Transportation Infrastructure

Transportation Infrastructure
The good news is that we are going to take a little break from math this class. Today we talk about transportation infrastructure. McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

Overview of transportation infrastructure
Transport functionality, principles and participants Transportation regulation Transportation structure Transportation service While we do not have much math to talk about… we do have a lot of transportation information. This includes regulations which are not often the most exciting items.

Transportation infrastructure supports the flow of our nations economy
Table 8.1 The Nations’ Freight Bill ($ billions) The role of transportation has changed a lot over the past 40 years. If you look at this table you can see that the cost of transportation has been on a steady climb. The $ spent on trucks is 20x the 1970 level. While it has increased 20x it is important to see that transportation as a general has actually decreased as a 5 of GNP. This is based on efficient processes. Additionally in the 1980s transportation was deregulated which opened the door to price flexibility and increased range of services. Other big changes to note is in the area of air transportation… it has increased from 0.4 up to 31B. Where pipline has increase from 0.9 to 10.0 over the same period.

Transport functionality primarily consists of product movement services
Product movement is the movement of inventory to specified destinations Restrictive element—in-transit inventory is “captive”, usually inaccessible during transportation Flexible element—inventory can be diverted during shipment to a new destination Transportation consumes time, financial, and environmental resources Transportation is more than 60% of the cost of logistics One of largest consumers of oil and gas in US Impacts traffic congestion, noise and air pollution Transportation is probably the most visible element of logistics. Everyone understand putting a box on a truck and driving it somewhere. Few people understand how to calculate the Economic order quantity. Transportation functionality provides two major services. Product movement and product storage. Lets talk about Product Movement first…. This is basically the movement of inventory (whether it is materials, components, WIP, of final goods) to a specific destination. This inventory can be “captive” such as on a ship or flexible such as on a truck. A ship could also be flexible, as well as a truck can also be restrictive. This movement is not cheap… it is estimated that transportation is 60% of the cost of logistics. There is also an environmental impact, such as the consumption of oil and gas. Lastly, if you have ever driven on a highway. You have see the traffic congestion and noise caused by transportation.

Transport also functions as storage services for products while in a vehicle
In-transit inventory is captive in the transport system Managers strive to reduce in-transit inventory to a minimum Product can also be stored in vehicles at origin or destination (trailers, trucks, railcars, etc) Usually more expensive than traditional warehousing Must pay rental or demurrage charges on vehicles used for storage Diversion occurs when a shipment destination is changed after a product is in transit The second component of transportation is storage…. In-transit inventory is a captive element of the transportation system. But the same vehicle that is transporting it can also be a storage vessel prior to shipment of at the destination. It is often cheaper to keep all the equipment or parts in the truck rather than unloading and reloading it a couple days later. We talked about the flexible element of product being transported… it is called diversion when a shipment destination is changed while it is enroute. This is the same term used to change the mission of an aircraft from a training mission to a SAR case.

Two fundamental transport principles
Economy of scale is the cost per unit weight decreases as the size of the shipment increases At least until you totally fill the carrying vehicle! Cost decreases because the fixed cost of the carrier is allocated over a larger weight of shipment Economy of distance is the cost per unit weight decreases as distance increases Often called the tapering principle Longer distances allow fixed cost of the carrier to be spread over more miles, lowering the per mile charge Goal is to maximize the size of the load and distance shipped while still meeting service expectations There are two economic principles that we need to discuss regarding the economic principles of transportation. They are economy of scale and economy of distance. Economy of scale is regarding the fixed cost of the truck or ship. It costs the same to ship a truck with 100 lbs of product or 1000lbs. The more goods you can but on board incrementally decreases the per unit cost of transportation. This is until you fill the transportation unit… then it starts again. Additionally, there is also an economy of distance. The longer the distance the more the fixed costs are spread out. This is often called the tapering principle. If you transport one shipment 1000 miles and then 2 shipments each 500 miles… you spend more time loading and unloading the truck, increasing your costs. When you are planning your shipments, you want to maximize both elements.

Transport participants
Shipper Consignee (Receiver) Carrier and Agents Government Internet Public The participants in the world of transportation are: The shipper (often called the consignor) The receiver (or the consignee) The carrier The government The internet and The public… We will talk about each.

Major relationships among transportation participants
I guess before we talk about each… we need to examine the relationship between them. You can see that the government is tied to the public. The carrier is tied to all the other elements. And the government and internet are both tied to the shipper, carrier and receiver. Figure 8.1 Relationship Among Transportation Participants

Role and perspective of participants
Shipper and consignee have a common interest in moving goods from origin to destination within a given time at the lowest cost Carriers desire to maximize their revenue for movement while minimizing associated costs Agents (brokers and freight forwarders) facilitate carrier and customer matching Government desires a stable and efficient transportation environment to support economic growth Internet is used to share real-time information with customers and suppliers. Public is concerned with transportation accessibility, expense, and standards for security, safety and the environment Lets talk about the roles and perspective of each of the participants. Shippers… they want the good picked up and delivered at specified times, with a predictable transit time, and zero loss or damaged items. At of course, the lowest price. The Carrier… wants to make as much money as possible by minimizing revenue and lowering operating costs. Agents (I have grouped them with Carriers until now)… they just match carriers and customers. Government… historically the government regulated carriers dictating the price they could charge. Now the government is in charge of a transportation service (USPS), but they are also in charge of the transportation safety which drive current regulations (we will talk about these later). The last role is the public… They are concerned with transportation safety, expense, accessibility, congestion, and environmental impacts.

Role of the Internet in transportation
The Internet now provides the vital communications links between the transactional participants (shipper-carrier-consignee) Replacing phone and fax technologies Web-based enterprises provide information marketplaces Freight matching Fuel, equipment, parts and supplies purchases I talked about the internet being one of the 6 elements of transportation…. Well its role is as the communication link between shippers, carriers, and receivers. We are talking about realtime tracking of packages and shipments. This replacing the old system of phones and faxes. In the past truckers would need to call in regularly to update their location. It is also used for items such as freight matching (things going to similar locations), and purchases of items such as fuel, equipment parts and supplies.

Transportation regulation by the government focuses on
Economic regulation seeking to make transportation equally accessible and economical to all without discrimination Government created infrastructure (roads, canals, ports) Intended to prevent carriers from taking advantage of suppliers while ensuring long-term financial stability for carriers Social regulation which takes measures to protect public safety and environment Department of Transportation (DOT) (1966) has active role in hazardous material safety and driver safety Hazardous Materials Transportation Uniform Safety Act (1990) took precedence over state and local regulations Since everyone likes discussions on regulations… today is your lucky day. The government saw that transportation had major impact on domestic and internal commerce, so they took a special interest in it. The interest was in the way of controlling it through regulations. The regulations we in two forms… economic and social. ECONOMIC: the government wanted equal access of economical transportation available to everyone. So they invested in the infrastructure such as highways, airports, waterways, and deepwater ports. Since the government didn’t provide transportation they made sure that the carriers ensured: service availability (service available to all businesses) Stability (guaranteed sufficient profits to ensure long term business) and fair prices (carriers could not take advantage of anyone). In 1980 the deregulation practices were stopped… not competition and antitrust laws are the only ones impacting transportation economics. SOCIAL: To protect public safety and the environment the department of transportation was created. The department manages harardous material transport and rules related to maximum driver hours.

History of transportation regulation
In 1800’s, rise of steamships and railroads created immense wealth and monopolies (e.g. Commodore Vanderbilt and the railroad “barons” ) Interstate Commerce Commission (ICC) created in 1887 to oversee regulation of interstate transportation To stop the railroad monopolies Other regulatory acts passed from 1906 to 1973 placed motor carriers, shipping, air transport and pipeline transport under ICC oversight By 1970, ICC had oversight on 100% of rail and air, 80% of pipeline, 43% of trucking and 6% of water carrier operations We are going to dig a little deeper into transportation regulation… In the 1800’s steamships and railroads were popping up all over the place. Unfortunately, they were primarily owned by a few people. If you had a business, you had to pay the rate set by these monopolies. This did not sit well with the government. So in 1887, the ICC was created (ICC = Interstate Commerce Commission) Its purpose was the stopping of the railroad monopolies. The book has information on the creation of the FAA and NASA, but all I need you to know is that the ICC continued to gain oversight over transportation. By 1970, it had oversight over all rail and air transportation, 80% of piplines, 43% of trucking and 6% of water cariers.

Transportation deregulation (1980)
Motor Carrier Act of 1980 deregulated the motor carrier industries Entry restrictions for new businesses were relaxed Restrictions for types of freight and range of services were abolished Individual carriers were given the right to price their services Trucking industry’s collective rate-making practices were abolished Staggers Rail Act of 1980 deregulated the rail industry Provide railroad management with freedom necessary to revitalize the industry Rail carriers were authorized to use selective pricing to meet competition and cover operating costs Carriers given increased flexibility with respect to surcharges Contract rate agreements between individual shippers and carriers were legalized Rail management given liberal authority to proceed with abandonment of poorly performing rail service As I have already mentioned… that came to an end in The Motor carrier and Staggers Rail Act were passed. The Motor carrier act relaxed entry restrictions, Restrictions on freight type and range were removed, Pricing restrictions were removed, and collective rate making practices were abolished. The Staggers Rail Act removed pricing restrictions, contract rates were legalized, and poor performing rail services were shut down.

Transportation regulation in the new millennium is stimulated by technology and global issues
Electronic Signatures in Global & National Commerce Act of 2000 Gave digital signatures legal status Patriot Act of 2001 Increased inspections at ports, airport security, and increased security at border crossings Continued Dumping and Subsidy Act Fines for artificial underpricing and “dumping” of foreign goods in U.S. markets Jones Act Only U.S.-built ships operating under a U.S. flag with U.S. crews can ship goods directly from a U.S. port to another U.S. port Since 1980… many other transportation regulations have come into effect. The Fedex and UPS guys are really happy the Electronic signature act was passed. It gives immediate visibility the packages are received., The Patriot Act is a post 9-11 change that increased the level of inspection completed at potential transportation bottleneck locations. To keep foreign companies from impacting our maket, the process of dumping items in the US market is now fined. Lastly… if you want to go from US prot to US port (shipping good) you must be under use flag and have a US crew. This allows for ships just to be searched once (during port of entry),

Transportation structure
Consists of rights-of-way, vehicles, and carriers operating within five basic modes A mode identifies basic transportation method or form Rail Highway Water Pipeline Air The tough section of regulations is now behind us. We now move into the world of transportation structure. The modes of transportation are generally: Rail Highway, Water, Pipeline and Air…

Truck share of domestic freight market exceeds all other modes combined
Table 8.2 Domestic Shipments by Mode and Volume You are looking at a chart that shows the weight (in tones) of domestic shipments. As you can guess… nationally, trucks drive the majority of the shipments. After that you are looking at rail. Then the weight of oil brings pipelines into third place. Followed closely by water (think great lakes and Mississippi.) The rail intermodal is part train part truck… and lastly is air. Air is expensive, so it does not get as much weight. Looking at the 2015 forecast… You can see that rail intermodal and truck will increase, while the others will decrease 9in percent share).

Rail mode has historically handled the largest number of ton-miles within continental US
Track mileage has declined by over half since 1970 Traffic shifted from broad range of commodities to hauling specific freight in traffic segments Carload Intermodal Container New technologies include articulated cars, unit trains and double-stack cars The first mode that we are going to discuss is Rail. Historically, the rail system has moved the largest number of ton-miles in the US. A ton-mile is a standard measurement that combines weight and distance. In the past rail ranked number one in the number of miles, but there has been a decline in the amount of rail track. In 1970, there was over 200K of track… that was down to 95K in 2005. Rail has high fixed cost (expensive equipment, switching yards, and track maintenance), but it has low variable costs The current focus of the rail industry is on carload, intermodal and container shipments. New technology in the rail world is articulated cars, unit trains and double stack cars.

Rail Top left: Articulated cars have extended rails chassis that can haul up to 10 containers. Top right: Double stack railcars. 2 containers on a single car. Bottom: unit train… just one single item. Usually sent direct to destination nonstop.

Truck mode has expanded rapidly since the end of World War II
Nearly 1 million miles of highways in U.S. Key benefits include Speed of transit Ability to operate door-to-door More efficient than rail for small shipments over short distances Dominate freight moves under 500 miles and from manufacturing to wholesalers to retailers Many companies run their own truck fleets as well (e.g. WalMart) The Tractor Trailer truck is the mode of transportation most on the rise since WWII. There is almost a million miles of highway making it easy a flexible mode of transport. The key benefits are the speed and ability to go door to door. If you want to move something under 500 miles… truck is the best method. Many companies, such as WalMart, run their own fleight of trucks.

Water mode is the oldest form of US transport dating back to the birth of our nation
Percentage of ton-miles has stayed between 19 and 30% since 1960’s Ranks between rail and truck in fixed cost Right of way (canals and rivers) maintained by Federal government Water is the oldest for of transportation. The usage of this mode has been pretty consistent between 19-30% since 1960, but the mix has moved from the great lake to more rivers and canals. The glory days of Detroit, Chicago, Cleveland, and Pittsburg as manufacturers are behind us. The ranking of this mode is between rail and truck for the fixed cost.

Pipeline mode accounts for about 68 percent of all crude and petroleum ton-mile movements in US
Have the highest fixed cost and lowest variable cost of all modes Unique transportation mode Can operate 24 hours a day, 7 days a week No emissions No empty container or vehicle to return Not flexible, and limited to liquids and gases If you want to move oil… you should think about the pipeline. It is currently moving around 70% of all oil (in ton-mile measurements) The fixed cost of getting the oil into the pipe and maintenance is the highest… but the variable cost is the lowest. The big pluses are that its ability to run 24/7 and there are no emissions, or vehicles to return. The negative is that it can only move certain products such as liquids and gases.

Air mode is the newest and least utilized transport mode for freight
Accounts for only 1% of intercity ton-miles Fastest of all the modes Fixed cost is 2nd lowest but variable costs are extremely high Most products air-shipped have high value, high priority or extreme perishability Air is the newest mode of transport. It accounts for only 1% of ton-miles. The fixed cost is the second lowest, but variable costs are extremely high. The plus is the quick movement, the negative is the cost. The primary user is products that have high value or priority or items that are perishable.

Comparison of fixed and variable cost structure of each transport mode
Table 8.4 Cost Structure For Each Model This slide talks about the fixed and variable costs. Fixed cost from highest: pipeline, Rail, Water, air, truck Variable from highest: Air, Truck, rail, water, Pipeline

Operating characteristics used to classify transport modes
Speed is the elapsed movement time from origin to destination Availability is ability of a mode to service any given pair of locations Dependability is the potential variance from expected delivery schedule Capability is the ability to handle any load size or configuration Frequency is the quantity of scheduled movements a mode can handle When you are deciding on which mode to use… you look at 5 operating characteristics. Speed… time from place to place Availability… service any pair group Dependability… variance from delivery schedule Capability… handle and load or configuration Frequency… quantity of movements it can handle.

Highway transport is appealing partly due to its relative ranking across characteristics
Table 8.5 Relative Operating Characteristics by Mode Lets see how speed ranks… lowest is best. Lowest rank is best Note: Lower is better

Table 8.5 Relative Operating Characteristics by Mode Availability Lowest rank is best Note: Lower is better

Table 8.5 Relative Operating Characteristics by Mode Dependability Lowest rank is best Note: Lower is better

Table 8.5 Relative Operating Characteristics by Mode Capability Lowest rank is best Note: Lower is better

Table 8.5 Relative Operating Characteristics by Mode Frequency Lowest rank is best Note: Lower is better

Table 8.5 Relative Operating Characteristics by Mode Total Lowest rank is best Note: Lower is better

Table 8.5 Relative Operating Characteristics by Mode Lowest rank is best Note: Lower is better

Infrastructure in crisis – US needs a National Transportation Plan
United States aggressively invested in highway construction after World War II However, this highway system is in need of widespread repair to sustain the safe movement of over 26 million trucks August 1, 2007 a major bridge span of interstate I-35 over the Mississippi River collapses Watch video of aftermath by selecting this link (slideshow mode) Roughly 12 percent (or 79,000) of public road bridges on the National Bridge Inventory are classified as structurally deficient As I’m guessing that most everyone knows… out transportation infrastructure is in crisis. After WWII… the US invested a lot into highway construction. The problem is that now the system needs a lot of repair. It has been estimated that 12% of the public bridges need structural repair. There was a good portion of the Economic Stimulus plan that went to road construction and repair. I have a video of the I-35 collapses.

Transportation service is achieved by combining modes
Traditional carriers are firms that provide service using only one of the five basic transport modes E.g. trucking firm or an airline Package service uses intermodal transportation (ground and air) to handle small shipments or parcel deliveries E.g. USPS, Fedex, or UPS Intermodal transportation combines two or more modes to take advantage of the inherent economies of each and provide an integrated service at a lower total cost E.g. piggyback service integrating rail and motor service Nonoperating intermediaries include several business types that do not own or operate equipment Act to broker services by other firms The reality of transportation is that it is primarily completed by combining multiple modes. The traditional carriers are firms that only handle one type of mode. A prime example of a traditional carrier is a airline like Delta. They transport the package from one airport to another. The Package service is a combination of ground and air (intermodal). It is used to handle small shipments and parcel deliveries. Think FEDEX and UPS. In the past small shipments were not a posibility, because they didn’t meet the minimum delivery windows.

Package service provides both regular and premium service
Package service is growing rapidly with the rise in e-Commerce and Internet consumer sales Ground package service offers regular delivery within metropolitan areas and between cities United Parcel Service (UPS), Federal Express Ground and United States Postal Service (USPS) Air package service is a premium service to deliver certain packages door-to-door by next-day or second-day Integrates truck and air modes seamlessly Since the rise of the internet… packaging services have been on the rise. They offer ground package and air package. The air is commonly a premium service which cost a lot more.

Piggyback is an intermodal transport that integrates rail and motor service
Most widely used systems are Trailer on a flatcar (TOFC) Container on a flatcar (COFC) Trailer or container is hauled by truck at origin and destination Railcar hauls for portion of intercity travel A variety of coordinated service plans have been developed Intermodal is the combination of any two modes. I mentioned truck and air… there is also truck and rail… which is just as common (but moves a lot more volume). The rail will move from city to city… then the truck will deliver to the buyer’s door.

Containerships are oldest form of intermodal transport
Loads a truck trailer, railcar or container onto barge or ship for the line-haul movement on inland waterways Land bridge concept moves containers in a combination of sea and rail transport Common for containers moving from Europe to Pacific Rim Transfer of freight between modes often requires handling containers and imposition of duties Function of ports is to make this seamless and fast Port throughput is big concern for supply chain managers The same concept used for rail and truck is used for water. This is especially important for Europe and Pacific rim countries. The combination can be water / rail or water/truck.

Coordinated air-truck is commonly used to provide premium package services
Many smaller cities lack airfreight services Costs can leveraged with delivery time by linking the modes The last method of intermodal travel is the air/truck. This is used for premium packages. It happens in cities without major airports or need door to door service.

Non-operating intermediaries do not own their own equipment
Freight forwarders—businesses that consolidate small shipments from various customers into bulk shipment for a common carrier for transport Shipper associations and agents—groups of shippers who employ an agent to consolidate purchases and shipments for them E.g. garment industry in New York Brokers—intermediaries that coordinate transportation arrangements for shipper, consignees and carriers, operating on a commission basis The last concept you need to understand is non-operating intermediaries. They do not own their own equipment. They commonly consolidate smaller shipments from various customers. They make their money by the cost savings that they provide the customers. Sampling of Non-operating Intermediaries

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