Transportation Seventh Edition Coyle, Novack, Gibson & Bardi © 2011 Cengage Learning Chapter 1 Transportation: Critical Link in the Supply Chain 1 © 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.

© 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. 2 Introduction Chapter focus: The role transport plays in: –Fostering improved supply chain integration Integration is not achievable without effective transport –Helping organizations to be more efficient and effective Chapter organization –Conceptual dimensions of transport –Fundamentals of supply chain management –Role of transport in the supply chain

Introduction Economics of Transportation Transportation –Pervasive element of daily life –Impacts citizens’ Economic well being Safety Social interaction Quality of physical environment Quality of daily life –Chapter focuses on the economic impact © 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. 3

Introduction Demand for Transportation Regions or areas tend to specialize in certain economic activities This specialization creates physical gap between markets and areas of production for a given good This gap creates a demand for transport Fundamental economic role of transport is to bridge this supply-demand gap © 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. 4

© 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. 5 Introduction Transport Measurement Units Typical measurement units –Ton-miles (freight) and passenger-miles (people) –Caution: Both units are heterogeneous. Two units may have Very different costs of production Very different service requirements Levels of measurement unit aggregation –Total transport output (freight or passenger) –Transport output by mode (mode share) –Transport output by carrier (market share)

© 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. 6

© 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. 7

© 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. 8 Introduction Price Elasticity of Demand Sensitivity of demand to price change Relative measure between price change and quantity change. Measured as: % change in quantity  % change in price Terminology –Price elastic: demand is sensitive to price change –Price inelastic: demand is insensitive to price change

© 2011Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 9 Introduction Price Elasticity of Demand 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

© 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. 10 Introduction Price Elasticity of Demand 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

© 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. 11 Freight Transportation Derived Demand Definition of derived demand –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 individual carrier actions

© 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. 12

© 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. 13 Value of (Transport) Service Transport cost is a component of landed cost –Landed cost includes: Cost of production Transport cost from production point to market –Transport costs influence a producer’s landed cost advantage/disadvantage vs. competitors, thus determining the market value of the transport service Similar to place utility concept (see Ch. 2) –Landed cost also determines extent or range of a producer’s market area (Lardner’s Law) and thus the value of transport service

© 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. 14

© 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. 15

© 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. 16 Value of (Transport) Service Service Components of Freight Demand Critical service characteristics and related supply chain cost impacts –Transit time Volume and cost of holding inventory Potential stockout and/or safety stock 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/or stockout costs

Value of (Transport) Service Location of Economic Activity Historically, transportation influences location of cities, particularly ports For firms, transport influences the location of manufacturing plants and distribution facilities –Influences very pronounced for firms producing or marketing globally Influences are dynamic –As economic activity locations shift, the pattern of transport demand also shifts and vice versa © 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. 17

Supply Chain Concept Development of the Concept Concept evolves in three phases –1960s: physical distribution concept –1980s: business logistics or integrated logistics –1990s: supply chain management concept A systems approach to analysis and decision-making is common to all three phases © 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. 18

Supply Chain Concept Development of the Concept Physical distribution concept –Focuses on physical distribution system costs and tradeoffs –Objective was to find lowest total physical distribution system cost –Example: transportation mode or carrier selection Involves tradeoffs between transport, inventory, materials handling, and packaging 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. 19

Supply Chain Concept Development of the Concept Business logistics concept –Adds analysis of inbound or sourcing side to the outbound physical distribution side –Development facilitated by Economic deregulation of transport in U.S. Rising degree of international or global sourcing Both create additional opportunities for cost savings through integrated management and coordination –Notion that logistics contributes to customer service and revenue generation begins to emerge © 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. 20

Supply Chain Concept Development of the Concept Supply chain management concept –Key underlying principles Systems analysis and management 3 key flows: product, information, and cash Integrated management of extended enterprise Focus on ultimate consumer of end product –Transport: most direct influence on product flow Product flow is two way Growing importance of reverse logistics systems © 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. 21

© 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. 22

Supply Chain Concept Development of the Concept –Information flow Sales trigger replenishment orders flowing upstream Traditionally, replenishment orders used by upstream supply chain members to forecast downstream demand –Long intervals between orders create demand uncertainty –Safety stocks used to buffer against uncertainty –Magnitude of uncertainty and safety stocks amplify upstream in a phenomenon known as the bullwhip effect SC compression via improved two-way information flow reduces uncertainty and cost impact of bullwhip effect –Transport carriers contribute to uncertainty reduction (reliable and fast deliveries) and improved two-way info flow (advanced shipment notices, bar codes, radio frequency tags) © 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. 23

Supply Chain Concept Development of the Concept –Financial or cash flow Payments flowing upstream for goods ordered If order and replenishment cycles shorten (orders and product flow faster) then cash flows faster Faster cash flow reduces working capital requirements for financing operations and processes and contributes to improved profitability –“free” cash flow cycle High transport service levels contribute to improved customer service and faster cash flow © 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. 24