Is it time to buy a lorry?

In this series, we explore the issue of when a company might decide to invest in its own fleet, and how it should go about doing it. This is a question a lot of our clients face, so we thought we would address this issue. The idea behind these articles is to help companies make the best decisions with research from the field. Enjoy!

Every business requires logistics – be it moving equipment, people or goods. The big question is: should you do your own deliveries, or pay someone to do it for you? With companies spending 9.34 % of sales revenue on logistics, this is quite literally a million dollar question.

Logistics costs amount to 9.34 % of companies sales – with the majority of that going to transportation. Source: Establish Inc, Supply Chain Consultants, 2014.

In order to decide whether or not to do your own deliveries, you need to calculate if it will be cheaper to do your own deliveries. Are the cost savings from doing your own deliveries larger than the amount of money it takes to purchase and maintain your own fleet? This becomes a question of the volume of parcels you deliver. If you deliver a lot of parcels, it probably makes sense to do the deliveries in-house. But what exactly is “a lot” of parcels? In this article, we will demonstrate what these calculations might look like for a business delivering average sized parcels in a small, densely populated city.

A.T. Kearney, a leading management consulting firm, performed a cost analysis for the Chinese market. They calculated the break-even volume – the point where it is cheaper for a company to do its own deliveries rather than rely on a 3PL. They found that the break-even volume in the average Chinese city lies at around 2,500 parcels per day. According to the report, “it is doubtful that even the largest e-commerce players can fully address the demand internally and profitably, considering the wide geographic spread of the market.”

A.T. Kearney’s analysis shows that a company needs to process more than 2,500 parcels a day in a Chinese city before it becomes more economical to handle the logistics internally.

With low labour and operating costs, China may be an outlier. At US$ 0.60 per external delivery, it’s easy to see why the break-even volume is so high. How would these numbers look in a city where the cost of 3PL delivery is not as cheap as it is in China? We chose to look at Singapore, a small, densely populated city with a higher cost of doing business.

As Singapore is ten times smaller than Beijing, a smaller fleet is needed to perform deliveries than in China. However, the costs of buying a fleet, maintenance, and salaries for operations staff and drivers will be higher.

3PL deliveries in Singapore are also more expensive than the US$0.60 per delivery used in the study, averaging US$4.00 (S$5.00) per delivery.

Considering both sides of the equation, we performed our own analysis, summarized in the graph below.

In Singapore, a company needs to process at least 120 deliveries a day before it makes economical sense to invest in a fleet.

The results indicate that the break-even volume in Singapore lies at about 120 deliveries per day, or 600 per week. Thus, if your firm consistently has this kind of volume, then it might make sense for you to start looking into developing your own fleet capabilities. Anything less and it’s probably not cost efficient for you to invest in your own fleet.

Once you’ve determined that you have enough volume to start looking into developing your own fleet, it’s time to consider the other factors. What kind of vehicles should you get? Should you hire full-time drivers or rely on a few part timers? How are you going to attract and retain reliable drivers? Do you have the expertise required to plan trips and manage your own fleet? Subscribe to our newsletter to be kept up to date as we explore this topic!

At VersaFleet, it’s our mission to make logistics operations simple for logistics operators. We offer a SaaS Transport Management System for logistics operators, making technology that was previously the domain of big logistics companies like DHL and UPS available to everyone. Our platform helps you to plan your jobs, optimise routes, dispatch drivers, include electronic point-of-delivery capabilities into your delivery services and much more. Check out our website to find out more, or request a free demo using the form below.

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