Chapters 5Chapters 5Transportation Systems & Transportation Systems &

ManagementManagement

Transportation OverviewTransportation Overview• The physical modes connecting the firm to

its suppliers and customers (i.e., fixed facilities).

• Economic utilities and added value– time and place utilities

• Major cost of doing business• Importance of transportation has intensified

– why?– Transportation is a huge demand

• It is needed due to the desire for other services

Lean and Logistics Trade-offsLean and Logistics Trade-offs

• Logistics trade-offs– Between transportation

and operation costs trade-offs

– higher transportation cost means _______ inventory costs

• Key strategy for reducing inventory costs

• Meeting Logistics customer service requirements

Cos

ts

Systems Alternatives

Less InvUS PO

The Basic Modes of TransportationThe Basic Modes of Transportation• The basic modes:• ____, ____, ____, ____, ____, and __________.• Distribution of ton-miles* for the various mode

Recreated by Coyle, Bardi, and Langley (2003).

RailRail• door to door service• Main goods shipped

– Capable of carrying a wide variety of products.– Esp. goods for _____ volume– E.g., ____, ____, fertilizer, mineral, lumber, autos,

containers• Characteristics

– ____ haul and ____ volume based on _____________ system

• Economical land-trans mode (compared with trucking) for long haul.

• Relatively secure transportation• Can offer _______ service for long haul.

– Capital intensive: high ______ costs• Special services: Intermodal (about ____ % of rail

revenue); unit train services (for uniform product transport)

Rail IndustryRail Industry

• Limited number of Class I carriers – Annual rev. > $ ______ mil.– Mergers and Acquisitions– Pros:

• Mega-firms are expected to provide customers seamless ____-to-____ service.

– Cons:• Transit times are spotty, but are generally

long.

• Reliability and safety are improving.

BNSF

CSX

Current Major Carrier NetworkCurrent Major Carrier Network

Motor CarriersMotor Carriers• door to door service capability• Used by almost all logistics systems

– 30% of all intercity freight and near ___% of local freight

• Characteristics– Transit times _____ than rail or water for short distance.– Flexibility

• _______, _____ vehicle size, and speed– Cost structure

• Relatively _____ cost compared to rail and water• ____ fixed costs and _____ variable costs.

– Do not own their rights-of-way.• Limited operating authority regarding service areas, routes,

rates and products carried.• Limited “zone of rate” still exists – “_________________” within

10% of price range.– Used for ____ inventory strategies (E.g., ___, ___) due to

cost structure & flexibility

Motor Carrier IndustryMotor Carrier Industry• Low cost of Entry:

– National HW (incl. 45K miles Interstates): 160,000 miles

– Even _ truck-trailer can do.

• A large number of small carriers: 505,000 registered motor carriers in 1999.– Among 12,500 regulated

carriers, only 7% of which had revenues >$__ million (Class I), with 76% having revenues <$__ million. The remaining 17 % are Class II carriers.

Recreated by Coyle, Bardi, and Langley (2003).(Common)

Legal Classifications: Common CarrierLegal Classifications: 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 provide _____ and adequate service.

• Carrier is liable for damages to products carried.

– Exceptions to liability include acts of ___, acts of the public enemy, acts of ________, acts of the shipper and defects inherent in the goods.

• The __________ Act of 1995 eliminated most of the common carrier economic regulation: e.g., entry controls, reasonable rates, and nondiscrimination provisions.

• When acting as a contract carrier, not subject to ___ (Surface

Transportation Board) economic regulations.

Legal Classifications: Contract Legal Classifications: Contract CarriersCarriers

• For-hire carrier that does not have to serve the general public.– May serve one or a few shippers exclusively.– May offer __________ equipment.

• _____ subject to regulation on services– Rates usually _____ than common or regulated carriers.– Other aspects of the carrier/shipper relationship are made

a part of the contract between the two parties.

• Becoming ____ popular as logistics managers use contract carriage to assure rates and service levels.

Legal Classifications: Exempt CarriersLegal Classifications: Exempt Carriers

• For-hire carrier exempt from economic regulation regarding rates and services.

• ______ entry controls; _____ rates.• Usually haul ______ 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.

Legal Classifications: Private CarriersLegal Classifications: Private Carriers

• The firm’s own transportation.• Not for-hire and thus ____ subject to Federal

regulations.• Pros:

• Cons:– Requires– Requires – ___________ are usually empty or return materials to the

firm’s plants and/or warehouses.

• Almost exclusively motor, but some rail, air and water also exist.

Air CarriersAir Carriers• ___-to-____ service• Passenger/freighter combo or all freighter• Carry goods with a high value to weight

ratio (i.e., _____ density).• Characteristics

– Extremely rapid– Rates are _____________ – Do not own rights-of-way.– Accessibility is low as is capability (B747 = 120 ton/12

ton).– Reliability subject to weather more than other

modes.

Goods Shipped by Air Goods Shipped by Air (2003)(2003)Total: 144 billion freight ton-kms

17%

13%

11%

9%7%

43%A

B

C

D

E

Other

Source: Clancy, B. and D. Hoppin (2004) The MergeGlobal 2004-2008 World Air Freight Forecast, MergeGlobal, Inc.; Prepared by Jean-Paul Rodrigue, Dept. of Economics & Geography, Hofstra University.

Thus, ________________________________________ _____________________________________________

Air Carrier IndustryAir Carrier Industry• Limited number of large carriers earn about

___% of the revenue.• Average revenue per ton mile ___ times

higher than rail and twice that of motor.• Rapid growth in global demand• Most secured and at the same time

vulnerable to weather more than other modes.

Domestic Water CarriersDomestic 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 ___% of the freight, while private and exempt carriers haul the other ___% of the ton-miles.

• Relatively low cost mode; do not own the rights-of-way; ____ entry and exit.

• Typically a ____ distance mover of low value, bulk-type mineral, agricultural and forest products

• ____ rates but long transit times

• Low accessibility but high capability

PipelinesPipelines

• Refers only to the oil pipelines, not natural gas

• Accessibility is very ______.– Not suitable for general transportation

• Cost structure is highly fixed with low variable costs.

• Own rights-of-way much like the railroads.• Major advantage is __________.

Comparisons of Different ModesComparisons of Different Modes

– highly efficient for moving large quantities of gas and liquid

– provides fast delivery at a high cost

– for bulky products that are not time sensitive

– highly flexible, relatively fast, for short to medium distances

– low cost, best for bulk goods going long distances

Intermodal TransportationIntermodal Transportation• Use of two or more modes of transportation

cooperating on the movement of shipment by publishing a _________ rate.

• Prerequisites of IM– Containerization

Management and coordination

Control over cargo

Mergers

Multimodal operators

Logistics

Driving Forces of Containerization and Driving Forces of Containerization and Multimodal TransportMultimodal Transport

Containerization

Cellular ships

Gantry cranes

Specialized terminals

Land consumption

Multi-rate structure

Multimodal Transportation

© 1999-2007, Jean-Paul Rodrigue, Dept. of Economics & Geography, Hofstra University

Intermodal EquipmentsIntermodal Equipments

• Containers – highway trailers – ______ standard freight containers (10 – 45 ft. long)– > 90 % of ISO containers: ___ or ___ ft. long, ___ or ___ ft.

high containers.– Non-ISO std containers: 45 – 53 ft. long & 9.5 ft. high.– Special Types: flat racks, open tops, refrigerated, heated thermal,

vented, ventilated, tank, etc.

• Handling Equipments– Lifting equipment: _____ crane & spreader, forklifts, straddle

carriers, stacking gantry cranes, side loaders

Types of Intermodal ServicesTypes of Intermodal Services

© 2003, Coyle, Bardi, and Langley.

Interchangeability / Consolidationof Intermodal Transportation

Composition

Transfer

Interchange

DecompositionLocal / Regional Distribution

National / International Distribution

Transport Terminal

‘First mile’

‘Last mile’

© 1999-2007, Jean-Paul Rodrigue, Dept. of Economics & Geography, Hofstra University

Intermodal TransportationIntermodal Transportation• Benefits of IM to international trade

– Cargo is loaded _________ reachable by rail/truck.– Single “_________.” (i.e., 1 contract for multiple modes)

– No need of making the various interconnecting arrangements

– ____ to ___ service– _________________ time - reliability– Reduced damage thanks to few handling– Reduced pilferage owing to reduced exposure of

merchandise and/or protection.

Indirect and Special CarriersIndirect and Special Carriers• Small-Package Carriers

– Evolved to carry small, irregular shipments– Fast service, premium rates– Examples are UPS, FedEx, RPS (FedEx Ground,

B-to-B), etc.

• Consolidators and __________________– Consolidates many small shipments– Saves shippers by using CL or TL rates– Examples are J.E.S. Forwarding, AAA Cooper,

Averitt, Southerneastern Freight Lines, etc.

• Shippers Associations– Acts as a consolidator for members– Object is also to get lower rates– Examples are …

Indirect and Special CarriersIndirect and Special Carriers

• Brokers– Acts as an intermediary– May be licensed by ____– Often used to provide backhauls for private

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.

Value Per Ton of U.S. Freight Shipments by Value Per Ton of U.S. Freight Shipments by Transportation Mode, 2002Transportation Mode, 2002

$667

$4,892

$611

$88,618

$37,538

$1,480

$775

$401

$241

$198

1 10 100 1,000 10,000 100,000

All Modes

Multiple modes

Single modes

Air (incl. truck and air)

Parcel, U.S.P.S, or courier

Truck and rail

Truck

Water

Pipeline

Rail

© 1999-2007, Jean-Paul Rodrigue, Dept. of Economics & Geography, Hofstra University

Transportation Spectrum DiagramTransportation Spectrum Diagram

Big

Slow

$ Cheap $

Small

Fast

$ Expensive $

Lowers Cost

Improves Service*

*T/L is generally faster than LTL, but not always as readily available

RailInter-Modal

Truckload LTL Parcel

Distance

Tran

spor

t cos

ts p

er u

nit ______

_____ _______

D1 D2

C1 C2

C3

Distance, Modal Choice and Distance, Modal Choice and Transport Costs Transport Costs

© 1999-2007, Jean-Paul Rodrigue, Dept. of Economics & Geography, Hofstra University

Chapter 10Chapter 10Transportation Management Transportation Management

Strategy:Strategy:1. Impacts of Deregulation2. Shipper’s Initiatives3. Proactive Management Approach4. Reducing the Number of Carriers5. Negotiating with Carriers6. Contracting with Carriers: Carrier

Evaluation7. Transportation Rates8. Documentations

Federal Transportation Federal Transportation Deregulation HistoryDeregulation History

• ____ Transportation was first deregulated in 1977.• The ______________ Act of 1980: rail and motor

transportation.• the ___________________ Act of 1995: Virtual

deregulation. • Major effects of deregulations:

– Transportation carriers became able to negotiate rates and services with shippers rather than adhere to published rates and services.

– Motor and Water Carriers• Rate and tariff-filing regulations eliminated except for

household and noncontiguous trade (b/w 48 states and Alaska, Hawaii, Puerto Rico, or an insular territory or possession of the United States).

• ________________________________.• All carriers may contract with shippers. • _____________________ for collective ratemaking for

single line abolished.

Federal Transportation Federal Transportation DeregulationDeregulation

• Freight Forwarders and Brokers– Both are required to register with the

Surface Transportation Board (STB).– Brokers must also post a $________ bond

to ensure payment to the carriers.– No economic rate or service controls.– Freight Forwarder is considered a _____

and is thus ______ for freight damages.

Effects of Deregulation 1Effects of Deregulation 1• Dynamic, Rapidly-Changes – why?• Changing business environment

– ____________________• Deregulation

– Greater pricing and _______________

• __________________ concept– Service customization

• Mergers and acquisition for efficiency (_________) and effectiveness (______________)

– Financial Success leads to investment in innovation, infrastructure, and safety

– Technological Innovation• Transportation Management System (TMS) for better

allocating resources and tracking

What is a TMS?What is a TMS?

Shipment Execution

Shipment Planning

Freight Accounting

- ____________________- load building/optimization/routing- ____________________

- load tendering/bidding- ________________- ________________

- audit/payment control- ______________- allocation/accruals

Rate Plan Tender Ship Track Pay AccountOrder

ShipmentReceipt

© 2004 Logility, Inc.

Effects of Transportation Deregulation 2Effects of Transportation Deregulation 2Constant Dollars Where Appropriate, Indexed to 1981 = 100Constant Dollars Where Appropriate, Indexed to 1981 = 100

0

50

100

150

200

250

300

1964

1970

1985

2000

2003

Productivity

Volume

Revenue

Price / Mix

1981

Staggers Rail Act*

* The Staggers Rail Act was passed in 1980, but implementation did not begin until 1981.

1995

1975

1990

Data Source: AAR Fact Books. Chart Design: R.E. Gallamore

© John R. Meyer, Harvard University, and Robert E. Gallamore, Northwestern University

Transportation Initiatives atTransportation Initiatives atShipper Firms TodayShipper Firms Today

• Competition and innovation is good:– More __________ and more ___________.

• Improved Planning and Control of Transportation• Shift from Transactional to Contractual Basis

– As ____________ increases– ________ (e.g., ) matters more than price.

• Concentration of Business Into Fewer Suppliers– For better price and _______________

• Integration of Transportation Needs with Broader Logistics Requirements

• New Partnerships Forming– For integrated service across regions, functions, etc.

toward competitive advantage

Proactive Management ApproachProactive Management Approach• Creativity in problem solving no longer restricted by

fixed regulations thanks to deregulation.• Broader Scope of Transportation Manager’s

Responsibilities– Carrier Selection– Rate/Service/Contract Negotiation– Tracing, Expediting, and Claims

• Upgraded Set of Accountabilities– _____________ (to control and reduce costs via bill review, vendor

evaluation, etc.)– Customer Service– Overall Quality and Customer Satisfaction

• Greater Awareness of and Interest by Executive-Level Management

Trends in Automation of the Shipper Trends in Automation of the Shipper Transportation Management FunctionTransportation Management Function

% of Percent Automated Traffic Activity Time & Effort 1980 1990 1995 22.8% 4.7% 19.0% 32.0% 13.9 8.4 22.7 41.1 Private Fleet 13.7 5.4 17.4 33.0 Billing/Auditing 9.8 17.1 46.4 75.7 Routing 9.1 13.9 38.3 62.8 Carrier Assignment 9.0 12.1 29.6 56.1 Tracing/Expediting 7.2 9.5 30.7 57.7 Claims 6.1 7.2 25.2 44.4

Source: LaLonde, et. al., The Evolution, Status, and Future of theCorporate Transportation Function, AST&L, 1991

Negotiating & Contracting with CarriersNegotiating & Contracting with Carriers• Deregulation made possible negotiations

between carriers and customers .– Rate negotiation is a common outcome of deregulation– Elevating the carrier to partnership status in the supply

chain philosophy assists in assuring a win-win arrangement between the partners.

– As in any contract, special and/or custom services such as _____ can be negotiated.

– Shippers are often rewarded with lower rates as the amount shipped increases.

– Contracts may be written with minimum shipment size per shipment or for annual cumulative shipment size.

– Quantity discounts are real savings that the carriers pass on to shippers.

Reducing the Number of CarriersReducing the Number of Carriers

• Consolidation of freight increases the shippers leverage with the remaining carriers.

• Being one of a carrier’s largest customers gives the shipper increased negotiating power.

• Shippers become more important to the carriers as they funnel larger volumes to fewer carriers.

• For example, one shipper went from 131 to ____ carriers.

• Improved service from the remaining carriers decreased its inventory by $30 million.

• Supply chain strategic alliances are also created through consolidation.

Comparison of Basic Modes of Comparison of Basic Modes of TransportationTransportation

• Cost/Price• Market Coverage• Degree of

Competition

• Predominant Traffic Types• Avg. Length of Haul (Domestic)

• Equipment Capacity

Step IStep II

Performance Rating of ModesPerformance Rating of Modes

SelectionDeterminants Railroad Motor

ModesWater Air Pipeline

Cost 1

Transit time ---

Reliability ---

Capability 5

Accessibility ---

Security ---

© 2003, Coyle, Bardi, and Langley.

Principal Carrier Selection DeterminantsPrincipal Carrier Selection Determinants

• _________• _________• _________

– ___________ – to deal with ____, ______, and ________

• Capability • __________

– Infrastructure to deal with capability and _________

• ___________________• Environment