Transport Fundamentals Chapter 6 CR (2004) Prentice Hall, Inc.

The Role of Transportation in Logistics 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.

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%.

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.

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.

Figure 9-1 The Carrier Selection Decision

The Transport Selection Decision Carrier Selection Determinants: Cost Transit time and reliability Can be a competitive advantage Lowers customers’ inventory costs Capability Accessibility Security

Figure 9-2 Carrier Selection Determinants and User Implications

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

Figure 9-3 Importance Ranking of Carrier Selection Determinants

The Basic Modes of Transportation3 The basic modes available to the logistics manager are rail, motor, water, pipeline, and air.

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.

The Basic Modes of Transportation: Railroads 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.

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

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.

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.

The Basic Modes of Transportation: Motor Carriers High accessibility Transit times faster than rail or water. Reliability can be affected greatly by weather. Relatively high cost compared to rail and water; trade-off is faster service.

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.

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

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

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.

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

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.

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.

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.

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.

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

Importance of Modes (Cont’d) By Volume Moved Percent Transportation of total mode volume Railroads 36.5% Trucks 24.9 Inland waterways 16.3 Oil pipelines 22.0 Air 0.3 Total 100.0 CR (2004) Prentice Hall, Inc.

Relative Costs of Performance Price, Mode ¢/ton - mile Rail 2.28 Truck 26.19 Water 0.74 Pipeline 1.46 Air 61.20 CR (2004) Prentice Hall, Inc.

Rate Types Class rates Exception rates Commodity rates Contract rates Freight all kinds (FAK) Released value rates Differed rates Container rates Special service charges CR (2004) Prentice Hall, Inc.

Special Carriers and 3PL Freight forwarders Shippers’ association Transportation brokers Container leasing Co. Freight audit/payment Equipment leasing (e.g., Ruan) CR (2004) Prentice Hall, Inc.

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.

Figure 9-6 Types of Intermodal Services

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.

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%.

Intermodal Transportation: RoadRailers Newest concept referred to as a “RoadRailer” Essentially a trailer that has been reinforced to ride on a rail bogey and be coupled together directly without first being placed on a rail flat car Saves weight and locomotive power and thus fuel for the railroad Special lower rates Motor competitive transit times