Chapter 9:

1. Chapter 9: The Transportation System

2. Learning Objectives-After reading this chapter, you should be able to do the following: • Explain the economic role transportation plays in the economy. • Discuss the economic and service characteristics of the basic modes. • Describe the carrier selection process. • Discuss the economic effect of rates, transit time, reliability, capability, accessibility, and security in the carrier selection decision. Management of Business Logistics, 7th Ed.

3. Learning Objectives • Compare the advantages and disadvantages of using common, regulated, contract, exempt and private carriers --- the five legal classes of carriers. • Discuss the economic and service characteristics of intermodal transportation and explain the dominance of rail-truck (piggyback) intermodal service. Management of Business Logistics, 7th Ed.

4. Learning Objectives • Discuss the economic rationale of using containerization. • Discuss the economic and service characteristics of indirect and special carriers. Management of Business Logistics, 7th Ed.

5. Logistics Profile:Victoria’s Secret • 33 to 35 percent of the $2.9 billion store, catalog, and E-commerce sales ship via the United States Postal Service (USPS). • Victoria’s Secret uses Global Logistics, a package expeditor, to service its southeast USPS shipments, with the object of three to five day service. • All loads to the USPS are palletized and are standing appointments and live uploads. Management of Business Logistics, 7th Ed.

6. The Role of Transportation in Logistics • Transportation is the physical link connecting the firm to its suppliers and customers. • In a nodes and links scenario, transportation is the link between fixed facilities (nodes). • Transportation also adds value to the product by providing time and place utility for the firm’s goods. Management of Business Logistics, 7th Ed.

7. The Role of Transportation in Logistics • As firms engage in global competition, transportation costs are becoming even more significant. • In 1999, U.S. firms spent an estimated $554 billion to move freight, or 9.9% of the GNP1; this is up from 397 billion, or 6.3% of the GDP in 1993. Management of Business Logistics, 7th Ed.

8. The Role of Transportation in Logistics • In 1999, as a percentage of sales, transportation was 3.24%, warehousing 1.84%, customer service 0.48%, administration 0.38%, and carrying cost 1.52%. • Outbound transportation was clearly the largest component of total physical distribution costs. • Cost trade-offs abound in transportation and are typified by trading lower inventory costs for higher transportation costs. Management of Business Logistics, 7th Ed.

9. The Transport Selection Decision • The Transportation – Supply Chain Relationship • Firms need to recognize that the lowest cost carrier does not necessarily guarantee that this carrier will result in the lowest landed cost. • Therefore, firms need to keep the big picture in mind when attempting to select a carrier. Management of Business Logistics, 7th Ed.

10. The Transport Selection Decision • The Carrier Selection Decision: • Various modes of transportation should be considered. • Choose a carrier or carriers within the selected mode, if there is a choice. • Carefully examine the service capabilities of the carrier as services can vary widely between carriers. Management of Business Logistics, 7th Ed.

11. Figure 9-1 The Carrier Selection Decision Management of Business Logistics, 7th Ed.

12. The Transport Selection Decision • Carrier Selection Determinants: • Cost • Transit time and reliability • Can be a competitive advantage • Lowers customers’ inventory costs • Capability • Accessibility • Security Management of Business Logistics, 7th Ed.

13. Figure 9-2 Carrier Selection Determinants and User Implications Management of Business Logistics, 7th Ed.

14. The Transport Selection Decision • The Pragmatics of Carrier Selection: • Transit time reliability • Negotiated rates • Consolidating shipments among a few carriers • Financial stability • Sales rep • Special equipment Management of Business Logistics, 7th Ed.

15. Figure 9-3 Importance Ranking of Carrier Selection Determinants Management of Business Logistics, 7th Ed.

16. The Basic Modes of Transportation3 • The basic modes available to the logistics manager are rail, motor, water, pipeline, and air. • Distribution of ton-miles* for the various modes is outlined in Table 9-1. *(a ton-mile is one ton of cargo carried one mile, and is a standard statistical measurement used in the transportation industry). Management of Business Logistics, 7th Ed.

17. Table 9-1 Modal Distribution of Ton-Miles Management of Business Logistics, 7th Ed.

18. The Basic Modes of Transportation: Railroads • Capable of carrying a wide variety of products, much more so that other modes. • Very small number of carriers; likely only one will be able to serve any one customer location. • Trend is to merge smaller companies into larger ones with ultimate goal of having perhaps two transcontinental rail carriers. Management of Business Logistics, 7th Ed.

19. The Basic Modes of Transportation: Railroads • This would permit seamless dock-to-dock service by one company; a distinct improvement over current systems. • Rail is a long haul, large volume system (high fixed costs; own rights-of-way). • Accessibility can be a problem. • Transit times are spotty, but are generally long. Management of Business Logistics, 7th Ed.

20. The Basic Modes of Transportation: Railroads • Reliability and safety are improving and are generally good. • Premium intermodal services • Straight piggyback and containerized freight • Double stacks • RoadRailer service • Unit train service • Intermodal Marketing Company (IMC) Management of Business Logistics, 7th Ed.

21. On the Line: It’s the Service, Stupid • It’s difficult to assess the railroad industry without getting into the subject of service… • Shippers complain; rail carriers say they are trying to improve. • Wall Street says that improving service is imperative. • Actual improvements are coming, but slower than the demand for faster, more reliable, and cheaper service. One problem is that standards continue to increase. Management of Business Logistics, 7th Ed.

22. The Basic Modes of Transportation: Motor Carriers • The motor carrier industry is characterized by a large number of small firms. In 1999, there were 505,000 registered motor carriers. • Low cost of entry causes these large numbers. • Used by almost all logistics systems and account for 82 percent of U.S. freight expenditures. • Consists of for-hire and private carriers. Management of Business Logistics, 7th Ed.

23. Figure 9-4 Overview of Interstate Motor Carrier Industry Management of Business Logistics, 7th Ed.

24. The Basic Modes of Transportation: Motor Carriers • Large number of small firms; in 1999, there were 12,500 regulated carriers, only 7% of which had revenues >$10 million, with 76% having revenues <$3 million. • Characterized by low fixed costs and high variable costs. • Do not own their rights-of-way. • Limited operating authority regarding service areas, routes, rates and products carried. Management of Business Logistics, 7th Ed.

25. The Basic Modes of Transportation: Motor Carriers • High accessibility • Transit times faster than rail or water. • Reliability can be affected greatly by weather. • Small vehicle size coincides with lower inventory strategies and quick replenishment (QR). • Relatively high cost compared to rail and water; trade-off is faster service. Management of Business Logistics, 7th Ed.

26. Figure 9-5 Overview of the Domestic Water Carrier Industry Management of Business Logistics, 7th Ed.

27. The Basic Modes of Transportation: Domestic Water Carriers • Available along the Atlantic, Gulf and Pacific coasts, along the Mississippi, Missouri, Tennessee and Ohio River systems and the Great Lakes. • Regulated common and contract carriers haul about 5% of the freight, while private and exempt carriers haul the other 95% of the ton-miles. Management of Business Logistics, 7th Ed.

28. The Basic Modes of Transportation: Domestic Water Carriers • Relatively low cost mode; do not own the rights-of-way; easy entry and exit. • Typically a long distance mover of low value, bulk-type mineral, agricultural and forest products • Low rates but long transit times • Low accessibility but high capability Management of Business Logistics, 7th Ed.

29. The Basic Modes of Transportation: International Water Carriers • General cargo ships • Large high capacity cargo holds • Engaged on a contract basis • Many have self-contained cranes for loading/unloading • Bulk carriers • Specially designed to haul minerals • Can handle multiple cargoes Management of Business Logistics, 7th Ed.

30. The Basic Modes of Transportation: International Water Carriers • Tankers • Specially designed for liquid cargoes • Largest vessels afloat, some VLCCs at 500k+ tons • Container ships • High speeds for ships; increasingly more common and important • Larger vessels can handle up to 5,000 containers. Management of Business Logistics, 7th Ed.

31. The Basic Modes of Transportation: International Water Carriers • RO-RO (Roll on-Roll off) • Basically a large ferry that facilitates the loading and unloading process by using drive on/off ramps • May also have the capacity to haul containers • Other • OBO multipurpose carriers • Barges (not transoceanic) Management of Business Logistics, 7th Ed.

32. The Basic Modes of Transportation: Air Carriers • Limited number of large carriers earn about 90% of the revenue. • Any of the air carriers can carry air freight although some haul nothing but freight. • Cost structure is highly variable; do not own rights-of-way. • Transit times are fastest of the modes, but rates are highest. Management of Business Logistics, 7th Ed.

33. The Basic Modes of Transportation: Air Carriers • Average revenue per ton mile 18 times higher than rail; twice that of motor carriers. • Seek goods with a high value to weight ratio. • Accessibility is low as is capability. • Reliability subject to weather more than other modes. Management of Business Logistics, 7th Ed.

34. The Basic Modes of Transportation: Pipelines • Refers only to the oil pipelines, not natural gas • Not suitable for general transportation • Some research has been performed to move minerals in a liquid medium, but outside of a few attempts to transport slurried-coal via pipeline, no real successes have occurred. Management of Business Logistics, 7th Ed.

35. The Basic Modes of Transportation: Pipelines • Accessibility is very low. • Cost structure is highly fixed with low variable costs. • Own rights-of-way much like the railroads. • Major advantage is low rates. Management of Business Logistics, 7th Ed.

36. Table 9-2: Performance Rating of Modes Management of Business Logistics, 7th Ed.

37. Legal Classifications of Carriers: Common Carrier • For-hire carrier that serves the general public at reasonable rates and without discrimination. • Stringent economic regulation designed to protect the public. • Must transport all commodities offered... • Commodities are limited to those that the carrier’s equipment will handle. Management of Business Logistics, 7th Ed.

38. Legal Classifications of Carriers: Common Carrier • Carrier is liable for damages to products carried. • Exceptions to liability include acts of God, acts of the public enemy, acts of public authority, acts of the shipper and defects inherent in the goods. • Continued service is assisted by ceiling and floor limits on the rates charged. • Backbone of the transportation industry. Management of Business Logistics, 7th Ed.

39. Legal Classifications of Carriers: Regulated Carrier • Regulated carriers are found in motor and water carriage. • The ICC Termination Act of 1995 eliminated most of the common carrier economic regulation for these two modes, including entry controls, reasonable rates, and nondiscrimination provisions. • When acting as a contract carrier, not subject to STB economic regulations. • Must provide safe and adequate service. Management of Business Logistics, 7th Ed.

40. Legal Classifications of Carriers: Contract Carriers • For-hire carrier that does not have to serve the general public. • May serve one or a few shippers exclusively. • May offer specialized equipment. • Not subject to regulation on services; rates usually lower than common or regulated carriers. Management of Business Logistics, 7th Ed.

41. Legal Classifications of Carriers: Contract Carriers • Other aspects of the carrier/shipper relationship are made a part of the contract between the two parties. • Becoming more popular as logistics managers use contract carriage to assure rates and service levels. Management of Business Logistics, 7th Ed.

42. Legal Classifications of Carriers: Exempt Carriers • For-hire carrier exempt from economic regulation regarding rates and services. • Limited entry controls; low rates. • Usually haul agricultural products, but there are special rules as to what may be hauled by each mode of transportation, e.g., rail piggyback is exempt.. • Limited number of carriers restricts availability. Management of Business Logistics, 7th Ed.

43. Legal Classifications of Carriers: Private Carriers • Private carriage is the firm’s own transportation. • Not for-hire and not subject to Federal regulations. • May not be the firm’s primary business but can charge a intracompany fee for transportation services. • Almost exclusively motor, but some rail, air and water also exist. Management of Business Logistics, 7th Ed.

44. Legal Classifications of Carriers: Private Carriers • Firms gain ultimate control over shipments and achieve maximum flexibility in moving goods. • Backhauls are usually empty or return materials to the firm’s plants and/or warehouses. • Requires a large capital investment. • Requires management time and expertise. Management of Business Logistics, 7th Ed.

45. Intermodal Transportation • Refers to use of two or more modes of transportation cooperating on the movement of shipment by publishing a through rate. • Logistics managers are looking for the best way to move shipments and these often attempt to take advantage of multiple modes of transportation, each of which has certain useful characteristics. Management of Business Logistics, 7th Ed.

46. Figure 9-6 Types of Intermodal Services Management of Business Logistics, 7th Ed.

47. Intermodal Transportation • Biggest disadvantage is that carriers are reluctant to participate. • Cultural bias towards using only one mode and this makes change more difficult. • Certain types have been fairly well developed, such as rail/water, motor/water, rail/motor, and motor/air. Management of Business Logistics, 7th Ed.

48. Intermodal Transportation: Containerization • Referred to as Container-on-Flat-Car (COFC); goods are placed in a large box, where they are untouched until they arrive at the consigee’s unloading dock. • Reduces theft, damage, multiple handling costs and intermodal transfer time. • Changes materials handling from labor intensive to capital intensive and may reduce costs from 10 to 20%. Management of Business Logistics, 7th Ed.

49. Intermodal Transportation: Containerization • “Land bridge” concept may apply for international shipments where oceans are separated by a large land mass. • For example, containers moving from Japan to Europe may dock at Long Beach, CA, transfer the containers to a railroad, and reload the containers onboard another ship in Norfolk, VA., continuing on to a European port. Management of Business Logistics, 7th Ed.

50. Intermodal Transportation: Piggyback • Trailer-on-Flat-Car (TOFC) • Over the road trailers ride in special rail cars. • Takes advantage of motor flexibility and rail’s long haul economic advantage. • Multiple service plans for shippers. • Some railroads provide varying levels of service, differentially priced. Management of Business Logistics, 7th Ed.