CSCMP's Supply Chain Quarterly
October 22, 2018

What's the best design for your dedicated fleet?

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 give adequate thought to which type of configuration they choose for those fleets. But they should consider the options carefully, because this decision can have a significant impact on cost and service.

The term "dedicated fleet," also known as "dedicated contract carriage," refers to tractors, trailers, drivers, and other resources exclusively devoted to serving a set of facilities or lanes in a transportation network. They usually are owned or leased by a motor carrier or logistics service provider that is hired by the shipper to manage its fleet operations. Traditional alternatives to a dedicated fleet include operating a private fleet, hiring common carriers, or contracting with third-party logistics providers for transportation services.

Article Figures
[Figure 1] Suitability of dedicated fleet with one-way flows
[Figure 1] Suitability of dedicated fleet with one-way flows Enlarge this image
[Figure 2] Suitability of dedicated fleet with bi-directional flows
[Figure 2] Suitability of dedicated fleet with bi-directional flows Enlarge this image
[Figure 3] Summary of dedicated fleet characteristics
[Figure 3] Summary of dedicated fleet characteristics Enlarge this image
[Figure 4] Example of network-based dedicated fleet
[Figure 4] Example of network-based dedicated fleet Enlarge this image
[Figure 5] Example of depot-based dedicated network
[Figure 5] Example of depot-based dedicated network Enlarge this image
[Figure 6] Case study: cost savings vs. number of working units
[Figure 6] Case study: cost savings vs. number of working units Enlarge this image
[Figure 7] Case study: cost savings vs. load ratio
[Figure 7] Case study: cost savings vs. load ratio Enlarge this image
[Figure 8] Solution for network-based dedicated fleet
[Figure 8] Solution for network-based dedicated fleet Enlarge this image
[Figure 9] Depot-based solution for case study
[Figure 9] Depot-based solution for case study Enlarge this image

For some shippers, dedicated contract carriage offers significant benefits. For one thing, dedicated transportation is an effective way to guarantee capacity. For another, experience has shown that it can reduce transportation costs and has the potential to improve on-time delivery performance by 5 to 10 percent. Moreover, shippers with dedicated contract carriage arrangements can more easily negotiate fuel surcharges and reduce their regulatory liability than can shippers with private 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 various nodes across the entire transportation network. In a depot-based fleet, freight moves revolve around the key truck terminals and destinations. Each has its advantages and disadvantages, and shippers should analyze each of the scenarios in-depth to understand the uncertainties and operational issues before identifying a design for implementation. This article, however, will make the case that depot-based dedicated fleets are the better choice for many shippers because they offer the potential for better service and lower costs.

Suitability of dedicated fleet
Before we look at which type 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 types of distribution networks. These assessments are based on research coupled with observations of real dedicated networks. As shown in Figure 1, the cost and service benefits of dedicated fleets in networks with one-way flows are limited. If the service requirements are low, available carrier capacity is high, and average 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 have 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 volumes, 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, however, it is difficult to identify those opportunities without the help of an analytical model. Such a model attempts to maximize the cost savings resulting from the implementation of a dedicated fleet.

When analyzing the cost impact of a dedicated transportation program, it is helpful for shippers to have historical information about the rates offered by common carriers for various lanes in their networks. They also will need comparative information about the cost of a dedicated fleet program, which may not be easily accessible. When that is the case, shippers may consider using hypothetical costs per mile for loads (say, US $1.25, $1.50, and $1.75) and for moving empty equipment (say, $0.75, $0.85, and $0.95) for the purpose of assessing the opportunity.

The net savings from implementing a dedicated fleet program can be determined based on the following equation (evaluation model):

Net savings = cost of using common carriers - cost of dedicated moves - cost of empty moves

This model identifies lanes that are suitable for dedicated contract carriage and those that are suitable for one-way moves. But the analysis should not stop there; after identifying the opportunities for dedicated moves, it is important to evaluate the implications for the remaining lanes, which will be served by other means. Lanes recommended for delivery by common carriers, for example, might experience a tariff (rate) increase due to a reduction in freight volumes. 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-evaluation.

Network-based vs. depot-based
Having 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 types of dedicated fleets.

A network-based dedicated fleet balances freight flows among its nodes, and thus requires continual movement from one node to another in the network. Ensuring that the sum of inbound flows (the number of truckloads) to any node is equivalent to the sum of outbound flows from the same node makes it possible to execute transportation activities with a high rate of loaded miles. This is illustrated in Figure 4, in which red arrows indicate empty moves in the network. The numbers associated with each lane represent the number of annual loads and the length of haul for that lane, respectively. In order to achieve such a balanced flow in the network, it may be necessary to move tractors, trailers, and drivers without loads.

A major limitation of the network-based dedicated fleet is that drivers are not always able to return to their originating depots on a regular basis. For example, a driver originating from Node A in Figure 4 could follow a number of different routings, such as ABCA, ABDA, ABDEBCA, or even ABDEBCDA. The actual time required to get back to Node A would, of course, depend on the specific lanes assigned to the driver and the length of haul associated with them.

In a large network with destinations scattered across the country, drivers are likely to remain away from their originating depots for long periods. Managers can create schedules that periodically bring drivers home, but enforcing such considerations in this type of network design could negatively affect the dedicated fleet's performance.

Depot-based dedicated solutions, on the other hand, are organized according to the inbound and outbound flows around individual 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 receive 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, 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 a cost-effective manner. Note that the 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 large depots that either have significant inbound and outbound activity or make many local deliveries. In addition, networks with a large number of facilities, including a combination of intra-company moves (that is, between the company's own plants and distribution centers) and outbound customer shipments, could benefit from a depot-based dedicated program.

One of the biggest advantages of a depot-based network is the ability to bring drivers and equipment home on a regular basis. This has a strong, positive impact on the drivers' quality of life and job satisfaction, which understandably translates to increased driver retention and better service.

Case study example
The following case study shows how a company can first analyze whether a dedicated fleet would be suitable for its distribution network and then which type of dedicated fleet to use. This analysis employs data for 108 sites plus 184 lanes with three major depots. More than 50,000 loads were hauled annually, with an average length of haul of 1,100 miles.

Figure 6 shows the correlation between the number of "working units" (each comprising a tractor, a trailer, and a driver) and cost savings for a networkbased dedicated fleet. Figure 7 shows the estimated savings associated with various 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 unproductive for the dedicated system.

As indicated in Figure 6, the estimated savings resulting from dedicated operations increases up to a certain point and subsequently diminishes. Figure 7 illustrates a similar relationship between cost savings and load ratio. In other words, there is an "optimum point" at which a dedicated system will maximize the net savings. The planning problem associated with dedicated fleet analysis 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 analysis 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 analyses assume that the cost per mile for hiring common carriers is US $1.20; the cost per mile for moving a load in a dedicated system is $1; and the cost per mile for moving empty equipment is $0.85. Actual charges vary greatly depending on a variety of factors, but the degree of difference between the three values is typical.

In Figure 9, applying these assumptions for Depot A results in a total savings of US $1,154,000 (= 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 savings in excess of US $2.1 million by employing 91 dedicated working units with an average load ratio of 99 percent.

The depot-based solution has another advantage: workforce stability. Unlike a network-based dedicated fleet, a depot-based solution stations a predictable number of drivers at predetermined locations. This is a distinct advantage when one considers that, when the economy is strong, it's not uncommon for U.S.-based long-haul motor carriers to see a 100-percent or higher annual turnover among drivers. Adopting a depot-based solution that regularly brings drivers home helps to attract and retain drivers for the long term. Moreover, it almost goes without saying that satisfied drivers will provide the best service to customers.

Lower driver turnover offers cost benefits, too. Assuming a typical cost of US $10,000 per year to recruit and train a driver and 100-percent annual turnover of long-haul drivers, 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 savings 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 turnover of drivers (a typical percentage), will require recruiting and training 46 drivers during the year. After deducting the lower recruitment and training costs, the depot-based solution can be expected to produce a savings opportunity of US $1.65 ($2.1 - $0.46) million. In short, the network-based dedicated fleet implementation might offer larger net savings, but when the driver turnover factor and associated costs are considered, a depot-based solution has merit.

Implications for carriers and shippers
The methodology for evaluating dedicated fleet opportunities presented earlier will benefit both carriers and shippers. First, it will give carriers the ability to evaluate the scale and scope of potential dedicated fleet opportunities in a shipper's network. This helps them to effectively respond to shippers' requests for proposal (RFPs). Second, carriers can use it to assess the dedicated fleet opportunity from the shipper's perspective by using market-average, common-carrier rates and the dedicated fleet cost coefficients they have proposed to the shippers. In addition, this analysis 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 employs sophisticated analytical methods to determine which carriers and modes should be used on a set of lanes in order to minimize systemwide 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 evaluate the trade-offs between implementing a depot-based dedicated fleet and a network-based dedicated fleet.

From a shipper's perspective, the proposed methodology can be used in two distinct ways. First, shippers interested in implementing their own private fleets could use this methodology to determine the scale and scope of private 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 private 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 various 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 improve service in their networks. Equally important, implementing a depot-based dedicated fleet has significant potential to enhance the quality of life for drivers, and thus improves driver retention. The creation of a stable workforce of drivers thereby ensures shippers a consistent, high quality of service to their customers at a reasonable cost.

Poornachandra Rao Panchalavarapu, Ph.D., is a senior engineer at Schneider National Inc.

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