This Document Contains Chapters 1 to 2 Chapter 1 TRANSPORTATION – CRITICAL LINK IN THE SUPPLY CHAIN Chapter Objectives: After reading this chapter, you should be able to do the following: 1. Discuss the changing global landscape for businesses and other organizations and the external forces that are driving change in the global economy. 2. Understand the special nature of transportation demand and the influence of transportation on companies and their supply chains operating in a global economy. 3. Appreciate the role of transportation in the movement of people and the influence such movement has on population centers and businesses. 4. Gain insight into the challenge of developing the appropriate metric for transportation output. 5. Discuss the economic concept of price elasticity as it relates to transportation demand. 6. Explain the concept of derived demand as it applies to transportation movements. 7. Discuss how transportation service adds value to a product. 8. Explain the importance of the components of transportation service that are important to the movement of freight and their impact upon supply chain costs. 9. Appreciate how transportation impacts the development of economic activity for other organizations. 10. Understand the development of supply chain management and the importance of transportation to supply chains. Chapter Overview As will be discussed in Chapter 2, transportation systems area a critical ingredient for the development and continuing economic viability of any country’s economy, but transportation is also a very important part of the financial success of most organizations. This chapter discusses the role and importance of transportation within the firm and as part of the supply chain. The nature of transportation demand and the concept of demand elasticity are explored since companies have the opportunity to negotiate rates with carriers. It is also important to understand how transportation can add value to a product and how that can influence the price of the product. Some attention is also given to passenger transportation. Transportation Profile--The changing economic landscape: Driving forces Businesses and other organizations are striving to be more efficient (reduce their cost of doing business) and more effective (improve customer service) to survive in the new environment. A critical element necessary to achieving these two objectives simultaneously is the supply chain organization. Transportation is a critical ingredient to the overall supply chain performance, acting as the glue that holds the supply chain together. The external forces driving the change include globalization, technology, supply chain integration and consolidation, consumer empowerment and government regulation and policy. Globalization is usually at the top of the list for most companies and other organizations. Some individuals have described globalization as “the good, the bad and ugly”. That is, we have experienced all three aspects with the ugly being the global recession of 2009-10; the bad being the loss of manufacturing and service jobs that we have experienced in our economy over the last several decades; and the good being the lower prices, wider availability of goods and creation of new employment opportunities that we have enjoyed during this same period. Overall in our economy, firms have more complexity and global interdependence, shorter product lifecycles, and new business models often with a significant amount of outsourcing involved in the organization. Globalization increases the importance and cost of transportation because of the longer shipping distances and transit times as well as increased risk. Technology can be viewed as an internal change factor since it can enhance the efficiency and effectiveness of how a company or organization operates. However, technology can also be viewed as an external driver of change in most organizations since the rapid development of technology (hardware and software) and its application by individuals, forces companies to change and adapt or otherwise, they may “perish”. Overall, technology can help to create a dynamic and increasingly competitive environment that promotes the development of new businesses and different approaches to business in organizations including transportation and related supply chain services. The third factor is the power shifts that have occurred along supply chains with consolidation and integration among retailers, wholesaler and other channels of distribution. Larger organizations have sufficient economic power and leverage to influence business practices among their suppliers and their customers. Retailers have come to recognize the importance of efficient (read low cost) and effective supply chains for delivering the best value – price combination for consumers. It can be argued that retailers and wholesalers have influenced more innovation and change in supply chains in the last two decades than manufacturers did in the previous five decades. The fourth factor is today’s enlightened consumer who is empowered by education, income and the endless information available via internet or other media. Consumer’s access to distant supply sources has expanded dramatically on a national and global scale. Their ability to garner information and prices about products and services has enabled them to obtain the best price-value proposition for their situation and has influenced more competitive challenges for businesses. The final factor is government policy and regulation. The deregulation of interstate transportation services, communication companies and financial institutions which occurred primarily during the 1980’s created a more competitive environment in these industry sectors which has had a significant impact on how they position and sell their services. Government regulation and policy area is continually being re-examined to see what is best in the current economic and global environment and continually change which means that logistics services and transportation services and overall supply chains have to respond and adjust to what these requirements are. The total consequence of the external forces discussed above is a fast changing economic, political and social environment in which competitive advantage can quickly diminish if an organization becomes too complacent and does not adjust their business practices and/or business model to change in the marketplace. The external environment is causing organizations to give more attention to the integration of their supply chains. Transportation can be viewed as the glue that holds the supply chain together. Economics of transportation In the 21st century, transportation systems will face significant challenges and problems because of global competition, government budget constraints, increased demand from special interest groups such as senior citizens, infrastructure challenges, sustainability issues, and energy costs. Transportation touches the lives of all U.S. citizens and citizens in other areas of the world. It affects their economic wellbeing, their safety, their access to other people and places, and the quality of their environment. When the transportation system does not function well, it is a source of great personal frustration and perhaps economic loss. Understanding the basic fundamentals of transportation economics will provide important insights into the role of transportation in businesses and other organizations that provide the output, revenue and income that really drives an economy . Demand For Transportation The goods we consume, our economic livelihood, our mobility, and our entertainment are impacted by transportation. The associated division or specialization of labor which enables mass production to occur is also an outcome of effective and efficient transportation. Transportation plays an important role in helping to bridge the supply and demand gap inherent in the mass production oriented approach. As geographical areas begin to specialize in the production of particular goods and/or services, they are relying more upon the other regions to produce the additional goods and services that they need or desire. In both instances, transportation is a critical ingredient. Transportation also provides the bridging function between supply and demand for people to move from their current places of residence to new locations. Transportation has a definite, identifiable effect upon a person’s lifestyle. An individual’s decisions about where to work, live, and play are influenced by transportation. The automobile has been a form of transportation that affects most people’s lifestyle, particularly in the United States. The convenience, flexibility, and relatively low cost of automobile travel permits individuals to live in locations distant from where they work. A prime ingredient for increased passenger travel is an economical transportation system. Rising costs of automobile and air travel occurring as a result of escalating energy, labor, and equipment costs is beginning to cause some change in lifestyles. Transport Measurement Units Transportation demand is essentially a request to move a given weight or amount of cargo a specific distance between two specific points. The demand for transportation is usually measured in weight- distance units for freight and passenger-distance units for people. For freight, the usual demand unit or metric is the ton-mile and for people the appropriate unit is the passenger-mile. The ton-mile, for example, is not homogeneous for comparison purposes. The demand for 200 ton miles of freight transportation could be a movement of 200 tons for one mile, 100 tons for two miles, or 1 ton for 200 miles. In addition, the unique transportation requirements for transportation, equipment and service may vary among customers for a 200 ton-mile movement. Similarly the passenger mile is a heterogeneous unit. Five hundred passenger-miles could be one passenger moving 500 miles or 500 passengers moving 1 mile. The demand for 500 passenger miles could be automobile, railroad, or airplane. As long as we recognize, the challenges inherent in the units when comparisons are made both are useful. The demand for transportation can be examined at different levels of aggregation also. Aggregate demand for transportation is the sum of the individual demands for freight or for passengers. In addition, aggregate demand is the sum of the demand for transportation via different modes and the aggregate demand for a particular mode. Demand Elasticity Demand elasticity refers to the sensitivity of customers to changes in price. If customers are sensitive to price, a price reduction will increase the demand for the item and the total revenue will also usually increase. An increase in price will have the opposite effect-less revenue and a reduction in sales. If customers are not sensitive to a change in price, we consider that demand to be inelastic because a price reduction will result in a small relative increase in the quantity demanded and the total revenues will decrease. Elasticity= % change in quantity/%change in price Aggregate demand for transportation is inelastic. Freight rate reductions will not dramatically increase the demand for freight transportation because transportation costs generally represent, in the aggregate, less than 4 percent of a product’s landed cost, and the demand is a derived demand. For modal shipments or for a specific carrier within that mode, demand may also be service elastic. Assuming no price changes, the mode or specific carrier demand is often sensitive to changes in service levels provided by competing carriers. Transit time and service reliability have become much more important to freight movement during the last several decades, as shippers have become increasingly aware of the impact of carrier service on inventory levels and customer service. Freight Transportation The demand for freight transportation is usually dependent upon the demand for a product in another location. Specialization and mass production create a need for market expansion at more distance locations which gives rise to increased demand for freight transportation. The demand to transport a product in a given location depends on the existence of demand to consume or use that product in the distant location. The demand for transportation is generally referred to as a derived demand, customer demand for a product. Derived demand is not unique to transportation since the demand for many raw materials is dependent upon the demand for the finished products which are produced from these raw materials. The derived demand characteristics implied that freight transportation would not be effected by transport carrier actions. Value of service considers the impact of transportation costs and service on the demand for the product. Lower transportation costs can cause a shift in demand for transportation among the modes and the specific carriers. It can also affect the demand to transport freight over a specific traffic lane The impact of transportation costs on the demand for a product at a given location usually focuses on the landed cost of the product which includes the cost of the product at the source, the cost to transport the product to its destination, plus any ancillary expenses such as insurance or loading costs. If the landed cost of the product is lower than that of other sources, there usually will be a demand for that product and also for the transportation of that product from its origin point. The landed cost also determines the extent of the market for business. The greater the distance the product is shipped, usually the higher the landed cost. At some distance from the product’s source, the landed cost usually becomes prohibitive to the buyer and there will be no demand for that product at that point. Also, the landed cost usually determines the extent of the market between two competing companies. LC(P)=LC(S) Production Cost(P)+Transportation Cost(P)=Production Cost(C)+Transportation Cost(C) Service Components of Freight Demand Shippers of freight have varying service requirements for their transportation providers. These service requirements range from specific pickup times to communication requirements. The service demands are related to the costs implications of the transportation service provided. The transportation service characteristics of freight include transit time, reliability, accessibility, capability, and security. Transit time affects the level of inventory held by both the shipper and the receiver and the associated carrying cost of holding that inventory. The longer the transit time, the higher the inventory levels required and the higher the carrying costs. Reliability refers to the consistency of transit times. Unreliable transit time requires the freight receiver to either increase inventory levels to guard against stock out conditions or incur stock out related costs. Accessibility is the ability of the transportation provider to move the freight between a specific origin and destination. The inability of a carrier to provide direct service between an origin and destination results in added costs and transit time for the shipper. The ability of the carrier to provide special service requirements is the essence of capability. Based on the physical and marketing characteristics of the freight, shippers might have unique demands for transportation, facilities, and communication. Finally, security is concerned with the safety of the goods in transit. Shipments that are damaged or lost in transit can cause increased cost in the areas of inventory and/or stock outs. Location of Economic Activity Transportation has been a determinant in the location of industrial facilities since the industrial revolution. The quality of the transportation service such as time required to traverse the spatial gap between sources of supply, the plants, the warehouses and the markets affects inventory cost, stock out costs, and other costs. Water transportation played an important role in the location of many major cities around the world. As the “frontier” in the United States was settled, it became tied to these port cities that provided a source of supply and markets for the western region. Other cities developed along the rivers which were the internal or inland water ways. As rail transportation developed, however, cities and industrial facilities grew along the railroads even though they were not always adjacent to the waterways. Later, the motor carriers enabled the development of cities and industrial facilities at virtually any location where there was a highway. Supply Chain Concept While references to supply chain management can be traced to the 1980s, it is safe to say that it was not until the 1990s that supply chain captured the attention of senior level management in numerous organizations. They began to recognize the power and the potential impact of supply chain management to make organizations more globally competitive and to increase their market share with consequent improvement in shareholder value. Development of the Concept It can be argued that supply chain management is not a brand new concept. Rather, supply chain management represents the third phase of an evolution that started in 1960’s with the development of the physical distribution concept which focused on finished goods or the outbound side of a firm’s logistic system. Distribution related activities which occurred after a product was produced. In the 1980s the concept of business logistics or integrated logistics began to be recognized which added the inbound side to the production point to the outbound side. This was really the second phase of development for the supply chain concept. A number of studies done during the 1950s and 1960s indicated the potential of the systems concept if it were applied in business related situations. The focus upon physical distribution management was on the system costs and analyzing tradeoff scenarios to arrive at the best or lowest physical distribution system cost. The system relationships which exist among transportation, inventory levels, warehousing, exterior packaging, materials handling, and customer service cost centers were analyzed and evaluated. The initial focus on physical distribution or outbound logistics was logical since finished goods were usually higher in value which meant that their inventory, warehousing, materials handling and packaging costs were relatively higher than for in-bound raw materials. The impact of transportation selection was, therefore, usually more significant for total physical distribution costs. A national organization called the National Council of Physical Distribution Management (NCPDM), was organized to focus the leadership, education, research and interest in the area of physical distribution management. The 1980s, was a decade of change with the deregulation of transportation, financial institutions, and the communication industry. The technology revolution was also well under way. During the 1980s, the business logistics or integrated logistics management concept developed in a growing number of organizations. Logistics in its simplest form added the inbound side to the outbound logistics of physical distribution management. International or global sourcing of materials and supplies were growing in importance. The underlying of the logic of the systems concept was also the rationale for the development of the logistics management concept because in addition to analyzing trade-offs for total cost, it could also include the value or demand aspects of customer service effectiveness. Supply chain management came into vogue and continues to be a focal point for making organizations more competitive in the global marketplace. Supply chain management can be viewed as a pipeline or conduit for the efficient and effective flow of products/materials, services, information and financials (usually cash) from the supplier‘s supplier through the various immediate organizations out to the customer’s customer. The extended enterprise or boundary spanning perspective of supply chain management represents a logical extension of the logistics concept providing an opportunity to view the total system of interrelated companies and their impact in the marketplace for the final product in terms of its price-value relationship. A supply chain is an extended enterprise that crosses the boundaries of the individual firms to span their related activities involved in the total supply chain. This extended enterprise should attempt to execute a coordinated or integrated 2-way flow of goods, information and financials( especially cash). TRANSPORTATION IMPACT ON GLOBAL SUPPLY CHAINS Many global supply chains are characterized by outsourcing production to low- labor cost counties such as China and India. These global supply chains often evolved as a consequence of trade agreements and aggressive government incentives along with cheap fuel prices which gave rise to low transportation rates. New technology, especially the internet, has allowed the development of collaborative relationships on a real time basis across globally extended enterprise systems and world trade has flourished between and among developed and underdeveloped economies. The transportation landscape which is a key factor or link in the success of global supply chains is facing some major challenges. The rapid growth which has occurred in global trade in the U.S. has placed much pressure on the ports which are the gateways for about 80 percent by weight of the international freight moving in and out of the U.S. Congestion has become a problem especially on the West Coast during peak periods. The latter is mainly attributable to the tremendous growth in the trade between the U.S. and the Asia Pacific countries. Congestion has also become a widely acknowledged problem on highways and at major rail gate ways which increases the West Coast port congestion problem. A concern of major proportions is escalating energy costs. While fuel prices did decline toward the end of the first decade of the 21st century, the expectation is that they will increase again to the $4.00 or higher level for a gallon of fuel. Motor carriers and airlines are impacted the most by these higher fuel prices because they are relatively inefficient in fuel consumption compared to the other three major modes of transportation—rail, water and pipeline. Sustainability is also an issue for the 21st century as individuals, organizations, and the government are showing a growing concern for the environment. Green supply chains have become a part of our vernacular. Organizations discuss their carbon foot print in the context of sustainability, and evaluate methods to reduce their carbon footprint. Transportation is an area that receives much attention in such discussions because the modes of transportation vary in terms of their impact. Customers expect their orders to be delivered in a timely, reliable and damage-free manner; and transportation is critical to this outcome. A product flow is a two way flow in the environment of the 21st century because a growing number of organizations are involved in reverse logistics systems for returning products that were unacceptable to the buyer for some reason—damaged, maintenance, obsolescence ,etc. A company can provide a valuable service in appropriate situations. The second flow indicated is the information flow which has become a very important factor for success in supply chain management. Figuratively, information is the trigger or signal for the logistics or supply chain system respond to a customer order. Traditionally, we have viewed information as flowing back from the market place as customers purchased products and wholesalers, retailers replenished their inventory. The information was primarily demand or sales data which triggered replenishment and was also the basis for forecasting future sales or orders. Note that other than the retailer or final seller, the other members of the supply chain traditionally reacted to replenishment orders. If there were long time intervals between orders, the members of the supply chain were faced with uncertainty about the level and the potential pattern of demand which usually resulted in higher inventory(safety stock) or stock out costs. The uncertainty contributed to a phenomenon known as the” bull whip effect” in the supply chain. One of the objectives of supply chain management is to mitigate the bull whip effect by reducing the level of uncertainty. One of the realizable outcomes of supply chain management is the sharing of sales information on a more real time basis to reduce uncertainty reduces the need for safety stock. In a supply chain environment information flowing forward in the supply chain has taken on increased significance and importance. Forward information can take many forms, such as advanced shipment notices (ASN’s), order status information, inventory availability information, and so on. The overall impact of good forward information has been to reduce uncertainty with respect to order replenishment. The third and final flow indicated is financials or cash. Financial flows have been viewed as one directional-- backward in the supply chain. In other words, this flow is payment for goods, services and orders received. A major impact of supply chain compression and faster cycle order times has been faster cash flow. Customers receive orders faster, they are billed sooner, and companies can collect sooner. The faster the cash – to – cash or order –to-cash- cycles has been very important for companies because it reduces the amount of working capital they need in their system. If cash flow is slow, a company needs more working capital to finance the processes until they collect from the customers. There are some companies have negative working capital or what financial organizations refer to as “free” cash flow. They collect from their customers before they have to pay their vendors or suppliers. Cash flow measures have become an important metric of the financial community to gauge the viability of companies. Supply chain management provides organizations with an opportunity to improve customer service and cash flow, and transportation sevice is an important part of this equation. It is important to be aware of the important role that transportation provides in the supply chain framework. The customer expects to have the right product delivered at the right place in the right quantity in the right condition at the right cost and transportation plays a very critical role in these attributes for a good system. Study Questions 1. What are the major forces or external factors which have impacted our economy during the latter part of the 20th and the early part of the 21st century? How have each of these factors influenced companies as well as their respective supply chains? Which of these factors do you feel is the most important for a computer company? Why? The dynamics of the changing environment for business is being driven by a set of external factors that include globalization, technology, supply chain integration, consolidation, consumer empowerment and government regulation and policy. Globalization is usually considered to be one of the most important external factors impacting organizations and how they have to compete as well as their associated supply chains. Technology has revolutionized how organizations go to market with their products and open up the door for different business models. It has also had a major impact on how supply chains are organized and the distances over which supply chains have to operate connecting the global points in the supply chain. During the latter part of the 20th century, there was a noticeable shift in economic power in many supply chains where large consolidated retailers and some wholesalers were able to exert major influence on how supply chains operated. The large retailers that accounted for a major proportion of manufacturing companies business were able to influence them particularly in the area of their supply chains. The retailers recognized the impact of the supply chain in enabling them to reduce their cost and improve their effectiveness in serving their customers. Today’s consumer cam be considered as being enlightened and empowered by their education and the information that they have at their disposal from the internet and other media sources. This power allows them to access supply chain sources on an expanded market basis and apply pressure to the supply chain to deliver the value price relationship they expect. The most effective supply chains are the ones that have responded to this empowered consumer and delivered products in a way that meet their particular needs. 2. What is the actual nature of transportation demand? How does transportation demand influence individual companies in the economy economy? Transportation demand is essentially a request to move a given weight or amount of cargo a specific distance between two specific points. Transportation plays an important role in helping to bridge the supply and demand gap inherent in the mass production oriented approach. It also plays a key role in international or global dependency by providing the ability to match supply and demand requirements on a global basis. The ability of countries to trade among themselves and to efficiently move goods is a key element in the success of global development. This has an effect or impact on the development of tactics and strategy to improve global supply chains and transport systems. It allows the exchange of ideas and the development of new approaches in the interchange which can occur among people in different parts of the world. 3. Measuring transport output can be challenging to individuals trying to make a comparison among modes of transportation. Why is this measurement so challenging or difficult? Is there a better measure? Why or why not? One of the challenges in evaluation transportation is the need for a simple, comprehensive but comparable unit of measurement. The unit which is most frequently used for freight is the ton-mile and for passengers, the passenger-mile. Both metrics or measures are two dimensional because they look at both weight and distance. This complicates the measurement process but if you recognize the shortcomings, it is a very usable way to compare the transportation modes. 4. What is meant by the concept of derived demand? Why is it so important in the area of transportation for shippers and carriers? Does this concept have application in other area, give some examples? The demand for transportation is generally referred to as a derived demand, customer demand for a product. Derived demand is not unique to transportation since the demand for many raw materials is dependent upon the demand for the finished products which are produced from these raw materials. The derived demand characteristics implied that freight transportation would not be effected by transport carrier actions. This assumption is true for the demand for transportation at the aggregate level. For example, if a freight carrier lowers the rate to zero for moving high tech personal computers from the United States to a developing nation, this free transportation may not materially change the demand for personal computers in a developing nation since it is a derived demand. The demand for personal computers is dependent s on the educational level of the citizens, electrical availability and the price of the computer itself. 5. Explain the difference between elastic and inelastic demand. Why are the two concepts important to transportation demand? Demand elasticity refers to the sensitivity of customers to changes in price. If customers are sensitive to price, a price reduction will increase the demand for the item and the total revenue will also usually increase. If customers are not sensitive to a change in price, we consider that demand to be inelastic because a price reduction will result in a small relative increase in the quantity demanded and the total revenues will decrease. 6. The aggregate demand for transportation service is said to be inelastic while the demand for an individual mode or carrier is often elastic. Explain why this is important to carriers and shippers. Aggregate demand for transportation is inelastic. Freight rate reductions will not dramatically increase the demand for freight transportation because transportation costs generally represent, in the aggregate, less than 4 percent of a product’s landed cost, and the demand is a derived demand. On the other hand, if we consider specific modes of transportation or specific carriers, the demand is generally elastic or price sensitive. Reductions in rates charged by a particular mode will usually result in increases in the volume of freight by that mode. For modal shipments or for a specific carrier within that mode, demand may also be service elastic. Assuming no price changes, the mode or specific carrier demand is often sensitive to changes in service levels provided by competing carriers. 7. Explain the concept of total landed cost as it related to transportation. How does it influence market boundaries? The landed cost also determines the extent of the market for business. The greater the distance the product is shipped, usually the higher the landed cost. At some distance from the product’s source, the landed cost usually becomes prohibitive to the buyer and there will be no demand for that product at that point. The company with the lower landed cost will have a greater market area than the firm with the higher transportation costs. 8. Discuss the various dimensions of transportation service and their impact upon costs for a company. The transportation service characteristics of freight include transit time, reliability, accessibility, capability, and security. Transit time can affect the level of inventory held by both the shipper and the receiver as well as the associated carrying cost of holding that inventory. The longer the transit time, the higher the inventory levels required and the higher the carrying costs. Reliability refers to the consistency of transit times. Reliable service directly affects the level of modal and specific carrier demand, that is, a shipper may shift from an unreliable carrier to one that is more reliable and service is more consistent. Accessibility is the ability of the transportation provider to move the freight between a specific origin and destination. The inability of a carrier to provide direct service between an origin and destination results in added costs and transit time for the shipper. The ability of the carrier to provide special service requirements is the essence of capability. Finally, security is concerned with the safety of the goods in transit. Shipments that are damaged or lost in transit can cause increased cost in the areas of inventory and/or stock outs. 9. What is the role of transportation in a supply chain? Why is this role so important in today’s environment? Transportation is a critical link in the overall supply chain which has become an important concept for organizations in the 21st century. Transportation can be viewed as the glue which helps to hold the supply chain together. 10. Provide a brief overview of the three phases of development for supply chain management. The concept of supply chain management has evolved from the 1960s when organizations looked at the outbound side of logistics, physical distribution management, in the 1980s for the second phase where integrated logistics management became an important focus. This phase include inbound logistics to outbound logistics. And finally supply chain management in the 1990s became the focal point which looks at an extended organization of all of the companies in the supply chain from original vendor to the ultimate consumer. Case Questions Case 1.1 Red Ball Express 1. Help Dave prepare this report by providing some information on the benefits of RFID Tags and GPS systems in the transportation industry. RFID tags and GPS benefits - Greater inventory visibility and traceability as products move through the supply chain - Increased information flows and real time data - reduced inventory - reduced theft in transit - prevention of tampering goods in transit. - reduced out of stock conditions – products present where and when needed - increased driver productivity – know the products they are transporting are being tracked - can ensure critical cold chain standards 2. Are there additional technologies that Red Ball could implement to help them improve efficiency? Explain. - Transportation Management System (TMS), software system designed to manage transportation operations. - Customer Relationship Management (CRM), software systems designed to know your customers history. Case 1.2 Clearfield Cheese Company 1. What strategies would you suggest for them to explore to improve their competitive situation? - Smaller pockets of inventory closer to bigger cities – reduce lead time from those distribution centers to customers and consequently become more responsive - More truckloads, volume shipments rather than sending a truck less than full - Transportation stop off consolidate orders and deliver to multiple customers on one trip, thereby reducing transportation costs - Better forecasting in order to reduce inventory - Better marketing to promote their American brand over the Canadian – play on national pride - Consider backhaul opportunities - Research continuous move opportunities Suggested Internet project Have the student identify total number of ocean-going containers imported to the U.S. from major U.S. trading partners. For the Top 10 (revenue) U.S. flagged airlines, identify the change in fuel cost each occurred between last year and this year. Some addresses are: United States Department of Transportation http://www.dot.gov/DOTagencies.htm Research and Innovative Technology Administration http://www.rita.dot.gov/ Maritime Administration http://www.marad.dot.gov/ National Transportation Library http://ntl.bts.gov/ Bureau of Transportation Statistics http://www.bts.gov/ Chapter 2 TRANSPORTATION – CRITICAL LINK IN THE ECONOMY Chapter Objectives: After reading this chapter, you should be able to do the following: 1. Understand the importance of transportation to the economic vitality of countries or regions. 2. Appreciate the role and contributions of transportation systems to the economic development of countries or regions. 3. Understand how transportation impacts the social and political dimensions of an economy or region. 4. Appreciate the historical role of transportation from an economic, social and political perspective. 5. Discuss the impact that improved transportation has upon land values. 6. Understand how transportation affects the price of goods and services. 7. Appreciate the function and scope of transportation in advanced and developed economies. Chapter Overview As indicated in Chapter 1, transportation plays a vital role in the initial development of the economy of a country and this ability to sustain development depends upon continuing improvement of the total transportation system and the associated infrastructure. This chapter explores the role, contributions and importance of transportation systems to the economic political and social dimensions of a country or region. Special attention is paid to the impact of the improved transportation upon land values and the prices of goods and services. Introduction The benefits of improved transportation are easier to comprehend when they can be viewed them from a macro perspective which is one of the objectives of this chapter. We can more fully appreciate the overall significance and impact of improved transport if we take this more holistic view. Transportation is a pervasive and extremely vital function in all industrialized economies. Transportation systems provide the necessary critical links between producers and consumers both domestically and globally. It has long been recognized that one of the critical ingredients for underdeveloped countries to improve economically is the need to invest in transportation infrastructure. This investment is frequently referred to as social capital, that is, society as a whole is the beneficiary of such investment because of the economic benefits associated with new businesses, higher wages, more jobs, etc. Transportation is one of the requirements of a developed economy because it can bring order out of chaos. The more complex life becomes and the more developed the economy, the more indispensable are the elements of transportation. Unfortunately, our transportation system is frequently taken for granted, and we do not consider the benefits that accrue to us. Historical Significance The growth of civilizations is directly associated with the development of transportation systems. A transportation system can help create a social structure. Eventually a society develops, with somewhat unified political opinions, cultural ideals and educational methods. The United States continues to grow in tandem with its transportation networks. Economic Significance Transportation systems have a major impact upon population patterns and urban economic development. The transportation services of a city are the “life support system” of the citizens. The transportation service adds value to the goods shipped and this topic deserves consideration. Transportation systems help determines the economic value of products. A simple model in the text describes how this is true. Place Utility The reduction in transportation costs gives the commodity place utility or place value. In a less efficient system, the goods will have no value if they can not be sold at the market price. The more efficient method of transportation creates place utility; since the goods can now be sold at point B for a competitive price (as illustrated in the text). Reductions in transportation costs permit market areas to purchase products from distant suppliers that might otherwise only be produced locally at a higher price. The reduction in transportation cost is actually greater for longer distances than for short ones because of the fixed charges. If a supplier can cover the transportation cost in his or her price range, an increase in the distance over which this given amount will cover the transport of goods will increase the market area of the product in an even greater ratio. Dionysius Lardner referred to this phenomenon as the Law of Squares in Transportation and Trade (also known as Lardner’s Law). Time Utility The concept of time utility is closely aligned to that of place utility. The demand for a particular commodity may only exist during certain periods of time. If a product arrives in a market at a time when there is no demand for it, then it possesses no value. Quantity Utility Transportation gives goods quantity utility through the assurance that the goods will arrive without damage in the right quantity. This utility has increased in importance in recent years with the high level of importance placed on minimizing safety stock inventories for both shippers and receivers. Transportation adds utility to goods because efficient transportation systems promote geographic specialization, large-scale production, increased competition, increased market areas and increased land values. Geographic Specialization The concept of geographic specialization assumes that each nation, state, or city produces products and services for its citizens with its capital, labor, and raw materials. The concept is closely aligned to the principle of absolute or comparative advantage. This principle assumes that an area will specialize in the production of goods for which it has the greatest advantage or the least comparative disadvantage. Geographic specialization is complemented by large-scale production or economies of scale which are the result of more efficient operations. The raw materials for production need to be transported to a manufacturing facility, and the finished products must be transported out of an area at reasonable costs to markets and consumers at acceptable prices. Geographic specialization assumes that the large-scale production of goods is demanded at distances away from the production site. Obviously, one area cannot rely upon its comparative advantage and large-scale production without the use of efficient transportation systems. The more efficient the transportation, the larger the potential market area and the possibility of increased scale economies. Efficient transportation can also provide the consumer with the benefit of increased market competition. Transportation can increases the market area for a product; thus, goods must be produced in the most efficient fashion, or distant competitors will enter the market and capture market share. Transportation improvements which enhance an area’s economy also can increase the value of land that is adjacent to or served by the transport improvements. It is important to note that transportation may not always have a positive impact on land values. Noise and air pollution accompanying some networks can decrease adjacent land values. Transportation Patterns Transportation patterns reflect the flow of people and commerce. The world’s major water routes for transporting merchandise traditionally go to and from Europe, the United States, and the Far East (Japan, Korea, Hong Kong, and Taiwan). In the United States, routes link the major metropolitan areas and represent the existing rail trunk line, interstate highway, and inland waterway patterns. The Canadian pattern links the major cities that are in a narrow population band along its border with the United States. Mexico’s major commerce routes are strongly tied to its economic center, represented by Mexico City. Gross Domestic Product (GDP) Transportation plays a major role in the overall economy of the United States and transportation accounts for about 10.5 percent of gross domestic product. Passenger transportation has been growing in relation to the GDP until recently. Freight Transportation which traditionally accounted for between eight and nine percent of GDP have decreased due to the more efficient use of transportation equipment and better network scheduling. It is interesting to note that overall transport expenditures as a percentage of GDP are slightly less than food expenditures and more than education expenditures. Modal split is a useful analytical tool for the study of transportation. The freight intercity modal split is dominated by railroads, with about 40 percent of the ton-miles in 2006 . Railroads typically move bulk, low-value commodities such as grain, coal, ore, and chemicals for longer distances which impacts their ton-miles share. In recent years, rail traffic by container, which transports relatively higher-value finished goods, has increased. The air mode, while highly visible, still handles less than one percent of the total ton-miles in the United States. The total ton-miles of freight increased between 1980 and 2006, as shown in Table 1.2, but the economy has expanded at a faster rate than the demand for freight transportation. The increase in global trade is one of the reasons for this phenomenon. For example, in the past, a domestic steel firm usually purchased transportation service for inbound raw materials (ore, lime, coal) and the movement of the outbound finished goods to the customer. At the very minimum, this involved four different movements. Today the steel may be imported, requiring one domestic movement between the port and the customer. Thus, steel is being used in the economy, but fewer transportation moves are involved in making it available to the customer. Good transportation spurs economic development by giving mobility and lower landed cost to production factors, which permits scale economies and increased efficiency. Good transportation enlarges the area that consumers and industries can draw on for resources and products. Good transportation expands the area to which a given plant or warehouse can distribute its products economically, and the resulting specialization and scale economies provide a wider choice of products for consumers at a lower cost. Environmental Significance Transportation sometimes pollutes the environment and exploits natural resources, although many citizens feel that the overall benefits provided by transportation exceed these costs. The Environment There has been growing concern over the impact of transportation on the environment in recent years, with particular emphasis on air quality (pollution), noise, and water quality. Increasing pressure from the environmentalists has resulted in legal restrictions that help govern the balance between a sound and efficient transportation system and a safe and clean environment. The term, Green Supply Chains, has become a part of our vocabulary. Transportation is an important part of all supply chains and will receive increasing attention in enviornmental analyses and discussions.. The major change which has occurred since the previous dition of this book was published is the growing acceptance by businesses and other organizations that they have an important role to play in helping to make improvemenyts in this area. Perhaps, even more important a growing recognition that it does not have to be a “zero sum game.” In other words, reductions in an organization’s carbon foot print, for example, can be accomplished along with reductions in the cost of transortation operations with careful planning. Many companies are looking at their transportation operations from this “win-win” perspective. There is already a growing challenge in the 21st century to ensure efficient transportation facilities and mobility by maintaining the present system and developing alternatives to meet the growing needs of individuals and organizations. Air Quality and Acid Rain Pollution is an external side effect of transportation because of the widespread use of internal combustion engines. Transportation is a major contributor to air pollution. Reductions have taken place in motor vehicle emission rates because of governmental requirements, but economic and population growth makes it a persistent problem especially oa global basis. Essentially, acid rain is a pollution-related phenomenon that causes falling rain to be much more acidic than normal because of the addition of sulfur dioxide, nitrogen oxides, and volatile organic compounds to the atmosphere causes acid rain. The acid deposits have an adverse impact on aquatic systems, crops, forests, human health, and visibility. An important issue facing the United States and the rest of the world is the so-called “greenhouse effect” and the related climate changes. Ozone reduction in the stratosphere is a big concern and we can expect worldwide concern and the development of protocols to reduce the risks in this area. Maritime and Water Quality The protection of the marine environment from the adverse effects of oil spills, garbage dumping from ships, hazardous material losses, and so on is a growing concern shared by many federal and state agencies. Noise Another type of pollution is noise, which can emit from many sources, including airplanes and motor vehicles. Noise emissions are governed by the Noise Control Act of 1972, which allows the setting of operational standards for aircraft and trucks and even rail equipment operated by interstate carriers. Safety One of the more disturbing by-products of transportation is injury and loss of life. In 2006, a total of 44,912 persons lost their lives in the United States while engaged in transport. Approximately 95 percent of those fatalities occurred in highway ¬vehicles. Train accidents, oil spills, and the threat of gaseous explosions while in transit have increased. With an increasing variety of products being shipped and an increasing volume of transportation, these problems require greater attention. Social Significance A well developed transportation system also contributes improved health and education delivery systems and effective communications among regions of a country. Overall, transportation plays a major social role in our economy that is not always fully appreciated nor understood by the citzenry. Political Significance The origin and maintenance of transportation systems are dependent on the government as its intervention is needed to design feasible routes, cover the expense of building public highways, and develop harbors and waterways. The government is responsible for aiding all passenger and freight transportation systems in which the costs cannot be covered reasonably by a central group of users. One outgrowth of regulation is the common carrier. The common carrier has a duty to render service without discrimination based upon set rates for specific commodities. The government’s role as a regulator of transportation services may entail certain drawbacks for the public. The government’s right of eminent domain may require individuals to move and sell their land, even though they might not wish to do so. Although families might be displaced, the government’s role is to act in the best interest of the public by designing routes that help the citizens of the nation efficiently conduct their business and meet their social needs. Closely connected with transportation’s political role is its function as a provider for national defense. Although it is accurate to say that the American transportation system has been shaped by economic factors, political and military developments have also played important roles. Overview of Modern Transportation The transportation system influences many aspects of our life. For example, the location of transportation facilities has effects on the surrounding communities. Railroads and superhighways can divide towns and neighborhoods, and the location of highway interchanges can determine the location of manufacturing, retailing, and distribution operations. Factors can be identified correlating network changes to changes in neighborhood characteristics. Regional shopping centers, higher-income commuter enclaves, and resort, vacation, and amusement districts can grow as the result of available transportation networks, and the appropriate conbination of economic and social factors. Market area decisions are dominated by the ability of the transporter to get the product to market at a low cost. Decisions about whether to purchase parts, raw materials, supplies, or finished goods for resale must reflect transport costs and decisions about where plants, warehouses, offices, and stores should be located all take transportation requirements into consideration. Lastly, pricing decisions are strongly affected by the transportation system. Overall, transportation interacts with three groups of our society: users, providers, and the government. Thus, transportation decisions makers are expected to consider all aspects of society in one form or another. The role of the user is to make decisions that will maximize the relevant consumer- oriented goals. Overview of Transportation Trends The transportation industry is in a continuing state of change. It is intertwined with the social, political, and economic forces in a society and economy. Since deregulation in the late 1970s and early 1980s carriers have organized, priced, sold their services, and managed operations based on this new environment. The Transportation Market • Customized services and equipment to meet specific shipper/receiver needs • Increased concern about equipment utilization • Increased global commerce with longer shipping distances • International transactions made faster and easier with improved information technology • Shift from heavy industrial, production-oriented transportation to fast, service-demanding finished goods transportation • Transportation becoming more integrated with production, sourcing, labor, distribution, and marketing factors in a supply chain context. • Greater marketing orientation by carriers • Higher fuel charges causing shifts in modal split • More international transportation Transportation Supply • Increased use of third-party services • Consolidation in air, rail, and motor modes • Increased use of public transportation in urban and suburban areas • Integration of modes via joint ownership or special arrangements • Continued technological advances in most modes • Less private carriage use for reasons of cost savings; still present where special services are involved • More international alliances of carrier • More concern with security and terrorism Operations and Management • Operations in closer link with marketing and sales of the carrier • Leasing of containers, aircraft, terminal facilities, and other assets on increase • Information-driven organization and structures • Decision making and accountability being pushed lower in the organization Government Policies and Regulation • Increased noneconomic regulation (environmental, substance abuse, safety and security) • Government funding not keeping up with the deterioration of transportation infrastructure • Increased concern about the financial viability of some modes of transportation, e.g., air transport. In the 21st century, our transportation system faces significant challenges and problems because of global competition, governmental budget constraints, and increased demand from special interest groups such as senior citizens and especially, the threat of terrorism.. The patterns of trade that help to drive transportation are changing more quickly and becoming more complex because of the dynamic global environment that we now live in and the changing economic base in the United States and the increased competitiveness or previously undeveloped countries such as China. Study Questions 1. Help the Chairman of the Joint Transportation Task Force (discussed in the beginning of this chapter) by providing a rationale for spending money from the stimulus package to improve and maintain the transportation infrastructure. In other words, why should the investment be made in improved transport systems? Investing in an improved transportation system would have an overall impact on multiple sectors of society. With transportation acting as a key ingredient to economic stimulation, improved infrastructure would improve businesses ability to produce and sell products and services. It would ensure more efficient versatility in transportation opportunities, providing flexibility to determine best routes and costs. Having the right products in the right place at the right time enables companies to maximize their revenue opportunities by adding extra value to their process. Transportation also plays an influential political role in national defense by providing the flexibility to move domestically and international in an efficient manner. This is most prominently reflected throughout the transportation of military supplies. Improved infrastructure reassures that our national defense is able to attain the supplies they need in a timely matter in order to protect our country. Furthermore, improved infrastructure is necessary for the world to continue their push towards a more environmentally friendly society. When companies can save costs on transportation, they are able to invest in areas that reduce their environmental impacts. Finally improved transport system results in social benefits. Socially, good transportation system can enhance health and welfare of a population. Though it not a significant problem in the United States, having the ability to transport food and life necessities throughout the country in an efficient manner can influence poverty and famine levels. Well-developed transportation also contributes improved health and education delivery systems and effective communications among regions of a country. 2. “Transportation is the most important economic factor for economic development”. Defend this statement. Transportation systems provide the necessary critical links between producers and consumers both domestically and globally. The citizens of industrialized countries are dependent upon transportation systems to move products from distant locations where they are produced to markets where they are needed, can be sold and consumed. It has long been recognized that one of the critical ingredients for underdeveloped countries to improve economically is the need to invest in transportation infrastructure. This investment is frequently referred to as social capital, that is, society as a whole is the beneficiary of such investment because of the economic benefits associated with new businesses, higher wages, more jobs, etc. 3. Why were the opening of the Erie Canal, the building of the transcontinental railroads and the building of the National System of Interstate and Defense Highways after World War II so important to the U.S? A transportation system can help create a social structure. People traveling or living within the bounds of a particular transportation network share ideas and experiences. Eventually a society develops, with somewhat unified political opinions, cultural ideals and educational methods. The highway system was envisioned as being a system of superhighways connecting the states and their major centers within the states which could enhance our ability to defend against enemy attack. The expenditures on air transport infrastructure are based primarily on military and political consideration as opposed to economic benefits, but the economic benefits usually outweigh the political and military benefits over the longer run 4. Why are highways serving major metropolitan areas sometimes described as their lifelines? Transportation systems have a major impact upon population patterns and urban economic development. A city would not be able to survive without its transportation system. Even the suburban areas surrounding the city are dependent on the transportation systems. Transportation services add value to the goods shipped. 5. Explain the nature and importance of time and place utility, and how they contribute to the value of a product. The reduction in transportation costs between points A and B gives the commodity place utility. The more efficient method of transportation creates place utility; since the goods can now be sold at point B for a competitive price. Reductions in transportation costs permit market areas to purchase products from distant suppliers that might otherwise only be produced locally at a higher price. Time utility is closely aligned to that of place utility. The demand for a particular commodity may only exist during certain periods of time. If a product arrives in a market at a time when there is no demand for it, then it possesses no value. Effective transportation can create time utility by ensuring that products are at the proper locations when needed. The increased emphasis upon just-in-time and scheduled deliveries as well as lean inventories has heightened the importance of time utilityespecially for high value products and emergency shipments. The efficiency of a new system enables the producer located at Point A to expand their market area to include B which is a value-add service. 6. Adam Smith stated the specialization of labor was limited by the extent of the market and that transportation helps to expand the market. Explain this statement. The concept of geographic specialization assumes that each nation, state, or city produces products and services for its citizens with its capital, labor, and raw materials. Since most areas cannot produce all of the needed products for its citizens, transportation is necessary to exchange(buy and sell) the goods that can be produced more efficiently at another location in return for different goods produced locally. Gain from the specialization of goods will be mutually advantageous when the cost ratios of producing two commodities are different in different areas. The development of specialization usually leads to lower prices, an increased availability of goods, and a higher standard of living. However, without the use of efficient transportation networks, the advantages of scale economies, production efficiencies, and specialization could be lost. The raw materials for production need to be transported to a manufacturing facility, and the finished products must be transported out of an area at reasonable costs to markets and consumers at acceptable prices. Otherwise, the goods have no value. Without transportation, local entrepreneurs could produce goods inefficiently and charge high prices for their consumption. Transportation can increases the market area for a product. 7. What is the relationship between improved transportation and land values? Transportation improvements which enhance an area’s economy can increase the value of land that is adjacent to or served by the transport improvements because the land becomes more accessible and potentially more useful. Suburban centers provide excellent examples. The value of the land in these areas has increased to reflect the advantageous life-styles that the new or improved transportation systems have made possible. The land values within the city are obviously also enhanced by the economic development. It is important to note that transportation may not always have a positive impact on land values. Noise and air pollution accompanying some networks can decrease adjacent land values. 8. “Transportation patterns reflect the flow of people and commerce.” Explain that statement and its significance for transportation systems. Transportation has a catalytic effect on a society in that it stimulates commerce and movement. The reverse is true also. The demand for commerce and movement will cause transportation to be developed. Routes have an east–west pattern between the developed nations and a north–south pattern between the developed nations primarily in the Northern Hemisphere and developing nations in Africa and South America. These routes closely approximate major air cargo and passenger routes of the world. In the United States, these routes link the major metropolitan areas and represent the existing rail trunk line, interstate highway, and inland waterway patterns. Mexico’s major commerce routes are strongly tied to its economic center. The railroad mainlines and early highway development created an economic and social orientation to this pattern. 9. While improved transportation systems provide economic benefits, there may be some associated enviornmental costs. What are the major enviornmental costs associated with transportation and what is their potential negative impacts? Transportation sometimes pollutes the environment and exploits natural resources. The debate of the overall benefits provided by transportation exceed the costs contiues. The environmental challenge of the future will be to accurately assess the relationship between industrial and consumer benefits compared to and their construction and external, societal costs associated with transportation improvements. Green Supply Chains, the balance between a sound and efficient transportation system and a safe and clean environment have become part of our vocabulary. Pollution from internal combustion engines, acid rain which contains more pollutants from industrial and commerical processes as well as vehicle emissions, oil spills, and ship generated garbage all have and will continue to have adverse effects on the environment. 10. “Improved transportation systems can also have social and political significance.” Explain. A good transportation system can enhance the health and welfare of a population, offer educational opportunities and effective communications among regions of a country. Adequate transportation is needed to create national unity; the transportation network permits the leaders of government to travel rapidly to and communicate with the people they govern. Case Questions Case 2.1 Opportunity Knocks 1. You have recently been hired by HOG, Inc. and Mr. Edwards has asked you to develop a set of discussion points that would point out the economic and perhaps, social benefits from a new highway link in central Pennsylvania. Disccusion Points •Can reduce travel time, which will increase business cycle time, and save transportation costs. By saving costs in transportation, companies would be able to invest the money in alternative areas that could improve their business from a efficiency and/or environmental standpoint. •PA emphasizes on dairy and agricultural products that rely on freshness and therefore benefit from more efficient routes of transportation to get to their necessary locations. •Federal Highway Administration has estimated that total freight volume moved in the U.S. is expected to triple by 2035, therefore needing a better route for transporting products. Also, reflects an incresed number of transportation units on the roadways in which congestions throughout existing routes will be reduced with more efficient roadways. •Beneficial to general public as a general transportation resource. •Penn State would have an easier connection to their branch campuses to develop more research opportunities, and improve the overall quality of the university reflecting. Case 2.2 The Green Team 1. You have been asked by the Green Team to critique their pilot program pointing out strengths and weaknesses as well as the addition of new initiatives for them to consider. Strengths •“Green friendly” •More efficient for each individual location •Ensure availablity of product by baking bread on site and reducing chance of stockouts •Reduce long run costs in transportation •Build stronger supplier relationships Weaknesses •Reduce expertise and specialization •Require more time a labor to bake on site. •Entirely new process therefore have a lot of details to be determined •Repetitive processes – same procedure occuring at multiple facilities. •Increased fixed costs for necessary equipment at multiple facilities. •Limits suppliers by location by procuring locally. Suggested Internet project Have the student research current U.S. freight expenditure by mode. In addition, find statistics for accident rates and fatalities in the U.S. for each mode. Have the student locate current total ton-miles by mode for freight and rank the modes from highest ton-miles to lowest. Some addresses are: United States Department of Transportation http://www.dot.gov/DOTagencies.htm Federal Highway Administration http://www.fhwa.dot.gov/ Federal Motor Carrier Safety Administration http://www.fmcsa.dot.gov/ Federal Railroad Administration http://www.fra.dot.gov/ National Highway Traffic Safety Administration http://www.nhtsa.dot.gov/ Maritime Administration http://www.marad.dot.gov/ Pipelines and Hazardous Materials Safety Administration http://www.phmsa.dot.gov/ Research and Innovative Technology Administration http://www.rita.dot.gov/ National Transportation Library http://ntl.bts.gov/ Bureau of Transportation Statistics http://www.bts.gov/ Transportation Safety Institute http://www.tsi.dot.gov/ Instructor Manual for Transportation: A Supply Chain Perspective John J. Coyle, Robert A. Novak, Brian Gibson, Edward J. Bardi 9780324789195
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