12/5/13 What' s the best design for your dedicated fleet?

CSCMP' s Supply Chain Quarterly

www.supplychainquarterly.com/print/scq201001dedicated/ 1/11
Quarter 1 2010
What's the best design for your dedicated fleet?
By POORNACHANDRA RAO PANCHALAVARAPU
When weighing the cost and service benefits of a dedicated truck fleet, consider alternative designs. In many cases, a design with the
potential to bring drivers back home on a regular basis will be the best option.
Although many companies use dedicated truck fleets to transport their goods, few giv e adequate thought to which ty pe of configuration they choose for those
fleets. But they should consider the options carefully , because this decision can hav e a significant impact on cost and serv ice.
The term "dedicated fleet," also known as "dedicated contract carriage," refers to tractors, trailers, driv ers, and other resources exclusiv ely dev oted to serv ing
a set of facilities or lanes in a transportation network. They usually are owned or leased by a motor carrier or logistics serv ice prov ider that is hired by the
shipper to manage its fleet operations. Traditional alternativ es to a dedicated fleet include operating a priv ate fleet, hiring common carriers, or contracting
with third-party logistics prov iders for transportation serv ices.
For some shippers, dedicated contract carriage offers significant benefits. For one thing, dedicated transportation is an effectiv e way to guarantee capacity .
For another, experience has shown that it can reduce transportation costs and has the potential to improv e on-time deliv ery performance by 5 to 1 0 percent.
Moreov er, shippers with dedicated contract carriage arrangements can more easily negotiate fuel surcharges and reduce their regulatory liability than can
shippers with priv ate fleets. Finally , dedicated fleets allow shippers to focus their personnel and financial resources on their core business operations, such as
manufacturing, rather than on transportation management.
Dedicated fleets may be broadly classified into two categories: network-based or depot-based. A network-based dedicated fleet balances freight flows between
the v arious nodes across the entire transportation network. In a depot-based fleet, freight mov es rev olv e around the key truck terminals and destinations.
Each has its adv antages and disadv antages, and shippers should analy ze each of the scenarios in-depth to understand the uncertainties and operational
issues before identify ing a design for implementation. This article, howev er, will make the case that depot-based dedicated fleets are the better choice for
many shippers because they offer the potential for better serv ice and lower costs.
Suitability of dedicated fleet
Before we look at which ty pe of dedicated fleet works best under which circumstances, it is important to note that a dedicated fleet is not suitable for all
circumstances. Figure 1 and 2 illustrate how suitable a dedicated fleet would be for specific ty pes of distribution networks. These assessments are based on
research coupled with observ ations of real dedicated networks. As shown in Figure 1 , the cost and serv ice benefits of dedicated fleets in networks with one-
way flows are limited. If the serv ice requirements are low, av ailable carrier capacity is high, and av erage length of haul is high (indicating long-haul
freight), there are no benefits to implementing a dedicated fleet other than guaranteeing capacity in the supply chain. In Figure 2, it is clear that dedicated
fleets hav e more to offer when the freight flows are bi-directional. (Note: Both figures assume no seasonality of freight flows in the network. If there are
significant seasonal freight v olumes, then there may be benefits to contracting short-term dedicated capacity .)
The examples used for Figures 1 and 2 are small and simple enough that it is possible to manually identify dedicated fleet opportunities. For large
transportation networks with significant flows, howev er, it is difficult to identify those opportunities without the help of an analy tical model. Such a model
attempts to maximize the cost sav ings resulting from the implementation of a dedicated fleet.
When analy zing the cost impact of a dedicated transportation program, it is helpful for shippers to hav e historical information about the rates offered by
common carriers for v arious lanes in their networks. They also will need comparativ e information about the cost of a dedicated fleet program, which may
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, and $1 .7 5) and for
mov ing empty equipment (say , $0.7 5, $0.85, and $0.95) for the purpose of assessing the opportunity .
The net sav ings from implementing a dedicated fleet program can be determined based on the following equation (ev aluation model):
Net sav ings = cost of using common carriers - cost of dedicated mov es - cost of empty mov es
This model identifies lanes that are suitable for dedicated contract carriage and those that are suitable for one-way mov es. But the analy sis should not stop
there; after identify ing the opportunities for dedicated mov es, it is important to ev aluate the implications for the remaining lanes, which will be serv ed by
other means. Lanes recommended for deliv ery by common carriers, for example, might experience a tariff (rate) increase due to a reduction in freight
v olumes. If those lanes experience significant rate hikes, then it may be justifiable to assign them to dedicated carriers instead. Any such changeable
situation requires periodic re-ev aluation.
Network-based vs. depot-based
Hav ing ascertained that it should use a dedicated fleet, a company should next look at whether it should adopt a network-based model or a depot-based
model. Figure 3 summarizes the main characteristics of these two ty pes of dedicated fleets.
A network-based dedicated fleet balances freight flows among its nodes, and thus requires continual mov ement from one node to another in the network.
Ensuring that the sum of inbound flows (the number of truckloads) to any node is equiv alent to the sum of outbound flows from the same node makes it
possible to execute transportation activ ities with a high rate of loaded miles. This is illustrated in Figure 4, in which red arrows indicate empty mov es in the
network. The numbers associated with each lane represent the number of annual loads and the length of haul for that lane, respectiv ely . In order to achiev e
such a balanced flow in the network, it may be necessary to mov e tractors, trailers, and driv ers without loads.
A major limitation of the network-based dedicated fleet is that driv ers are not alway s able to return to their originating depots on a regular basis. For
example, a driv er originating from Node A in Figure 4 could follow a number of different routings, such as ABCA, ABDA, ABDEBCA, or ev en ABDEBCDA.
The actual time required to get back to Node A would, of course, depend on the specific lanes assigned to the driv er and the length of haul associated with
them.
In a large network with destinations scattered across the country , driv ers are likely to remain away from their originating depots for long periods. Managers
can create schedules that periodically bring driv ers home, but enforcing such considerations in this ty pe of network design could negativ ely affect the
dedicated fleet's performance.
Depot-based dedicated solutions, on the other hand, are organized according to the inbound and outbound flows around indiv idual depots in the network.
Figure 5 shows an example of a depot-based dedicated network, with Node A being the depot. Nodes C and E receiv e shipments from Depot A. Nodes B, D, and
F ship to Depot A. Depot A is shipping to Node C 400 loads annually with a length of haul of 600 miles on lane AC. Nodes B and D are shipping 300 and 200
loads, respectiv ely , to Depot A. By mov ing the empty equipment from Node C to Nodes B and D, the backhaul transportation to Node A could be executed in a
cost-effectiv e manner. Note that the resource requirement at Node D may be satisfied by mov ing empty equipment ov er short distances from Nodes C and E.
Depot-based dedicated fleet programs are suitable for large depots that either hav e significant inbound and outbound activ ity or make many local deliv eries.
In addition, networks with a large number of facilities, including a combination of intra-company mov es (that is, between the company 's own plants and
distribution centers) and outbound customer shipments, could benefit from a depot-based dedicated program.
12/5/13 What' s the best design for your dedicated fleet? CSCMP' s Supply Chain Quarterly
www.supplychainquarterly.com/print/scq201001dedicated/ 2/11
One of the biggest adv antages of a depot-based network is the ability to bring driv ers and equipment home on a regular basis. This has a strong, positiv e
impact on the driv ers' quality of life and job satisfaction, which understandably translates to increased driv er retention and better serv ice.
Case study example
The following case study shows how a company can first analy ze whether a dedicated fleet would be suitable for its distribution network and then which ty pe
of dedicated fleet to use. This analy sis employ s data for 1 08 sites plus 1 84 lanes with three major depots. More than 50,000 loads were hauled annually ,
with an av erage length of haul of 1 ,1 00 miles.
Figure 6 shows the correlation between the number of "working units" (each comprising a tractor, a trailer, and a driv er) and cost sav ings for a
networkbased dedicated fleet. Figure 7 shows the estimated sav ings associated with v arious load ratios. "Load ratio" is defined as the ratio of loaded miles to
total miles in the network; "total miles" includes both loaded and empty miles. With a high load ratio, it is possible to justify a dedicated fleet implementation
for a small portion of the network. With a smaller load ratio, there will be a greater number of loads but also more empty miles, which is unproductiv e for
the dedicated sy stem.
As indicated in Figure 6, the estimated sav ings resulting from dedicated operations increases up to a certain point and subsequently diminishes. Figure 7
illustrates a similar relationship between cost sav ings and load ratio. In other words, there is an "optimum point" at which a dedicated sy stem will maximize
the net sav ings. The planning problem associated with dedicated fleet analy sis and design, then, is to determine both the optimal number of working units
and the optimal load ratio.
Figure 8 summarizes the results of the shipper's analy sis of a network-based dedicated fleet with a load ratio of 99 percent, and Figure 9 does the same for a
depot-based solution with a load ratio of 99 percent. (The load ratio was chosen simply for the purpose of discussion.) These analy ses assume that the cost per
mile for hiring common carriers is US $1 .20; the cost per mile for mov ing a load in a dedicated sy stem is $1 ; and the cost per mile for mov ing empty
equipment is $0.85. Actual charges v ary greatly depending on a v ariety of factors, but the degree of difference between the three v alues is ty pical.
In Figure 9, apply ing these assumptions for Depot A results in a total sav ings of US $1 ,1 54,000 (= 6,043,000*1 .2 - 6,043,000*1 -64,000*0.85). When all
three depots are taken into consideration, the scenario offers potential cost sav ings in excess of US $2.1 million by employ ing 91 dedicated working units
with an av erage load ratio of 99 percent.
The depot-based solution has another adv antage: workforce stability . Unlike a network-based dedicated fleet, a depot-based solution stations a predictable
number of driv ers at predetermined locations. This is a distinct adv antage when one considers that, when the economy is strong, it's not uncommon for U.S.-
based long-haul motor carriers to see a 1 00-percent or higher annual turnov er among driv ers. Adopting a depot-based solution that regularly brings driv ers
home helps to attract and retain driv ers for the long term. Moreov er, it almost goes without say ing that satisfied driv ers will prov ide the best serv ice to
customers.
Lower driv er turnov er offers cost benefits, too. Assuming a ty pical cost of US $1 0,000 per y ear to recruit and train a driv er and 1 00-percent annual
turnov er of long-haul driv ers, the network-based dedicated fleet implementation presented in Figure 8 will incur an estimated US $1 million recruitment
and training cost. That brings the net sav ings for the network- 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 assumed 50-percent turnov er of driv ers (a ty pical percentage), will require
recruiting and training 46 driv ers during the y ear. After deducting the lower recruitment and training costs, the depot-based solution can be expected to
produce a sav ings opportunity of US $1 .65 ($2.1 - $0.46) million. In short, the network-based dedicated fleet implementation might offer larger net sav ings,
but when the driv er turnov er factor and associated costs are considered, a depot-based solution has merit.
Implications for carriers and shippers
The methodology for ev aluating dedicated fleet opportunities presented earlier will benefit both carriers and shippers. First, it will giv e carriers the ability
to ev aluate the scale and scope of potential dedicated fleet opportunities in a shipper's network. This helps them to effectiv ely respond to shippers' requests for
proposal (RFPs). Second, carriers can use it to assess the dedicated fleet opportunity from the shipper's perspectiv e by using market-av erage, common-carrier
rates and the dedicated fleet cost coefficients they hav e proposed to the shippers. In addition, this analy sis will guide carriers in proposing appropriate, lane-
based pricing strategies in the shippers' networks. Third, this methodology will help carriers participating in optimization-based transportation
procurement. (Optimization-based transportation procurement employ s sophisticated analy tical methods to determine which carriers and modes should be
used on a set of lanes in order to minimize sy stemwide transportation costs.) Specifically , carriers could identify bundles of lanes and associated pricing,
which is a key input to the optimization-based transportation procurement process. Finally , carriers could ev aluate the trade-offs between implementing a
depot-based dedicated fleet and a network-based dedicated fleet.
From a shipper's perspectiv e, the proposed methodology can be used in two distinct way s. First, shippers interested in implementing their own priv ate fleets
could use this methodology to determine the scale and scope of priv ate fleet opportunities in their networks. They can do so by using the rates paid to
common carriers and the estimated cost of establishing and operating a priv ate fleet as inputs. Second, shippers can use the methodology to negotiate rates
with dedicated carriers. For example, shippers could estimate the cost benefits of a dedicated fleet on v arious lanes and negotiate the rates accordingly .
Transportation and logistics managers should consider a depot-based dedicated fleet as a way to reduce their operating costs and improv e serv ice in their
networks. Equally important, implementing a depot-based dedicated fleet has significant potential to enhance the quality of life for driv ers, and thus
improv es driv er retention. The creation of a stable workforce of driv ers thereby ensures shippers a consistent, high quality of serv ice to their customers at a
reasonable cost.
Poornachandra Rao Panchalavarapu, Ph. D. , has worked as a senior engineer at the motor carrier Schneider National Inc. for 12 years. In his current role there, he
consults with Fortune 500 companies; his projects have involved supply chain optimization assignments spanning five continents. Rao has spoken at conferences
and has contributed articles to several publications. He also serves on the editorial review board of the International Journal of Information Systems and Supply
Chain Management. Educated both in India and in the United States, he holds a Ph. D. in systems engineering from Case Western Reserve University.
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