trucks, whereas it is delivered via tractor trailer-type trucks.
Though there are exceptions, most scrap firms use company-managed trucks—owned or leased—for their short hauls and contract carriers for longer runs. Thus, the question of whether to own, lease, or contract out becomes more like a series of issues: owning vs. leasing for the short-haul end of the business, deciding when and how to contract out, and sorting out when to break the rules.
There haven't always been so many options. A decade ago, recyclers had little choice but to buy their trucks, either new or used, because leasing companies rarely leased vehicles to scrap firms. "They were afraid what they'd get back," explains Bill Clay, vice president of operations for Louis Padnos Iron & Metal Co. (Holland, Mich.), which owns its fleet. Today, in contrast, several nationwide truck leasing firms and many truck manufacturers offer leased vehicles to the scrap industry.
When it comes to owning trucks, you can either buy them outright—if you have the capital—or finance the purchase through a bank or truck dealership. In this way, the purchase is similar to buying a car.
If you decide to lease, you can choose to pay a flat monthly fee, which can include the cost of a full-service maintenance contract, or a monthly and a per-mile fee. Recycling companies generally lease vehicles for three to six years, and they can set up the contract in one of several ways, including:
- lease to own, also called a conditional sales agreement, in which the company buys the leased equipment over several years;
- open-end lease, in which the company purchases the equipment at a predetermined or residual value after a set period of time; and
- closed-end lease, in which the company bears no obligation at the end of the lease, enabling the firm to "cycle out" its old leased trucks in exchange for new leased trucks.
In general, recyclers lease only the tractor power units of trucks, opting to own the accompanying containers for cost and service reasons. Nevertheless, many leasing companies will make special arrangements to offer their customers specialized hydraulic, or "wet-line," trucks such as roll-offs and dump trailers, as well as lugger-type trucks. "Leasing companies will do just about whatever you want them to do," notes one scrap executive, "but you'll pay for it."
If you choose to work with contract carriers for some or all of your trucking needs, you basically have two options: Sign a long-term contract for regular pickup and delivery, or work on a per-trip/per-ton basis.
The Owning-vs.-Leasing Decision
Before deciding whether to buy or lease your trucks, you should consider how the two options compare in six key areas.
Financing. Buying trucks requires a large capital outlay, which may or may not be an issue, depending on your company's financial health. "If you've got money in the bank, why not buy?" asks one executive and truck owner. "All we'd be doing by leasing is paying someone else to finance the vehicle." Among other benefits, owning enables you, rather than the leasing company, to depreciate your vehicles, and you can use your owned trucks as barter when trading them in for new ones, which can save you money on the purchase price.
Leasing, in contrast, requires no large capital outlay up front, which enables you to preserve your banking line of credit and spend money on revenue-generating projects instead of trucks, which are depreciating assets. "I'd rather spend money on scrap inventory or equipment for the yard than on new trucks," says Sidney S. Metzner, chairman of the board of Conservit Inc. (Hagerstown, Md.), which leases most of its trucks.
There are other financial advantages to leasing as well. "Though owning and leasing work out pretty much the same for us from a cash-flow and bottom-line standpoint," says Alan Jay Perlman, president and chief executive officer of F. Perlman & Co. Inc. (Memphis, Tenn.), "we're better off leasing because our bank doesn't look at a lease as a debt."
In terms of the tax consequences, the two options currently weigh out pretty equally since the Tax Reform Act of 1986 repealed investment tax credits, reduced the tax rate, and created a new alternative minimum tax.
Maintenance/service. Of all the issues that influence the decision to buy or lease trucks, maintenance is one of the most critical for scrap recyclers due to the toll the business takes on hauling vehicles. Those firms that own their trucks frequently maintain them on-site, employing mechanics and maintenance facilities they use to keep up their processing and handling equipment. Meanwhile, many companies that lease trucks take advantage of the maintenance agreements available through leasing companies.
Not all recyclers that own a fleet maintain it, however. And leasing vehicles doesn't always mean they'll be maintained off-site. Some own their trucks but contract out the maintenance, with one such scrap company arranging for its fleet to be serviced at night by an independent contractor, which enables the trucks to be in peak form during business hours. Other firms, such as F. Perlman, lease trucks but do most maintenance on-site. "We looked into leasing with a full-service maintenance contract, but the costs were astronomical," Perlman notes. The reason for these high costs, explains one executive and truck owner, is that "leasing companies factor in the nature of our industry, which is more abusive to trucks than a lot of other industries. Our trucks have a lot of tire problems and they wind up with many incidental dings and dents, which, in a lease/maintenance contract, could put you in the poorhouse."
Of course, there are drawbacks to maintaining trucks on-site, too, scrap recyclers point out. For instance, doing your own truck repair typically requires compliance with local, state, and federal regulations on underground storage tanks, used oil, oil filters, tires, batteries, even washing soaps for mechanics. Also, as engine technology becomes more sophisticated, you may have to take the expensive steps of purchasing updated diagnostic/maintenance equipment, retraining mechanics, and/or hiring new technicians. Moreover, on-site truck maintenance forces you to tie up money in parts inventory.
By relegating truck maintenance to someone else, you can eliminate the need for a staff truck mechanic or independent contractor, or at least reduce the workload on current maintenance employees. "Our maintenance department is busy enough without having to keep up with the constant preventive maintenance and breakdowns of trucks," says one processor. Another executive and truck owner notes, "Certainly, one of the big benefits of having a leased fleet is that the trucks are always well-maintained and you eliminate a lot of downtime due to maintenance problems. You pay for that privilege, of course, but to some people it's worth it." Leasing companies also assume the burdens related to regulatory compliance and parts supplies, though you must carry insurance on your vehicles regardless of whether they are owned or leased.
When it comes to service, many leasing firms point out that they can offer preventive maintenance, 24-hour emergency road service, filling and service stations coast-to-coast, and substitute vehicles. In addition, some leasing arrangements, such as F. Perlman's, enable the lessee to reduce some day-to-day costs of running the fleet by diesel fuel from the dealership at a discounted rate and other special terms.
Cost discovery. To operate a trucking fleet in the most cost-effective manner, you must first be able to accurately determine your costs. Recyclers who own their fleet say that keeping everything in-house enables them to track and control their expenses better than if they leased. "We've got all of our maintenance and operating costs on computer," says Clay. "We know what our trucks cost us."
Those who lease, however, point out that numerous costs can go undetected or underestimated in an ownership situation. "Companies that own their trucks tend not to calculate their freight, especially on picking up scrap," says one scrap executive. Metzner notes another point: "When you own, you tend to keep a truck until it starts to nickel-and-dime you to the point where you don't know how much it costs to run per mile." In contrast, he says, a monthly leasing fee can make trucking costs predictable, enabling you to easily assess how much you're paying—and for what—on many aspects of your fleet. "Leasing enables us to know exactly what our fixed costs are," Metzner points out.
Efficiency. To run a fleet effectively, you must have trucks that are efficient and reliable. Some companies find leasing attractive, they say, because it gives them a chance to frequently update their fleet with new, state-of-the-art, fuel- and load-efficient vehicles. This isn't much of a selling point for those that already operate a clean, efficient fleet, or that have the money to buy their own state-of-the-art vehicles. It is attractive, however, to firms that are operating older trucks and would like to upgrade without having to buy a new fleet.
Administration. Managing a truck fleet means keeping track of myriad details—financial, administrative, regulatory, and maintenance-related. One truck owner speaks for many when he asserts, "It's getting to the point where operating your own fleet is becoming a nightmare." Leasing companies can take care of many of these unenviable tasks, such as permitting, licensing, fuel tax reporting, and inspections, which can reduce your headaches and give your managers—and you—more time to devote to other tasks. "I'd love to be able to walk away from all the responsibilities that come into play when operating a trucking fleet," says truck-owner Frank Cozzi, secretary and treasurer of Cozzi Iron & Metal Inc. (Chicago). Clay adds his own anecdote: "I know one small operator who said that when he switched to leasing his trucks, it felt as if someone had lifted a 50-pound weight off his back." The other side to this convenience, as any fleet operator will point out, is that you end up paying for someone else to deal with the hassles.
Control. Last but not least, recycling firms that who own their trucks say that ownership, in essence, is about control—real and perceived. "We control our own destiny, we control our own costs," Clay says. It's not that those who go the leasing route don't have control over their vehicles, or that a leased truck can't physically do everything an owned vehicle can do, but fleet ownership means not being beholden to, or dependent on, a leasing company for financing, customer service, maintenance—nothing. In this sense, ownership represents independence and self-reliance, which appeals to many recyclers.
Contracting Out
Contract motor carriers fill an invaluable niche in the scrap business, primarily making long-haul deliveries of processed scrap to consumers. The main reason for this is financial. "We find that contract carriers can do long hauls cheaper than we can," says Metzner, "because they can easily arrange backhauls, and they've often got a national support network for their trucks." Another reason is that few recyclers like to send their own trucks more than 150 miles or so away because such runs are time-consuming, put more wear on the vehicles, and increase the potential for highway accidents and breakdowns. Some recyclers even have contracts with their union drivers that preclude sending their trucks farther than, say, 50 miles.
On short-haul work, most recyclers prefer not to use contract carriers except during busy times when their own trucks are overwhelmed, even though contractors can usually haul material cheaper. There are two reasons for this preference, with the first being convenience. "The main advantage of owning or leasing rather than contracting out for industrial pickups is that your trucks are right there," says one fleet manager, "and you can dispatch them whenever and wherever you want."
The second reason has to do with customer service. Contract carriers, many executives claim, can't provide the immediate responsiveness, flexibility, and personal touch needed to service short-haul industrial suppliers. "When picking up scrap, you must be in control of the situation," one truck owner says. "You have to be able to juggle and change your schedule around, which is easier to do when you use your own trucks." Jeff Levy, manager of operations for Newman Metal Processing (St. Catharines, Ontario), which leases trucks to own, agrees: "If you lose an industrial account because of poor service, there goes your bread and butter. I'd be afraid to put such an important responsibility in someone else's hands. If we don't service our customers when they need us, someone else certainly will."
That's why Chris Charlebois, president of Advance Metals Recycling (Buffalo, N.Y.), is such a rare breed in the scrap industry. He sold his fleet a decade ago and opted to use contract carriers exclusively for both his short-haul industrial pickup business and long-haul deliveries. Why? Because he was fed up with the high operating costs, administrative hassles, and personnel problems related to maintaining his own fleet.
Contracting out all trucking services is the most hands-free approach available to recyclers—one that gives them the greatest freedom to focus on their primary business. "I can't see why processors would choose to run their own trucks, unless they're also in the hauling business," says Daryl Parks, executive vice president and general manager of American Iron & Supply Co. (Minneapolis), which works exclusively with contract carriers. "We know we do one thing really well, and that's recycling scrap."
Upon selling his fleet, Charlebois opted to work primarily with smaller, independent carriers rather than larger hauling firms. "What we found," he explains, "was that the independents tend to be very hungry, and they're eager to do a good job." American Iron & Supply also does considerable business with independent carriers, some of which work exclusively for the firm. "We have direct radio communication with our contracted drivers," Parks notes. "In essence, it's no different than having our own trucking company." He points out, however, that his firm is adamant about owning all of its containers, and he recommends that other recyclers do the same. "You make yourself vulnerable and could get into some serious binds if your contractor owns the containers and you have a problem with the contractor," Parks explains.
For Charlebois—and others who have taken the same path—the rewards of contracting out all trucking services have been "a lot fewer headaches, and costs I can control." Indeed, contractors assume the work—and worries—of keeping up with wages, insurance, licensing, and other administrative tasks. Contracting also enables you to easily monitor your trucking costs—"If a carrier quotes me a price per ton," one recycling executive notes, "then I know precisely what a run is going to cost me"—and eliminate virtually all in-house truck-related maintenance, personnel, regulatory, and administrative costs. On the topic of customer service, Barbara Kiddoo, traffic manager for Keywell Corp. (Frewsburg, N.Y.), which contracts out all of its trucking, adds: "It may be easier to service industrial suppliers when you have your own trucks, but for us the economics outweighed the convenience." As Charlebois remarks, "If I had it to do over, I'd do the same thing."
Working with contract carriers can have its drawbacks, however. For one thing, Cozzi notes, "you don't have as much control over contract carriers as you do with a driver that's working for you by the hour." More important, the proliferation in recent years of motor carrier undercharge claims has sent shock waves of fear through all recyclers who deal with contract carriers. (For a detailed look at the undercharge claims issue, see "When a Deal's Not a Deal," July/August 1992.) For most scrap executives, however, this is a problem that has simply required them to become more cautious in their contractual dealings with carriers. "When we do contract carrier work now, we make sure we have all the t's crossed and the i's dotted," Perlman says. "We're making sure that we have paperwork before shipments are made, that we have an actual contract set so we don't run across the undercharge problem in the future."
Back to the Question
Now that the scales have been weighed on all sides, it's time once again to ponder the question: Should you own, lease, contract out, or mix these choices? "There are advantages to each approach," Cozzi notes. "It depends on your individual situation and your financial position at any given time. You can do just about anything today."
In any case, when considering the options, and all the variables that go with them, keep one thought in mind: The best trucking approach will likely be the one that enables you to provide the best service to your suppliers and consumers at a manageable cost and with the fewest hassles. •
There are several ways to meet your trucking needs, including owning, leasing, and contracting out. This look at the options can help you select the best approach for your company.