Last mile delivery

Internal vs. External Delivery Fleet: Everything You Need to Know

Internal vs. External Delivery Fleet: Everything You Need to Know

Outsourcing.

These days it seems every company is looking at ways to contract at least some part of their last-mile delivery to a third party. And although it might look like a good choice at first, there is a lot to consider when entering the On-Demand landscape.

So, tread carefully!

The rise of Delivery as a Service and Third-Party Logistics (3PL) companies has made it easier than ever before to outsource a delivery service. But with the benefits of low initial overhead, the choice to pay as you go, and fast implementation, come other challenges. Challenges you could better meet in-house.

The key is to treat it like any other investment.

And like every other investment, you need to find a balance between these three factors:

  • Operational costs and efficiency;
  • Scalability and growth, and;
  • Customer experience.

But to arrive at a decision, you first need to understand the difference between an internal and an external delivery fleet, and how each solution will impact your company. That’s why you’re here!

Here’s everything you need to know about building a private delivery fleet and outsourcing a delivery fleet to a third-party provider:

What is an Internal Delivery Fleet?

Having an internal delivery fleet means operating a delivery service independently by using a dedicated in-house staff and a private fleet of vehicles to deliver all products or services to customers.

It gives you complete control over how you operate and manage the delivery service. This can be very useful when you want the freedom and flexibility to build a deep relationship with customers and provide a quality of service that’s consistent with your brand.

At the same time, it places your company at a greater risk. You take on the full responsibility of delivering goods or services safely and securely to your customers.

It also means that you cover the complete cost of running such a service, such as payroll expenses, the purchase, and maintenance of vehicles, implementation of route optimization software, etc.

But that’s not the end of the story.

As many small and medium companies, as well as large scale enterprises, swear by their decision to build internal fleets, it’s worth digging deeper.

Let’s take a closer look at the advantages and disadvantages of owning and operating private fleets.

The Advantages of Private Delivery Fleets

Complete Control Over Operations

Building a private delivery fleet in-house means you get complete control over the entire delivery process. It gives you a free pass to shape the service around the company, and it makes it easier to plan around existing demands and future requirements.

For example, your current demands may have led you to establish a delivery service, but having an internal delivery fleet also opens up opportunities to expand beyond your existing market.

Another issue with external fleets can be the type of vehicles they own.

As most On-Demand companies operate standardized vehicles in their fleets, their limitations might hinder your delivery service if your demands exceed the capacities or capabilities.

For example, if you sell larger products like furniture or goods that require specially equipped vehicles for transport as in the food and drink industry.

With an in-house fleet, there is no such risk. You can simply buy or lease vehicles in your fleet and equip them based on the product or service specifications.

It’s also up to you to determine how you will manage delivery logistics. This ensures resources are spent and spread optimally across your service so it best serves existing operational capacities, budget limits, and the needs of your customers.

Most importantly, though, you don’t have to rely on a third party to provide a complete customer experience. And that kind of independence can be very uplifting and liberating.

Freedom and Flexibility

The control that comes with having an internal delivery fleet, also means there is a lot of freedom and flexibility to determine the direction of your delivery service.

Maybe you have a bad experience with local 3PL providers, or there aren’t any nearby companies that offer that kind of service. With an internal fleet, it doesn’t matter.

Owning a delivery fleet makes you self-sufficient. That’s a great way to shape deliveries around product or service offerings, which can be more difficult with an external fleet.

If a third-party fleet restricts the types of products they deliver or simply don’t have the capacity, like, for example, delivering frozen foods, alcohol, or pharmaceuticals, having an internal fleet can be a real game-changer.

Not only that, but very few outside fleets can handle unexpected deliveries.

The flexibility that comes with an internal fleet and the supporting infrastructure lets you schedule deliveries or re-route drivers as soon as orders arrive.

And with an all-out service dedicated to delivering the best possible solution, you can get a jump on competitors and offer what nobody else is: customer value.

Customer-Oriented Service

A big part of building and operating an internal fleet is that you get to recruit and train your own delivery workforce. The importance of this is something you can’t overlook since it has a real impact on customer service.

As you start bringing people into the delivery team, you get to instil them with the company philosophy, so everyone can get on the same page with your customer service practices.

It’s a great way to meet customer expectations if they are already used to a high-level level of care online or at your brick-and-mortar store.

Even if you hire drivers from project to project, for example, they still have a deeper level of connection with the way you manage customer relationships than, say, a courier from UPS or DHL.

And the deeper the commitment of your delivery fleet to the goals you are trying to achieve, the better the service your company will provide in the field.

Brand Recognition and Awareness

Advertising the company logo and colours on the side of your vehicles is a clear advantage of operating an internal fleet.

Think of Coca-Cola, Walmart, and Amazon in the US, or Domino’s Pizza and Tesco in the UK. The branding on their trucks has become recognizable around the world. So much in fact that it can even spur real emotions in customers, as the case with Coca-Cola.

And right from the start, it makes a real impact.

First, it lets customers know you provide home delivery now, which can immediately boost sales since 66% of all consumers prefer home delivery to any other type of delivery.

It’s also a great way to maintain consistency in the brand offering, as you have full control over how the delivery service treats your customers. That can be especially important to loyal long-term customers.

But it also affects the way you are portrayed in the minds of potential new customers who are deciding between you and your competitors.

Efficient Communication

Another benefit of keeping the delivery service in house is that you exchange information within the fleet more efficiently.

Unlike an external fleet, an internal fleet has the ability to remain connected throughout the lifecycle of a delivery. By using the same channels of communication, information can flow back and forth between managers and agents in the field.

This top-down and bottom-up flow of information means communication is faster while cutting out the middleman reduces reaction times.

A manager can assign new stops to driver schedules as quickly as new delivery orders arrive. At the same time, drivers can relay changes from the field as they happen in real-time, and request support as it becomes necessary.

Nurturing customer relationships is equally important. So, operating deliveries with a centralized system of communication and alerts that can simplify that process is another factor that raises efficiency across the board.

Having an efficient network of communication like this greatly improves performance efficiency, which always has a positive effect on the bottom line.

Lower Costs Down the Line

Let’s face it, creating a delivery fleet from nothing is an expensive venture. You need to buy vehicles and equipment, hire staff and cover payroll, build a supply chain, and automate the process using digital logistics software.

All of that requires a sizable investment of capital before you can hit the ground running.

Be that as it may, it’s still a potentially worthwhile investment. With potentially better returns down the line than operating a delivery service using an external fleet.

Despite all the monthly expenses (fuel, payroll, insurance, software subscriptions, etc.), you could potentially have significantly lower overhead costs when you operate an internal fleet. Depending on the stability of your volume level, of course. It might not seem that way at first glance until you take a look at how third party companies charge their services.

Delivery as a Service and 3PL companies make their profit margin by selling their service as their main product and pricing it up appropriately above their costs. This could mean that the cost per delivery is significantly higher, particularly when you factor in all of the ‘extras’: surcharges, waiting time, etc.

At the other end of the scale, operating an internal fleet provides you flexibility around the delivery component.

You could potentially offer free delivery for example as you have full control over the associate cost structure. This might put your business at a significant competitive advantage.

Assuming you have a steady enough base of demand, despite the upfront capital investment and ongoing costs (driver wages, fuel, etc.) you can generate healthy returns on operating an internal fleet - so long as you are optimizing your routes appropriately to minimize miles driven, etc.

The Disadvantages of Operating a Private Fleet

High Initial Capital Requirements

The biggest drawback of operating an in-house fleet is surely the heavy upfront investment costs necessary to build it.

You need to buy (or lease) vehicles and supporting equipment, hire drivers, develop a supply chain network, purchase insurance, and subscribe to digital logistics software to manage it all. All of it is necessary, but of course, has associated costs.

You also can’t expect all of this to happen overnight. You need to take into account the time it will take to procure everything which requires additional capital to support it.

Besides the financial, physical, and human resources, you will also need to think about raising intellectual capital.

Do you have enough logistics expertise and experience to operate a fleet independently? What about others on your team? How much will it cost to teach them and learn everything you need to know yourself?

All of this will require serious consideration before you set out to create your delivery fleet.

Slow Scalability

As fast and agile an in-house fleet can be when it comes to day-to-day operations, it is very cumbersome when you want to scale it.

Initially, it will be easy to expand your operations. All you have to do is add additional drop-off locations, optimize their routes, and add them to your fleet’s delivery schedule. But what happens when your demand outgrows the size of your fleet?

When that happens, you will need to increase your capacity. And that will require another round of investment.

As before, you will need to buy new equipment, hire and train staff, and integrate everything into the existing process. And when the need arises to scale again, the process will repeat itself.

At one point, you will have created a blueprint and the process would seem fast and easy. But when you compare it to contracting a bigger provider or fleet outsourcing to more than one company to meet increasing demand, how fast does scaling an internal fleet get?

Forward planning around your demand will be important as you think about how to scale your fleet and ensure it is always optimal as the scale of your operations will be very much a function of the route planning and optimization software that you decide to implement.

Complete Liability

What happens when something goes wrong during drop-off? When a package is damaged, or it arrives late? When the order is misplaced, or when it doesn’t arrive at all? How does it affect your reputation and service record? And who is liable for that?

When you operate an internal delivery service, you take on all of the responsibility and risk for failed deliveries.

While it doesn’t happen often, every time it happens it lowers your credibility among customers, which can have a serious impact on the bottom line.

Since there is so much risk involved, even when you insure the service against unexpected events, the small scale and low reputation of your company will hinder you from getting a good rate.

To minimize that risk, you will have to have a sophisticated reverse logistics strategy and a responsive customer service team that enables you to handle those situations efficiently and with minimal cost to the company and effect on the brand image.

On the other hand, you can choose outsourcing courier services to an external fleet and let them take on all the liability and risk that comes with operating a delivery service.

What is an External Fleet?

Having an outside delivery fleet means outsourcing your last-mile delivery activities to a dedicated third-party service provider. The hired company is then responsible for delivering your products or services directly to the customer using its vehicles, equipment, facilities, and staff to do it, in return for a fee.

Businesses that provide this type of service tend to be Delivery as a Service, Third-Party Logistics (3PL), or Dedicated Courier companies.

Outsourcing last-mile delivery like this is useful for companies that lack the necessary capital or know-how to build and manage an in-house fleet. So, there is also less risk involved, as well.

Instead, a company can rely on a third party to provide a delivery service and focus its attention on core work activities, such as talking with customers, preparing orders, or developing products.

And although the service fee of retail fleet outsourcing may potentially reduce profit margins, the minimal upfront cost and faster implementation can potentially drive greater overall revenue.

That’s why many companies starting up their delivery service usually choose to outsource the service. But to find out what else might influence your decision, here are the main benefits of an external fleet.

The Advantages of Outsourcing a Delivery Fleet

Lower Initial Capital Requirements

Fleet outsourcing the last-mile of delivery to a third-party provider is a lot more flexible since it requires little to no upfront costs to set up and usually involves pay-as-you-go service fees.

For many startups and companies that lack the necessary funds or expertise to build a fleet in-house or those with lumpy demand patterns, this often proves to be a more affordable, or at least more flexible, option.

Usually, the only significant upfront investment needed to operate an outsourced fleet is an Order Management System, which allows you to connect incoming orders to the service provider’s fleet management, delivery and transport systems. Everything else is optional.

Many third-party companies also have access to a wealth of contacts and resources, which they can use to gain much better deals on insurance or software subscription and make their service fees a lot more affordable.

With no significant investment to speak of, operating an external service also means the much faster implementation of your delivery service.

Fast Implementation

Deliveries have become such an integral part of the shopping experience that the market size for last-mile delivery in North America alone is set to rise to almost 51 billion dollars by 2022.

To seize this opportunity, companies must create a delivery service quickly. Outsourcing a fleet to an outside partner is the fastest way to work around that problem.

Contracting your service to an external fleet is a great way to get the necessary resources and infrastructure to start delivering products or services to customers as soon as you’re ready.

Even though this means raising the cost of delivery and renouncing a percentage of the delivery order, it’s a price many companies are willing to pay to get an operational delivery service within a short space of time.

It also means you can rely on the provider to gain access to a wealth of knowledge, tools, and best practices that would otherwise take years to accumulate, or might simply be out of reach.

With a fleet at your disposal at the earliest opportunity, you can become more competitive and increase your revenue potential, but also gain more time and freedom to focus on other areas of your business.

Greater Focus on Core Activities

Let’s face it, there are a lot of things to worry about when you own a business, and delivery service is just another activity that requires your attention.

If you’re new to it, planning, managing, and executing deliveries can take a real toll on other areas of your business unless you contract a provider.

Outsourcing the fleet and the delivery side of your business to another company allows you to focus on the core activities of your business.

Without the need to spend time on the administrative burden involved with the managing of day-to-day tasks of a delivery fleet, you can zero in on other essential tasks like:

  • customer relationship strategy;
  • marketing and customer acquisition;
  • service or product development;
  • automation of the business;
  • employee training and growth;
  • capital management;
  • accounting and financial management;
  • financial and business analysis;
  • quality and output performance.

Further, you gain access to the software solutions that the third-party logistics companies offer. Tools like digital logistics software, fleet management, and route optimization platforms serve the bottom line by ensuring maximum performance.

For example, routing optimization of third-party logistics operations can significantly reduce fuel consumption, tire wear and tear, and the need for vehicle maintenance.

Additionally, these companies also qualify for bigger discounts and lower rates, which means lower monthly overhead and even more resources you can use.

More flexibility

Even though contracting an external fleet is potentially a more expensive option, it still allows you the flexibility of a fully variable set of costs vs. having a base of fixed costs of your own. This allows you to flex your spending in line with your own demand patterns.

While an in-house fleet usually involves worrying about fuel, toll road, payroll, insurance payments, software subscriptions, and other operational costs, these are all part of the bundle you consume when you outsource a fleet to a third party company.

Providers usually charge per delivery, per mile/kilometre, or the size of the shipped item, and charge it on an upfront or ongoing basis, depending on the agreement you have with them.

All unexpected expenses are the issue of the provider, which can include vehicle repairs, late fees, or the cost of returning failed deliveries.

Although these costs are passed onto you as the customer, you are often protected by the agreement you originally signed which limits your exposure to anything beyond the course of normal business.

Passing over the Liability

Operating external carriers may involve less risk during delivery operations.

As dedicated providers become responsible for delivering products or services, they also take on all (or at least some) of the liability in case something happens, which might affect your customers or the company’s reputation and bottom line. This is usually covered by their insurance which is part of the package of services which you buy from the third party.

Failed deliveries, misplaced or wrong orders, late arrivals, or damaged products en route are also often covered in some way, shape or form as part of the service.

In some of these instances, the third party might be liable and have to compensate the customer at no extra cost to your company. This is usually handled by the provider’s customer service department and initiating reverse logistics.

Providers also remain responsible for unexpected events in the field that are out of their control, such as vehicle or equipment malfunction, unforeseen driver behaviour or health issues (like the state of delivery during the COVID-19 outbreak), or external disasters.

All of these situations are usually covered by the provider’s insurance policies, which cover everyone and everything involved during drop-off.

However, it does highlight the importance of choosing a reliable and professional company with a good delivery track record. This way, you not only reduce liability for yourself but also provide the best possible service to your customers.

The Disadvantages of Outsourcing a Delivery Fleet

Potential Erosion of Margins

Despite the attraction of low initial capital requirements and fixed costs, outsourcing your logistics operations, especially with a stable and predictable volume and revenue base, can erode your operating margins.

A company with an internal fleet is responsible directly for the associated costs, but they also have control over them. Therefore, they have the flexibility to be creative when pricing products or services to customers. For example, a company can offer free delivery as a value-add service to them.

By contrast, a company with an external fleet can’t operate with such flexibility as they have limited control over the cost structure of the provider.

Less Control Over the Fleet

Handing over part of your business to a third-party always involves relinquishing at least some control over those operations. When it comes to your delivery fleet, it is no different.

Unlike an in-house delivery operation which retains total control over its staff and fleet, outsourcing the service to another company causes you to lose some of that control to the provider.

In agreement with you, the chosen company takes over the operations and the management of the entire delivery process. Under such circumstances, it is difficult to direct your service the way you want.

It also means that you have to rely on the contractor to maintain your standard of service. Sure you can bind them to an SLA, but without direct oversight, you cannot know whether their staff are making mistakes or delivering the same quality your customers are accustomed to.

That is a real problem for your company since customer experience has become the new battlefield for business, with 96% of all customers saying it is an important factor that determines their loyalty to a brand.

Lack of Communications Efficiency

It’s hard enough to maintain efficiency in communications when all agents operate under one roof. But when channels are split between two organizations, the task becomes significantly more difficult.

Working with a third party raises the complexity of the communications network, reducing the flow of information and increasing the chance for misunderstanding.

As miscommunication between operators grows, harmony and teamwork are reduced within the fleet. Tensions can get high and lead to incoherence.

It also means that both organizations use different lines to communicate with one another.

While information can flow directly up and down the line of communication within the external fleet, it has to flow indirectly between the fleet’s management and the company that hired it.

So even though the operations manager can issue tasks to drivers directly, and those drivers can relay back the information from the field, an in-house manager can’t make any requests directly to drivers. He has no direct link with them and has to rely on the external staff to pass his message along to the fleet.

This complex, indirect, and linear style of communication is a lot more time-consuming and can put a lot of pressure on decision-makers on both sides of the table. And when it involves time-sensitive deliveries, it usually results in substandard performance and output from the agents in the field.

However, customers are the ones who will feel the biggest effect of poor communication, as it will lead to mistakes and failed deliveries. That can have a bad impact on their experience and cause your reputation to plummet, causing a blow to your bottom line.

Can You Create a Hybrid Fleet?

A hybrid delivery fleet involves combining features or elements of the internal and external fleet to gain a best-of-both-worlds scenario.

Even though outsourcing services to a provider and managing an in-house fleet seem like two very different things that can’t work together, in reality, a hybrid can operate with even greater success as either model independently in some circumstances.

Creating a mixed delivery fleet usually involves assembling a delivery operations team in-house (sometimes consisting of just one distribution manager) and giving them control of an external fleet (drivers and their vehicles).

You may also control the route optimization or delivery management software solution in this instance as well.

This kind of hybrid fleet is a great balance between an external fleet. First, it’s very useful for companies that may not want to buy equipment and vehicles, but possess the required human capital and experience to manage their delivery service and want to have more control vs. fully outsourcing everything.

The mixed workforce within a hybrid fleet streamlines communication while providing greater flexibility, control, and allowing more focus on core activities.

What Are Your Company’s Needs?

No two companies are exactly alike. What’s the right choice for your business, may not be the right choice for your competitors.

Only you can decide between operating an in-house fleet, outsourcing your delivery to a service provider, or creating a delivery service that combines internal and external fleets.

At first glance, it’s hard to see why every small-to-mid-sized business wouldn’t choose to outsource its services to a third-party provider. The company can start up its delivery service with minimal investment, yet gain access to a wealth of resources that it can use to effortlessly meet its demand.

On the other hand, there are a host of logical reasons (often centered around predictability of demand and a strong desire to preserve brand control) that can justify the human, financial, and intellectual capital required to build a private fleet, then it can be a worthwhile investment for that particular company.

At an enterprise level, similar dilemmas exist, it is always a trade-off between flexibility and control.

The key is to make the decision based on the needs and factors specific to your company, and the goals you wish to achieve.

That’s why one of the most underestimated factors when choosing between an internal and external fleet is the ability to execute a distribution and logistics operation shoulder to shoulder with your core business activities and gain advantages from it which outweigh the financial and time commitment.

After all, delivery is complimentary to your core business - your customers are relying on it and it needs to work efficiently and at high quality. A lot of this will come down to how the operation is built and managed, the systems that are used, and the people that are involved in the operation (whether this is internal or external). Maintaining clear oversight and transparency (both for your and your customers) over the operations will also be key to success.