1. Chapter 9: The Transportation System

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

3. Chapter 9Management of Business Logistics, 7 th 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 GDP; this is up from 397 billion, or 6.3% of the GDP in 1993.

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

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

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

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

8. Chapter 9Management of Business Logistics, 7 th Ed.8 Figure 9-3 Importance Ranking of Carrier Selection Determinants

9. Chapter 9Management of Business Logistics, 7 th Ed.9 The Basic Modes of Transportation: Railroads Capable of carrying a wide variety of products, much more than 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.

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

11. Chapter 9Management of Business Logistics, 7 th Ed.11 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.

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

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

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

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

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

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

18. Chapter 9Management of Business Logistics, 7 th Ed.18 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)

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

20. Chapter 9Management of Business Logistics, 7 th Ed.20 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.

21. Chapter 9Management of Business Logistics, 7 th Ed.21 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.

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

23. Chapter 9Management of Business Logistics, 7 th Ed.23 Table 9-2: Performance Rating of Modes Selection DeterminantsRailroadMotor Modes WaterAirPipeline Cost 34251 Transit time 3241--- Reliability 2143--- Capability 12435 Accessibility 2143--- Security 3241---

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

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

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

27. Chapter 9Management of Business Logistics, 7 th Ed.27 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.

28. Chapter 9Management of Business Logistics, 7 th Ed.28 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.

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

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

31. Chapter 9Management of Business Logistics, 7 th Ed.31 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.

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

33. Chapter 9Management of Business Logistics, 7 th Ed.33 Figure 9-6 Types of Intermodal Services

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

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

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

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

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

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

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