Chapter 3, p96

Motor Carriers

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.

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.

• 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.

• 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.

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.

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 shipper’s 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.

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)

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.

• 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.

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)

• 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 carrier’s total transit time

• 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.

• 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.

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.

• 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.

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.

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/m^3) 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.

• 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.

Terminals p106

• TL operations might not require terminals for the movement of freight.

• They use the shipper’s plant for loading and the receiver’s 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.

• 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.

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.

• 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 driver’s 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.

• 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.

• 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:1.First, by standing order – a constant repetitive

pickup e.g. every day at 10am or every Tuesday at 2pm.

2.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.

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

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

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.

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.

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 carrier’s cost then is associated with daily operating costs – the variable costs of fuel, wages, maintenance, and highway user fees (toll).

• 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.

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).

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.

• 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.

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)

• 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 revenue’s.

• 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.

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.

Current IssuesSafety• 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.

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.

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