CH-11-12-14 Global Transportation Execution – Transportation: A Supply Chain Perspective : Chapter Notes

This Document Contains Chapters 11,12 and 14 Chapter 11 GLOBAL TRANSPORTATION EXECUTION Chapter Objectives: After reading this chapter, you should be able to do the following: 1. Recognize the importance of intermodal service in global transportation execution 2. Describe the intermodal options available to global transportation managers 3. Discuss the importance of proper freight packing, documentation, and insurance 4. Understand the government’s role in safe and secure global transportation operations 5. Discuss ocean transportation services, equipment options, and rate structures 6. Describe international air transportation services, equipment options, and rate structures 7. Understand the role of ancillary service providers in facilitating global freight flows 8. Appreciate the critical roles that seaports and airports play in the global supply chain 9. Articulate the customs clearance process for import goods 10. Analyze current issues impacting the execution of global transportation Chapter Overview Despite the advertisements and commercials that make global freight movement look easy, the global journey is fraught with challenges of using multiple carriers from different modes, numerous border crossings, and long distances. The risk of disruptions, delays, damage, and other problems make for an eventful time whether you are importing electronics or exporting fresh produce. Whether the issues is securing enough capacity, dealing with governmental regulations, or some other unexpected problem, global transportation execution is anything but simple. Overcoming these potential challenges to move products safely and quickly across borders is the focus of Chapter 11. Following an overview of global freight flows, this chapter spotlights the key players in global transportation execution - transportation companies, third party logistics firms, port operators, and ancillary service providers. The chapter wraps up with a discussion of Customs clearance. Ultimately, Chapter 11 helps students understand the key role that transportation plays in successful global trade. OVERVIEW OF GLOBAL FREIGHT FLOWS The first major section of the chapter provides students with an introduction to the initial decisions that companies must make regarding the type of service used, intermodal options, and freight preparation. Global freight primarily moves via one of two service options - direct service or indirect service. Direct service is commonly used in situations when international freight is moving relatively short distances between directly accessible origin and destination points. A single mode of transportation is used to move freight from the seller’s location in one country to the customer’s location in another country with no interim stop-offs or transfers to other modes or carriers. Indirect service is used in situations where freight is moving long distances between continents or facilities that are not directly accessible by the mode of choice. In this type of service, freight flows are interrupted by interim stops and transfers of freight between carriers and modes. Intermodal Transportation Chapter 11 provides the textbook’s primary discussion of intermodal transportation because so much international freight is moved via intermodal transportation. Virtually everything moving across an ocean will involve truck or rail carriers for product pickup and delivery and an air or ocean carrier for the linehaul portion of the trip. This section provides a definition of intermodal transportation and a discussion of its primary benefits. Various intermodal options for moving international freight are covered, as well as the differences between containerized freight and transload freight. The importance of containers, along with their capacities and capabilities are identified, along with recent volume statistics. The importance of proper routing and the use of specialized routes (land bridges, mini-bridges, and micro-bridges) are explained and examples provided. Congestion issues and other challenges conclude the discussion. Preparing Freight for Movement To help students recognize the risks of in-transit product damage and delays, coverage of freight preparation activities is provided. During preparation for release of the freight to the transportation company, key precautions must be taken. These include preventing freight damage through protective packaging and proper packing, insuring the goods against key risks, and completing all necessary documentation. Chapter 11 primarily focused on damage prevention strategies as the latter two issues - insurance and documentation - were covered in detail in Chapter 10. Exporters must pay attention to the stress that global transportation puts on packaged goods, particularly goods moving via ocean. Four potential in-transit problems should be kept in mind when choosing packaging materials: breakage, moisture, pilferage and excess weight. While shipping containers provide some protection from these issues, it is critical to protect products as they are packed in shipping cartons and to protect the cartons when being packed in the shipping container. Policy and Regulatory Issues Impacting Global Flows The section wraps up with a discussion of policy issues that impact the flow and cost of global freight movement. Students may be under the impression that transportation deregulation is a common government theme but they should be made aware of the differences between domestic and global transportation. Given the strategic nature of international transportation, governments around the world actively regulation global transportation activity, invest in transportation infrastructure, and promote international trade. They may also control the import/export of strategic materials. In the U.S., current policy and regulatory actions focus on transportation safety, environmental impact reduction, and security. Key policy priorities include: Protection of the traveling public Reduction of congestion, air pollution, greenhouse gas emissions, noise and dependence on a volatile world oil market. Prevention of terrorism and other security threats GLOBAL TRANSPORTATION PROVIDERS The global transportation market is served by carriers in all modes of transportation, including pipelines in North America and Eastern Europe. Because intra-continental freight flows are similar to domestic moves, this section of Chapter 11 immerses students in intercontinental ocean transportation and air transportation. Surface transportation and ancillary service providers are briefly discussed. Ocean Shipping Ocean shipping is an essential resource in global supply chains. The vast majority of containerized finished goods as well as bulk materials moving across oceans travel via this mode. As ocean shipping is a very diverse industry, the section methodically introduces students to the variety of service options, equipment types, pricing alternatives, and key issues. Service Options The three primary categories - liner services, charter services, and private services - are covered. Definitions of the various charter types are provided. Equipment Types Students are introduced to five general groups of ship types - containerships, break-bulk ships, roll-on/roll-off vessels, bulk carriers, and combination ships. Descriptions of their size, capabilities, and primary cargoes are discussed. Rate Structure A discussion of rates, segmented by type of service, is provided. Within each service type, coverage focuses on the factors affecting rates - carrier cost structure, commodity, freight volume, origin and destination points, and ancillary services required. Current Issues The shift in carrier challenges from capacity shortages and a global boom to the current economic woes and a dearth of volume are discussed. Students are introduced to the problem of new capacity coming on line as demand plummets and the resulting impact on global freight rates. International Air Air cargo is a $50 billion business that transports 35 percent of the value of goods traded internationally. While air cargo transportation remains a small and specialized mode in terms of tonnage, it is a critical part of airline business and global supply chains. In this section, international air transportation characteristics are discussed, including service options, equipment types, pricing alternatives, and key industry issues. Service Options The primary types of international air carriers - air cargo and combination - are covered. The air cargo options of integrated and non-integrated services compared and contrasted. Equipment Types Students are introduced to three general aircraft types - air freighters, passenger airplanes, and combi airplanes. Descriptions of their size, unique capacities and capabilities, and primary cargoes are discussed. Rate Structure A discussion of rates, segmented by value of service and cost of service pricing factors, is provided. Issues of cargo time sensitivity, commodity value and density, shipment dimensional weight, origin and destination points, and ancillary services are discussed. Students are also introduced to three types of international air carrier rates: general cargo, class, and specific commodity rates Current Issues This section provides students with a look at the challenges facing the international air industry - declining volume, cost obstacles, and new security requirements. The industry’s response to this “perfect storm” is also discussed. Surface Transport Moving goods across adjacent land borders is the primary domain of trucks, rail, and pipeline service. Because the general industry structure, service options, and equipment types are consistent with domestic truck, rail, and pipeline transportation, the focus here is on current issues and challenges. In particular, the impact of patchwork of domestic trucking rules, lack of equipment and infrastructure standards, and varying safety regulations on global freight flows is discussed. Rail challenges related to inconsistent regulations, limited investment in cargo transfer facilities, and infrequent, non-priority service are also identified. Ancillary Services The complexity of international transportation makes it difficult for any importer or exporter to independently plan and execute global freight flows. This section introduces students to the wide variety of third party logistics (3PL) companies that facilitate the movement of goods via ocean and air. The purpose and capabilities of some 3PLs are covered in this section of Chapter 11: International freight forwarders Non-vessel owning common carriers Export packers PORT OPERATIONS AND CUSTOMS CLEARANCE Ports provide the infrastructure, equipment, and labor needed to load, unload, and transfer freight between carriers. Without efficient port operations, it would be extremely difficult to achieve the tremendous volume of global trade of the last decade. This final segment of the chapter discusses the key role of port and the customs clearance process in completing the final leg of the global freight journey as efficiently and quickly as possible. Seaports A seaport is an area of land and water with related equipment to permit the reception of ships, their loading and unloading, and the receipt, storage, and delivery of these goods. There are thousands of seaports around the world, though the vast majority of international trade flows through a small group of major ports. This section focuses on the infrastructure, operations, and current issues of seaports. Infrastructure Basic facilities, equipment, and services greatly impact the capabilities and capacity of a seaport. This section focuses on key issues of waterway depth and turning basins, wharfside freight handling capabilities, and landside facilities. Operations The general processes and flow of goods through a seaport are discussed. Students gain perspective on the number and variety of organizations involved in supporting cargo transfers to/from ocean carriers. Current Issues While challenged with capacity shortages just a short time ago, seaports now find themselves fighting for a lower volume of import and export freight. They must innovate to remain competitive and carrier friendly as well as support the changing security and equipment handling requirements of the industry. Airports An airport is broadly defined by the U.S. Federal Aviation Administration as any area of land or water used or intended for landing or takeoff of aircraft. It has adjacent areas used for airport buildings, facilities, and equipment, as well as rights of way to the buildings and facilities. Most international freight moves through multi-purpose airports, though new cargo only airports are being established. This section focuses on the infrastructure, operations, and current issues of airports. Infrastructure Importers and exporters base airport selection on numerous factors - existing restrictions which may limit operations (capacity caps or noise limits), runway length, terminal facilities, and freight forwarder presence, as well as landing fees, airport quality, and weather. Airports must also have the necessary equipment to efficiently handle cargo. Terminals are needed to facilitate fast intermodal transfers of freight, while warehouses are needed to protect and store cargo. Operations The general processes and flow of goods through airports are discussed. Students gain perspective on the number and variety of organizations involved in supporting cargo transfers to/from air carriers. Current Issues Airports face many of the same challenges as seaports. They must flex capacity to deal with the current downturn in international air cargo volume while positioning the infrastructure and operations for future demand. They must also support increasing government security requirements. Customs Clearance When import cargo reaches the destination country, it must be cleared through Customs. The challenge is that each country’s regulations and process may be unique. Also, depending on the product, country of origin, and other relevant issues, the Customs entry and clearance process can be complex. This section provides students with a general overview of the U.S. Customs and Border Protection clearance process. The six key activities of customs clearance - entry filing, arrival, examination, classification, taxation, and release - are described. The section also provides insight into the specialized roles played by bonded warehouses, Free Trade Zones, and customs brokers in global commerce. Students gain an understanding of how these experts facilitate the entry process and help importers avoid customs clearance pitfalls that delay shipments and increase costs. Study Questions 1. How does direct service differ from indirect service in global transportation? When is it advantageous to use each type? Direct Service is commonly used in situations when international freight is moving relatively short distances between directly accessible origin and destination points. A single mode of transportation is used to move freight from the seller’s location in one country to the customer’s location in another country with no interim stop-offs or transfers to other modes or carriers. When to use: direct service is effective for truckload moves across land borders such as freight flowing from Canada to the U.S. or between countries on the European continent. Indirect Service is used in situations where freight is moving long distances between continents or facilities that are not directly accessible by the mode of choice. In this type of service, freight flows are interrupted by interim stops and transfers of freight between carriers and modes. When to use: indirect service is used for most international freight, particularly intermodal shipments moving from the interior of one continent to the interior of another continent. 2. What are the benefits and drawbacks of intermodal transportation for international freight? The primary benefits of intermodalism include: •Intermodal transportation facilitates global trade. The capacity and efficiency of ocean transportation allows large volume shipments to be transported between continents at relatively low per unit costs. The speed of air transportation allows perishable goods to flow quickly between countries. The domestic legs of the delivery can take place via truck. •Greater accessibility is created by linking the individual modes. The road infrastructure allows trucks to reach locations that are inaccessible to other modes, especially air transportation, water transportation, and pipelines. •Overall cost efficiency can be achieved without sacrificing service quality or accessibility, In other words, intermodal transportation allows supply chains to utilize the inherent capabilities of multiple modes to control cost and fulfill customer requirements. The primary drawbacks of intermodalism are generated by the multiple carriers and intermediaries involved in moving the freight: •Number of freight transfers can reduce shipment visibility •Increased handling can lead to product damage. •Transit times can be longer due to the dwell time between modal hand-offs. •Paperwork may be more complex. 3. What combination of intermodal services would be most beneficial for the following products? a. Lumber moving from British Columbia, Canada to Hickory, North Carolina A combination of truck transportation for pickup and delivery of the lumber with rail service for linehaul transportation would be most efficient. Water transport is a possible replacement for rail but would increase the transit time. b. Seedless grapes moving from Valparaiso, Chile to Phoenix, Arizona A combination of truck transportation for pickup and delivery of the grapes with ocean service for linehaul transportation would be most efficient. Air transport is not warranted because of the low value and perishability of grapes. c. iPhones moving from Cupertino, California to Copenhagen, Denmark A combination of truck transportation for pickup and delivery of the iPhones with air service for linehaul transportation would be most efficient. Air transport is a viable option, given the value to weight ratio of the goods, the potential for theft, and the fragile nature of the phones. 4. If you need to move two TEUs of Adidas footwear from the factory in China to the European distribution center in Antwerp Belgium, what route options should be considered? Which would you choose? The logical option would be to consider an intermodal shipment consisting of truck and water service. A Mediterranean-based water route using the Suez Canal will provide a useful shortcut. For example a Yantian, China to Antwerp, Belgium route would take approximately 25 days, moving the containers through the South China Sea, the Strait of Malacca, the Indian Ocean, the Gulf of Aden, the Red Sea, the Suez Canal, the Mediterranean Sea, and the Atlantic Ocean. Other (less efficient) route options include: •An Asia-America-Europe land bridge uses a North American rail link to connect the origin and destination. •A long Pacific to Atlantic route around the southern tip of Africa •An Asia-Europe land bridge movement of freight via ocean from China to a Pacific harbor in Russia, across Russia via the Trans-Siberian Railway, and onward to Belgium via water, rail, or truck transportation. 5. If you are moving international cargo to the United States, what security issues and regulations would impact your operations? How will you comply with these requirements? There are a number of different issues that must be considered: •Security - terrorism threats have led to legislation and programs that impact global transportation These include the Maritime Transportation Security Act of 2002, the Container Security Initiative, and the Advanced Manifest Rules. A recent addition to the security effort has been passage of the Importer Security Filing or “10+2” rule, a regulation that supplements the Advanced Manifest Rules. It requires that ten additional pieces of information from the importer and two additional pieces of information from the carrier be provided to U.S. Customs and Border Protection (USCBP) 24 hours before loading of the ship. •Documentation - Freight documents control international cargo on its journey from origin point in the country of export to its final destination in the country of import. Missing or incorrect paperwork can cause delays and additional costs. In general, international cargo travels with four types of documents: invoices, export documents, import documents, and transportation documents. These documents must be completed fully and accurately prior to tendering freight to the transportation company. •Carton Marking - information provided on the outside of the cartons must comply with customs regulations of the country of destination, enable freight handlers and receivers to correctly identify shipments, facilitate proper handling of shipments, and adhere to environmental and safety regulations for hazardous materials. •Public safety - Laws have been enacted to limit the size of freight equipment, combined freight and equipment weight, and travel speed. Current regulations also focus on driver qualifications, equipment safety, random drug testing of truck drivers, and control of hazardous material transport. Effective management of freight flows requires that transportation managers take the time to understand and comply with government policies and regulations, both at home and abroad. This includes both regulations that impact the flow of import goods as well as those that affect the flow of export goods. Failure to abide by these requirements at home and abroad will lead to delivery delays and potential penalties, including fines, freight confiscation, and/or denial of entry. If you are unsure of the regulations, the prudent option is to work with experienced carriers and 3PLs. 6. What are the major trends and issues in ocean transportation? How does this impact global supply chain operations? As transportation is a derived demand industry, global economic booms and busts directly impact the ocean transport industry. The current global recession leads to lower trade volumes and excess capacity in the liner and charter markets. The result is precipitous rate drops despite many carriers removing ships from service to cut capacity. The survival of financially weak carriers is challenged and their only hope may be a merger or purchase. The growth of new capacity is creating excess volume. Ocean carriers went on a ship ordering binge for 10,000-TEU-plus vessels in 2007. Because it takes years to build a new ship, the added capacity - 35 ships in 2009, 49 in 2010 and 91 in 2011 - comes at a time when it is not needed. The additional TEU capacity will likely keep freight rates depressed in the near future, as highlighted by the On the Line article. Other issues include: fluctuating fuel prices and rising fees for port services and Panama Canal transits, increasing environmental legislation, and growing freight protection headaches such as piracy threaten to drive operating and insurance costs higher. 7. How has the Ocean Shipping Reform Act impacted the process for determining ocean transportation rates? Historically, the majority of liner rates were determined collectively by a group of carriers serving specific trade routes and ports. These shipping conferences are essentially legal cartels in which the carriers agree not to compete on price by publishing standardized rate tariffs. The conferences were allowed to exist with anti-trust immunity by governments because of the high fixed cost structure of the industry. Contract rates and independent rates were also available but with limited availability. The 1999 implementation of the Ocean Shipping Reform Act (OSRA) altered the balance of ratemaking power in the liner industry. A primary goal of OSRA was to promote a more market driven, efficient liner shipping industry. OSRA brought about many changes to the conference system, most notably the ability of large shippers to negotiate private, confidential contracts with liner companies. This enhanced ability to deal with individual carriers, the elimination of the “me-too” requirement for similarly situated customers, and the confidentiality of certain commercially sensitive service contract terms have fostered a shift to contract carriage. As a result of OSRA and other reforms, many ocean conferences have lost significant membership, ceased operations, or shifted their focus. For example, the Trans-Pacific Stabilization Agreement (TSA) is now a research and discussion forum of major ocean container shipping lines that no longer negotiates rates or files tariffs with the U.S. Federal Maritime Commission or with Asian governments. 8. Given the high cost of international air freight service, why would companies choose this mode of transportation? While air cargo transportation remains a small and specialized mode in terms of tonnage, it is a critical part of the airline business and the supply chain for time-sensitive freight. Air carriers transport ship small quantities of high-value, low weight, semi-finished and finished goods. Primary commodities moved globally as air cargo include: computers, precision instruments, electronics, pharmaceuticals, perishable foods, periodicals, and apparel. The more urgent the need for the product, the more viable air cargo transport becomes. 9. How are air cargo rates calculated? Calculate the cost of international air transportation for the following shipment: 200 cartons of fine jewelry weighing a total of 2,500 pounds. The carton dimensions are 18 inches by 12 inches by 12 inches (l x w x h). The freight rate is $10.25 per pound. Air cargo rates are based on the value of service or the cost of service. Value of service rates are demand based and considers the sensitivity of the cargo being shipped to freight rates. Cost of service factors also enter into air carrier pricing of cargo. Given the limited cargo-carrying capacity of a plane, space is at a premium. The utilization of this space is related to the density of the cargo, with low-density cargo requiring more space per weight unit than high-density cargo. Air cargo is evaluated two ways for ratemaking purposes - weight and dimensional weight. Air carriers use the greater of the actual weight or dimensional weight to calculate shipping charges. Carriers calculate international air shipments as (Length x Width x Height) / (Dimensional Factor). The common dimensional factor for international freight is 166 for shipments measured in inches and 5,000 or 6,000 for shipments measure in centimeters. In the example, the weight per case is 2,500/200 = 12.5 pounds the dim-weight is (18 x 12 x 12)/166 = 15.6 pounds Hence, the total cost is: 15.6 x 200 x $10.25 = $31,980 10. What value do third party logistics companies bring to global transportation execution? Importers and exporters leverage the expertise of third party logistics (3PL) companies. These service providers facilitate the movement of goods via ocean and air by developing exceptional capabilities in one or more steps in the global freight flow process. a. International freight forwarders The primary role of an international freight forwarder (IFF) is to help importers and exporters transport their goods. Many IFFs specialize in particular service areas, modes of transport, or markets. IFFs are often seen as the travel agents of international freight transportation. These service providers identify and book the best routes, modes of transport, and specific carriers for customers, based on their specific requirements. b. NVOCCs NVOCCs are common carriers that provide service via containers rather than the entire ship. NVOCCs book container berths on ships on a regular basis, allowing them to gain advantageous rates from the ocean carriers. They are able to resell the space to customers in smaller increments at favorable rates. The NVOCC combines the goods from multiple customers into a single load to fill a container. The container is then given to an ocean carrier for movement to the destination port. Upon arrival, the NVOCC receives the container and delivers the contents to each final destination. c. Customs brokers Customs brokers are private individuals or firms licensed by USCBP to prepare and file the necessary customs entries, arrange for the payment of duties found due, take steps to speed the release of the goods in USCBP custody, and otherwise represent their principals in customs matters. They are experts at the entry process and can help importers avoid customs clearance pitfalls that delay shipments and increase costs. Other key duties include: completion of documents, coordination of inland and ocean transportation, dockside inspection of cargo, and other duties as required by the importer. 11. What roles do airports and seaports play in global transportation? How does cargo flow through these facilities? Ports provide the infrastructure, equipment, and labor needed to load, unload, and transfer freight between carriers. Without efficient port operations, it would be extremely difficult to achieve the tremendous volume of global trade of the last decade. On an export move, a land carrier (trucking company or railroad) delivers the export freight to the port and checks in at the security gate. The freight is then staged at its assigned holding location. When the appropriate linehaul equipment (ship or airplane) arrives, the freight is retrieved and loaded. At the point of import, the freight is unloaded, after which it is cleared through Customs and moved to a storage area or loaded directly onto an outbound truck or railcar. Prior to its release, the freight will be scanned and possibly inspected by Customs for security purposes. The delivery carrier then moves the freight from the port to the importer’s facility. 12. Identify and briefly describe the six steps involve in the USCBP customs clearance process. What can individual companies do to streamline this process? Figure 11-8 in the textbook provides a good overview of the Customs clearance process elements: Entry Filing Entering merchandise is a two part process consisting of: (1) filing the documents necessary to determine whether merchandise may be released from USCBP custody, and (2) filing the documents that contain information for duty assessment and statistical purposes. The entry must be accompanied by evidence that a bond has been posted with USCBP to cover any potential duties, taxes, and charges that may accrue. Arrival As the goods arrive at the seaport or airport, USCBP is notified of arrival and unloading. Examination Following presentation of the entry documents and arrival of the shipment, it may be examined by USCBP or the examination may be waived. Classification All goods imported into the U.S. are subject to duty or duty-free entry in accordance with their classification under the applicable items in the U.S. Harmonized Tariff Schedule (HTS). The HTS comprises a hierarchical structure for describing all goods in trade for duty, quota, and statistical purposes. Taxation When import goods are dutiable (i.e., taxable) ad valorem, specific, or compound rates may be assessed. An ad valorem rate, the type of rate most often applied, is a percentage of the value of the merchandise. Import duties vary from product to product and are dependent on the commodity being imported, its declared value, its country of origin, and other factors like anti-dumping legislation and quota controls. Release After the clearance requirements are completed and USCBP has accepted the rate and amount of duty ascertained, the entry is considered to be liquidated. The goods can be released to the importer for onward domestic delivery of the goods. The Customs clearance process can be streamlined by: (1) working with reputable, known suppliers and customers, (2) working with knowledgeable carriers and customs brokers, (3) filling out paperwork accurately, clearly, and in a timely fashion, (4) use carriers that participate in the Advanced Manifest System to pre-clear products before arrival. Case Questions CASE 11–1 Where There’s Smoke… 1. Based on the conversation, what are the main causes of SSI’s global transportation problems? The primary issue facing SSI is the lack of attention paid to transportation. It is treated as an afterthought by the company. The buying staff purchases product with no attention paid to the transportation cost and service ramifications of their sourcing locations or volume. This puts the transportation coordinator in a very reactive mode. Another problem is the transportation coordinator’s propensity to go with the easy answer - the carriers with which he is familiar and comfortable. He may be missing out on opportunities to use higher quality and less expensive carriers. He is also failing to leverage transportation contracts. A third issue is the “go it alone” attitude of SSI. It appears that they are doing everything related to transportation in-house. There are likely good opportunities to leverage the capabilities of 3PL specialists. A final issue is the heavy reliance on airfreight. More on this issue is provided in Question 2. 2. Given their product lines, is SSI using the right mix of global transportation services? Explain. No, SSI is not using the right modal mix. The 50/50 modal split appears to be a decision made to offset poor procurement planning and inadequate forecasting. There is an over-reliance on airfreight to rectify decision making errors and inventory shortages. Also, the markup on SSI’s merchandise are likely not high enough to warrant the use of airfreight. They are cutting into profitability by ordering late and using the wrong modal mix. 3. How can SSI leverage Mario’s idea about external assistance with transportation? SSI could team with any number of 3PLs to better control their freight flows and leverage their volume. For example: •International freight forwarders could be used to help with carrier selection, routing, documentation, and control of product flows. •Export packers could be used to reduce packaging costs while better protecting product. •NVOCCs could be used to gain access to ocean carrier capacity at lower rates. •Customs brokers could be used to streamline the entry process, ensure that appropriate duties are being paid, and getting product released in a timely fashion. 4. What about the ideas that Bobby provided? Would routing, contracting, or chartering impact ocean service? There is some potential in Bobby’s recommendations. SSI should take transportation issues into account when selecting suppliers. Strategically located suppliers near major ports would make it easier for Bobby to have multiple carrier and routing options. Transportation contracts could be used to leverage SSI’s transportation purchases IF their freight volume was consistent enough to attract the attention of carriers. Sporadic volume or less than containerload (LCL) quantities would make it difficult to negotiate beneficial contracts. In that situation, working with a NVOCC may yield better rates. The one option that is completely unrealistic is the idea of using ocean charter service. Given the small number of SSI stores and the type of products being moved, there is no advantage of trying to use charter service. 5. Is Bobby’s complaint about product packing legitimate? What should be done? Bobby does have a legitimate complaint about packaging. While it is important to protect the freight from damage, excessive use of packing materials can be wasteful. As more space is taken up by packing materials, fewer products are included in each case. SSI will end up “shipping air” rather than product. The company will also run the risk of paying air freight charges based on dim-weight due to the large box sizes rather than actual weight. CASE 11–2 As the Blade Turns 1. What are the major problems and pitfalls that RW faces as it tries to go global with its product line? First and foremost in RW’s list of challenges is the highly unusual nature of the freight. The length of the blades will pose a major transportation problem, as will the weight. Specialized carriers will need to be found. A related issue will be the cost of transportation. The company will have to investigate the financial feasibility of profitably exporting the product to India. Another consideration will be routing the shipments. Kalamazoo, Michigan is a landlocked city more than 600 miles from an Atlantic Ocean port and over 2,200 miles to a Pacific Ocean port. Transit through the Great Lakes and the St. Lawrence Seaway to the Atlantic is possible, but slow. Rail transport to a port of export is possible but will be difficult due to the product characteristics. Avoiding damage will be another issue to resolve. Properly protecting the freight will be paramount, given the value of the goods. Finally, export/import regulations of the two countries will need to be investigated, as well as any applicable duties and taxes. 2. What mode(s) of transportation would you recommend to Helm as most appropriate for moving the turbine blades domestically and internationally? The options for origin-port moves include truck, rail, and water transport. Internationally, it is possible to transport the turbines from Michigan to India using specialized freight aircraft such as the Boeing 747 Freighter or Anotov AN-225. This would reduce the need for lengthy origin to seaport ground transportation, though the cost would be very high. Ocean transport is a more financially viable, but slower option. Origin ports could include New York, Baltimore, or Norfolk. The destination port would be Mumbai or Chennai. The options for port-destination moves include truck and rail. 3. How would you route shipments of turbine blades from Kalamazoo to Bangalore? Why? The domestic route would be from Kalamazoo to the Port of New York / New Jersey. To reduce water service transit time, an Atlantic Ocean - Mediterranean Sea - Suez Canal - Red Sea - Indian Ocean route would be used. Note: there is some risk with this route, given the crossing of the Gulf of Aden. The final delivery route would be from the Port of Chennai to Bangalore. 4. What role will ports play in the flow of turbine blades from the U.S. to India? It will be critical to work with ports that have experience and the capability to handle freight of this nature. They may need to have specialized equipment for loading/unloading the turbines and staging area capacity to hold the turbines while waiting for carrier arrival. Also, seaports must host ocean carriers that serve the trade route with appropriate ships. If air transport is used, airport runways and taxiways must be able to handle the large aircraft that will transport the turbines. SUGGESTED INTERNET PROJECT Give students a product with a North American origin and an inland international destination (e.g., a container of hockey skates moving from Kitchener, Ontario to Moscow, Russia). Ask them to develop two diagrams of the key freight movement steps. The first diagram would focus on intermodal transportation involving ocean transport. The second diagram would outline intermodal transportation using air transport. Students should investigate the flows and include the following elements in their diagrams: •Origin to port moves - distance, possible carriers, routes, transit times •Port to port moves - distance, carriers, routes, transit times •Port to destination moves - distance, possible carriers, routes, transit times •3PLs to potentially involve in the process and their location of activities •Potential problem spots - likely areas for delays, disruptions, losses Some helpful websites include: CIA World Factbook www.cia.gov/library/publications/the-world-factbook/ Inbound Logistics inboundlogistics.com/3pl/top100.shtml LogLink www.loglink.com Mapquest www.mapquest.com Sea Rates www.searates.com UPS wwwapps.ups.com/ctc/request Chapter 12 THIRD PARTY LOGISTICS Chapter Objectives: After reading this chapter, you should be able to do the following: 1. Understand the concept of third party logistics and its role in the movement of goods 2. Identify the different types of third party logistics service providers 3. Describe the four types of transportation activities that are outsourced 4. Discuss the reasons why companies seek integrated third party logistics services 5. Understand the size and scope of the third party logistic market 6. Evaluate the reasons for outsourcing and the results achieved 7. Summarize the process for outsourcing transportation and logistics activities 8. Appreciate the current challenges and competitive issues in the third party logistics industry 9. Compare the coordination roles of various service provider types 10. Recognize the importance of information technology in managing outsourced activities Chapter Overview Given the financial and service impact of transportation on a company’s success, it is critical to develop an effective transportation strategy. For a growing number of organizations, particularly those moving freight internationally, this strategy involves outsourcing some responsibilities to external service provider. These third party logistics service providers (3PLs) are experts in the management and flow of freight, allowing customers to focus their resources on other activities. Some of the larger global 3PLs provide a “one-stop shopping” solution where customers can purchase all their transportation service needs, regardless of mode or geographic requirements. Companies must be careful with outsourcing activities. It is imperative to work with 3PLs that have strong capabilities, capacity, and track records of quality transportation services. How to find these top notch 3PLs is the goal of Chapter 12. The chapter discusses the general structure of the 3PL industry, customer characteristics, and relationship options. Specific issues related to establishing and managing 3PL relationships is addressed, followed by a discussion of current and future 3PL industry issues. Throughout the chapter, students gain an understanding of the key benefits and challenges of outsourcing transportation requirements. INDUSTRY OVERVIEW Given the expansive list of 3PL definitions, the introductory section of the chapter provides students with a broad interpretation of 3PL companies, that being: “an external supplier that performs all or part of a company’s logistics functions.” This encompasses suppliers of services such as inventory management, warehousing, distribution, financial services, and transportation, though Chapter 12 focuses on the transportation aspects of the 3PL industry. Still, it is important to remind students that transportation services provided by a 3PL must be well integrated with the customer’s other logistical activities. Types of 3PL Providers Most 3PLs have a core expertise in one or more logistics function. Thus, the initial segmentation of providers is based on functionality. 3PLs can be categorized as: transportation based, distribution based, forwarder based, financial based, or information based firms. Although some 3PLs may fit in more than one area, this discussion provides students with an idea of the scope of activities that may be outsourced. Transportation Based - these 3PLs trace their origins to freight movement via truck, rail, air, or other modes of transportation. As customer requirements expanded, these transportation companies developed 3PL subsidiaries or major divisions to provide a broader set of capabilities to serve the marketplace. Distribution Based - these 3PLs suppliers originated from the public or contract warehousing business and have expanded into a broader range of logistics services. Based on their traditional orientation, these types of organizations are heavily involved in logistics activities such as inventory management, warehousing, and order fulfillment. Forwarder Based - this group of 3PLs includes freight forwarders, brokers, and agents that primary facilitate the flow of goods on behalf of customers. These providers were discussed extensively in Chapter 10 and Chapter 11. Financial Based This category of 3PL providers helps customers with monetary issues and financial flows in the supply chain. Their traditional roles include freight rating, freight payment, freight bill auditing, and accounting services. Information Based The Internet has provided an excellent platform for the growth of information based 3PLs. These companies have digitized many activities that were previously performed manually or required the use of licensed software. Today, these information based 3PLs provide logistics information systems, online freight brokerage services as well as cargo planning, routing, and scheduling. Another 3PL segmentation method is the company’s ownership of tangible assets - facilities and equipment. When a 3PL owns many or all of the assets necessary to run its customers’ transportation and logistics activities, they are known as asset based providers. When a 3PL contracts with other firms to provide transportation and logistics service rather than owning the required equipment and facilities, it is called a non-asset based provider. Students are much more likely to be familiar with asset based providers like UPS, FedEx, and other transportation based 3PLs. Thus, it is important to help them understand the concept of a non-asset based provider, its roles, and benefits. 3PL Services and Integration Within the transportation function, 3PLs provide four primary types of services: freight movement, freight management, intermediary services, and specialty services. Figure 12-1 highlights different services in each category and explanations are provided for 3PL services that are not discussed in other chapters of the textbook. The coverage includes traditional 3PL services, as well as some of the more unique capabilities and participants: Surface freight forwarding Air freight forwarding Freight brokerage Intermodal marketing companies Shippers associations Dedicated contract carriage Drayage Pool distribution Merge in transit Household goods movement The services section wraps up with a discussion of two key capabilities being developed by innovative 3PLs. First, they are developing integrated service offerings to accommodate customer desires for “one stop shopping” with a single service provider. Second, they are expanding service territories to meet the requirements of increasingly global customers. 3PL USER OVERVIEW The second section of Chapter 12 focuses on the customer aspects of 3PL. The key issues include: who are these customers, why they outsource transportation and logistics activities to 3PLs, and what services they require. As they read the chapter, students learn that outsourcing has become a way of life for shippers who rely heavily on 3PLs to help plan, execute, and control their supply chains. The discussion centers on annual data collected by Armstrong & Associates, Inc. and the Georgia Tech/CapGemini annual study of the 3PL industry. The data reveals that aggressive growth and expansion of the global 3PL industry produced revenues of $487 billion in 2007. In the U.S. alone, 3PL gross revenues grew to $122 billion in 2007 - an $8.4 billion increase over the previous year. This represents approximately 16 percent of total U.S. logistics spending. Key customers include Fortune 500 companies, particularly technology, automotive, and retailing industries. Reasons for Outsourcing While outsourcing is popular among companies with few internal transportation capabilities, 3PL services are also used by companies with world class supply chain capabilities. They use 3PLs when it is appropriate to reduce costs, increase resource capacity, and fill gaps in expertise. Both groups leverage the knowledge, skills, networks, and resources of experienced 3PLs rather than building or extending internal capabilities. Table 12-3 provides a comprehensive list of reasons for outsourcing. Primary Activities Outsourced While the use of 3PLs has grown dramatically, customer engagement patterns have not changed dramatically from year to year. 3PL services are widely "tactical" in nature, meaning 3PLs are used for specific tasks such as transportation or warehousing. These tactical services often focus on transportation. The 2009 Georgia Tech-CapGemini study found that half of the most frequently outsourced activities are related to the movement and management of freight. Far fewer companies engage in outsourcing at a strategic level where a 3PL essentially takes over a customer's entire logistics and supply chain operation. However, customers seek out 3PLs that have the ability to leverage IT and integrate people, processes, and services. Results Achieved The section wraps up with a discussion of customer perspectives regarding their 3PL relationships. Overall, 3PL users are satisfied with their outsourcing results, according to the Georgia Tech-Capgemini study. The study participants, from across industries and around the globe, place a high value on their relationships with 3PL service providers and credit 3PLs with helping them to attain goals related to service, cost, and customer satisfaction. While the successes are many, there remains an opportunity for improvement. Customers continue to have concerns regarding the following issues: unrealized service-level commitments, lack of continuous improvements and achievements in offerings, and cost reductions not realized. ESTABLISHING AND MANAGING 3PL RELATIONSHIPS The development of a 3PL relationship should involve significant planning and preparation. After all, companies are entrusting 3PLs to safely distribute their products and maintain their reputations. Thus, companies should carefully evaluate potential 3PL service providers and select the one whose capabilities, commitment level, and price match the buyer’s requirements. This can be a time consuming process but it will greatly increase the likelihood of a mutually beneficial relationship. The chapter outlines a six step process for selecting and managing 3PL partners. Step 1: Perform Strategic Assessment - The first stage involves the process by which the manufacturer becomes fully aware of its transportation and logistics needs and the overall strategies that will guide its operations. Step 2: Decision to Form Relationship - The second stage focuses assessing internal competencies and weaknesses, in an effort to identify potential partners with strong capabilities that are needed by the customer. Step 3: Evaluate Alternatives - Another key activity that requires significant attention is conducting thorough assessments of the capabilities of each 3PL under consideration. This should involve capability and capacity reviews, performance evaluations, and interviews. Step 4: Select Partners - While this stage is of critical concern to the customer, the selection of a transportation or logistics partner should be made only following very close consideration of the credentials of the top candidate 3PLs. Step 5: Structure Operating Model - The fifth stage focuses on the “rules of engagement” and coordination of the 3PL relationship. This focuses on the activities, processes, and priorities that will be used to build and sustain the relationship. Step 6: Implementation and Continuous Improvement - The ongoing step of the process is to continuously monitor and evaluate performance, seek out improvement opportunities, and sustain a mutually beneficial, long-term relationship. The ultimate goal of this six step process is to develop productive relationships between companies and 3PL service providers that create outstanding customer service and cost efficient operations. Like any relationships, both organizations must invest time and energy into its development and sustainment. Both parties must share information, trust their counterparts, and be open to new ideas and methods. The most successful, long term 3PL relationships occur when the organizations collaborate on a regular basis, adopt a team approach to problem solving, and leverage each other’s capabilities. STRATEGIC CHALLENGES FOR 3PL USERS Although the industry is poised for future growth, 3PLs must prepare for future challenges and growing customer requirements. The wrap up section of Chapter 12 discusses the issues facing 3PL users and their service providers as they move into the future. In an increasingly complex, global operating environment, customers must carefully evaluate their outsourcing options and bear in mind a number of potential strategic issues related to 3PL relationships: service needs, strategic coordination, technology integration, goal cohesion, supply chain security, and more: Service Requirements - Early in their planning processes, 3PL customers must determine if they are going to take a tactical or strategic approach toward outsourcing. This will drive other key decisions throughout the lifecycle of the 3PL relationship. Coordination Role - 3PL customers must also identify the specific roles required of 3PLs and choose a provider accordingly. Those customers using a tactical approach to purchasing 3PL services will be well served by specialist while those using a strategic approach would be best served by lead logistics providers and 4PL companies. Technology Integration - When customers outsource transportation activities, they must take steps to maintain control and visibility of their freight. Hence, they must work with 3PLs possessing strong technology capabilities to foster communication, enhance shipment visibility and event management, and improve day-to-day operations. Goal Cohesion - Customers must work with their 3PLs to develop reasonable expectations and requirements that are achievable as well as provide the opportunity for service provider profitability. Supply Chain Security As a company’s supply chain becomes more global, the potential for security risk multiplies. The ability of 3PLs to navigate the complex and changing pathway of government anti-terrorism regulations is another factor that customers must consider when selecting a 3PL service provider. Future Issues and Challenges - As customers extend their global activities, supply chain complexity will also grow. 3PLs, especially those developing far reaching physical networks, integrated logistics capabilities, and effective IT tools, will be well positioned to serve the transportation and logistics requirements of their customers. Study Questions 1. Define the concepts of outsourcing and third party logistics. What role does transportation play in 3PL? Outsourcing is an arrangement in which one company provides services for another company that could also be or usually have been provided in-house. A 3PL firm may be defined as “an external supplier that performs all or part of a company’s logistics functions.” These functions may include: inventory management, warehousing, distribution, financial services, and transportation. Transportation is one of the most widely outsourced logistics activities. The 2009 Georgia Tech-CapGemini annual study of 3PL customers, found that half of the most frequently outsourced activities are related to the movement and management of freight. Hence, 3PL firms offer a wide array of transportation-related movement, management, intermediary, and special services as Figure 12-1 in the chapter reveals. 2. What are the basic types of 3PL firms? How do they facilitate the planning and execution of freight transportation? •Transportation Based - these 3PLs trace their origins to freight movement via truck, rail, air, or other modes of transportation. As customer requirements expanded, these transportation companies developed 3PL subsidiaries or major divisions to provide a broader set of capabilities to serve the marketplace. •Distribution Based - these 3PLs suppliers originated from the public or contract warehousing business and have expanded into a broader range of logistics services. Based on their traditional orientation, these types of organizations are heavily involved in logistics activities such as inventory management, warehousing, and order fulfillment. •Forwarder Based - this group of 3PLs includes freight forwarders, brokers, and agents that primary facilitate the flow of goods on behalf of customers. •Financial Based - This category of 3PL providers helps customers with monetary issues and financial flows in the supply chain. Their traditional roles include freight rating, freight payment, freight bill auditing, and accounting services. •Information Based - The Internet has provided an excellent platform for the growth of information based 3PLs. These companies have digitized many activities that were previously performed manually or required the use of licensed software. Today, these information based 3PLs provide logistics information systems, online freight brokerage services as well as cargo planning, routing, and scheduling. 3. Why would a company use an asset based 3PL service provider versus a non-asset based provider? Reasons for using asset based service providers: Many customers choose to work with asset based providers because they have readily available capacity, permanent employees, and direct control of the customers’ freight. They prefer to work with a single 3PL who will take total responsibility for the outsourced activity and assume accountability if problems occur. Customers can also maintain greater visibility of outsourced activities and inventory if they are handled by a technology savvy asset based provider who performs all activities internally rather than handing them off to other companies. Reasons for using non-asset based service providers: Customers view non-asset based providers as being more flexible than their asset based counterparts. Non-asset based 3PLs can be unbiased in their decision making as they are not limited to an internal infrastructure of assets. Because they are not restricted to using any particular transportation company or set of facilities to serve customers, they are free to objectively choose the best set of service providers and create innovative solutions for customers. This can lead to tailored services and lower overall costs for the customer. 4. Why is service integration an important issue to the 3PL industry? What companies are developing these capabilities? As customers embrace global sourcing and distribution, their supply chains become more complex and challenging. In turn, they need the assistance of highly capable 3PLs to develop integrated, cross-functional global supply chains. Transportation expertise is not enough to capture the attention of these increasingly sophisticated customers. 3PLs must also develop expertise in supply chain network design, process implementation and coordination, and day-to-day execution. Doing all three requires strong IT tools, multi-modal capabilities, and the ability to manage and streamline the flow of goods through the supply chain. In response to the demand for integrated services, larger 3PLs (Deutsche Post, UPS, and FedEx) have embarked on an aggressive plan to expand and integrate their capabilities. Others, such as Exel, CEVA Logistics, and Geodis Wilson are bolstering their integration capabilities and their international resources through the creation of internal divisions, acquisition of smaller 3PLs, or the development of partner relationships with other 3PLs. 5. Discuss the reasons why companies choose to use the services of 3PLs and why other companies do not use 3PL services. While outsourcing is popular among companies with few internal transportation capabilities, 3PL services are also used by companies with world class supply chain capabilities. They use 3PLs when it is appropriate to reduce costs, increase resource capacity, and fill gaps in expertise. Both groups leverage the knowledge, skills, networks, and resources of experienced 3PLs rather than building or extending internal capabilities. Table 12-3 provides a comprehensive list of reasons why companies outsource and why other companies choose not to outsource. 6. What are some of the more frequently outsourced logistics activities? Less frequently outsourced? While the use of 3PLs has grown dramatically, customer engagement patterns have not changed dramatically from year to year. 3PL services are widely "tactical" in nature, meaning 3PLs are used for specific tasks such as transportation or warehousing. These tactical services often focus on transportation as highlighted by Table 12-4 in the Chapter. The 2009 Georgia Tech-CapGemini study found that half of the most frequently outsourced activities are related to the movement and management of freight. Far fewer companies engage in outsourcing at a strategic level where a 3PL essentially takes over a customer's entire logistics and supply chain operation. 7. To what extent are clients/customers satisfied with 3PL services? What can 3PLs do to improve customer satisfaction? Overall, 3PL users are satisfied with their outsourcing results, according to the Georgia Tech-Capgemini study. The study participants, from across industries and around the globe, place a high value on their relationships with 3PL service providers and credit 3PLs with helping them to attain goals related to service, cost, and customer satisfaction. While the successes are many, there remains an opportunity for improvement. Customers continue to have concerns regarding the following issues: unrealized service-level commitments, lack of continuous improvements and achievements in offerings, and cost reductions not realized. 8. Describe the six steps involved in establishing and managing 3PL relationships. Which step(s) do you feel is (are) most critical? Step 1: Perform Strategic Assessment - The first stage involves the process by which the manufacturer becomes fully aware of its transportation and logistics needs and the overall strategies that will guide its operations. Step 2: Decision to Form Relationship - The second stage focuses assessing internal competencies and weaknesses, in an effort to identify potential partners with strong capabilities that are needed by the customer. Step 3: Evaluate Alternatives - Another key activity that requires significant attention is conducting thorough assessments of the capabilities of each 3PL under consideration. This should involve capability and capacity reviews, performance evaluations, and interviews. Step 4: Select Partners - While this stage is of critical concern to the customer, the selection of a transportation or logistics partner should be made only following very close consideration of the credentials of the top candidate 3PLs. Step 5: Structure Operating Model - The fifth stage focuses on the “rules of engagement” and coordination of the 3PL relationship. This focuses on the activities, processes, and priorities that will be used to build and sustain the relationship. Step 6: Implementation and Continuous Improvement - The ongoing step of the process is to continuously monitor and evaluate performance, seek out improvement opportunities, and sustain a mutually beneficial, long-term relationship. The second part of the question is an opinion response. While every step contributes to the success of a 3PL relationship, selecting the right partners (#4) and managing 3PL performance (#6) are particularly important for achieving outstanding customer service and cost efficient operations. 9. If you were given the task of outsourcing your company’s transportation operations, what types of capabilities would you seek in a 3PL service provider? The specific list of required capabilities would depend upon the company’s goals, objectives, internal transportation capabilities, and capacity. That being said, key capabilities of 3PLs would include: •Expertise and significant experience in the desired transportation service functionality •Strong information technology capabilities •Commitment to customer service and continuous performance improvement •Access to capacity and service coverage of required geographic regions •Financial stability and strong cash flow •Efficient operations and competitive pricing •Compatible management style and philosophy / cultural fit 10. Discuss the challenges that 3PLs and their customers face as they seek to improve performance and reduce costs. The ongoing success of the relationship will be a direct function of both organizations being committed to continuous and breakthrough improvement. This requires that both organizations invest time, money, and energy in the relationship. Each must take an active role in performance measurement and improvement, training and feedback, and communication. Too often, customers want to outsource activities to 3PLs and take a hands-off approach. This type of strategy will not maximize performance Another challenge is achieving a collaborative relationship. The companies must commit to an operating model that supports the service and profitability goals of both organizations. Operations must be intertwined, communication must be timely and constructive, and control must be shared. Service and cost success cannot be achieved unless these steps are taken and risks and rewards are shared. 11. How would you distinguish between a logistics service provider, a value-added service provider, and a lead logistics provider? What role does each play in coordination of transportation and logistics activities? •Logistics service providers - these specialists perform key activities within the transportation function but the coordination role remains in-house with the customer. The primary goal of a logistics service provider is to help the customer meet customer requirements as efficiently as possible. •Value added service providers - these 3PLs take a more active role in providing value added services beyond basic functions. Value added service providers often have integrated capabilities, strong geographic coverage, and information systems. Thanks to these attributes, customers tend to share coordination roles with these 3PLs. •Lead logistics providers - these service providers offer a wide range of services and the capability to manage and integrate operations on behalf of their customers. Lead logistics providers are assigned primary responsibility for coordination and control of transportation and logistics activities. In some cases, they even manage the use and performance of logistics service providers and value added service providers. 12. Why is information technology an important issue to customers when outsourcing transportation and logistics activities? IT is a high priority issue for 3PL customers and they should scrutinize the current IT capabilities and future IT investment plans of potential service providers during the 3PL selection process. Technology is viewed as a critical capability of 3PL service providers to improve communication, enhance shipment visibility and event management, and manage day-to-day transportation operations, according to the Georgia Tech-CapGemini study. More than 92 percent of the study participants view IT capabilities as a necessary element of a 3PL service offering. However, only 35 percent report that they are satisfied with their 3PL service providers’ IT capabilities, continuing a gap between expectations and performance that has lingered for more than seven years. 3PLs will need to improve their abilities to provide shipment visibility and their integration among internal systems to support this customer requirement. Without them, it is difficult for customers to achieve seamless information flows across their transportation and logistics networks. On the 3PL side, the lack of IT integration hampers their ability to coordinate internal activities, offer true integrated service capabilities, or effectively serve as a lead logistics provider. Case Questions CASE 12–1 Wardrobe Concepts Ltd. 1. What role can third party logistics play in the WCL-Home Mart supply chain? Is it a viable option to the WCL private fleet or for-hire transportation? A 3PL provider could handle all the delivery activities between WCL and Home Mart. The most relevant option would be to have the 3PL firm serve as WCL’s dedicated contract carrier. In this role, the 3PL is a viable alternative to the constrained WCL private fleet and the use of for-hire carriers which is not viewed in a positive light by the VP of Marketing. This option will provide the desired private fleet capabilities while preserving the capacity of WCL’s private fleet for delivery of higher end products to distributors. This dedicated contract carriage arrangement would help the 3PL gain valuable insights into the WCL-Home Mart delivery process that could be used to improve operations. The 3PL could also expand operations to support WCL as new customers are added. 2. What type of 3PL service provider is best suited to serve the WCL-Home Mart supply chain? Why? The company should seek a transportation based service provider that is experienced with the movement of furniture, appliances, storage equipment, and other bulky/fragile types of products. This will help cut down on damage and other customer service problems. Specifically, an asset based 3PL with expertise in regional transportation would be most beneficial for WCL. This type of 3PL would have the equipment capacity, driver staff, and knowledge needed to successfully and economically support the Home Mart account. 3. Does Doan need to investigate the use of an integrated 3PL or a lead logistics provider? Why / why not? At this point, Doan needs a 3PL with transportation expertise rather than a full service outsourcing solution. He appears to be knowledgeable and in good control of existing WCL operations, hence there is not a need to seek out the expertise of a lead logistics provider. However, if the Skyline product line grows, then Doan may need warehouse capacity and fulfillment support in addition to the required delivery services. If that situation arises, it may be beneficial to find an integrator who can store product, fill customer orders, and deliver them in a timely, defect-free fashion. 4. Given the situation and the Marketing VP’s concerns, identify and discuss the challenges of using 3PL services for the Home Mart deliveries. The primary problem facing WCL is the nature of the product - they are high cube, low weight, and susceptible to damage. Many carriers avoid this low density, high risk product as it is not what they consider to be “good freight” that generates high profits. Hence, WCL will have to find a 3PL who has the right equipment to handle the freight, as well as experienced drivers and loaders. Another problem is the forecast of deliveries. The first set of deliveries will be truckload quantities of inventory and displays going to each store. After that, demand will shift to smaller replenishment quantities that are better suited to less-than-truckload deliveries. The 3PL will need to have expertise in both truckload deliveries for the initial work and executing multi-stop delivery routes for the subsequent orders. CASE 12–2 Jetstream Aerospace 1. Discuss the pros and cons of using third party logistics for Jetstream’s aftermarket services. Table 12-3 in the textbook effectively highlights the pros and cons of outsourcing Jetstream’s aftermarket service operations. Pros: Jetstream may be able to leverage the expertise of a 3PL for reduced service costs and improved customer service, using a 3PL will allow Jetstream to focus its efforts on manufacturing and new product delivery rather than service parts logistics, and the 3PL may be able to leverage existing facilities to extend the Jetstream service parts network without the company needing to invest in aftermarket service facilities. In short, Jetstream could create a service parts network that is better, faster, and cheaper than what could be achieved in house if they strategically choose a quality service provider. There are potential drawbacks to 3PL use, particularly if Jetstream does a poor job of defining their needs and/or makes a poor choice of 3PL provider. Control could be lost, promised cost savings may not materialize, service levels may not improve, visibility of orders could be reduced, and essential customer relationships could be weakened by the introduction of a 3PL that fails to perform as promised. 2. What potential risks exist with outsourcing the aftermarket services to a 3PL? The primary risk in this scenario is a loss of control over the aftermarket services. If Jetstream outsources the replacement parts supply chain and fails to monitor 3PL performance, they are wholly dependent upon the 3PL to effectively serve the customers. Poor service performance will tarnish Jetstream’s image among customers, rather than the 3PL’s image. Also, by outsourcing these key functions, Jetstream may lose internal expertise and critical knowledge about transportation and logistics. Finally, cost control may be an issue that arises. 3. What transportation and logistics activities should be considered for outsourcing in this situation? Should Jetstream obtain these services on a tactical or strategic basis? Given the problems identified by the executives, Jetstream should seek out a 3PL or service provider or consortium of 3PLs with an extensive and integrated set of capabilities: •Expedited delivery service •Warehousing and fulfillment services •Inventory management •Order management and customer service Given the time sensitivity of the situation and the need to maintain order visibility, it would make the most sense to obtain these services on a strategic basis from a single, highly capable 3PL. If Jetstream insists on managing the aftermarket services internally, they will need to coordinate activities closely with tactical delivery service providers to ensure that customers don’t experience delays or visibility gaps. 4. What type of 3PL service provider is best suited to meet Jetstream’s aftermarket service goals? How should they go about finding a capable 3PL service provider? The most logical choice here is an integrated 3PL that has both transportation and distribution capabilities. The 3PL needs to be able to strategically manage inventory, have system-wide visibility, fulfill orders within a short window, and deliver service parts in a very quick fashion. It would not be beneficial to Jetstream or its customers to distribute these roles among multiple firms. Jetstream should meticulously follow the six step process outlined in the chapter to (1) determine if their needs can be adequately met by a 3PL service integrator, and (2) establish a relationship with a qualified, service-oriented 3PL that has experience in service parts management on a global basis. This process would likely lead Jetstream to companies like FedEx, UPS, Exel, Caterpillar Logistics Services, or some other global 3PL company that understands the aftermarket customer service side of business. SUGGESTED INTERNET PROJECT Assign teams of students a 3PL company and ask the team to create a presentation about the company. Students should be required to use multiple sources of information (more than just the company website) in their research. As part of the presentation, each team should provide a SWOT analysis of the company. This will prevent the presentation from being a “commercial” for the company. Key elements of the presentation could include: Some helpful websites include: Company websites 3PL Study www.3plstudy.com Armstrong and Associates www.3plogistics.com DC Velocity www.dcvelocity.com Freightworld www.freightworld.com Inbound Logistics inboundlogistics.com/3pl/top100.shtml Logistics Today www.logisticstoday.com SupplyChainBrain www.supplychainbrain.com Chapter 14 ISSUES AND CHALLENGES OF GLOBAL SUPPLY CHAINS Chapter Objectives: After reading this chapter, you should be able to do the following: 1. Discuss the growing concern about U.S. transport capacity and the transport infrastructure needed to support global trade 2. Understand what conditions or factors fostered prosperity during the 1980s and 1990s 3. Appreciate the impact and challenges associated with congestion and the transport infrastructure in the overall economy 4. Understand the challenges and issue related to congestion and infrastructure among the major modes of transportation in the U.S. 5. Discuss why sustainability has become a major objective for businesses in general but especially for transportation 6. Appreciate the impact of shipment consolidation and eliminating water from some finished products can have upon sustainability and supply chain costs 7. Discuss the role and objectives of the Smart Way Transport Program sponsored by the U.S. Environmental Protection Agency 8. Develop insights into the special challenges that transport companies will face in the 21st century with respect to energy 9. Appreciate the opportunities that transport carriers will have to improve supply chain performance through proactive collaboration and technology 10. Understand how supply chain visibility can help transport carriers to improve their efficiency and effectiveness Chapter Overview During the 1980s, 1990s and the early part of the 21st century, transportation became relatively less expensive for a given level of service which contributed significantly to enhanced productivity and economic growth. This phenomenon was attributable to two major factors, viz., relatively inexpensive fuel and competition, particularly in the motor carrier sector of the transportation industry. In fact, one could argue that we were “spoiled” by these two conditions which fostered economic prosperity. However, times have changed with increased fuel prices and a reduction in available capacity in the motor carrier sector due to driver hour restrictions and other factors discussed in Chapter 5. The other modes of transportation, especially air carriers, have faced similar challenges. This change has occurred at a crucial time in worldwide global development. The concern is that the rising fuel changes, competitive market forces and other factors could cause the cost of moving goods to increase in the years ahead. There are a number of factors including congestion, the environment, and the transport infrastructure that may affect the long, global, and frequently, vulnerable supply chains with their movements of high value, time sensitive commodities. If these challenges are not mitigated, the cost of moving freight will thwart economic progress in developed as well as underdeveloped economies. Since the transportation industry will have to address these challenges and issues in the future, we will discuss major issues in some detail and examine their impact on the important sectors of the transportation industry. The initial issue will be congestion and the transportation infrastructure, followed by sustainability, fuel prices, and technology. Congestion and Transportations Infrastructure All of us have experienced the frustration associated with congestion usually while we are riding in an automobile. However, we seldom consider the total or real cost of congestion. For many businesses, however, the cost of congestion is real and important. A conservative estimate of the cost of these delays is about $7 billion per year. Increased costs to carriers are eventually reflected in higher transportation rates for shippers. It is predicted that congestion on highways will spread from large urban areas and some intercity routes to large stretches of intercity highways in both urban and rural areas. The top 10 highway interchange bottlenecks cause an average of 1.5 million annual truck hours of delay. The large interregional freight railroads have experienced a significant increase in demand especially for trailer-on-flatcar (TOFC) and container on flat car (COFC) movements. Congestion on the mainline railroad network is forecast to spread significantly by 2035. The American Association of Railroads reports that congestion will increase to almost 16,000 miles on the main lines of the railroads (30 percent of the network) if current capacity is not increased. A potential solution to the rail congestion problem is the construction and return of double tracks to accommodate two way traffic simultaneously which was common on the main lines of most large railroads prior to World War II. On inland waterways, aging infrastructure and locks frequently cause bottlenecks. For example, of the 510,000 commercial vessel passages through federal and state locks, 31 percent experienced delays. The challenge is that inland waterways are also susceptible to weather delays, including problems caused by flooding, draughts, ice and other storm related disruptions. The inland ports have capacity issues, but most of them are not as problematic as the ocean ports. The congestion problem at the ports is a real challenge; especially, since these ports are the gateways for imports and exports. The port congestion problems are manifested in several areas. A growing share of waterborne commerce, especially imports, move in very large container ships. In addition, the congestion problem is exacerbated by the fact that trans-loading of the containers is frequently required. Another related problem is that many port areas are constrained by the scarcity of land nearby and/or the high cost of such land for the development of marine terminals and related facilities. There is also the environmental challenges in port area with the discharge of various fluids (intentionally or unintentionally); the garbage, trash and other debris that may be thrown “overboard”; and other ecological damage. Some port areas are notorious for their insensitivity to the ecology of the marine environment. Major efforts are underway to improve the environmental impact of port area. Sustainability: The Green Supply Chain Going “green” is a slogan or objective that was given “lip service” for many years by individuals and organizations. Pressure began to build in a number of quarters for green supply chains which meant that both shippers and carriers would have to initiate efforts to eliminate pollutants, reduce carbon footprints, etc. The local, state and federal governments also began to exert pressure on carriers and shippers to improve. Interestingly enough, some organizations found that they could actually reduce their “carbon footprint” and lower their costs, along with their efforts to lower their negative impact on the environment. There is no doubt that that higher fuel prices in 2008, helped to spur interest among carriers and shippers to reduce fuel consumption, but it is only one of six reasons that is motivating business to drive their sustainability agenda. It should be noted that in addition to fuel efficiency there are a number of other sustainability areas that are impacted by supply chains. These areas include packaging, facilities, and waste disposal. The important point is that there are many opportunities for transportation and logistics service companies to improve in areas related to sustainability and to reduce their negative impact on the environment. In the long run, the recognition that “going green” has economic advantages impacting profitability will be the most important driving force. The examples of “green” initiatives discussed are cascading through supply chains and encouraging initiatives by other suppliers and transportation companies. The transport sector is being pushed in this direction by customers, the government and by increased operating costs. These sustainability initiatives are being enhanced by government programs such as the “Smart Way Transport Partnership”. This is a federal program initiated by the Environmental Protection Agency (EPA) in 2004 to target selected carriers to reach out to shippers. The goals of the program are a cleaner environment, more efficiency, and less costly transportation options through collaborative efforts. Sustainability and an emphasis upon “Green Supply Chains” have gained momentum among major shippers and the various transportation modes. The recognition of the environmental and the economic benefits for carriers and shippers along with government policy and public pressure has given these efforts much momentum. However, transportation companies still have many opportunities to improve. For example, have any trucks passed you lately on the highway when you were driving at the maximum posted speed (hopefully)? Fuel Cost and Consumption Fuel price volatility along with overall price increases has been an issue with transportation carriers and shippers since the mid-1970s. This trend in price has been exacerbated by the location of the best oil fields in distant countries and the disproportionate share of oil consumption in the United States. The challenge, then for carriers and shippers, will be to deal with the uncertainty and volatility of fuel prices, and the expectation that the price will be increasing over time. The motor carrier industry is highly fuel intensive and therefore, very sensitive to price increases and associated with volatility. The annual cost for fuel escalated over 70 percent over the course of 2004 to 2008. Fuel surcharges helped the industry to cope during this period, but it was still challenging and some companies did not survive. Airlines are the most intensive user of fuel. Fuel costs have grown to be the largest expense for airlines. The airlines have also used fuel surcharges for freight movements, but with limited success and the surcharges became an inhibiter to air cargo growth. The higher fuel charges have also been challenging for passenger movements. The airlines are the most sensitive mode to increased fuel charges. A return to oil prices above a $130 a barrel would deal a very negative blow to the airline industry and their future economic viability. While water carriers are very fuel efficient, they are not insensitive to significant fuel price increases. This is particularly true for the global container shipping lines. The shipping lines have become more aggressive about collecting bunker fuel surcharges, but they have not been as successful as trucking companies. With the advantages of fuel efficiency and constrained capacity, the railroad sector has not experienced the same level of cost pressure as the other modes of transportation. Domestic rail service has actually benefited from the higher fuel costs since more shippers were interested in switching to rail intermodal service for long haul freight. Even with the decline in fuel prices in 2009, the demand for rail intermodal service has remained high. As noted, pipelines operate very efficiently compared to other modes which allowed them to price their services competitively as fuel prices escalated between 2006 and 2008. Also some shippers are “tied” to the pipelines because of their location and have limited alternatives for service. The net result was that their traffic did not vary much in volume. Carriers Responses Fuel surcharges have become the major component of the strategy of carriers to increase revenues for fuel cost recovery measures. A second response, suggested above, has been service capacity and network rationalization. Network rationalization usually means cutting or reducing service on unprofitable routes. A third response to the fuel issues is to improve the operational efficiency of carriers. This can be done through fleet replacement and equipment modernization in terminal areas. A fourth response both to the fuel issue and sustainability is the use of technology to manage and control equipment effectively. Large motor carrier companies in particular are investing in relatively expensive technology which allows them to track and trace equipment on a real time basis. Collaboration and Visibility: Art and Science Some definitions of supply chain management refer to it as an art and a science. Used in this context, the authors indicate that there are many scientific and/or mathematics based software applications that can help managers to improve efficiency, effectiveness and execution in their supply chains. The “art” dimension of the supply chain definition refers to the person-to-person or company-to-company joint tactics, operations, and/or strategies that can improve supply chains. This is frequently referred to as the “softer side” of the supply chain business which requires people, groups, and/or organizations to work together and trust each other in addressing challenges and issues that are obstacles to improvements for success. There are many initiatives underway in the area of tactical or operational collaboration. The most important potential of collaboration is at the strategic level, and it involves the sharing of information to improve results for all members of the supply chain. This is a win-win-win scenario for the buyer, seller, and logistics service provider. It is an example of collaboration at its best, organizations working together and sharing information to improve the efficiency, effectiveness and execution of the supply chain. The visibility applications during the last decade were expanded to include insight into the status of orders, inventory turns and shipments across the supply chain as indicated in the previous example of the VMI program of the consumer products company. In other words, it became more practical tool to capture and analyze supply chain data for decisions and making risk mitigation and process improvement. Also visibility applications could be used to alert analysts of supply chain disruptions such as shipment delays, unusual stockouts, etc. Study Questions 1. There have been an increasing number of editorials in newspapers and magazines about their concern over transport capacity and infrastructure. What is the nature of this issue? Why is it such a problem? How can it be resolved? Basically there has been an exponential increase in the demand for the movement of freight. Some of this growth is the result of economic growth in the U.S. economy. However, there is no question that the globalization of our economy during the last several decades has been a major factor in the demand growth because of the increase in the level of imports as well as exports. Unfortunately, the maintenance and improvement in the transportation infrastructure has not kept pace with the increased demand. Also, the capacity of the transportation carriers has not matched the demand growth during the peak years. The solution is primarily finding sufficient public and private funds to invest in improving and maintaining the total system. Increasing user charges (fuel tax, license fees, tolls, etc.) is not a popular option. The solution will require both public and private funding and some behavioral changes among users of the transportation system. 2. While we have concerns about transportation service currently, there did not appear to be any special challenges or big problems during the 1980s and 1990s. Why were these two decades so different as far as transportation is concerned? The 1980s and the 1990s were special in that transportation service became relatively less expensive. This phenomenon was attributable primarily to two factors, namely, relatively inexpensive fuel and competition among transport carriers because they had excess capacity, particularly in the motor carrier industry. These two conditions helped to foster and sustain a relatively long period of economic growth, but the growth lead to increased demand for transportation service which was challenged by constraints in the infrastructure in the 21st century. 3. We have all experienced highway congestion and “bumper-to-bumper” traffic, but congestion is a bigger issue for supply chains and transport service providers. Why? Congestion is a problem for the general public because it increases economic and social cost, but our increase in economic cost is usually relatively low (extra fuel). However, for businesses the delays can substantially increase their economic or real cost of operation. The text indicates that highway delays cost Nike an additional $4 million per week in extra inventory costs without considering increased labor cost, fuel costs, etc. The text offers other examples and costs to businesses. 4. Sustainability and the environment have captured the attention of ordinary citizens but also shippers and carriers. What is the nature of the concern? How can shippers and carriers mitigate their impact on the environment? The overall concern is the diminishing quality of our environment and its resources. The ecological system is being negatively impacted, for example, by the carbon footprint of many businesses and individual households. There is a direct correlation between economic development of countries and the quality of the environment. The logistics systems and supply chains of companies have a major impact on the environment through their transportation, packaging, warehousing and related decisions. Network optimization can reduce transport miles and reduce warehouse locations which will reduce the carbon footprint. Analyzing and rationalizing packaging can also lead to improved sustainability, collaboration to increase land consolidation and emergency, expedited shipments is another for positive improvement. All-in-all the supply chain can be a major factor for improved sustainability. 5. “Don’t ship air” and “don’t ship water” are the bases of some important supply chain strategies. What do these statements really mean? What are the related strategies? How do these strategies help? “Don’t ship air” essentially means don’t waste space in a transport container or its carrying capacity. The most obvious is reducing empty or partially filled shipment miles. The empty shipments frequently occur with backhauls and achieving balanced flows is always a challenge but can be accomplished with shipper-carrier collaboration and visibility. “Don’t ship water” refers to products that have water included in the final finished product which can be a significant part of the weight of the product. The classic examples are beer and soda which are about 90% water. But, there are many other consumer products that contain water. The underlying premise is that water is available in most market areas and adding the water even eliminating it can result in significant transportation savings. The Walmart example in this text provides an example of the benefits. 6. The U.S. Environmental Protection Agency has implemented the Smart Way Transport Program. Discuss the nature and role of the program. DO you think it will be effective? Why or why not? This program, initiated by the E.P.A. is an effort to target carriers to reach out to shippers on a collaborative basis to work toward a cleaner environment, more efficient and less costly transport options. The program has doubled in size since 2004 and has topped 1,100 members including some of the top companies in the U.S. The E.P.A has pointed out the possibility of significant savings with the adoption of their recommended practices. It is already effective as pointed out in this text and should continue to be effective. 7. Fuel prices have been very volatile during the last five years. What factors have contributed to this volatility? Why is it such a special challenge to supply chains? How can it be fixed? Essentially, the volatility is a manifestation of world supply and demand. Demand is growing at a steady rate, especially with the economic emergence of underdeveloped countries in Asia, the Pacific Rim and South America. The supply of oil is limited and is produced for export in a limited number of countries. The U.S. exacerbates the problem because we consume a disproportionate share of the world supply. There is no easy solution but a collective effort by individuals and businesses to conserve energy will help mitigate the problem. Alternate fuel sources can also help. 8. What is collaboration? How can supply chains use collaboration to their advantage? Collaboration is essentially cooperation between buyers, sellers, and logistics providers. Aimed at eliminating cost and improving services. It is frequently based upon sharing information and examining opportunities to help each other. Collaboration can happen at the tactical, operational and on strategic level. As discussed in the text, Vendor Managed Inventory is a good example of proactive collaboration that has had benefits in many supply chains. 9. What is meant by the term – supply chain visibility? How can it be used to advantage by shippers and carriers? Supply chain visibility is a popular concept today, but there is no universally accepted common definition of the term visibility. Literally interpreted it obviously means the ability to see or visualize important elements and related actions in the supply chain. It is usually used in conjunction with assets whether it be the amount of inventory by sku in a contain warehouse, or the location of a fixed asset like a tractor-trailer which is in transit. Federal express, for example, allows shippers to track or trace their shipments via the internet while they are in transit. For a business, this visibility reduces uncertainty and enables them to make tactical or operational adjustments if necessary. The example in the text of the consumer product company providing a VMI service with EDI exchanges is an example of visibility. Newer technology like GPS systems provides even better visibility. Essentially, it is a tool to allow companies to operate more efficiently and effectively with suppliers, service providers and customers. 10. Are you optimistic or pessimistic about transportation in the 21st century? Why? I am cautiously optimistic about transportation in the 21st century. Several factors contribute to this outlook: Technological Advancements 1. Electric Vehicles (EVs): The rapid development and adoption of electric vehicles are reducing greenhouse gas emissions and reliance on fossil fuels. Major automakers are increasingly committing to all-electric fleets, and battery technology is improving, extending the range and reducing charging times. 2. Autonomous Vehicles: Self-driving technology is progressing, promising safer and more efficient travel. Autonomous vehicles could reduce traffic accidents, optimize traffic flow, and provide mobility solutions for those unable to drive. 3. Hyperloop and High-Speed Rail: Innovations like the Hyperloop and advancements in high-speed rail could revolutionize long-distance travel, making it faster, more efficient, and less environmentally damaging than current air travel. Urban Mobility and Public Transportation 1. Smart Cities: Integration of smart technologies in urban planning is enhancing public transportation systems. Real-time data and connectivity are improving the efficiency and reliability of buses, trains, and other transit options. 2. Micromobility: The rise of micromobility solutions such as electric scooters, bikes, and other small electric vehicles is providing flexible, last-mile transportation options in urban areas, reducing the need for car ownership. 3. Sustainable Practices: Cities are increasingly prioritizing sustainable transportation initiatives, such as bike lanes, pedestrian-friendly infrastructure, and car-free zones, contributing to reduced emissions and improved air quality. Environmental and Policy Considerations 1. Regulatory Support: Governments around the world are enacting policies to support sustainable transportation, including subsidies for EVs, investments in public transit infrastructure, and stringent emissions regulations. 2. Public Awareness: Growing awareness of climate change and environmental issues is driving demand for greener transportation options. Consumers are more willing to adopt sustainable practices and technologies. Challenges and Considerations While these advancements are promising, several challenges remain. Infrastructure development needs to keep pace with technological innovations. There are also concerns about cybersecurity, data privacy, and the ethical implications of autonomous vehicles. Additionally, ensuring equitable access to advanced transportation solutions is crucial to avoid widening the gap between different socioeconomic groups. Overall, while there are hurdles to overcome, the trends in technology, policy, and public awareness provide a solid foundation for an optimistic outlook on the future of transportation in the 21st century. Case Questions Case 14.1 Green and Lean 1. George and Jeff need some help in trying to understand how it would be possible to be green and lean at the same time. They need some help from you to understand how these two objectives could be achieved simultaneously. Give them some pointers on how it can be done. The best advice would be to start “simple” or focus on some basic concepts such as “Don’t ship air” and “Don’t ship water”. Many companies, especially consumer product companies, of the economic conditions of the 1980s and 1990s with low fuel costs and a very competitive transportation system were able to make a profit even though their logistics and supply chain systems were not operating efficiently. There was a focus on customer service which leads to shipments in trailers which were not loaded fully and/or excess empty back hauls. Packaging was utilized which did not effectively use space. More focused and detailed analysis can lead to a reduction of this wasted space and to more efficiency. The Subway in the text is a good illustration of the potential for improved sustainability and lower costs. Also, many consumer products contain water which adds weight and consequently cost to transportation and warehousing is increased. An evaluation and rationalization of products will frequently lead to opportunities to produce products in more concentrated forms. The soap detergent situation discussed in the case is a good example of such opportunities. Network optimization software and transportation management systems are technology tools that can be utilized to reduce transportation miles and cost. Any reduction in miles reduces the carbon footprint (check the Subway example again). The important point is that improving sustainability and reducing cost are not inconsistent and that there are many opportunities in the supply chain area to accomplish these dual objectives. Your student can find many examples in the text or by doing research on the Internet. Case 14.2 Bald Eagle Valley Trucking 1. You have been chosen to work on the BEV project which will require you to answer the following questions: (a) What are the major challenges and issues trucking companies’ face presently? Trucking companies are faced with a number of challenges as discussed in both Chapter 5 and Chapter 14. Some of the major challenges are: (1) Volatile fuel prices which make it difficult to plan for profitable operations. (2) Congestion on the highways which cause delays and possible delivery problems. (3) Driver turnover and possible driver shortage. (4) Regulation at the local, state, and federal levels which may be overwhelming for a small company. (5) There are other issues that your students may report. (b) What insights can you provide to help BEV mitigate some or all of the issues? (1) Fuel prices- the most effective approach is a surcharge agreement which results in automatic adjustments when fuel prices increase. The base price or rate is usually fixed based upon a benchmark price for fuel, when the fuel price reaches certain agreed upon levels, an automatic adjustment is made. Careful route planning to minimize miles also can help. (2) The best approach is to use GPS systems which help identify potential delay problems and seek alternative routes. Individual GPS units in each tractor may be too expensive for a small company. However, using cell phones to communicate directly with drivers can help mitigate the problem. Using information available on state and local government web pages about construction and even temporary problems can also help. (3) There are several approaches to aid in reducing driver turnover. BEV may be faced with having drivers on the road over night as they expand their delivery area for their customer. They should try to minimize overnight trips through route planning. They should endeavor to pay their drivers comparable, fair wages and evaluate incentives to reward efficiency. Continuing communication with drivers to receive early alerts about issues that they have with company practices and policies can also help. (4) Careful attention must be given to government policies and regulations by someone in the organization or someone hired as a part-time consultant. Any significant regulatory changes impacting drivers operations, etc, must be communicated effectively in the organization. (c) What advice can you provide to help them with their request for funding? There are a number of possible alternatives for funding that will require investigation. One that is obvious is to borrow money from a financial institution. This will require preparing a detailed strategic plan to rationalize why they need such funds and how they will be able to repay the loan. Supporting documentation from Coca Cola would help their case. There are government agencies at the state and local level that have funds for economic development. These loans, which usually have lower interest, will require proof that the business will favorably impact the local area or state in terms of employment, sales to local businesses, etc. Another possibility is to lease the equipment which is a popular alternative for many smaller companies and even large companies. This will increase operating expenses but provide flexibility that could be beneficial. The leasing alternatives are discussed in the text. Suggested Internet project Using U.S. government websites, identify pending legislation that addresses current U.S. infrastructure issues across all modes of transportation. Are there any common infrastructure themes across the modes? Repeat the exercise suggested above, but investigate previous legislation passed by the U.S. Congress that addressed U.S. infrastructure issues. Some addresses are: United States Department of Transportation http://www.dot.gov/DOTagencies.htm Federal Highway Administration http://www.fhwa.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/ Surface Transportation Board http://www.stb.dot.gov/ Instructor Manual for Transportation: A Supply Chain Perspective John J. Coyle, Robert A. Novak, Brian Gibson, Edward J. Bardi 9780324789195