Transport Management & Theory Practices (10)

Management of Transportation

Seventh Edition Coyle, Novack, Gibson & Bardi

© 2011 Cengage Learning

Chapter 11Carrier Strategies

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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CBN Trucking• Regional LTL facing strategic challenges

– Strengths: growing revenues, good customer loyalty, adding new customers

– Weaknesses/challenges • Falling profit margins• Rising resource (supplier) costs• IT systems incapable of meeting customer requirements• Productivity steady but not improving• Market encroachment from substitute services• Traffic congestion impairing performance and market

reach


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CBN Trucking, cont’d

• Recognize unique economic characteristics of transportation– Derived demand– Services cannot be stored


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Carrier Operating Conditions

• Introduction– Operating conditions create the competitive

environment– Carrier competitive strategies/tactics

• Constrained by operating conditions• May be able to manipulate same conditions for

competitive advantage

– Operating conditions include• Operating network• Operations• Labor• Performance measures


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Carrier Operating Conditions, cont’d

• Operating network– Larger the geographic spread of the network, the

more difficult the operation is to manage• Deployment of assets/equipment to distant locations• Long empty backhauls• May operations performed beyond scope of supervisors• Network is interrelated, one part may affect another

1000s of mile away• Greater exposure to weather conditions, hazards, traffic

congestion, theft, and calamities, all often beyond mgmt. control


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• Operations– Safety requires extensive operating rules/regulations

• Carrier and government issued• Gov’t issued regulations by mode

– Ex: trucking, regulations cover» Equipment, equipment operation, driving time

• Gov’t issued regulations by characteristic of commodity– Ex: transport of hazardous materials, transport of large loads

• Regulations designed to protect– Traveling and shipping public– Public in general– Transport operators


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• Labor– Labor intensity varies by mode– Transport has high degree of unionization

• Unions tend to be craft-based • Multiple craft unions increases management

challenge, risk of shutdown from strikes

– Government tends to have a higher degree of involvement in transport labor-mgmt. relations

• Justified by economic and safety significance of transport


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• Performance measures– Service-related measures

• Each measure impacts an aspect of shipper inventory costs

• Examples– Transit time length: pickup to delivery

» Cycle stocks

– Transit time consistency/reliability

» Safety stocks and stockout costs

– Freight damage

» Safety stock and stockout costs© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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• Performance measures, cont’d– Financial measures

• Profitability oriented measures– Profit margin: Net income/Op. revenue

– Operating ratio: Op. expense/Op. revenue

– Return on assets: Net income/Total assets

– Return on equity: Net income/Total equity

• Liquidity measures: ability to meet current financial obligations

– Current ratio: Cur. Assets/Cur. liabilities

– Acid test ratio: Cur. Assets-Inv./Cur. liabilities© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Carrier Operating Conditions, cont’dFinancial Performance Measures, cont’d

• Liquidity measures, cont’d– Working capital: Cur. assets – cur. liabilities

– Cash flow: Net inc. + Depreciation + Def. Taxes

• Solvency measures: considers ability to pay principal and interest on long-term debt

– Debt ratio: Total liabilities/Total assets

– Debt-to-equity ratio: Total liabilities/Total equity

» High ratio means creditors have greater claim on than owners due

• Examples


11© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Table 11-1

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Operating Strategies

• Rule of efficiency: Most efficient to move in continuous, straight line when possible– Minimize circuitry, sporadic movement– Ex. applications: unit trains

• Minimize intermediate handlings– Ex: run-through trains, interlined trailers, use of

containers


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Operating Strategies, cont’d

• Maximize capacity utilization on each run– Once run is scheduled, more costs are fixed w/r

volume or weight carried• Higher utilization lowers average costs

– Various means for improving capacity utilization• Delaying vehicle dispatch

• Pricing incentives

• Consolidation, break-bulk

• Rerouting partially filled vehicles

• Investing in automated loading/unloading equipment © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.


Table 11-

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Operating Strategies, cont’d

• Minimize empty mileage– No revenue earned when empty, yet vehicle

operating costs change little, loaded or empty– Much effort spent on finding return hauls

• Match availability and use of labor and equipment with demand– Responsibility of scheduling planners and

dispatchers


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Technology and Equipment

• As vehicle capacity increases– Vehicle capital costs rise, but at a slower rate

than vehicle capacity• Example of economies of scale (falling average

costs as scale (capacity) increases

– Vehicle operating costs rise, but at a slower rate than vehicle capacity

• Example of economies of utilization (falling average costs as an existing capacity is more fully used)

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Technology and Equipment

• Route characteristics determine required vehicle power, speed and maneuverability– Lower horsepower tractors used for local delivery

• Match vehicle capacity to route demand and required service frequency

Table 11-3


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Technology and Equipment, cont’d

• Fastest speed not necessarily most efficient– Relates closely to fuel consumption

Figure 11-1


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• Minimize vehicle (tare) weight relative to gross (tare plus freight) weight– Gross vehicle weights constrained by

• Propulsion systems

• Infrastructure regulations

– Steps taken to reduce tare weight• Materials used

• Minimize exterior paint on vehicle


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• Maximize vehicle cubic capacity– Vehicle cubic capacity a function of vehicle

dimensions - height, length and width– Dimensions constrained by safety regulations

and infrastructure (way) limitations– Vehicle dimensions have major financial

implications for transporters of low density freight, such as household goods



Table 11-4

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• Standardize equipment when possible– Lowers operating and perhaps capital costs by

simplifying • Planning, purchasing, crew training,

• Vehicle maintenance, spare parts inventories

• Market and commodity requirements may warrant specialized equipment– Requires careful assessment of tradeoffs with

advantages of standardized equipment © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Hub-and-Spoke Route System

• Evolved in 1970s and 1980s– Done to improve vehicle utilization on long

distance routes– Assists in matching vehicle size to route

volume– Can improve schedule frequency


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Figure 11-2


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Marketing

• Service marketing differs from product marketing– Services are intangible– More of a focus on the service provider– Services are labor intensive and thus subject to

more variability– Simultaneous production and consumption of

services– Services are perishable


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Marketing, cont’d

• Market orientated carriers view themselves as part of shippers logistics system– Stress customer satisfaction, flexible operations– Willingness to tailor services – Taking on more value adding tasks

• Development of third-party (3PL) operations– Carriers establish subsidiaries– Customers outsource more logistics-related tasks


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Coordination

• Marketing and operations can have conflicting objectives– Well-managed carrier ensures that:

• Marketing considers operational costs in its efforts

• Operations keeps constant eye on service performance

• Accountability for profitability runs throughout the organization


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Challenges Affecting Carrier Mgmt.

• Operations are geographically dispersed– Op. employees may receive minimum supervision– Accountability gets lost on long shipments– May require tight controls, decentralized management

structures, close communications– Trends in leading carriers

• More sophisticated training for customer-facing employees

• Employee empowerment

• Performance measurement

• Adoption of wireless and satellite communication


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Challenges Affecting Carrier Mgmt.Cont’d

• Organizational structures– Historically, strong vertical hierarchies by

functional area or skill• Disadvantages of:

– Inflexible, resistant to change– Hindrance to cross-functional communications at middle

and lower management levels– Can develop goals inconsistent with corporate goals

• Difficult to determine costs– Affected by many factors that vary from

situation to situation© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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The Terminal

• General nature– Nodes in network where freight/passengers are

stopped for value-adding activities• Consolidation or concentration

• Dispersion or break-bulk

• Shipment services– Storage, billing (ticketing), routing

• Vehicle services

• Shipment process services– Weighing, customs, claims processing, interchange



Figure 11-3

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The Terminal, cont’d

• Terminal ownership– Privately owned terminals

• Capital costs are assets on carrier’s balance sheet

• Once constructed, then capital costs are fixed

• Railroads, trucking, pipelines, air freight

– Publicly provided terminals• Carriers charged fees for use

• Air and most post facilities


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• Types of terminals– Rail

• Hump or marshalling yards

• Transloading terminals

– Water: harbors and ports– Air: some variation in functions of freight and

passenger terminals– Pipeline: storage facilities and pumping stations– Motor carrier (truckload)


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• Types of terminals, cont’d– Motor carrier (LTL)

• Pick-up and delivery terminals (PUD)– Known as satellite or end-of-line terminal

– Interacts most directly with customers

– Served by peddle runs

– Functions include

» consolidation and dispersion, cross-docking

» Tracing, rating, billing, sales, claims

– Improved IT is enabling centralization of some traditional PUD functions


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• Types of terminals, cont’d– Motor carrier (LTL), cont’d

• Break-bulk terminal– Consolidation and dispersion

– Little direct customer contact

– Over the road driver domiciles

• Relay terminal– Service facilities for drivers and equipment

– Provide layovers for drivers on long runs between break-bulks

– Do not handle freight© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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The Terminal, cont’d• Terminal management decisions

– Number of terminals• Most relevant for LTL carriers• Decision depends upon

– Degree of desired market penetration– Degree of required customer service– “Fit” in network

» PUD terminals married to break-bulks, thus, break-bulk capacity influences number of PUD terminals

– Total cost

• Trend has been to reduce number of terminals– Speeds transit times, reduces capital requirements, reduces

handling of freight


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• Terminal management decisions, cont’d– Locations of terminals

• Most relevant to LTL carriers

• Factors in decision– Driver hours of service regulations

– For PUD’s, degree of backhauling to break-bulk

– Market penetration and potential


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• Terminal management decisions, cont’d– Equipment selection and development

• Positioning is a critical operating decision

• Most modes have varying equipment types that most constantly be positioned in appropriate markets, terminals and routes

– When power units can be separated from freight carrying unit, then positioning becomes more complex

– Some equipment is dedicated to particular customers, further complicating positioning


Transport Management & Theory Practices (10)

Business

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