Thursday, December 1, 2011

Why Electric Matters: The Modern Energy Challenge for Supply Chain Fleets

As a followup post to my previous inquiry into LTL shipping, I want to explore trucking and land shipping logistics even more today. This time, I will be exploring the challenges facing transportation fleets in terms of the rising cost of operations.

When I worked on my internship over the summer, we identified several aspects of ownership proposition for a vehicle, but for a fleet manager, here are the most salient points:

1) Capability (can this vehicle do the job I want it to do?)
2) Variable costs (cost of fuel, maintenance, etc.)
3) Fixed costs (cost of vehicle acquisition)

Imagine for a second that you are Wal-Mart's fleet manager.You are in charge of the 3rd largest supply fleet in the world,, meaning that you have almost 52,000 trailers in service and numerous other vehicles, the guests to the ball in Wal-Mart's highly choreographed logistics dance. Your semi trucks get 7.1 miles per gallon (mpg).

All of a sudden, the President of the United States has ordered that the Corporate Average Fuel Economy (CAFE) standard be raised so that the your fleet (and yes, it is your fleet, because you run an in-house transportation system in your supply chain) realizes a 20% reduction in fuel usage by 2025 .

Your current fleet of trailers will be obsolete within 15 years. Your fixed costs will go through the roof as you scramble to replace your trailers with more efficient ones. Ouch.

Regulatory incidences such as the CAFE standard affect the supply chain because they constrain the physical means of conveyance available to fleet managers. Whereas we might consider the type of freight being shipped in LTL, FTL, or Parcel shipping methodologies, attention must now be paid to the trucks actually doing the work (let's set aside any consideration of using planes for now, under the assumption that jet fuel costs will also rise).

Once again, indirect regulation of the supply chain forces landed supply chains to innovate. Clearly, the cost of acquisition over time will be costly, but perhaps a small change of perspective will help ease the pain of transitioning to a more fuel efficient fleet.

I had the chance to meet the regional marketing manager of Smith Electric (, a company that manufactures electric medium and heavy freight trucks last summer. During that time, I learned about how Frito-Lay, in conjunction with the need to transition to a more environmentally friendly fleet, has begun experimenting with electric trucks to take advantage of other opportunities in outbound logistics (i.e. shipping their product to stores).

Frito-Lay, as was told to me, recognized the value proposition of Total Cost of Ownership (TCO) of a vehicle throughout its lifetime. Essentially, while most fleet managers are concerned with the acquisition of vehicles to meet capacity needs, Frito-Lay saw that the variable costs of fueling their vehicles contributed significantly to the operation of their supply chain to urban environments.

This is intuitive to anyone who has ever driven a car in a city. You know that your MPG dips in a city due to the constant stop and go of driving in a highly regulated driving environment. Imagine you drive a beer truck through the streets of New York--how much fuel (and subsequently, money) do you waste sitting in idle?

One feature of the electric engine (or most hybrid engines manufactured introduced after 2005) is that vehicles sitting in park or at a total stop don't expend energy. Moreover, the comparative cost to move a medium freight vehicle from a dead stop is less for an electric vehicle than a gas vehicle due to the cost of energy. Given many, many trips in a vehicle's lifetime, the savings add up.

By taking into account the total cost of ownership, a business case was made for the variable cost of electric trucks mitigating the fixed cost, thus mitigating the effects of fixed cost throughout the vehicle's lifetime. Essentially, Frito-Lay is banking on the cost of the electric truck being either only a certain percentage more expensive, the same, or less. They just have to find out.

Electric might not be the solution forever, but a lot of fleet managers are seriously considering it as a means to meet regulatory standards. This is a challenge that needs to be solved from the mechanic all the way up to the CFO--that's the extent of how many hands the energy challenge needs to innovate.

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