Transportation Sixth Edition Coyle, Bardi, & Novack © 2006 Thomson Chapter 1 Transportation, the Supply Chain, and the Economy

Coyle/Bardi/Novack Transportation 6e © 2006 Thomson2 Chapter 1 Topics The 2000s: A Decade of Challenge The Logistics Concept The Supply Chain Concept Total Cost Analysis Business Logistics Activities Transportation and the Economy

Coyle/Bardi/Novack Transportation 6e © 2006 Thomson3 Chapter 1 Topics, cont’d Historical Significance Economic Significance Environmental Significance Social Significance Political Significance Overview of Modern Transportation Overview of Transportation Trends

Coyle/Bardi/Novack Transportation 6e © 2006 Thomson4 Chapter 1 Topics, cont’d Demand for Transportation Demand Measurement Units Level of Aggregation Demand Elasticity Freight Transportation Value of Service Passenger Transportation

Coyle/Bardi/Novack Transportation 6e © 2006 Thomson5 The 2000s: Decade of Challenge 1990s put focus on business fundamentals –Quality, value add of customer service First decade of 2000s –Ever increasing customer expectations –Increasing strategic and operational roles for transport, logistics, and supply chain management in meeting higher expectations

Coyle/Bardi/Novack Transportation 6e © 2006 Thomson6 The 2000s: Decade of Challenge, cont’d Continuously emerging challenges: –Increasing e-business activity via Internet Fulfillment characterized by –smaller shipment sizes –more frequent deliveries –residential delivery requirements –push to reduce inventory levels –Increasing world trade and global business operations Lengthening and more transport intensive supply chains

Coyle/Bardi/Novack Transportation 6e © 2006 Thomson7 The 2000s: Decade of Challenge, cont’d Continuously emerging challenges, cont’d –Changing nature of business alliances Push for asset productivity and improved processes Expanding scope of 3PL services Alliances among competitors –Ever changing, more capable technology Many operating efficiencies Communications (Ex: GPS) Data capturing (Ex: RFID)

Coyle/Bardi/Novack Transportation 6e © 2006 Thomson8 The Logistics Concept Military origins Early business applications –Physical distribution integration –Materials management integration Definition –Process orientation –Integrated management –Systems decision-making framework –Focus on customer requirements

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Coyle/Bardi/Novack Transportation 6e © 2006 Thomson11 The Supply Chain Concept Integrated product, information, and cash flow management throughout channels Multi-firm orientation –Not synonymous with logistics Significant role for transportation Logistics as enabler of enterprise model

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Coyle/Bardi/Novack Transportation 6e © 2006 Thomson13 Total-Cost Analysis Interdependencies –Among logistics activities –Between functional areas within firm –Between firm and supply chain partners Cost trade-offs within systems –Need for system-wide analysis Objective of total-cost reduction Importance of service level choice –Relation to revenue generation, strategy

Coyle/Bardi/Novack Transportation 6e © 2006 Thomson14 Business Logistics Activities Movement-storage interaction Impact of transportation decisions on other corporate functions Utility creation Materials management Physical distribution

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Coyle/Bardi/Novack Transportation 6e © 2006 Thomson16 Transportation and the Economy Transportation: a tool of civilized societies –Essential element of daily life Conceptual views of transportation –Enabler of utility creation –As a bundle of services at a certain cost –Factor of production –Market access –Spatial and temporal relationships

Coyle/Bardi/Novack Transportation 6e © 2006 Thomson17 Historical Significance Development of civilization Creation of social structures Communication Facilitation of trade Military conquest and national defense

Coyle/Bardi/Novack Transportation 6e © 2006 Thomson18 Economic Significance Conceptual Foundations Value of goods –Place utility, Lardner’s Law, producer- consumer gap –Time and quantity utilities Utility of goods: additional concepts –Geographic specialization –Large-scale production –Increased competition –Land values

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Coyle/Bardi/Novack Transportation 6e © 2006 Thomson21 Economic Significance, cont’d Transportation patterns –Patterns of trade –Impact on population locations Gross Domestic Product (GDP) –Measure of the size of the economy Transport: 15.7% of GDP in 2001 Downward trend due to improving transport productivity Modal split – passengers, freight

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Coyle/Bardi/Novack Transportation 6e © 2006 Thomson25 Environmental Significance The Environment –Air quality –Acid rain –Global climate changes –Maritime and water quality –Noise Safety Substance Abuse

Coyle/Bardi/Novack Transportation 6e © 2006 Thomson26 Social Significance Employment –Approx. 4.7 million(10%) workers employed in transport in U.S. (2000) –Employment growing Enhancement of health and welfare –Social integration –Famine and other disaster relief efforts

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Coyle/Bardi/Novack Transportation 6e © 2006 Thomson28 Political Significance Governmental responsibility –Regulatory role examples Common carrier concept Power of eminent domain –Promotional role examples Facilitation of commerce Preservation of national defense

Coyle/Bardi/Novack Transportation 6e © 2006 Thomson29 Overview of Modern Transportation Prior material: broad impact of transport –Economic (micro and macro) –environmental, social, political Three decision-making groups shape the transport system : –Users: create the demand requirements –Providers: supply, operate, and manage services to meet demand –Government: develop policy, supply infrastructure, and regulate

Coyle/Bardi/Novack Transportation 6e © 2006 Thomson30 Overview of Transportation Trends Key trends in demand for transport services Key trends in supply, operation, and management of transport services Key trends in government policy and regulation

Coyle/Bardi/Novack Transportation 6e © 2006 Thomson31 Demand for Transportation Demand measurement units –Ton-miles (freight) –Passenger-miles (people) –Heterogeneous units: Two units may have Very different costs of production Very different service requirements Levels of aggregation –Total –By mode –By carrier

Coyle/Bardi/Novack Transportation 6e © 2006 Thomson32 Demand (price) elasticity Sensitivity of demand to price change Relative measure between price change and quantity change –% change in quantity  % change in price Terminology –Price elastic: demand is sensitive to price change –Price inelastic: demand is insensitive to price change

Coyle/Bardi/Novack Transportation 6e © 2006 Thomson33 Demand (price) elasticity, cont’d If % change in quantity < % change in price, then demand is price inelastic (insensitive to price change) –Price increase leads to revenue increase –Price reduction leads to revenue reduction If % change in quantity > % change in price, then demand is price elastic –Price increase leads to revenue reduction –Price reduction leads to revenue increase

Coyle/Bardi/Novack Transportation 6e © 2006 Thomson34 Demand (price) elasticity, cont’d Aggregate demand for freight transportation tends to be price inelastic –Cost for transport generally small % of product’s landed cost Demand for particular mode or carrier tends to be price elastic –Often, substitutes are available Service elasticity

Coyle/Bardi/Novack Transportation 6e © 2006 Thomson35 Freight Transportation Demand Characteristics Derived demand –Def: Demand for transport service to move a product to a given location depends upon the existence of demand to consume (use) that product at that location Remember, demand is a relationship between price and quantity demanded –Aggregate demand for freight transport cannot be easily affected by carrier actions

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Coyle/Bardi/Novack Transportation 6e © 2006 Thomson37 Value of (Transport) Service, cont’d Transport cost is a component of a product’s landed cost –Transport costs influence a producer’s landed cost advantage/disadvantage in distant markets, thus determining the value of the transport service to the producer –Similar to place utility concept Landed cost also determines extent or range of a producer’s market area (Lardner’s Law) and thus value of transport service

Coyle/Bardi/Novack Transportation 6e © 2006 Thomson38 Freight Rate Equalization To increase market area freight rates are equalized (averaged) with mor distant points being subsidized and nearer points penalized Can be national in scope or regional Freight rates are part of product pricing strategy

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Coyle/Bardi/Novack Transportation 6e © 2006 Thomson40 Value of (Transport) Service, cont’d Service components of freight demand –Transit time Volume and cost of holding inventory Potential stockout costs –Reliability or consistency of transit time Safety stock and/or stockout costs –Accessibility: impacts transport cost and time –Capability: “special” service requirements –Security: safety stocks and stockout costs

Coyle/Bardi/Novack Transportation 6e © 2006 Thomson41 Passenger Transportation Expenditures for passenger movement –10% of GDP Intercity (long-distance) passenger travel –Demand influenced by trip purpose Business travel - schedule-sensitive Vacation travel - price-sensitive Personal travel Urban transit (intracity passenger travel)

Coyle/Bardi/Novack Transportation 6e © 2006 Thomson42 Passenger Demand Characteristics Destination Schedules and speed Cost Equipment Entertainment and Attention Terminals Complaints and Experiences