Chapter 3, p96

1
Chapter 3, p96

• Motor Carriers

2
Industry Overview

• Types of Carriers
• The first major division of motor carriers is
  between for-hire and private carriers.
• The for-hire carrier provides a service to the
  public and charges a fee for the service.
• The private carrier provides a service to the
  industry or company that owns or leases the
  vehicles, and thus does not charge a fee, but
  obviously the service provider incurs the cost.

3

• For-hire carriers can be either local or
  intercity operators.
• Local carriers pick up and deliver freight within
  the commercial zone of a city.
• Intercity carriers operate between specifically
  defined commercial zones.

4

• For-hire carriers may be common and/or contract
  operators.
• Common carriers are required to serve the general
  public upon demand, at reasonable rates, and
  without discrimination.
• Contract carriers serve specific shippers with
  whom the carrier have a continuing contract thus
  not available for general public use. Contract
  carriers also typically adapt their equipment and
  service to meet shipper needs.

5

• Another important distinction is between the
  truckload (TL) and the less-than-truckload (LTL)
  carriers.
• Truckload carriers provide service to shippers
  who tender sufficient volume to meet the minimum
  weight required for a truckload shipment and
  truckload rate or will pay the difference.
• That is, the TL carrier pick up a truckload and
  delivers the same truckload at the destination.
• Less-than-truckload carriers provide service to
  shippers who tender shipments lower that the
  minimum truckload quantities.
• Consequently LTL carrier must consolidate the
  numerous smaller shipments into truckload
  quantities for the line-haul (intercity) movement
  and disaggregate the full truckloads at the city
  for delivery in smaller quantities.

6
Number of carriers

• There consist a large number of small carriers,
  particularly in the truckload segment of the
  industry.
• This is because of the limit capital needed to
  enter the TL market in contrast to the LTL
  carriers that have terminals that increase the
  capital requirements.
• The LTL segment of the motor carrier industry
  requires a network of terminals to consolidate
  and distribute freight , called a hub-and-spoke
  system.

7

• Brief description of an LTL operation
• Shipper that have small shipping requirements ,
  use LTL carriers
• LTL shipper typically has shipments headed for
  more than one destination.
• The LTL carrier collects the shipments at the
  shippers dock with a pickup and delivery (PUD)
  vehicle i.e. a vehicle that does the collection
  and delivery of all shipments.
• After the PUD vehicle is finished collecting and
  delivering shipments, it returns to a
  consolidation or break-bulk facility.
• Once at the consolidation facility, the packages
  collected are sorted by their final destination.
• The next part of the trip is called the line-haul
  i.e. the trip between consolidation and break
  bulk facilities.
• After the line-haul portion of the trip, the
  trailers are unloaded at another break-bulk
  facility and are then sorted and reloaded into a
  PUD vehicle to be delivered to the receiver.

8
Market Structure

• Motor carrier vehicles, both for-hire and
  private, primarily transport manufactured, high
  value products. These vehicles carry more than a
  majority of the various manufactured commodity
  categories.
• The commodity list includes food products,
  manufactured products, consumer goods and
  industrial goods.
• Motor carriers transport less of commodities such
  as grain, coal, iron ore, primary nonferrous
  metal products because such commodities generally
  must move long distances and in large volumes
  (they are usually shipped by rail and water)

9
Competition

• The motor carrier industry offers few capital
  constraints to entry.
• With a relatively small investment, an individual
  can start a motor carrier business and compete
  with an existing carrier.
• Thus freedom of entry, discounting, and lack of
  regulatory constrains appear to dominate the
  industry and suggest that competition between
  firms can control the industry.

10

• The major segment that has extensive capital
  requirements for entry is the LTL carrier
• The LTL carrier must invest in terminals and
  freight-handling equipment that are simply not
  needed by the TL carrier.
• However, the responsiveness to customer demands
  for service still dominates all motor carrier
  organizations, and shippers expect carriers to
  respond to their needs.

11
Operating and Service Characteristics

• General Service Characteristics
• The motor carrier possesses a distinct advantage
  over other modes in the area of accessibility
  (the ability of the transportation provider to
  move freight between a specific origin and
  destination p39)
• The motor carrier can provide service to
  virtually any location.
• Motor carrier access is not constrained by
  waterways, rail tracks or airport locations.
• Therefore, motor carriers have potential access
  to almost every origin and destination.
• Motor carriers provide the bridge between the
  pickup and delivery point and the facilities of
  other modes. (universal coordinator)

12

• Another service advantage is speed.
• For shipments going under 800km, the motor
  carrier vehicle can usually deliver goods in less
  time than other modes.
• Although the airplane travels at higher speed,
  the problem of getting freight to and from the
  airport via motor carrier adds to the air
  carriers total transit time

13

• The smaller cargo-carrying capacity of the motor
  carrier vehicle enables the shipper to use the TL
  rate or volume discount, with a lower volume.
• The smaller shipping size of the motor carrier
  provides the buyer and seller with the benefits
  of lower inventory levels, lower
  inventory-carrying costs and more frequent
  services.

14

• Another positive service characteristic is the
  smoothness of transport.
• Due to the suspensions and motor tyres, the motor
  carrier ride is smoother than rail and water
  transport and less likely to result in damage to
  cargo (cargo damage is still a reality)
• This reduces the package requirements and thus
  packaging costs.
• Lastly, the for-hire segment of the motor carrier
  industry is customer or market orientated.
• The small size of most carriers has enabled
  (forced) the carriers to respond to customer
  requirements and service needs.

15
Equipment

• Many of the motor carrier service advantages
  emanate from the technical features of the
  transportation vehicle.
• The high degree of flexibility, the relatively
  smooth ride and the small carrying capacity are
  the unique characteristics that result in greater
  accessibility, capability, frequency of delivery
  and pickup, cargo safety and lower transit time.
• The availability to operate one cargo unit (e.g.
  a trailer) eliminates the time needed to collect
  several cargo units.
• Motor carrier equipment flexibility is added by
  the lack of highway constraint (unlike the
  railroad and water carriers it is not constrained
  to fixed railway or waterway)
• There are however gross vehicle weight and axle
  weight restrictions on vehicles travelling on
  roads.

16

• TL and LTL carriers need to make two types of
  equipment decisions what type of tractor (power)
  and what type of trailer?
• Power must be specified to be able to handle the
  size and length of the load, along with the
  terrain over which it travels.
• Many different specifications for tractors can be
  used, including single axle and twin axle, with
  different engine and drive combinations.
• Decisions regarding trailers include length,
  trailer type (dry van, refrigerated, ragtop,
  container, flatbed and carrier capacity.

17
(No Transcript)
18
Types of Vehicles

• Motor carrier vehicles are either line-haul or
  city vehicles.
• Line-haul vehicles are used to haul freight long
  distances between cities. (when operated in
  cities it is not very efficient)
• City straight trucks are used within a city to
  provide pickup and delivery service.

19

• LINE-HAUL VEHICLES
• Usually a tractor-trailer combination of 3 or
  more axles. (Fig 3.5)
• Be aware that the net carrying capacity of
  line-haul vehicles is also affected by the
  density (kg/m3) of the freight.
• CITY STRAIGHT TRUCKS
• City vehicles or straight trucks are usually
  smaller and are single units (Fig 3.5).
• Cargo and power unit combined in one vehicle.

20

• SPECIAL VEHICLES
• Designed to meet special shipper needs.
• Dry van Standard trailer or straight truck with
  all sides enclosed.
• Open top trailer top is open to permit loading
  of odd-sized freight.
• Flatbed Trailer has no top or sides used
  extensively to haul steel.
• Tank trailer Used to haul liquids petrol or
  diesel.
• Refrigerated vehicles Cargo unit has controlled
  temperature.
• High cube cargo unit has drop-frame design or is
  higher than normal to increase cubic capacity.
• Special unique design to haul a special
  commodity.

21
Terminals p106

• TL operations might not require terminals for the
  movement of freight.
• They use the shippers plant for loading and the
  receivers plant for unloading.
• TL terminals normally provide dispatching, fuel
  and maintenance services.
• These terminals are designed primarily to
  accommodate drivers and equipment, but not
  freight.

22

• LTL carriers do require terminals where they use
  them for loading, consolidation or break-bulk.
• A driver makes deliveries throughout the country
  but will always return to his domicile the
  terminal that the driver originally left.
• The terminals used by motor carriers can be
  classified as pickup or delivery, break-bulk and
  relay.

23
PICKUP AND DELIVERY TERMINALS (PUD)

• The terminal is a key facility in the operation
  of an LTL hub-and-spoke system.
• The most common type terminal found in the LTL
  system is the PUD terminal (Also known as
  satellite or end-of-the-line (EOL) terminals).
• The basic transportation service provided at this
  terminal is the pickup and/or delivery of freight
  on peddle runs.
• A peddle run is a route that is driven daily out
  of the PUD terminal for the purposes of
  collecting freight for outbound moves or
  delivering freight from inbound moves.

24

• Terminal Peddle Run Example FIG3.6
• The PUD terminal is located at Altoona and
  attached to it are four peddle runs.
• A driver will depart from the terminal and
  deliver freight to customers located on that
  drivers assigned peddle.
• During and after the deliveries, freight will be
  picked up from the customers and returned with
  the driver to the terminal.
• At the end of the day the terminal will have
  freight to be consolidated and moved outbound
  from customers in the 4 peddle run areas to
  customers in other areas of the country.

25
(No Transcript)
26

• The basic terminal services performed at these
  facilities are consolidation and dispersion.
• Break-bulk e.g. freight moving inbound to Altoona
  from other terminals will be broken (passing
  through a break bulk) into individual deliveries
  by peddle run.
• Consolidation e.g. Freight that is brought back
  by the peddle drivers for movement inbound from
  Altoona will be consolidated into line-haul
  trailers for movement to the appropriate
  break-bulk terminal.

27

• The dispatch operation provided at the PUD
  terminal is critical to the operating efficiency
  of the peddle runs.
• Customer has 2 ways for freight to be picked up
• First, by standing order a constant repetitive
  pickup e.g. every day at 10am or every Tuesday at
  2pm.
• Second, on demand - where the customer phones in
  for a pickup. This is where local dispatcher gets
  involved in recording the nature of the shipment
  and the required time of pickup and assigns that
  shipment to the driver on the appropriate peddle
  run.

28
BREAK-BULK TERMINALS

• Another type of terminal found in an LTL
  hub-and-spoke system.
• This facility performs both consolidation and
  dispersion (break-bulk) services.
• The main purpose of this terminal is to provide
  an intermediate point where freight with common
  destinations from the PUD terminals is combined
  in a single trailer for movement to the
  delivering PUD terminal, e.g. FIG 3.7

29
(No Transcript)
30
Terminal Management Decisions p110

• NUMBER OF TERMINALS
• How many terminal? It depends
• Firstly, the degree of market penetration and
  customer service desired by the carrier will help
  with this decision.
• The theory is the more terminals, the closer to
  the customer, the better the service
• Second, small terminal vs long peddle e.g. FIG
  3.9

31
(No Transcript)
32

• Example1
• This network utilizes only one terminal but has
  extremely long and expensive stem times for its
  peddle runs.
• The terminal must also be large to accommodate
  the volume of freight that will come from these
  four peddles.
• Example 2
• This network utilizes 2 terminals, with each
  having two peddle runs with significantly shorter
  stem times.
• Each terminal is also smaller than the one in
  example 2.
• So then we have double the amount of terminals
  but decreased stem times for PUD customers.
• This decision would be based on the service
  implications of establishing terminals closer the
  customers versus the cost of adding another
  terminal.

33
LOCATIONS OF TERMINALS

• Some variables to take into consideration when
  deciding the locations of terminals.
• The DOT (USA) limits the amount of time a driver
  can continuously operate a vehicle before a rest
  period is required. Currently the limit is
  11hours, so optimally, PUD terminals should be
  located no more that 11hours away from a
  break-bulk.
• PUD terminals should be located to minimize the
  distance that freight would need to be backhauled
  to the break bulk.
• Market penetration and potential will help
  determine terminal locations.

34
COST STRUCTURE p112

• Fixed Versus Variable Cost Components
• The cost structure of the motor carrier industry
  consists of high levels of variable costs and
  relatively low fixed costs.
• The bulk of the motor carriers cost then is
  associated with daily operating costs the
  variable costs of fuel, wages, maintenance, and
  highway user fees (toll).

35

• E.g FIG 3.10, indicates that in 2001 the total
  cost to operate a tractor-trailer was 2.07/mile
  (R9/km)
• Fixed costs refers to vehicle interest
  depreciation and interest on terminals, garages
  and offices management and overheads.
• The two categories with the largest share of
  variable costs are labour and fuel.

36
(No Transcript)
37

• LABOUR
• From Fig 3.10 we can see that the cost of drivers
  accounts for about 19 of total costs per vehicle
  mile.
• FUEL
• Since (1974) the higher price of fuel has
  resulted in a rise in the relative proportion of
  fuel cost to total cost.
• Oil are 125 per barrel and economists say that
  if it reaches 150 per barrel it could have
  significant consequences for the economy.
• From Fig 3.10 we can see the fuel cost is about
  8 of total costs (please note that this is 2001
  figures).

38
Economies of Scale

• Economies of scale exist when an expanded level
  of output results in reduction in the total unit
  cost of transport (per ton-kilometre) because
  with the increasing output, the fixed cost per
  unit of output declines faster than the variable
  cost increases per additional unit of output.
• There does not appear to be major economies of
  scale for large-scale motor carrier operations.
• Economies of scale are realized through more
  extensive use of large-sized plants.

39

• The large number of small firms, especially in
  the TL segment, suggests that small-sized
  operations are competitive.
• Certain economies exist in the greater use of
  indivisible inputs such as terminals, management
  specialists and information systems.
• The average cost of such inputs will decrease as
  output (greater use) increases.
• Carriers that operate over wide geographic areas
  require more terminals, elaborate information
  systems and more management specialists than
  those that operate over narrow geographic areas
  and benefit more from economies of scale.

40

• Operating Ratio
• Is the measure of operating efficiency used by
  motor carriers.
• The operating ratio measures the percent of
  operating expenses to operating revenue.
• Operating ratio (Operating expenses / Operating
  revenue) x 100
• Operating expenses are those expenses directly
  associated with the transportation of freight,
  excluding non-transportation expenses and
  interest costs.
• Operating revenue are the total revenue
  generated from freight transportation services
  (non-transportation services are excluded)

41

• Carriers might use this ratio to support a rate
  increase request.
• The closer the ratio is to 100, the more
  indicative of the possible need to raise rates to
  increase total revenues.
• E.g. an operating ratio of 94 indicates that
  for every operating revenue Rand (100cents), 94
  cents is consumed by operating expenses. Leaving
  6 cents of every operating Rand to cover interest
  costs and a return to the owners.
• If the operating ratio is equal or greater than
  100, there is no revenue available to cover fixed
  or overhead costs or to return a profit to
  owners.
• Increasing revenues and/or reducing costs are
  viable approaches to resolving the problem of a
  high operating ratio.

42

• Funding
• Highway users motor carrier vehicle operators
  pay for the construction, maintenance and
  policing of highways through fuel tax and toll.
• The more you use the roads the more you pay for
  it.

43
Current Issues

• Safety
• Improved safety can mean improved profitability
• Deficiencies in safety can translate into
  decreased profitability because of expensive
  claims for lost or damaged goods, increased
  insurance premiums, accidents and fines.
• A major related concern that we have touched on
  is that of alcohol and drug abuse.
• Another area of safety concern are drivers
  hours-of-service and fatigue issues.
• Vehicle size and weight is another safety issue.
  There are size limit and weight-carrying
  regulations.

44

• Technology
• Global positioning satellites (GPS), technology
  are being used to track vehicles throughout their
  movement from origin to destination.
• The use of satellites allows carriers to pinpoint
  the location of the vehicle and relay this
  information to the customer.
• Satellite communication will continue to play a
  role in improved safety and customer service.

45

• Financial Stability
• When there is a slump in the economy (recession)
  it usually involves periods of overcapacity which
  lead to severe pricing pressure. This causes
  weaker carriers to exit the market.
• Shipper have become increasingly cognizant of the
  failure rate among motor carriers because when a
  carrier goes out of business, the interruption of
  service could have serious consequences.
• This is why many shippers have introduced a
  financial evaluation of carriers into their
  overall decision framework for selecting
  carriers.
• END