CH-5 Motor Carriers – Transportation: A Supply Chain Perspective : Chapter Notes

Chapter 5 MOTOR CARRIERS Chapter Objectives: After reading this chapter, you should be able to do the following: 1. Understand the development of motor carriers and their contributions to the U.S. economy 2. Be familiar with the different types of firms in the motor carrier industry 3. Appreciate the market forces shaping the motor carrier industry 4. Gain knowledge of the service characteristics of motor carriers 5. Identify the different types of vehicles and terminals used in the motor carrier industry 6. Understand the impacts of fuel and labor on the motor carrier cost structure 7. Be aware of current issues facing the motor carrier industry Chapter Overview Brief History The motor carrier industry played an important role in the development of the U.S. economy during the 20th century, and it continues this role in the 21st century. The United States has spent more than $128.9 billion to construct its interstate highway system and as the interstate system was developed, motor car¬riers steadily replaced railroads in transporting finished and unfinished manufactured products. In 1980 railroads moved 1.6 billion tons, compared to more than 200 billion tons by motor carriers. By 2006, motor carriers were handling 10.7 billion tons. Industry Overview In 2006 the United States paid over $645.6 billion for highway transportation, approximately 83.8 percent of the total 2006 Nation’s Freight Bill. Motor carriers transported 1,264 billion revenue freight ton-miles in 2003, or 31 percent of the ton-miles transported by all modes. During 2005, approximately 8.7 million people were employed in the motor carrier industry, with an average annual compensation of $51,683. These figures clearly demonstrate the significant role that motor carriers play in our society and the dependence of U.S. companies on motor carrier service. Finally, motor carriers logged 432.9 billion miles used for business purposes in 2006 (excluding the government and farm sectors. The first major division of motor carriers is between for-hire and private carriers. For-hire carriers can be either local or intercity operators, or both. Private carriers typically haul only for the owner company. The for-hire carriers may be common and/or contract operators. The common car¬riers are required to serve the general public while the contract carriers serve specific shippers with whom the carriers have a continuing contract. Another important distinction is the truckload (TL) and less-than-truckload (LTL) carriers. The truckload carriers provide service to shippers who tender sufficient volume to meet the minimum weights required for a truckload shipment and truckload rate or will pay the difference. Less-than-truckload carriers provide service to shippers who tender shipments lower than the minimum truckload quantities, such as 50 to 10,000 pounds. A hybrid type of carrier that has developed can best be characterized as a “heavy LTL” motor carrier, utilizing consolidation terminals (like LTL carriers) to fully load and deliver from the trailer, much like a “pool” carrier, charging linehaul rates plus a charge for each stop-off (like TL carriers). Interstate common carriers might be classified by the type of commodity they are authorized to haul but, since 1995, they can then transport any commodity they wish, with only household goods and related items being subject to any economic oversight. Number of Carriers The motor carrier industry consists of a large number of small carriers, particularly in the TL (truckload) segment of the industry. As of 2008, a total of 616,187 interstate motor carriers were on file with the Office of Motor Carriers. There is a significant difference between TL and LTL carriers, both in terms of number and start-up costs. The growth that happened in the industry was primarily in small TL carriers because of the low start-up costs required to enter the industry. The LTL segment of the motor carrier industry requires a network of terminals to consolidate and distribute freight, called a “hub-and-spoke” system. Perhaps a brief description of an LTL operation would be helpful. The LTL carrier col¬lects the shipments at the shipper’s dock which are taken to a consolidation or break-bulk facility. The packages are sorted by their final destination and loaded for movement. 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. The TL segment of the industry has been experiencing some limited concentration. With the repeal of the Interstate Commerce Act, combined with changes in distri¬bution patterns, a climate was created in which new TL carriers could easily enter the business Low startup costs in this sector still enabled new entrants to attempt success in this area. Market Structure Motor carrier vehicles, both for-hire and private, primarily transport manufactured, high-value products Motor carriers transport less of commodities such as grain, primary nonferrous metal products, motor vehicles and equipment, and paper and allied products Competition Motor carriers compete vigorously with one another for freight. The motor carrier industry has few capital constraints to entry. With a relatively small investment combined with freedom of entry, price discounting, and lack of regulatory constraints that appear to dominate the industry and suggest that competition between firms can control the industry. Certain segments of motor carriers such as LTL carriers have higher capital requirements than others, as indicated, and therefore have some degree of capital constraint for entry. Special equipment carriers – carriers of liquefied gases or frozen products – usually have larger investments. The large TL carriers like J. B. Hunt and Schneider National also have significant capital investment. On the whole, the motor carrier industry, especially for contract carriers, has been market oriented. Meeting customer requirements has been a common trait of motor carriers. OPERATING AND SERVICE CHARACTERISTICS General Service Characteristics The motor carrier pos¬sesses a distinct advantage over other modes in the area of accessibility as they can provide service to virtually any location. The U.S. system of highways is so pervasive that virtually every shipping and receiving location is accessible via highways Motor carriers provide the bridge between the pickup and delivery point and the facilities of other modes such as rail intermodal; that is, the motor carrier is referred to as the universal coordinator. Another service advantage of the motor carrier is speed. For shipments going under 500 miles, the motor carrier vehicle can usually deliver the goods in less time than other modes. When compared to other modes, 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. This relatively damage-free service reduces the packaging require¬ments and thus packaging costs. The for-hire segment of the motor carrier industry is customer or market ori¬ented. The small size of most carriers has enabled (forced) the carriers to respond to customer equipment and service needs. Equipment The high degree of flexibility, the relatively smooth ride, and the small carrying capacity of the vehicle are the unique characteristics that result in greater accessibility, capability, frequency of delivery and pickup, cargo safety, and lower transit time. The motor carrier vehicle can also be loaded quickly. The capability to operate one cargo unit separately elim¬inates the time needed to collect several cargo units. The other dimension of motor carrier equipment flexibility is the lack of highway constraint. The motor carrier is not con¬strained to providing service over a fixed railway or waterway. In most cases, equipment represents the largest operating asset that a carrier main¬tains. TL carriers need to make two types of equipment decisions: what type of tractor (power) and what type of trailer. Decisions for power include the terrain operated through and trailers include length and trailer type which must be made in light of market demands and the type of carrier operation. LTL carriers must make the same types of equipment decisions as TL carriers, along with deciding where to deploy this equipment. Having the right mix of power and trailers at a particular terminal location determines its ability to efficiently serve its customers. Types of Vehicles Motor carrier vehicles are either linehaul or city vehicles. Linehaul vehicles are used to haul freight long distances while city straight trucks are used to provide pickup and delivery service. LINE-HAUL VEHICLES The linehaul vehicle is usually a tractor–trailer combination of three or more axles. The cargo–carrying capacity of these vehicles depends on the size (length) and the state maximum weight limits. CITY STRAIGHT TRUCKS City vehicles, or “straight trucks”, are normally smaller than linehaul vehicles and may be single units. There is growing use of small trailers to pick up and deliver freight in the city as these trailers can also be used for linehaul. SPECIAL VEHICLES In addition to the linehaul and city vehicle classifications, there are numerous special vehicles which are designed to meet special shipper needs. The Department of Transportation’s Federal Motor Carrier Safety Administration has estab¬lished many rules and regulations governing the specifications of motor carrier vehicles. Terminals Truckload carriers might not require terminals for the movement of freight but LTL freight operations do require terminals. 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. This section will present an expanded discussion of the types and roles of the terminals in this system. The most common type of terminal found in the LTL system is the PUD terminal. The PUD terminal serves a local area and provides direct contact with both shippers and receivers. 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. Note that there are two elements of a peddle run, one called stem time and the other called peddle time. Stem time is the time from when the driver leaves the terminal until the driver makes the first pickup or delivery and when the driver makes the last pickup or delivery until returning to the terminal. A carrier would want to locate PUD terminals in such a way that this non-revenue-producing travel time is minimized. The other type of time is peddle time and this is revenue-producing time as it occurs when shipments are han¬dled. Carriers would want to maximize the amount of time a driver spends performing these activities. The dispatch operation provided at the PUD terminal is critical to the operating effi¬ciency of the peddle runs. The dispatcher needs to be familiar with the geography of the peddle runs and the capacity of the PUD driv¬ers and trailers to efficiently route freight with the appropriate vehicle. Other services that are provided at the PUD terminal might include tracing, rating and billing, sales, and claims but some carriers are beginning to centralize these functions at break-bulks or other locations. BREAK-BULK TERMINALS Another type of terminal found in an LTL hub-and-spoke system is called a break-bulk. 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. Break-bulk facilities also serve as driver domiciles. City drivers located at a PUD ter¬minal will always remain in their local area during their shift and will be able to return home when it is over. Linehaul drivers might or might not be able to return home after a trip, depending on the length of haul they are assigned. RELAY TERMINALS Relay terminals are necessitated by the maximum hours-of-service regulation that is imposed on drivers. At the relay terminal, one driver substitutes for another who has accumulated the maxi¬mum hours of service. An alternative to the relay terminal is the use of a sleeper team—two drivers. While one driver accumulates the off-duty time in the sleeper berth of the tractor, the other driver is driving. The sleeper team has been most successful for long trips with many destinations. TERMINAL MANAGEMENT DECISIONS Many types of operating and location decisions need to be made when utilizing terminals in a carrier’s network. Number of Terminals LTL carriers have the most difficult decision primarily because of the vast number of terminals in these sys¬tems and the relatively small investment needed to develop a terminal site. The first question is “How many terminals should we have?” The answer is affected by many different variables. Second, the dilemma of small terminal versus long peddle must be addressed. The small-terminal-versus- long-peddle decision would be made based on the service implications of establishing terminals closer to customers versus the cost of adding another terminal. Locations of Terminals Closely related to the decision of how many terminals to establish is the decision of where to establish them and LTL carriers, however, must consider some other variables. Driver time, minimizing the distance freight would need to be backhauled to the break-bulk, and market penetration and potential will help determine terminal location. Recent trends in the LTL sector have seen significant reductions in the number of terminals as these carriers strive to provide overnight and second-day delivery to more and more customers. COST STRUCTURE 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. Approximately 70 to 90 percent of the cost is variable, and 10 to 30 percent is fixed. The publicly funded highway, the carrier’s ability to increase or decrease the number of vehicles used, and that most carriers as a group (with the exception of the LTL carrier) do not require expensive terminals create this high variable/low fixed cost situation. The bulk of the motor carrier’s cost, then, is associated with daily operating costs—the variable costs of fuel, wages, mainte¬nance, and highway user fees. The two categories with the largest share of the variable costs are labor and fuel. LABOR The cost of drivers accounts for 20 percent of the total costs per vehicle mile and labor costs usually absorb about 55 percent of a carrier’s revenue dollar. The over-the-road (intercity) driver is typically paid on a mileage basis, such as 42.0 cents per mile; local drivers are paid by the hour. The FMCSA’s driving time regulations will permit drivers to drive a maximum of 11 hours after being off duty for 10 consecutive hours. A driver is permitted to be on duty a maximum of 14 hours after 10 consecutive hours off duty. In addition, no driver can drive after accumulating 60 hours on duty in 7 consecutive days, or 70 hours in 8 consecutive days. The most pressing labor issue facing motor carriers is the shortage of qualified drivers. Along with the new licensing requirements, the DOT also imposed stringent rules dealing with drug and alcohol abuse. The hardships imposed by the very nature of long-haul motor carrier operations have also impacted the availability of drivers. The motor carrier industry has undertaken several initiatives to counteract the problem of driver retention and recruitment. FUEL Carriers have experienced a 426-percent increase in diesel fuel prices from 1976 to 2007—approximately 53 cents per gallon in 1976 to about $2.79 per gallon in 2007. The price of the diesel fuel includes a highway user tax imposed by both the federal and state governments. The federal fuel tax is 24.4 cents per gallon of diesel fuel plus a state average of 24.5 cents per gallon. Economies of Scale There does not appear to be major economies of scale for large-scale motor carrier operations. The concentration of the LTL business is indicative of economies of operation in this segment. In the short run, certain economies exist in the greater use of indivisible inputs such as terminals, management specialists, and information systems. For TL operations, very limited investment is required for terminals, but informa¬tion systems are becoming increasingly important to efficient operations. Operational cost trade-offs exist between large and small carriers. A large-scale operation affords savings in purchase economies of equipment and in such inputs as fuel, parts, and interest on loans. Overall, long-term economies of scale appear not to be significant in TL motor car¬rier transportation and are present to some degree in the LTL segment. OPERATING RATIO A measure of operating efficiency used by motor carriers is the operating ratio. The operating ratio measures the percent of operating expenses to operating revenue. Operating expenses are those expenses directly associated with the transportation of freight, excluding non-transportation expenses and interest costs. Operating rev¬enues are the total revenues generated from freight transportation services; non-transportation services are excluded. An operating ratio of 94 indicates that 94 cents of every operating revenue dollar is consumed by operating expenses, leaving 6 cents of every operating dollar to cover interest costs and a return to the owners. The federal government has the responsibility to provide highways to meet the national defense and commerce needs of the country. The state and local governments assume the responsibility for maintaining the high¬ways, while the federal government provides up to 90 percent of the construction cost of new highways. The National Highway System consists of the 46,876-mile interstate high¬way system, 113,124 miles of existing state and federal non-interstate highways. FUNDING Highway users pay for the con¬struction, maintenance, and policing of highways through highway user taxes. Federal and state governments assess highway user taxes which are paid into the Federal Highway Trust Fund that yields 90 percent of the construction costs for the interstate system and 50 percent of the construction costs for all other federal-aid roads. The states also assesses highway user taxes such as fuel tax, vehicle registration fees, ton-mile taxes, and special-use permits to defray the cost of construction, maintenance, and policing of highways. Motor carriers with operations in many states must buy¬ vehicle registrations in each state and maintain records of miles driven in a particular state so that the state will receive a fuel tax or ton-mile tax. Current Issues Safety The FMCSA has developed rules under which its inspectors determine whether a carrier is fit from a safety rule compliance perspective. The system includes three categories: Satisfactory, Conditional, and Unsatisfactory and a carrier might be forced to stop operating if it has received an Unsatisfactory rating and improvements are not made. Many shippers seek safety fitness information as part of their selection process, so there is considerable pressure on carriers to operate safely. Many transportation contracts contain clauses that permit the shipper to cancel the contract if the carrier’s safety rating is Unsatisfactory. A major related concern is that of alcohol and drug abuse. Drug and alcohol testing are required in certain circumstances. All fleets, regardless of size, are required to have a complete program, including random and post-accident testing in place. Divers’ hours-of-service and fatigue are two areas of concern. The hours of service rules have been revised to address today’s changing environment. Another safety issue receiving attention deals with vehicle size and weight. Recent studies have analyzed increasing total gross vehi¬cle weight to 94,000 pounds with the addition of a third axle to the trailer but this will require federal legislation. Technology The use of satellite technology has a major impact on the motor carrier industry. Using global positioning technology (GPS), satellites are being used to track vehi¬cles throughout their movement from origin to destination. One area where satellite communication has had a very positive effect is in the movement of hazardous materials. This tracking allows for quick reaction to any accidents or spills, and the computers can give the name of the authority in the area to call in case any emergency action needs to be taken. Satellite communication will continue to play a role in improved safety and cus¬tomer service for motor carriers into the future. LTL Rates
Since the early 1980s, the LTL segment of the motor carrier industry has used dis¬counts from published tariffs as a means of pricing segments to attract traffic of large shippers. The Interstate Commerce Commission (ICC) was eliminated and for all practical purposes LTL rates are subject to the free-market environment. The shipper has more choices for LTL today than existed during the height of regulation.
A limited amount of anti-trust immunity was also preserved but only for classifica¬tions, mileage guides rules, and general rate adjustments. Individual carrier rates are subject to anti-trust action but cannot be challenged that the rate is unreason¬ably high. There is no longer any requirement to file tariffs, and contracts can be used instead. This law also reduced the time for recovery of disputed freight charges from 3 years to 18 months. Financial Stability Another major concern in the motor carrier industry is financial stability. In 2007, a total of 1,985 motor carrier firms failed, mostly those having at least five vehicles. Overcapacity has periodically been a severe problem for the motor carrier industry, most recently during the recession of 2008 and 2009. Given that there is a finite amount of freight to be transported at any one time and there is little, if anything, that carriers can do to influence this, market share changes generally occur at the expense of one carrier over another. Shippers have become increasingly cognizant of the failure rate among motor car¬riers, and many have introduced a financial evaluation of carriers into their overall decision framework for selecting carriers. Study Questions 1. The motor carrier is probably the most visible segment of the transportation system in the United States, but in many ways the motor carrier is also the most significant element of the freight transport industry. What factors account for the motor carrier's visibility and significance? The motor carrier industry played an important role in the development of the U.S. economy during the 20th century, and it continues this role in the 21st century. As the interstate system of highways were developed from the 1950s to 1980s, motor car¬riers steadily replaced railroads as the mode of choice for transporting finished and unfinished manufactured products. In 1950 the railroad industry moved 1.4 billion tons of freight on an intercity basis, whereas motor carriers moved 800 million tons. In 1980 railroads moved 1.6 billion tons, compared to more than 200 billion tons by motor carriers. By 2007, motor carriers were handling 10.7 billion tons (see Figures 3.1 and 3.2). In 2006 the United States paid over $645.6 billion for highway transportation, approximately 83.8 percent of the total 2006 Nation’s Freight Bill. Motor carriers transported 1,264 billion revenue freight ton-miles in 2003, or 31 percent of the ton-miles transported by all modes. During 2005, approximately 8.7 million people were employed in the motor carrier industry, with an average annual compensation of $51,683. These figures clearly demonstrate the significant role that motor carri¬ers play in our society and the dependence of U.S. companies on motor carrier service. Finally, motor carriers logged 432.9 billion miles used for business pur¬poses in 2006 (excluding the government and farm sectors). 2. The railroad industry played a significant role in the development and growth of many cities and geographic regions during the 19th century. What role, if any, have motor carriers played during the 21st century in terms in economic development? The growth of this industry is noteworthy considering it did not get started until World War I, when converted automobiles were utilized for pickup and delivery in local areas. The railroad industry, which traditionally had difficulty with small ship¬ments that had to be moved short distances, encouraged the early motor carrier entrepreneurs. It was not until after World War II that the railroad industry began to seriously attempt to compete with the motor carrier industry, and by that time it was too late. The motor carriers have shaped our economic development, particularly after World War II. As industry moved to the suburbs, they were no longer tied to railroad tracks. Our suburban shopping complexes are dependent on motor carriers. The door-to-door speed of motor carriers has allowed industry to develop new methods of distribution which allow greater choice for consumers. Frequency of deliveries, which underlie much of the Just In Time programs, would not be possible without motor carriers. 3. Private carriage is more important in the motor carrier segment of our transportation industry than any of the other four major modal segments. What factors have contributed to private carriage becoming so prevalent in the motor carrier area? 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 cost. Private carriers might transport commodities for-hire, but when operat¬ing in such a capacity, the private carrier is really an exempt for-hire carrier. Many firms started operating their own tractor-trailers to provide better service and faster delivery. Grocery store chains needed the flexibility that only their own vehicles would provide. Some firms such as chemical and petroleum companies needed specialized equipment that could not be obtained from commercial carriers. Until recently, private trucking often offered cost savings over commercial carriers since the cost of the transportation did not include a markup for profit. 4 The so-called local carrier is also almost unique to the motor-carrier industry. Why? The growth of this industry is noteworthy considering it did not get started until World War I, when converted automobiles were utilized for pickup and delivery in local areas. The railroad industry, which traditionally had difficulty with small ship¬ments that had to be moved short distances, encouraged the early motor carrier entrepreneurs. The local carri¬ers pick up and deliver freight within the commercial zone of a city. Local carriers frequently work in con¬junction with intercity carriers to pick up or deliver freight in the commercial zone. Trucking started in the local or short haul market. The railroads could not fill the crosstown delivery role as well as motor carrier vehicles. Even in the time between World War I and World War II, motor carriers were used to move freight to and from the railroad freight houses. After World War II, motor carriers dominated the local market due to their speed and flexibility. This allowed them to expand into the medium range and eventually, the long haul market. 5. Compare and contrast the truckload segment of the motor carrier industry with the LTL segment in terms of infrastructure, cost structure, market structure, and operating characteristics. The LTL carriers have far more infrastructure than do the truckload (TL) carriers since they are required to operate a network of terminals and equip them with material handling equipment to handle the small shipments. TL carriers do not have terminals as such and normally delivers the shipment on the same trailer upon which it is picked up. Costs are similar for both TL and LTL for drivers, equipment and fuel. LTL carriers have additional labor costs that TL carriers do not have due to the requirements of the LTL carriers to staff the terminals with dock workers. LTL carriers have more drivers than do TL carriers since they must have both pickup and delivery as well as line haul drivers. Both types of motor carriers have a high level of variable cost and a low level of fixed cost. Although, fixed costs for the LTL segments are higher than those for the TL segment because of terminal investments. The market structure for both TL and LTL carriers is similar since they compete against others within their own arena (LTL versus LTL) as well as with other carriers (LTL versus TL). This mode is customer driven for both LTL and TL carriers. TL carriers, in general, face a market that can be characterized as monopolistic competition; LTL carriers operate in an oligopolistic market. Operations are similar for both except that the LTL carriers have more in-transit handling of their shipments. Hours of service and other safety rules apply equally to both TL and LTL carriers. Both carriers compete with other modes on their flexibility, accessibility, and speed/frequency of delivery. 6. What is the nature of intramodal and intermodal competition in the motor carrier industry? How have the motor carriers fared in terms of intermodal competition since 1980? Intramodel competition has intensified in the past ten years with the gradual removal of regulations. LTL carriers now compete against TL carriers as well as package carriers such as United Parcel Service and FedEx. The total number of carriers has increased and, particularly in the TL sector, competition is intense. In the LTL sector, non-union carriers compete with unionized trucking firms, putting severe pressure on prices and margins. Motor carriers compete vigorously with one another for freight. With the large number of for-hire motor carriers, rivalry between firms can be intense. However, the most severe competition for for-hire carriers often comes from the private carrier. As indicated earlier, 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 constraints appear to dominate the industry and suggest that competition between firms can control the industry. Such a conclusion has been the basis for greater reliance on the marketplace and less reliance on regulation. Even though the LTL segment is more concentrated, there is still intense competi¬tion between the top carriers. Other competitors also include United Parcel Service, FedEx, and FedEx Ground. Intermodal competition exists between the railroads with their piggyback and container service and the TL carriers. The competition is limited to the major corridors such as Los Angeles-Chicago and other such high volume lanes. This intermodal competition keeps the prices of both modes constrained. 7. Describe the general service characteristics of motor carriers and explain how these service characteristics have contributed to the growth of the motor industry The motor carriers have a distinct advantage with near universal accessibility. Speed allows motor carriers to compete with air up to 500 miles and rail up to 1,500 miles. Door to door service combined with a wide range of equipment allows carriers to serve nearly all shippers. The smaller size vehicles means a shipper does not have to accumulate a large volume of freight before making a shipment. The smoother ride and easier handling might reduce packaging costs and the potential for damage. The ability of motor carriers to combine with other modes gives them access to all shippers and makes motor carriers an indispensable part of most shipments. 8. The cost structure of the motor-carrier industry is affected by its infrastructure, (such as highways and terminals). Discuss the cost structure of motor carriers and how it is affected by the infrastructure. Should there be changes made in public policy with respect to the motor carriers' use of public highways? The cost structure of the motor carrier industry consists of high levels of variable costs and relatively low fixed costs. Approximately 70 to 90 percent of the cost is variable, and 10 to 30 percent is fixed. The public investment in the highway sys¬tem is a major factor contributing to this low fixed-cost structure because the high¬way is the motor carrier’s “right of way”. Much debate exists as to whether motor carrier vehicles pay a fair share of the total cost of highways. In 2006 motor carriers paid $37.4 billion in federal and state highway user taxes. The central issue is whether motor carriers should pay for the added construc¬tion and maintenance costs caused by their heavier weight. 9. Describe how fuel and labor have impacted motor carrier cost structures and how they have altered motor carrier operations. Fuel and labor are the largest variable costs incurred by a motor carrier. Because the majority of costs for a motor carrier are variable, these two costs become increasingly important to manage. The incredible rise in diesel prices over the last few years has put a strain on motor carriers’ financial stability. To help offset the costs of rising fuel prices, motor carriers have undertaken several initiatives. First, motor carrier vehicle design has incorporated technology to allow fuel consumption rates to reach 6.5 to 7.0 miles to the gallon. Aerodynamic design, fiberglass bodies, and improved engine/drive-train efficiencies have allowed motor carriers to reduce their overall fuel consumption. Second, many carriers are scrutinizing their terminal locations and number of terminals to help avoid empty miles and unnecessary backhauls. Third, motor carriers are increasing the loaded capacity of their vehicles to maximize cube and weight of their trailers thus minimizing the number of trips they must make. Whether a motor carrier is unionized or not, driver wages are a large percent of variable costs. Many motor carriers have re-examined the work rules they have in place with their drivers to gain more efficiencies in driver scheduling. Because there is a shortage of qualified drivers in the motor carrier industry, reducing driver wages has not been a strategy to reduce labor costs. 10. What are the major issues facing motor carriers as we approach the twenty¬ first century? How should these issues be addressed? Safety Deficiencies in safety can translate into decreased profitability because of expensive claims for lost or damaged goods, increased insur¬ance premiums, accidents, fines, and so on. These consequences are not unique to the motor carrier industry; in fact, they apply to the entire transportation industry. The FMCSA has developed rules under which its inspectors determine whether a carrier is fit from a safety rule compliance perspective. Many shippers seek safety fitness information as part of their selection process, so there is considerable pressure on carriers to operate safely. Many transportation contracts contain clauses that permit the shipper to cancel the contract if the carrier’s safety rating is Unsatisfactory. A major related concern is that of alcohol and drug abuse. It has been estimated that American industry pays $50 to 100 billion for the effects and results of sub¬stance abuse in the workplace every year, either for the cost of accidents or losses in productivity. In response to this problem, the motor carrier industry has begun to move toward drug screening for its employees. Drug and alcohol testing are required in the fol¬lowing circumstances: • As a requirement for employment • As a part of a regular physical exam required of current employees • For “cause,” required after any accident • On a random selection basis Other areas of safety concerns are drivers’ hours-of-service and fatigue issues. Under a complex formula for allowed driving and required rest periods, a driver can be on duty for not more that 60 hours in 7 days or 70 hours in 8 days. As previously discussed, these rules have been altered to address today’s changing environment. Another safety issue receiving attention deals with vehicle size and weight. Recent studies have analyzed increasing total gross vehi¬cle weight to 94,000 pounds with the addition of a third axle to the trailer. The studies have also addressed increased use of triples. All these issues include safety concerns and will require federal legislation before any changes can be made. Technology The use of satellite technology has a major impact on the motor carrier industry. Using global positioning technology (GPS), satellites are being used to track vehi¬cles throughout their movement from origin to destination. The use of satellites allows the carriers to pinpoint the location of the vehicle and relay this informa¬tion to the customer. The interaction between the driver, using an on-board com¬puter, and a home-base computer allows route or arrival adjustment for poor weather or road conditions, and these adjustments can be communicated to the customers. Satellite communication will continue to play a role in improved safety and cus¬tomer service for motor carriers into the future. LTL Rates Since the early 1980s, the LTL segment of the motor carrier industry has used dis¬counts from published tariffs as a means of pricing segments to attract traffic of large shippers.. Although certain portions of rate oversight were transferred to the then newly created Surface Transportation Board, for all practical purposes LTL rates are subject to the free-market environment. As it currently stands, the shipper has more choices for LTL today than existed during the height of regulation. A limited amount of anti-trust immunity was also preserved but only for classifica-tions, mileage guides rules, and general rate adjustments. Individual carrier rates are subject to anti-trust action but cannot be challenged that the rate is unreason¬ably high. There is no longer any requirement to file tariffs, and contracts can be used instead. Financial Stability Another major concern in the motor carrier industry is financial stability. The oper¬ating ratios of many motor carriers have been in excess of 95 percent, and some companies have operating ratios of over 100. The high operating ratios are a clear indicator of the financial plight of many motor carriers and an indication of the low competitive rates. In 2007, a total of 1,985 motor carrier firms failed, mostly those having at least five vehicles. Overcapacity has periodically been a severe problem for the motor carrier industry, most recently during the recession of 2008 and 2009. Given that there is a finite amount of freight to be transported at any one time and there is little, if anything, that carriers can do to influence this, market share changes generally occur at the expense of one car¬rier over another. These periods of overcapacity also lead to severe pricing pres¬sure, which can cause weaker carriers to exit the market. Shippers often exploit these factors and the “spot” market can drive prices below costs as carriers seek to move empty equipment. Shippers have become increasingly cognizant of the failure rate among motor car¬riers, and many have introduced a financial evaluation of carriers into their overall decision framework for selecting carriers. Case Questions Case 5.1: Hardee Transportation 1. Using the information in this chapter, how would you tell Jim to proceed? In light of the current hours of service rules, Hardee has littlie choice but to work with the customers to achieve a solution. While the drivers have a longer working period, loading and unloading, fuel and rest breaks count against the total on duty 11 hour period. The sales team should take a representative sample of recent runs and service requirements for its larger customers and analyze them in light of the new hours of service. These findings should then be discussed with the customer base. Without discussing price, inquiries should be made to other carriers either directly or through a trade association to determine what the industry is doing. Suggest to the student that they do literature search to see what has been written on the topic. It is highly likely that these shippers have heard from other carriers and have received similar requests from other carriers. Recommendations for Jim 1. Analyze and Optimize Costs - Review Cost Structure: Understand the breakdown of fixed and variable costs. Key areas include fuel, labor, maintenance, and equipment. - Fuel Efficiency: Invest in fuel-efficient technologies and practices. Consider adopting telematics for better fuel management and route planning. - Maintenance Programs: Implement a rigorous preventive maintenance schedule to reduce unexpected breakdowns and costly repairs. - Load Optimization: Use load optimization software to maximize trailer capacity and reduce empty miles. 2. Leverage Technology for Operational Efficiency - Transportation Management System (TMS): Invest in a TMS to optimize routing, improve asset utilization, and enhance real-time decision-making. - Telematics and GPS: Equip the fleet with telematics and GPS tracking for better route planning, real-time monitoring, and enhanced driver performance. 3. Enhance Service Quality - Customer Service Excellence: Ensure high levels of customer service by focusing on on-time deliveries, reliable communication, and responsive support. - Value-Added Services: Consider offering specialized services such as expedited shipping, temperature-controlled transportation, or handling hazardous materials. 4. Ensure Regulatory Compliance - Stay Current with Regulations: Keep up-to-date with industry regulations, including hours of service (HOS), safety standards, and environmental policies. - Training and Education: Regularly train drivers and staff on compliance requirements to avoid penalties and maintain a high safety standard. - Electronic Logging Devices (ELDs): Ensure all vehicles are equipped with ELDs to monitor driving hours and ensure compliance with HOS regulations. 5. Strategic Market Positioning - Identify and Leverage USPs: Determine what sets Hardee Transportation apart from competitors (e.g., specialized equipment, superior service) and promote these strengths. - Market Segmentation: Target specific market segments that align with Hardee's strengths and capabilities, such as specific industries or geographic regions. 6. Adopt Sustainable Practices - Sustainability Initiatives: Explore the adoption of electric or alternative fuel vehicles to reduce carbon footprint and operational costs in the long run. - Green Logistics: Implement green logistics practices, such as reducing idle times, optimizing routes for lower emissions, and participating in carbon offset programs. 7. Financial Management - Regular Financial Reviews: Conduct regular financial reviews to monitor cash flow, profitability, and cost management. Use these insights to make informed decisions. - Cost-Benefit Analysis: Before making significant investments, conduct thorough cost-benefit analyses to ensure alignment with strategic goals and financial health. Actionable Steps for Jim 1. Conduct a SWOT Analysis: Evaluate Hardee Transportation's strengths, weaknesses, opportunities, and threats to understand its current position and areas for improvement. 2. Engage Stakeholders: Hold meetings with key stakeholders, including drivers, operations managers, and major customers, to gather insights and identify key issues. 3. Set Clear Objectives: Define specific, measurable objectives for cost reduction, service enhancement, and compliance. 4. Pilot Programs: Implement pilot programs to test new technologies and strategies on a smaller scale before full-scale rollouts. 5. Monitor and Adjust: Continuously monitor the outcomes of implemented changes and adjust strategies as necessary to ensure ongoing improvement and alignment with business goals. By following these recommendations, Jim can position Hardee Transportation for improved operational efficiency, enhanced service quality, and sustainable growth in the competitive motor carrier industry. Case 5.2: Squire Transportation 1. If you were advising Squire’s management team on their impending decision, what would you tell them? The implementation of regional operations in TL operations today is becoming more commonplace. Regional operations reduce the amount of deadhead miles and the number or equipment repositioning. Regional operations basically segment the country into geographic regions in which a fleet will operate. Vehicles that must cross regions with a shipment do so with a different driver/tractor assigned to that region. So, the average length of haul will not change with regional operations, but the percent of loaded miles will increase. 2. Is there an alternative to reduce the impacts of high diesel prices other than to develop regional operations? One alternative would be to increase prices. However, this might not be readily accepted by the market. Another alternative is to begin trailer-on-flatcar (TOFC) service for shipments travelling in excess of 800 miles. This might increase overall transit time, but costs would be reduced for both the carrier and the shipper. 3. If not, how would you advise Squire to develop a regional operation? There are other alternatives. However, if Squire would undertake regional operations it would need to analyze its customer base and shipment patterns. The “regions” could be developed along shipping lanes that would allow for the smooth transition across regions. Squire would also need to analyze whether or not regional operations will impact how it pays its drivers. Regions would need to maintain equipment pools; so an analysis of the location and size of these pools would be necessary. Suggested Internet project Idea 1. Have the student log onto the Internet and visit several motor carrier sites. Have the student prepare a report of the discussing the differences and similarities of these sites. The student should relate their answer to the current climate in the motor carrier industry. Idea 2. Have the student examine the websites of the American Trucking Association and the Federal Motor Carrier Safety Administration and determine the primary focus of each entity. Some addresses are: CRST International http://www.crst.com J. B. Hunt http://www.jbhunt.com FedEx Freight http://www.fedex.com/us/freight/main/?link=4 Schneider National http://www.schneider.com YRC Worldwide www.yrcw.com Motor Carrier Associations American Trucking Associations http://www.truckline.com National Private Truck Council http://www.nptc.org National Tank Truck Carriers http://www.tanktruck.net/ Federal Motor Carrier Safety Administration http//www.fmcsa.dot.gov Idea 3. Try to arrange a visit to a local trucking terminal so students can relate text material to the actual operation of an LTL carrier. Idea 4. Invite a representative of a local trucking company or trucking association to discuss the industry in relation to the issues identified in the textbook. Instructor Manual for Transportation: A Supply Chain Perspective John J. Coyle, Robert A. Novak, Brian Gibson, Edward J. Bardi 9780324789195