1. The Transportation System
Chapter 9:
The Transportation System

2. 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.
Chapter 9
Management of Business Logistics, 7th Ed.

3. 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.
Chapter 9
Management of Business Logistics, 7th Ed.

4. 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.
Chapter 9
Management of Business Logistics, 7th Ed.

5. 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.
Chapter 9
Management of Business Logistics, 7th Ed.

6. 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.
Chapter 9
Management of Business Logistics, 7th Ed.

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

8. The Transport Selection Decision
Carrier Selection Determinants:
Cost
Transit time and reliability
Can be a competitive advantage
Lowers customers’ inventory costs
Capability
Accessibility
Security
Chapter 9
Management of Business Logistics, 7th Ed.

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

10. 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
Chapter 9
Management of Business Logistics, 7th Ed.

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

12. 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).
Chapter 9
Management of Business Logistics, 7th Ed.

13. 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.
Chapter 9
Management of Business Logistics, 7th Ed.

14. 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.
Chapter 9
Management of Business Logistics, 7th Ed.

15. 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)
Chapter 9
Management of Business Logistics, 7th Ed.

16. 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.
Chapter 9
Management of Business Logistics, 7th Ed.

17. 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.
Chapter 9
Management of Business Logistics, 7th Ed.

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

19. 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.
Chapter 9
Management of Business Logistics, 7th Ed.

20. 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).
Smaller shipment size
Higher value manufactured goods
Safety concerns exist, packaging requirements not very stringent
Relatively high cost compared to rail and water; trade-off is faster service.
Chapter 9
Management of Business Logistics, 7th Ed.

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

22. 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.
Chapter 9
Management of Business Logistics, 7th Ed.

23. 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
Chapter 9
Management of Business Logistics, 7th Ed.

24. 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
Chapter 9
Management of Business Logistics, 7th Ed.

25. 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.
Chapter 9
Management of Business Logistics, 7th Ed.

26. 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)
Chapter 9
Management of Business Logistics, 7th Ed.

27. 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. Generally considered a high cost mode.
Transit times are fastest of the modes, but rates are highest.
Chapter 9
Management of Business Logistics, 7th Ed.

28. 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.
Important in international distribution
Chapter 9
Management of Business Logistics, 7th Ed.

29. 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.
Chapter 9
Management of Business Logistics, 7th Ed.

30. 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.
Chapter 9
Management of Business Logistics, 7th Ed.

31. Table 9-2: Performance Rating of Modes
Selection
Determinants
Railroad
Motor
Modes
Water
Air
Pipeline
Cost 3 4 2 5 1
Transit time
---
Reliability
Capability
Accessibility
Security
Chapter 9
Management of Business Logistics, 7th Ed.

32. 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.
Chapter 9
Management of Business Logistics, 7th Ed.

33. 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.
Chapter 9
Management of Business Logistics, 7th Ed.

34. 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.
Chapter 9
Management of Business Logistics, 7th Ed.

35. 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.
Chapter 9
Management of Business Logistics, 7th Ed.

36. 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.
Chapter 9
Management of Business Logistics, 7th Ed.

37. 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.
Chapter 9
Management of Business Logistics, 7th Ed.

38. 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.
Chapter 9
Management of Business Logistics, 7th Ed.

39. 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.
Chapter 9
Management of Business Logistics, 7th Ed.

40. 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.
Chapter 9
Management of Business Logistics, 7th Ed.

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

42. 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.
Chapter 9
Management of Business Logistics, 7th Ed.

43. 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%.
Chapter 9
Management of Business Logistics, 7th Ed.

44. 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.
Chapter 9
Management of Business Logistics, 7th Ed.

45. 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.
Chapter 9
Management of Business Logistics, 7th Ed.

46. Indirect and Special Carriers
Small-Package Carriers
Evolved to carry small, irregular shipments
Fast service, premium rates
examples are UPS, FedEx, RPS, etc.
Consolidators and Freight Forwarders
Consolidates many small shipments
Saves shippers by using CL or TL rates
Chapter 9
Management of Business Logistics, 7th Ed.

47. Indirect and Special Carriers
Shippers Associations
Acts as a consolidator for members
Object is also to get lower rates
Brokers
Acts as an intermediary
May be licensed by STB
Often used to provide backhauls for private carriers
Chapter 9
Management of Business Logistics, 7th Ed.

48. Indirect and Special Carriers
Intermodal Marketing Companies (IMC)
An intermediary that solicits shipments for rail/motor intermodal service.
Can speed traffic through consolidation (fills the normal two-trailer load on an intermodal flat car, avoiding delays waiting for another trailer going to the same destination).
Particularly advantageous for small (one trailer) shippers.
Chapter 9
Management of Business Logistics, 7th Ed.