TRANSPORTATION SYSTEM

1. Chapter 9:
The Transportation System

2. Learning Objectives-After reading this
chapter, you should be able to do the following:
 Explain the economic role transportation
plays in the economy.
 Discuss the economic and service
characteristics of the basic modes.
 Describe the carrier selection process.
 Discuss the economic effect of rates, transit
time, reliability, capability, accessibility, and
security in the carrier selection decision.

3. Learning Objectives
 Compare the advantages and disadvantages
of using common, regulated, contract, exempt
and private carriers --- the five legal classes
of carriers.
 Discuss the economic and service
characteristics of intermodal transportation
and explain the dominance of rail-truck
(piggyback) intermodal service.

4. Learning Objectives
 Discuss the economic rationale of using
containerization.
 Discuss the economic and service
characteristics of indirect and special carriers.

5. Logistics Profile:
Victoria’s Secret
 33 to 35 percent of the $2.9 billion store,
catalog, and E-commerce sales ship via the
United States Postal Service (USPS).
 Victoria’s Secret uses Global Logistics, a
package expeditor, to service its southeast
USPS shipments, with the object of three to
five day service.
 All loads to the USPS are palletized and
are standing appointments and live
uploads.

6. 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.

7. 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.

8. 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.

9. 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.

10. 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.

11. Figure 9-1
The Carrier Selection Decision

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

13. Figure 9-2 Carrier Selection
Determinants and User Implications

14. 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

15. Figure 9-3 Importance Ranking
of Carrier Selection Determinants

16. 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).

17. Table 9-1
Modal Distribution of Ton-Miles

18. 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.

19. 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.

20. 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)

21. 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.

22. 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.

23. Figure 9-4 Overview of Interstate
Motor Carrier Industry

24. 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.

25. 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.

26. Figure 9-5 Overview of the
Domestic Water Carrier Industry

27. 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.

28. 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

29. 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

30. 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.

31. 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)

32. 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.

33. 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.

34. 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.

35. 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.

36. Table 9-2:
Performance Rating of Modes
Selection
Determinant
s
Railroa
d Motor
Modes
Water Air Pipeline
Cost 3 4 2 5 1
Transit time 3 2 4 1 ---
Reliability 2 1 4 3 ---
Capability 1 2 4 3 5
Accessibility 2 1 4 3 ---
Security 3 2 4 1 ---

37. 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.

38. 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.

39. 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.

40. 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.

41. 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.

42. 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.

43. 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.

44. 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.

45. 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.

46. Figure 9-6
Types of Intermodal Services

47. 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.

48. 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%.

49. 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.

50. 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.

51. 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

52. 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

53. 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

54. 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.

55. Chapter 9:
Summary and Review Questions
Students should review their knowledge of the
chapter by checking out the Summary and Study
Questions for Chapter 9.

56. End of Chapter 9 Slides
The Transportation System