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12/5/13 What's the best design for your dedicated fleet? CSCMP's Supply Chain Quarterly

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Quarter 1 2010

What's the best design for your dedicated fleet?By POORNACHANDRA RAO PANCHALAVARAPU

When weighi ng t he cost an d servi ce benefit s of a dedicated t ruck fl eet , consider alt erna ti ve desi gns. In man y cases, a design with th epotential to bring drivers back home on a regular basis will be the best option.

Alt houg h m an y compa nies u se dedica ted t ru ck fl eets t o tra nsport th eir goods, few g iv e adequ at e th ough t t o whi ch ty pe of config ur at ion t hey ch oose for t hose

fleets. But they should consider the options carefully , because this decision can ha ve a significant im pact on cost and service.

The term "dedicated fleet," also known as "dedicated contract carriag e," refers to tractors, tr ailers, driv ers, and other r esources exclusively devoted to serv inga set of facilities or lan es in a tra nsportation netw ork. They u sually are owned or leased by a motor carrier or logistics service provider that is hired by theshipper to ma nage its fleet operations. Traditional a lternativ es to a dedicated fleet include operating a priv ate fleet, hiring common carriers, or contracting wit h t hir d-par ty logist ics pr ovi ders for tr an sporta tion ser v ices.

For some shippers, dedicated contract carria ge offers significant benefits. For one thing , dedicated transportation is an effective way to guara ntee capacity .For an other, experience has shown that it can r educe transportation costs and has the potential to improve on-time delivery performan ce by 5 to 10 percent.Moreover, shippers with dedicated contract carr iage arra ngements can more easily negotiate fuel surcha rges and reduce their regula tory liability than ca nshippers with priva te fleets. Finally , dedicated fleets allow shippers to focus their personnel a nd financial resources on their core business operations, such a s

manufacturing, rather than on tr ansportation management.

Dedicated fleets may be broadly classified into two categories: network-based or depot-based . A network-based dedicated fleet balances freight flows betweenthe v arious nodes across the entire transportation network. In a depot-based fleet, freight m oves revolv e around the key truck terminal s and destinations.Each ha s its advan tages and disadvant ages, and shippers should ana ly ze each of the scenarios in-depth to understand the uncerta inties and operationalissues before identifying a design for implementa tion. This art icle, however , w ill m ake the case that depot-based dedicated fleets are th e better ch oice formany shippers because they offer the potential for better serv ice and lower costs.

Suitability of dedicated fleetBefore we look at which ty pe of dedicated fleet works best un der which circumstances, it is important to note tha t a dedicated fleet is not suitable for allcircumstances. Figure 1 and 2 illustrate h ow suitable a dedicated fleet would be for specific ty pes of distribution n etworks. These assessments ar e based onresearch coupled with observations of real dedicated networks. As shown in Figure 1 , th e cost a nd service benefits of dedicated fleets in netw orks with one- wa y flows a re l im ited. If the ser v ice r equi rem ent s ar e low, av ail abl e ca rr ier cap aci ty is hig h, an d av era ge l eng th of hau l is h igh (in dica tin g lon g-ha ulfreight), there a re no benefits to implementing a dedicated fleet other than guara nteeing capacity in the supply cha in. In Figure 2, it is clear that dedicatedfleets have more to offer when the freight flows are bi-directional. (Note: Both figur es assume n o seasonality of freight flows in the network. If there ar esignificant seasonal freight v olumes, then there m ay be benefits to contra cting short-term dedicated capacity .)

The exam ples used for Figures 1 and 2 are small and simple enough tha t it is possible to manua lly identify dedicated fleet opportunities. For la rgetran sportation netw orks with significant flows, however, it is difficult to identify t hose opportunities without the h elp of an anal yt ical model. Such a modelattempts to ma ximize the cost savings resulting from the implement ation of a dedicated fleet.

When an al y zing th e cost im pac t of a dedica ted t ra nsport at ion pr ogra m, it i s help ful for ship pers t o hav e hi storic al infor ma tion about th e ra tes offer ed by

common carriers for va rious lanes in their networks. They also will need compara tiv e informa tion about th e cost of a dedicated fleet program , wh ich ma y not be easily accessible. When that is the case, shippers may consider using hy pothetical costs per mile for loads (say, US $1. 25, $1 .50, a nd $1.7 5) and formoving empty equipment (say, $0.75, $0.85, and $0.95) for the pur pose of assessing the opportunity .

The net sav ings from implementing a dedicated fleet program can be determined based on the following equation (evalua tion model):

Net sav ings = cost of using common car riers - cost of dedicated mov es - cost of empty mov es

This model identifies lanes that ar e suitable for dedicated contract car riage an d those that ar e suitable for one-way moves. But the an aly sis should not stopthere; after identifyin g the opportun ities for dedicated moves, it is important to ev aluate t he implications for the r emaining lanes, which will be served by other means. Lanes recommended for delivery by common carriers, for example, m ight experience a t ariff (rate) incr ease due to a reduction in freight v olum es. If th ose lan es expe rien ce sign ifica nt ra te h ikes, th en it ma y be ju stifia ble t o assign th em t o dedicat ed ca rr iers i nste ad. An y such cha ng eabl esituation requires periodic re-eva luation.

Network-based vs. depot-basedHaving ascertained that it should use a dedicated fleet, a company should next look at whether it should adopt a n etwork-based model or a depot-basedmodel. Figure 3 summar izes the ma in char acteristics of these two ty pes of dedicated fleets.

A n etw ork-based dedic at ed fleet bal an ces fr eigh t fl ows am ong it s nodes, a nd t hu s requ ires c onti nu al mov eme nt from one n ode to an other in t he n etw ork.Ensuring tha t th e sum of inbound flows (the n umber of truckloads) to any node is equivalent to the sum of outbound flows from the sam e node makes itpossible to execute transportation activ ities with a high rate of loaded miles. This is illustrated in Figure 4, in which red arrows indicate empty moves in thenetwork. The num bers associated with each l ane represent the num ber of annua l loads and the length of haul for that lane, respectively . In order to achievesuch a balanced flow in the network, it ma y be necessary to move tr actors, trailers, and driver s without loads.

A m aj or lim ita tion of the n etw ork-based dedi cat ed fleet is th at driv ers a re n ot al wa y s abl e to r etu rn to th eir origi na tin g depots on a r egu lar basis. Forexample, a driver originating from Node A in Figure 4 could follow a number of different r outings, such as ABCA, A BDA, ABDEBCA, or ev en ABDEBCDA.The actua l time required to get back to Node A would, of course, depend on th e specific lanes assigned to the driver a nd the lengt h of haul associated withthem.

In a large n etwork with destinations scattered across the country , driv ers are likely to remain a way from their originating depots for long periods. Managerscan cr eate schedules that periodically brin g driver s home, but enforcing such considerations in this ty pe of network design could negativ ely a ffect thededicated fleet's performance.

Depot-based dedicated solutions, on the other han d, are orga nized according to the inbound and outbound flows around indiv idual depots in the netw ork.

Figure 5 shows an exam ple of a depot-based dedicat ed network, with Node A being the depot. Nodes C and E receiv e shipment s from Depot A. N odes B, D, andF ship to Depot A. Depot A is shipping to Node C 400 loads annually with a length of haul of 600 m iles on lan e AC. Nodes B and D are shipping 300 and 20 0loads, respectively , to Depot A. By moving the empty equipment from Node C to Nodes B and D, the backhaul transportation to Node A could be executed in acost-effective ma nner. N ote that th e resource requirement at Node D may be satisfied by moving empty equipment over short distances from Nodes C and E.

Depot-based dedicated fleet programs are suitable for lar ge depots that either ha ve significant inbound an d outbound activ ity or make m any local deliveries.In addition, networks with a la rge num ber of facilities, including a combination of intra-company moves (that is, between the company 's own plants anddistribution centers) and outbound customer shipments, could benefit from a depot-based dedicated program.
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One of the biggest advant ages of a depot-based network is the ability to bring driv ers and equipment h ome on a regula r basis. This has a strong, positiveimpact on the driv ers' quality of life and job satisfaction, which u nderstandably tr anslates to increased driver retention and better service.

Case study exampleThe following case study shows how a company can first an aly ze whether a dedicated fleet would be suitable for its distribution network an d then which ty peof dedicated fleet to use. This analy sis employs data for 108 sites plus 184 lanes with t hree ma jor depots. More than 50, 000 loads were hauled annua lly , wit h a n a v era ge l eng th of hau l of 1 ,1 00 m iles.

Figure 6 shows the correlation between the num ber of "working units" (each comprising a t ractor, a trailer, and a driv er) and cost savings for anetw orkbased dedicated fleet. Figur e 7 shows the estima ted sav ings associated with v ar ious load rat ios. "Load rat io" is defined as the rat io of loaded miles tototal miles in t he network; "total m iles" includes both loaded and empty miles. With a high load rat io, it is possible to justify a dedicated fleet implementationfor a small portion of the network. With a smaller load ratio, there will be a gr eater nu mber of loads but also more empty miles, which is unproductive forthe dedicated system.

As in dica ted in Figu re 6 , t he est ima ted sa v ing s resu lt ing from dedica ted oper at ions in cre ases u p to a cer ta in p oint a nd sub sequen tly dimi nish es. Fig ur e 7illustrates a similar relationship between cost savings a nd load ratio. In other words, there is an "optimum point" at wh ich a dedicated system w ill max imizethe net sav ings. The planning problem associated with dedicated fleet ana lysis and design, th en, is to determine both the optimal n umber of working unitsand the optimal load ratio.

Figure 8 summ arizes the results of the shipper's analysis of a network-based dedicated fleet with a load ratio of 99 percent, an d Figure 9 does the same for adepot-based solution with a load rati o of 99 perc ent. (T he load ratio was chosen simply for the purpose of discussion.) These ana ly ses assume th at th e cost permile for hiring common car riers is US $1.20; t he cost per mile for movin g a load in a dedicated system is $1; and the cost per mile for moving em pty equipment is $0.85. Act ual cha rges var y greatly depending on a va riety of factors, but the degree of difference between the three va lues is ty pical.

In Figure 9, apply ing these assumptions for Depot A results in a total sav ings of US $1,154 ,000 (= 6, 043 ,000*1 .2 - 6,043 ,000*1 -64 ,000*0.85). When allthree depots are taken into consideration, the scenario offers potential cost saving s in excess of US $2.1 m illion by employing 9 1 dedicated working units wit h a n a v era ge l oad ra tio of 99 perc ent .

The depot-based solution has another a dva nta ge: workforce stability . Unlike a network-based dedicated fleet, a depot-based solution stations a predictablenumber of driv ers at predetermined locations. This is a distinct adv antage when one considers that, when the economy is strong, it's not un common for U.S.-

based l ong-ha ul m otor ca rr ier s to see a 1 00-per cen t or h igh er a nn ua l tu rn ove r a mong driv ers. Adoptin g a depot-based solu tion t ha t r egu lar ly brin gs dri v ershome helps to attract an d retain driv ers for the long ter m. Moreover, it alm ost goes without saying t hat satisfied driv ers will provide the best service tocustomers.

Lower driv er turn over offers cost benefits, too. Assuming a ty pical cost of US $10,000 per y ear to recruit an d train a driv er and 1 00-percent an nualturnov er of long-haul driv ers, the network-based dedicated fleet implementation presented in Figure 8 will incur a n estimated US $1 million recruitm entand tra ining cost. That brings the n et saving s for the n etwork- based dedicated fleet solution with a 99-percent load ratio down to US $1.4 ($2.4 - $1)million. The depot-based dedicated fleet solution shown in Figure 9 , with an a ssumed 50-percent turn over of drivers (a ty pical percentage), w ill requirerecruiting a nd training 46 driv ers during the y ear. After deducting the lower recruitm ent and tra ining costs, the depot-based solution can be expected toproduce a sav ings opportun ity of US $1.65 ($2.1 - $0.46 ) million. In short, the network-based dedicated fleet implementa tion might offer larger net savings, but wh en t he dr iv er t ur nov er fa ctor an d associa ted costs a re c onsidere d, a depot-based solu tion h as m eri t.

Im plications for carriers and shippersThe methodology for ev aluatin g dedicated fleet opportunities presented earlier will benefit both car riers and shippers. First, it will giv e carr iers the ability to eva lua te the scale an d scope of potent ial dedicated fleet opportu nities in a shipper's network. Th is helps them to effectiv ely r espond to shippers' requests forproposal (RFPs). Second, car riers can use it to a ssess the dedicated fleet opportun ity from the shipper's perspective by using ma rket-avera ge, common-carrier

rates an d the dedicated fleet cost coefficients they hav e proposed to the shippers. In addition, this ana lysis will guide carr iers in proposing appropriate, lane- based pr icin g str at egie s in t he sh ipper s' netw orks. Thir d, t his m eth odology wil l h elp ca rr ier s par tic ipat ing in opt imi zati on-based t ra nsport at ionprocurement. (Optimization-based transportation procurement em ploy s sophisticated analy tical m ethods to determine wh ich car riers and modes should beused on a set of lanes in order to min imize systemwide tran sportation costs.) Specifically , ca rriers could identify bun dles of lanes a nd associated pricing, wh ich is a k ey inpu t t o the opt imi zati on-based t ra nsport at ion pr ocur em ent process. Fina lly , ca rr ier s could ev al ua te t he t ra de-offs between imp lem ent ing adepot-based dedicated fleet and a network-based dedicated fleet.

From a shipper's perspective, the proposed methodology ca n be used in tw o distinct way s. First, shippers interested in implementing t heir own priv ate fleetscould use this methodology to determine the scale an d scope of priv ate fleet opportunities in t heir netw orks. They can do so by using the r ates paid tocommon carriers an d the estimated cost of establishing a nd operating a priv ate fleet as inputs. Second, shippers can use the meth odology to negotiate rates wit h dedic at ed ca rr ier s. For ex am ple, shipper s could est im at e th e cost ben efits of a dedica ted fl eet on v ar ious la nes a nd n egotia te t he r at es acc ording ly .

Transportation and logistics managers should consider a depot-based dedicated fleet as a way to reduce their operating costs and im prove serv ice in t heirnetworks. Equally important, im plementing a depot-based dedicated fleet has significant potential to enhance the qual ity of life for driv ers, and thusimproves driver retention. The creation of a stable workforce of drivers thereby ensures shippers a consistent, high qualit y of service to their customers at areasonable cost.

Poo rnac ha ndra Rao Panc hala va rapu , Ph. D., has w ork ed as a s enio r en gine er a t the mo tor c arrier Sc hne ider Natio nal In c. for 12 ye ars . In his cu rrent ro le th ere, hecons ults with Fortune 500 com panies; his projects have involved supply chain optimization assignments s panning five continents. Rao has s poken at conferencesand has contributed articles to s everal publications. He also serves on the editorial review board of the International Journal of Information Systems and SupplyChain Management. Educated both in India and in the United States, he ho lds a Ph.D. in system s engineering from Case Western Reserve University.

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