CH-11 Transportation—Managing the Flow of the Supply Chain – Supply Chain Management: A Logistics Perspective : Book Guide

CHAPTER 11 TRANSPORTATION—MANAGING THE FLOW OF THE SUPPLY CHAIN LEARNING OBJECTIVES After reading this chapter, you should be able to do the following: • Explain the role transportation plays in the supply chain. • Discuss the service and cost characteristics of the primary transportation modes. • Discuss the key activities involved in transportation planning and execution. • Explain current transportation management strategies used to improve supply chain performance. • Use service and cost metrics to analyze transportation performance. • Describe how information technology supports transportation planning and execution. CHAPTER OVERVIEW Introduction Transportation involves the physical movement of goods between origin and destination points, links geographically separated partners and facilities in a company’s supply chain, and facilitates the creation of time and place utility in the supply chain. In 2014, more than $907 billion was spent on freight transportation in the United States, which is nearly 63 percent of all expenditures for logistics activities, far exceeding the amount of money spent on warehousing, inventory management, order processing, and other fulfillment system expenses. The Role of Transportation in Supply Chain Management A supply chain is a network of organizations that are separated by distance and time with transportation allowing these organizations to extend the reach of their supply chains beyond local supplier capabilities and market demand. With efficient, effective transportation capabilities, organizations can build global supply chains that leverage low-cost sourcing opportunities, which allows them to compete in new markets. Transportation efficiency promotes the competitiveness of a supply chain. In terms of supply management, cost-effective transportation helps companies gain access to higher-quality, lower-priced materials and realize economies of scale in production. Likewise, low-cost transportation improves demand fulfillment opportunities. Transportation plays a key role in supply chain design, strategy development, and total cost management. Availability and efficiency are not enough; transportation service must also be effective. Inexpensive transportation is of little value to a supply chain if the product does not arrive as scheduled and damage-free to the correct location. High-quality, customer-focused transportation has a direct impact on an organization’s success as it delivers the right product at the right time, in the right quantity and quality, at the right cost, and to the right destination. Additionally, transportation can create supply chain flexibility. By working with carriers that offer a range of transit times and service options, organizations can satisfy supply chain demands for expedited and standard delivery speeds. Transportation also influences supply chain design, strategy development, and total cost management. • Transportation service availability, capacity, and costs influence decisions regarding the number and location of supply chain facilities • Transportation capabilities must align with the company’s strategy. • Intentional tradeoffs should be made between transportation and related activities to optimize supply chain efficiency. Role Inhibitors There are numerous obstacles to synchronizing transportation with other supply chain activities. And part of the challenge is a variety of supply chain trends and external issues that must be addressed. The growth of outsourcing, particularly offshore manufacturing creates major transportation challenges. While the vast distances produce higher transportation costs, the extended transit times and greater potential for supply chain disruptions necessitate higher inventory levels. Changing customer requirements also affect the transportation function. Growing demand for smaller, more frequent deliveries will limit opportunities to move product in economic load quantities. Transportation capacity constraints pose another challenge to organizations moving freight through the supply chain. Rising transportation rates present another major concern for organizations. Transportation rate variation adds to the complexity of the transportation function. Capacity, freight volume, and fuel costs each influence the rates charged by carriers. As volume increases and capacity becomes constrained, rate increases become a real possibility. Conversely, when freight volume decreases due to an economic slowdown or demand shifts, excess capacity results and rates tend to decrease. The transportation industry is also impacted by governmental requirements that affect cost structures and service capabilities. Historically, government regulation of transportation has focused on competition and pricing. For decades, these rules limited opportunities and incentives for carriers to develop unique service offerings and tailored pricing. Economic deregulation of most modes by 1980 and ocean shipping in 1998 gave carriers the freedom to operate with little governmental intrusion, sparking much-needed competition based on services, price, and performance. In contrast, regulation is growing in areas where the transportation industry has the potential to impact the safety of citizens, quality of life, and protection of commerce including: • Changes in commercial drivers’ licensing and in the hours of service that drivers can work. • Environmental sustainability is addressed by government regulation. Laws aimed at reducing noise, air and water pollution from the transportation sector have long been the focus of federal and state regulators. • The ongoing threat of terrorism has led to security-focused legislation that directly impacts the transportation industry. Enhanced border security initiatives improve security but require increased cargo inspection, greater paperwork requirements, and longer Customs clearance times across all modes of transportation. Ultimately, this variety of external issues makes it difficult to develop transportation processes that mesh well with supply chain requirements Modes of Transportation When the need to move freight arises, supply chain managers can choose from among five modes of transportation: truck, rail, air, water, and pipeline. Additionally, intermodal transportation combines the use of two or more of the basic modes to move freight from its origin to destination. Collectively, 19.7 billion tons of goods valued at nearly $17.4 trillion move through the U.S transportation system. The trucking industry dominates freight flows in terms of the value and volume of goods moved. The results are less skewed on the basis of ton-miles (an output measurement combining weight and distance, or tonnage multiplied by miles transported). Trucks tend to focus on local and regional markets while the other modes provide long distance moves of larger freight quantities. In terms of freight expense, organizations spent $907 billion for transportation services in 2014. More than 77 percent of the total was spent on trucking services at $702 billion. Rail followed with 8.8 percent; water, 4.4 percent; forwarders, 4.4 percent; air, 3.1 percent; and, pipeline, 1.9 percent.7 Collective consideration of freight value, volume, and spending indicate that rail, water, and pipelines provide economically priced services for lower-value commodities. Truck, multimodal, and air transportation are premium-priced services for moving higher-value goods. Collective consideration of freight value, volume, and spending indicate that rail, water, and pipelines provide economically priced services for lower-value commodities. Truck, multimodal, and air transportation are premium-priced services for moving higher-value goods. Motor Carriers Motor carriage is the most widely used mode of transportation in the domestic supply chain. The sophisticated U.S. highway network permits trucks to reach all points of the country. The trucking industry is highly competitive and made up of 532,024 interstate motor carriers and intrastate hazardous materials motor carriers. There are no significant cost economies of scale that makes it possible for small carriers to compete. First, there are no significant barriers to entry that make it impossible for small carriers to compete. The equipment and licensing costs are within the reach of most organizations. Second, most expenses are related to freight movement, making trucking a high-variable-cost, low-fixed-cost business. Wages and benefits, fuel, maintenance, and tires drive the performance of trucking companies. Third, fixed costs are minimal as most trucking companies do not have extensive terminal and equipment needs. Also, the U.S. government builds and maintains the highways, and motor carriers pay for highway use through fuel taxes, licenses, and other user fees. Much of the freight moved by the trucking industry is regional in nature, moving within a 500-mile radius of the origin. The trucking industry is comprised of for-hire and private fleet operations. Private fleets transport freight that is owned by the organization that is operating the trucks. For-hire trucking companies are broken down into three general types: • Truckload carriers (TL) handle single large shipments per trailer that exceed 15,000 pounds or use the full cubic capacity of a trailer. TL carriers provide direct service, picking up the load at the origin point and delivering it directly to the destination without stopping at freight-handling terminals. • Less-than-truckload (LTL) carriers move multiple shipments ranging from 150 pounds up to 15,000 pounds in each trailer. National LTL carriers use a hub-and-spoke network of local and regional terminal facilities to sort and consolidate shipments moving to a particular market area. Regional LTL carriers focus their efforts on a particular area of the country. • Small package carriers handle shipments up to 150 pounds and move multiple shipments on a single van or truck. They use networks similar to LTL carriers to move freight efficiently throughout the country. Over time, the lines between carrier types have blurred. Customers prefer to work with motor carriers that can provide multiple capabilities. In response, FedEx and UPS transitioned from small package carriers to full service trucking companies with TL and LTL divisions. Additionally, regional LTL carriers offer some direct TL-like services, and TL carriers are providing multi-stop deliveries for their customers. Multiple equipment types and sizes allow motor carriers to transport a wide variety of commodities and shipment sizes. Single trailers up to 53 feet long and twin 28-foot trailers are allowed nationwide. In a limited number of states, specially trained truck drivers are allowed to move longer combination vehicles on designated highways. While motor carriers are the primary force in domestic transportation, trucking is useful for shipping goods to an adjacent country—between the United States and Mexico or Canada, for example. It is very common in Europe, where transport distances are relatively short. Motor carriers also play a major role in intermodal shipments, moving freight to airports and ports and picking up freight for delivery at the destination airports and ports. To minimize paperwork and border crossing delays, international truck shipments are often made in bond—the carrier seals the trailer at its origin and does not open it again until it reaches its destination country. The trucking industry faces key challenges related to labor, costs, and competition. The American Trucking Association estimates that the current shortage of 48,000 drivers could rise to 175,000 by 2024.12 Though trucking companies use fuel surcharges to pass along rising energy costs, they are not always able to recoup rising labor, insurance, and maintenance expenses. Finally, competition continues to be fierce within the trucking industry as well as with other modes of transportation. Customers expect near-perfect performance and will look for different options if service disruptions occur or rates spike. Railroads Railroads transport more than 2.2 billion tons of freight annually despite a lack of direct accessibility to all parts of the supply chain. Rail service is perceived as being a slow, inflexible, and inconsistent mode. The industry is dominated by a very small number of large firms. With merger and acquisitions, there are seven Class I railroads (revenues in excess of $467 million). The class I carriers generated $70.5 billion of freight revenue and handled 28.8 million carloads and 12.8 million intermodal trailers and containers. BNSF Railway, CSX Transportation, Norfolk Southern Railway, and Union Pacific Railroad are the dominant carriers in the industry. However, as none of these rail carriers services the entire country, they work together to provide coast-to-coast rail service. This mode requires a large investment in terminals, equipment, and trackage to begin operation, and the accompanying huge capacity allows railroads to be a decreasing cost industry. As output (ton-miles) increases, the average per-unit production cost decreases. Rail transportation is primarily used for the long-distance movement of low value raw materials and manufactured products but they also handle some high-value goods, primarily automobiles and intermodal containers filled with imported finished goods. The rail industry is comprised of the following two carrier types: • Linehaul freight carriers provide service between major markets and customers within those markets. • Short line and regional carriers provide the local and regional links between individual customers and the national rail network of the Class I railroads. Railroads can move almost any type of freight in very large quantities. Hopper cars, boxcars, intermodal well cars, gondolas, and other specialized equipment are available from railroads, railcar leasing companies, or private owners. Rail equipment can be organized into loads and transported in one of the three following primary ways: • Manifest trains contain a mixture of equipment and freight for multiple customers. • Unit trains move an entire block of railcars carrying a single commodity from the origin to a single destination. • Intermodal trains are special types of unit trains of intermodal containers and trailers. Rail is primarily a domestic mode of transportation, though it can be valuable for cross-border movement of commodities and containers. The constraints on international rail transport include limited border crossing points and differing track gauges between countries. One unique international strategy is the use of land bridge routing that combines ocean and rail modes. The strategy can reduce transit time by a week or more versus all-water service. The rail industry faces a number of challenges moving forward. Capacity is a key issue as volume has surged. With the track infrastructure remaining largely unchanged, the additional freight, crews, and equipment have continued to clog the system. Interest in intermodal rail service is high but service quality is an issue among potential customers and the railroads must address their congestion issues and deliver goods on time. Air Carriers Air cargo transportation is specialized mode in terms of tonnage with U.S. spending at $28 billion in 2014 of which $12 billion is international cargo.17 Global air cargo revenue is expected to reach $63 billion in 2015 and the mode moves 35 percent of the value of world trade by value of goods. International air freight movement is handled by a broader range of organizations with FedEx, Korean Air Lines, Cathay Pacific, and Lufthansa recording the largest ton-kilometers activity in the industry. The air carrier cost structure consists of high variable costs in proportion to fixed costs. Similar to motor and water carriers, air carriers do not invest heavily in facility infrastructure or byways. The government builds terminals and provides traffic control of the airways. Air carriers pay variable lease payments and landing fees for their use. Equipment costs, though quite high, are still a small part of the total cost. Air transportation is used to ship small quantities of high-value, low-weight, semi-finished, and finished goods. The following two primary carrier types dominate this mode: • Combination carriers move freight and passengers, often on the same trip with cargo loaded in the belly of the aircraft. • Air cargo carriers focus exclusively on the movement of letters and envelopes, and freight. Air carriers can also be separated on the basis of service capabilities: o Integrated carriers provide door-to-door service, a consistent schedule of pickup and delivery windows, and standard expedited service through their hub-and-spoke networks. o Nonintegrated carriers provide on-demand, air-only service from airport to airport. They rely on freight forwarders or the customer to provide delivery service to and from the airport. The air cargo industry faces numerous obstacles to profitable growth. First, demand is waning for products, such as notebook computers and boxed software, which previously moved in large volume via air. Second, mode-shifting of freight from air to ocean and new rail connections in Asia is limiting air freight growth. Finally, the strategies of near-shoring and on-shoring reduce the need for long-distance international air cargo service. Despite these challenges, industry advocates believe that international air cargo can reach annual revenues of $100 billion Water Water transportation has played a significant role in the development of many countries and is a major facilitator of international trade. In the United States, $302 billion worth of freight and 6.5 percent of the total ton-miles annually is moved via water transportation.20 The industry generated $40 billion in revenue, $31 billion for the movement of international goods, and $9 billion for domestic coastal, inland, and Great Lakes traffic.21 Globally, water carriers dominate all other modes, garnering approximately half of the international freight revenue and handling nearly all tonnage. The fleet of U.S. flagged fleet moves 2.2% percent of the nation’s freight value via 8,918 self-propelled vessels and 31,081 barges.22 The international ocean fleet includes approximately 50,000 merchant ships including 16,800 bulk carriers, 11,651 tankers, 10,381 general cargo ships, and 5,106 containerships.23 There are more than 20 million TEU (20-foot equivalent unit containers) and 252 million tons deadweight of capacity in active liner trades Water transportation is a high variable cost business. To begin operation, carriers require no investment for the right-of-way. Nature provides the “highway,” and port authorities provide terminals with unloading and loading services, storage areas, and freight transfer facilities. The water carriers pay user fees for these port services only when used. Large oceangoing ships require significant capital investments, but cost is spread over a large volume of freight transported during the lengthy lifespan of most ships. Domestic water carriers compete with railroads for long-distance movement of low-value, high-density, bulk cargoes that mechanical devices can easily load and unload. Primary commodities moved include: petroleum, coal, iron ore, chemicals, forest products, and other commodities. However, international water carriers handle a wider variety of goods. Every conceivable type of cargo is transported via ocean carrier, from low-value commodities to imported automobiles. Many imported consumer goods flow to the United States in ocean shipping containers. Two primary carrier types dominate the for-hire portion of the water industry: • Liner services employ a wide variety of ships in their fixed route, published schedule service. • Charter services lease ships to customers on a voyage or time basis and follow routes of the customer’s choosing. Ocean transportation of goods ranging from crude oil to electronics is facilitated by a wide range of specialized ships. The most widely used options include the following: o Container ships are critical to the globalization of trade as they transport standardized containers, which are commonly rated in TEUs (20-foot equivalent units) or FEUs (40-foot equivalent units o Bulk carriers carry cargoes with low value-to-weight ratios, such as ores, grain, coal, and scrap metal. o Tankers carry the largest amount of cargo by tonnage, usually on a charter basis. o General cargo ships are usually on a charter basis and have large cargo holds and freight-handling equipment to facilitate the loading and unloading of a large variety of freight. o Roll-on, roll-off (RO–RO) vessels are another type of ship proving its value in international trade using built-in ramps to drive or tow vehicles on or off. Water carriers operate in a highly competitive marketplace and face significant financial challenges. First, there is significant overcapacity in the container shipping sector due to the number of mega-vessels that are being put into service. This is occurring at a time when the strategies of near-shoring and on-shoring reduce the need for trans-Pacific service. Second, congestion at major ports and transfer points for containers disrupt freight flows. New technologies and infrastructure is needed to alleviate these chokepoints. Finally, the schedule reliability of liner service continues to lag other modes. Pipeline Pipelines handle a significant proportion of all intercity ton-mileage of freight. It is a unique mode of transportation as the equipment is fixed in place and the product moves through it in high volume. Pipelines effectively protect the product from contamination and also provide a warehousing function. Pipelines provide the most economical form of transportation with the lowest cost per ton of any mode. Pipeline costs are predominantly fixed as they must build their own right-of-way. Variable costs in the industry are very low as little labor is required to operate the pipelines and limited fuel is needed to run pumps. The construction of a pipeline becomes cost effective when product flows continuously, allowing the fixed costs to be spread over a high volume of goods. The vast majority of products moved by pipeline are liquids and gases, the economically feasible products to flow via this mode. The pipeline industry is comprised of for-hire and private carriers that maintain their own infrastructures. For-hire carriers of liquid products can move different products through their system at the same time, separated by a batching plug that maintains the integrity of individual products. Private carriers include petroleum and natural gas companies that use pipelines to move product to and from their refineries, processing plants, and storage facilities The oil system is made up of the following three primary types of pipelines: • Gathering lines are very small pipelines usually from 2 to 8 inches in diameter. • Trunk lines, measuring from 8 to 24 inches in diameter, bring crude oil from extraction points to refineries. • Refined product pipelines carry petroleum products from refineries to large fuel terminals with storage tanks The ongoing issues for the pipeline industry are safety and security. Compared to other modes, pipelines have enviable safety and environmental records with spills amounting to only one gallon per million barrel-miles. Intermodal Transportation Intermodal transportation service refers to the use of two or more carriers of different modes in the origin-to-destination movement of freight. These primary benefits of inter modalism include the following: • Greater accessibility is created by linking the individual modes. Trucks provide the flow between airports and the customer. Railroads can also facilitate the use of domestic river transportation and international ocean transportation. • Overall cost efficiency can be achieved without sacrificing service quality or accessibility. The speed and accessibility of trucks would be used for the initial pickup and final delivery, while the cross-country transportation would be handled by the cost-efficient railroads. • Intermodal transportation facilitates global trade. There is strong evidence that intermodal transportation has grown in importance and volume. The number of containers flowing through North American ports more than doubled in 20 years; from 24.7 million TEUs in 1995 to 56.9 million TEUs in 2014. Domestic flows of intermodal freight have also risen. The U.S. rail system moved 13.5 million containers in 2014. Intermodal growth is largely attributable to the development of standardized containers that are compatible with multiple modes. Specialized containers are also available for handling temperature-sensitive goods, commodities, and other unique cargoes. Better information systems to track freight as it moves through the supply chain and the development of intermodal terminals to facilitate efficient freight transfers between modes as well as new generations of ocean vessels, railcars, and truck trailers are helping growth. Ocean carriers are continually developing larger containerships to handle international intermodal traffic which relatively fast, serving Pacific or Atlantic routes only and can only serve deep-water ports. The rail industry also offers a variety of equipment for moving intermodal shipments which allow the movement of wider variety of containers, everything from 10-foot ocean containers to 53-foot domestic freight container in nearly any combination. Double-stack service is especially efficient. The freight services provided by intermodal transportation can be viewed in terms of product-handling characteristics as follows: • Containerized freight is loaded into/onto storage equipment (a container or pallet) at the origin and delivered to the destination in/on that same piece of equipment with no additional handling. • Transload freight involves goods that are handled and transferred between transportation equipment multiple times. On the Line The Sixth Mode of Transportation Traditional modes of transportation play a critical role in the movement of physical goods. In contrast, when products like movies, books, software, and music are converted to digital formats, the goods become data that no longer require physical transportation. They can be “transported” via the Internet for direct sale to consumers and the volume is growing. Sales of downloaded music were $6.85 billion in 2014 versus sales of CDs and vinyl albums at $6.82 billion. Sales of digital books reached $5.69 billion in 2014 and are projected to reach $8.69 billion in 2018. And the Netflix streaming subscriber base reached 69 million in the third quarter of 2015. Given the volume of books, CDs, DVDs, and packaged software that is shifting away from truck and air cargo to electronic formats and delivery, there are suggestions that the Internet should be considered the sixth mode of transportation. Robert Walton argues that delivery via the Internet fits the definition of a mode of transportation (the ability to move products from one location to another), provides time and place utility, and eliminates the cost of delivery. Additionally, this “mode” does not use fossil fuels, emit noise, or contribute to roadway congestion. Hence, it is a sustainable mode that does not have negative environmental or social impacts. Transportation Planning and Strategy Understanding the modal options is an important aspect of transportation management. However, before the freight moves, other vital issues must also be addressed. Supply chain professionals must make a series of interrelated transportation decisions and design processes that properly align with the organization’s supply chain strategies. Functional Control of Transportation The initial decision for any organization is straightforward but important—determining which department(s) will be responsible for each part of the transportation process. In most organizations, responsibility for transportation decisions falls to one or more of the following departments: logistics, procurement, and marketing. Firms now assign transportation decision-making responsibility to a single department which strives to coordinate inbound and outbound transportation, develop common goals, leverage purchasing power, and procure quality service in support of supply chain excellence. Terms of Sale Terms of sale clarify the delivery and payment terms agreed upon by a seller and buyer. Wise selection of these terms is critical as the decision determines where the buyer’s responsibilities begin and where the seller’s responsibilities end. They cover issues related to mode and carrier selection, transportation rate negotiation, in-transit freight responsibility, and other key decisions. • Free on board (FOB) terms are used for domestic transactions while International Commercial Terms (Incoterms) are used for international transactions. Strategically, the use of FOB origin for product purchases and FOB destination for product sales makes sense as this works well providing greater visibility of inbound freight and opportunities to consolidate outbound freight. Coordination of supply chain freight movement can also be achieved through these terms of sale. At times, both the seller and the buyer want to use the FOB terms to be in control of the freight. And factors such as power, expertise, and risk should impact which organization ultimately manages the transportation process. • Incoterms facilitate efficient freight flows between countries. As described by the International Chamber of Commerce, Incoterms are international rules that are accepted by governments, legal authorities, and practitioners worldwide for the interpretation of the most commonly used terms in international trade. They address matters relating to the rights and obligations of the parties to the contract of sale with respect to the delivery of goods sold. Decision to Outsource Transportation The organization with FOB freight control and procurement responsibility must analyze the transportation “make or buy” decision. Firms must choose between transporting goods using a private fleet (the “make” option) which account for nearly half of all U.S. freight transportation spending. Firms may also use external service providers to move freight (the “buy” option). Some firms have decided that it is best to have external experts move the freight and/or manage the transportation process as they also offer a variable cost, simplified, headache-free alternative to private transportation. By using for-hire carriers, the customers do not have to incur the large capital cost, invest the time needed to build transportation expertise, or take on the potential risks inherent in operating a private fleet. Third-party logistics provide and alternative and they offer wide array of transportation services and the 3PL serves as the firm’s private fleet and devotes a management team, drivers, and equipment to the relationship. Another service is traffic management where the 3PL provides transportation planning and tactical decision making, handles administrative functions like freight bill auditing, and coordinates supply chain activities. Some 3PLs provide international transportation assistance in the areas of documentation carrier and route selection, Customs clearance, and other tasks that impact the timely, cost-effective flow of goods across borders. Three types of international 3PLs that provide valuable services for organizations that do not have internal global transportation expertise or the freight volume to warrant a full-time staff: • International Freight Forwarders (IFF) – helps importers and exporters move their goods. Many consolidate freight in particular service areas, modes of transport, or markets. • Non Vessel-owning Common Carriers (NVOCC) – helps organizations move freight in less than container load quantities. Unlike IFFs, who usually act as the organization’s agent, NVCOCCs are common carriers. They book container berths on ships on a regular basis, allowing them to gain advantageous rates from the ocean carrier. • Customs Brokers – are individuals or firms licensed by the CBP to act as agents for importers. Brokers are experts at the entry process and, for a fee, help importers avoid Customs clearance pitfalls that delay shipments and increase costs. Modal Selection A critical transportation management issue is modal selection; it affects how fast and economically product will flow across portions of the supply chain. Choosing among the six modal options is a function of three factors: modal capabilities, product characteristics, and modal freight pricing. Numerous studies have been conducted over the years to identify the most important performance capabilities in modal selection. These studies commonly identify accessibility, transit time, reliability, and product safety as the key determinants in choosing a mode. Cost is another essential consideration in modal selection. • Accessibility determines whether a particular mode can physically perform the transport service required and considers the mode’s ability to reach origin and destination facilities and provide service over the specified route in question. • Accessibility advantage: Motor carriage, because of its inherent ability to provide service to virtually any location. • Accessibility disadvantage: Air, rail, and water. All face accessibility limitations due to infrastructure issues. Transit time is critical in supply chain management because of its impact on inventory availability, stockout costs, and customer satisfaction. Transit time is the total elapsed time that it takes to move goods from the point of origin to the destination (i.e., door to door). • Transit time advantage: Air transportation is very fast, motor carriage is also relatively fast because it can provide more direct movement from origin to destination • Transit time disadvantage: Rail, water, and pipeline are extremely slow with average transit speeds of 22 miles per hour, 5–9 miles per hour, and 3–4 miles per hour, respectively. Reliability refers to the consistency of the transit time provided by a transportation mode and many companies feel that transit time reliability is more important than speed as it and is measured by the statistical variation in transit time. • Reliability advantage: Motor carriers and air carriers, as they are the most reliable. • Reliability disadvantage: Water carriers and rail carriers have been slow and consistent, but with the capacity and congestion challenges, they have become less consistent. Product Safety is critical as goods must arrive at the destination in the same condition they were in when tendered for shipment. Precautions must be taken to protect freight from loss due to external theft, internal pilferage, and misplacement, as well as damage due to poor freight-handling techniques, poor ride quality, and accidents with packaging being important. • Safety advantage: Air transportation and motor carriage have the best reputations for product security. • Safety disadvantage: Rail and water face significant challenges to maintaining product integrity. The cost of transportation is an important consideration in the modal selection decision, especially when a low-value commodity needs to be moved. A number of factors are taken into consideration when freight rates are developed, including weight of the shipment, distance from origin to destination, nature and value of the product, and the speed required. • Cost advantage: The cost of transportation service varies greatly between and within the modes and prices vary with the tradeoff is slow speed for low cost. • Cost disadvantage: Motor carriage and air transportation are high-cost modes compared to the others. Each transportation situation is unique, and these higher cost modes are appropriate options. Given the varying capabilities and cost of each transportation mode, it is obvious that modal selection is not a quick and easy process. Durability is another key consideration in the modal selection process. Product value is a critical factor in modal selection. Generally, an inverse relationship exists between product value and the impact of transportation on its value. Shipment characteristics—size, route, and required speed—cannot be ignored in modal selection. Infrastructure availability tend to limit modal selection to two or three realistic options and the shipment-related requirements of speed, reliability, and safety must be matched to the modal customer service capabilities Carrier Selection Carrier selection is a specialized purchasing decision that typically will be made after the modal decision has been made with attention to selecting the individual transportation service providers within the mode. The carrier selection is based on a variety of shipment criteria and carrier capabilities: transit time average and reliability, equipment availability and capacity, geographic coverage, product protection, and freight rates. A major difference between modal and carrier selection is the number of options. Modal selection involves six primary options, but the carrier selection may involve fewer or many more alternatives. Another difference is the frequency of the decision as carrier selection requires more active and frequent engagement of the transportation buyer and the type of service provided within a mode impacts carrier selection as well. The type of service provided within a mode affects carrier selection. Direct service providers provide point-to-point flows of goods, generating the advantages of speed and safety because freight is handled less and moves without detour to the destination. Indirect service requires interim stops or transfers between equipment. This reduces transit speed and subjects the freight to additional handling but offers lower cost because carriers can consolidate the freight for more efficient transportation. Carrier selection strategy commonly focuses on concentrating the transportation buy with a limited number of carriers. Using a small group of carriers the organization leverage its purchasing dollars for lower overall rates while building relationships with service providers and is reflected by core carrier concept. Rate Negotiations Some transportation buyers take an adversarial approach and seek to minimize transportation cost. They hold out for the largest possible discount off the published rate regardless of the impact on carrier financial performance. This short-term perspective can lead to service quality degradation or loss of capacity when the carrier finds a more lucrative customer. The buyer will then need to find new service providers. The alternative is to engage in collaborative negotiations with compatible carriers. These negotiations focus on developing contracts with carriers for a tailored set of transportation services at rates that fairly compensate the carriers. When the parties successfully complete the negotiation, a contract for transportation services is developed and signed. The buyer received tailored services, gains a commitment for scarce capacity, and locks into competitive rates. The carrier receives a relatively stable volume of business across a set of geographic lanes which allows it to improve labor and equipment utilization and reduce the cost of operations. Transportation Execution and Control When a shipment needs to be moved across the supply chain, transportation planning efforts culminate and execution processes take center stage. Decisions must be made regarding shipment size, route, and delivery method; freight documents must be prepared; in-transit problems must be resolved; and service quality must be monitored. Shipment Preparation To ensure maximum effectiveness in the shipment-carrier matching process, many organizations maintain a corporate transportation routing guide. The strategy behind routing guides is to promote supply chain excellence through transportation. Transportation managers have the ability to make last-minute, cost-saving decisions such as efforts to consolidate freight, coordinate shipment deliveries and take full advantage of container capacity or by combining multiple orders destined for a single location into a single shipment for distribution. The transportation operation is the last line of defense in protecting product integrity and value. It is imperative to use carriers with an effective track record of damage- and shortage-free delivery service. Freight Documentation Shipments are accompanied by related documents that spell out the details of the shipment. The bill of lading is probably the single most important transportation document and is either negotiable or non-negotiable. A straight bill of lading is nonnegotiable and the carrier must deliver the goods only to the specific receiving organization and destination in return for freight charge payment. An order bill of lading is negotiable and serves as a title to the goods listed on the document. Bills of lading also differ by type of move whether domestic or international as well as a being unique to the mode. The freight bill is the carrier’s invoice for the fees the carrier charges to move a given shipment. The freight bill lists the shipment, origin and destination, consignee, items, total weight, and total charges A freight claims form is a document that the transportation buyer files with the carrier to recoup monetary losses resulting from the carrier’s failure to properly protect the freight. Carriers are not liable for freight claims if the damage is attributable to some uncontrollable factor such as the following: • Natural disaster of some other “act of God” • Military attack or similar “act of public enemy” • Government seizure of freight or “act of public authority” • Failure to adequately package the freight or other negligent “act of the shipper” • Extreme fragility, perishability, or similarly problematic “inherent nature of the goods” A number of other documents may also be required to move freight efficiently through the supply chain. These include critical transaction documents like the commercial invoice that provides a record or evidence of a transaction between an exporter and importer or the certificate of origin that authenticates the country of origin for the goods being shipped. Both are used for commodity control and duty valuation by the country of import. In addition to the transportation documents described earlier, valuable and sometimes necessary paperwork includes a shipper’s letter of instructions, dock receipts, shipment manifests, dangerous goods declaration forms, and insurance certificates. Documentation-based freight delays and disruptions can be minimized with accuracy, timeliness, and attention to detail. Carriers and governmental authorities may halt the flow of goods if documents appear to be inaccurate, incomplete, or fraudulent. Availability of documents prior to the tendering of goods to carriers is also critical. Most carriers will not accept freight without the necessary paperwork. For international freight, the U.S. Customs 24-Hour Advance Vessel Manifest Rule requires carriers to submit cargo information a full day before it is loaded onto a vessel at a foreign port. If the buyer fails to submit documentation by this deadline, then the carrier will not load the freight which results in a missed voyage and potential supply chain disruptions. Maintain In-transit Visibility Management of the transportation process does not end when the freight and related documents are tendered to the carrier. It is important to control the freight and manage key events as product moves across the supply chain. Visibility of in-transit freight is a key facilitator of this control as it prevents freight from temporarily “falling off the radar screen.” The goal of visibility is to provide the location and status of the shipments regardless of the position in the supply chain, enabling transportation buyers to make adjustments as needed to meet customer needs. Accurate and up-to-the-minute shipment data make it possible for organizations to respond to problems as they emerge. Transportation Metrics The key service requirements are generally observable and quantifiable. This allows organizations to monitor activities through transportation metrics or key performance indicators (KPIs), which are objective measures of carrier or private fleet performance critical to the success of the organization. Customer focus on KPIs targeting transportation service quality. This targets doing things right the first time according to customer-defined requirements. Three of the “Seven Rs” align with quantifiable transportation service quality KPIs—“at the right time” targets transit time, “in the right condition” concentrates on freight protection, and “at the right cost” pertains to rates and billing accuracy. Customers must also consider qualitative aspects of service quality such as responsiveness, professionalism, and flexibility. The focus on lean supply chains and just-in-time operations makes consistent, on time delivery a critical requirement, which is the most important KPI used by transportation buyers to evaluate their carriers. Freight protection is another service quality factor. Shipments must arrive safely and completely. Supply chains supporting just-in-time manufacturing operations and retailers with lean inventories are especially vulnerable to delivery shortages or damage, as they keep little to no safety stock on hand to replace the unavailable goods. Since transportation rates and service requirements are tailored to a specific customer’s requirements, it is imperative that carriers accurately bill customers using the correct shipment data, rate structures, and charges for each load. Incorrect data entry or misapplication of contract provisions can lead to overstatement of rates and accessorial service charges, misrouted freight, incorrect payment due dates. The ultimate service quality KPI is the execution of perfect deliveries, the ratio of defect-free deliveries to the total number of deliveries made. Transportation buyers should seek out high-quality carriers that consistently provide flawless service that is on time, damage free, accurate, responsive, and cost effective. Defect-free transportation eliminates the need for rework, reduces administrative work, and tempers the use of premium service, as well as promoting customer satisfaction, inventory reduction, and supply chain stability. While service quality is critically important for customer satisfaction, transportation service efficiency cannot be ignored. Transportation is the single largest logistics expense, and it is imperative that organizations get the greatest value for their spend. Service requirements must be balanced with the expenses related to moving freight. Aggregate efficiency measures focus on the total transportation spending versus goal, budget, or sales. Item-level KPIs focus on the transportation expense per unit of measure (e.g., pound, case, selling unit). Understanding what is spent to move each unit highlights transportation’s impact on the overall cost of goods. This KPI also provides a baseline from which improvement efforts can be made. Asset utilization is a critical aspect of transportation cost control. The higher the utilization of the equipment, the lower the transportation cost per pound, cubic foot or selling unit. Empty equipment miles must be minimized and cube utilization must be maximized to keep costs under control, reduce resource use, and avoid carbon emissions. Efficiency measures can also be used to evaluate and improve carrier and private fleet performance. Labor productivity KPIs ensure that equipment operators, freight handlers, and other personnel are performing at acceptable levels. Rapid loading and unloading time improves carrier employee and equipment turnaround time, keeping both in productive use. Efficiency improvements lead to lower transportation operations costs. Monitor Service Quality Individual transportation KPIs provide valuable nuggets of information but do not give a detailed perspective of a carrier’s service quality. Transportation managers must holistically analyze the outcome of their transportation strategy, planning, and decision-making efforts. This is accomplished through a coordinated, ongoing carrier performance monitoring initiative. One strategy for developing an objective, holistic view of carrier service quality is to develop scorecards. Transportation Technology Software and information technology tools have been developed to support transportation planning, execution, and performance evaluation. The carrier community relies on technology to coordinate the flow of customer freight. Routing and load planning tools promotes optimization of pickup, linehaul, and delivery operations. Dispatching software facilitates the management of drivers, in-transit visibility, and regulatory compliance. Brokerage solutions help to match loads with available capacity and manage the financial aspects of these transactions. Additional tools support the complex to the routine activities, from pricing strategy to documentation preparation. Collectively, this wide array of tools provides carriers with the critical functionality and mobile access needed to manage dynamic transportation networks. Transportation buyers and managers leverage a variety of tools and technologies to support supply chain success. Individual applications provide point solutions for activities like load planning optimization, freight rating, and load tendering. Integrated supply chain tools like global trade management software includes transportation management tools for contract and rate management, carrier selection and booking, documentation preparation, and freight audit. The most comprehensive tools are transportation management systems (TMS) which support the planning and execution of transportation operations. Transportation Management Systems Software tools related to the movement of goods across the supply chain are lumped together in a general category called transportation management systems (TMS), which is defined as information technologies used to plan, optimize, and execute transportation operations Critical TMS planning applications include the following: • Routing and scheduling—proper planning of delivery routes has a major impact on customer satisfaction, supply chain performance, and organizational success. • Load planning—effective preparation of safe, efficient deliveries can be accomplished via TMS load optimization programs to help managers build a database of package dimensions, loading requirements, and equipment capacity. Three key TMS execution tools include the following: • Load tendering determines which carriers are eligible to move the freight and then tenders the freight to the best carrier. • Status tracking maintains visibility of shipments as they move across the supply chain through delivery confirmation. • Appointment scheduling automates the scheduling function. Two useful analytical applications are as follows: • Performance reporting and score carding—managing carrier performance and TMS tools can automate the collection of data, measurement of KPIs, and dissemination of periodic reports. • Freight bill auditing—payments made to carriers must reflect the agreed upon contractual rates and the services rendered. SUMMARY • Transportation is a dynamic activity and a critical supply chain process. It is the largest logistics cost in most supply chains, and it also directly impacts fulfillment speed and service quality. By providing the physical links between key participants across domestic and global supply chains, transportation facilitates the creation of time and place utilities. • Managing the transportation process for maximum supply chain impact requires considerable knowledge of transportation options, planning, decision making, analytical skills, and information sharing capabilities. • Transportation is a key supply chain process and must be included in supply chain strategy development, network design, and total cost management. • Numerous obstacles—global expansion of supply chains, rising costs, limited capacity, and government regulation—must be overcome to synchronize transportation with other supply chain processes. • Fulfillment of supply chain demand can be accomplished through five modal options or the intermodal use of truck, rail, air, water, and pipeline transportation. • Multiple planning activities occur prior to carrier and mode selection: Responsibility for managing the transportation function and freight control decisions must be made with a strategic supply chain focus. • Mode selection is based on the relative strengths of each modal or intermodal option in terms of accessibility, transit time, reliability, safety and security, transportation cost, and the nature of the product being transported. • Carrier selection focuses on the type of service required (direct or indirect), geographic coverage, service levels, and carrier willingness to negotiate reasonable rates. • Most commercial freight moves under contractual rates that are negotiated directly between freight buyers and transportation companies for specific volumes of tailored services at mutually agreed-upon prices. • Shipment routing guides help organizations ensure internal compliance with service contracts and maintain centralized control over freight tendering decisions. • Freight documentation provides the details of each shipment, sharing critical information that promotes uninterrupted flows of goods through the supply chain. • Organizations must continue to manage freight after it has been tendered to carriers by maintaining in-transit visibility of shipments and monitoring carrier performance. • Numerous metrics are available to evaluate transportation service quality in terms of carrier timeliness, freight protection, accuracy, and perfect deliveries. Service efficiency measures focus on spending proficiency, asset utilization, and labor productivity. • Transportation management systems and related tools are widely used information technologies that support the effective planning, execution, and analysis of transportation processes. ANSWERS TO STUDY QUESTIONS 1. Discuss the role of transportation in the supply chain. Provide examples of how transportation can positively and negatively impact supply chain performance. Conceptually, a supply chain is a network of organizations that are separated by distance and time. Transportation provides the critical links between these organizations, permitting goods to flow between their facilities. By bridging these buyer-seller gaps, transportation allows organizations to extend the reach of their supply chains beyond local supplier capabilities and market demand. With efficient, effective transportation capabilities, organizations can build global supply chains that leverage low-cost sourcing opportunities and allow them to compete in new markets. Transportation service availability is critical to demand fulfillment in the supply chain. Demand for transportation service can exceed capacity in a strong economy. Transportation efficiency promotes the competitiveness of a supply chain. In terms of supply management, cost-effective transportation helps companies gain access to higher-quality, lower-priced materials and realize economies of scale in production. Likewise, low-cost transportation improves demand fulfillment opportunities. By keeping transportation expenses reasonable, the total landed cost of a product (its production costs plus transportation costs and related supply chain fulfillment costs) can be competitive in multiple markets. Not only must transportation costs be effective, but service capabilities must also be in line with customer requirements. Inexpensive transportation is of little value to a supply chain if the product does not arrive as scheduled and damage free to the correct location. High-quality, customer-focused transportation has a direct impact on an organization’s ability to provide the “Seven R’s of Logistics”— getting the right product, to the right customer, in the right quantity, in the right condition, at the right place, at the right time, and at the right cost. Additionally, transportation can create supply chain flexibility. By working with carriers that offer a range of transit times and service options, organizations can satisfy supply chain demands for expedited, next-day service as well as more economical, standard delivery requests. In addition to the linking and customer service roles, transportation plays a key role in supply chain design, strategy development, and total cost management. • Transportation service availability, capacity, and costs influence decisions regarding the number and location of supply chain facilities. • Transportation capabilities must align with the company’s strategy. • Intentional tradeoffs should be made between transportation and related activities (e.g., procurement, production, and inventory management) to optimize supply chain efficiency. 2. Describe the major challenges faced by transportation managers in the current environment. While transportation can provide valuable support to an organization’s supply chain, it is a mistake to assume that these roles can be easily accomplished. There are numerous issues—supply chain complexity, competing goals among supply chain partners, changing customer requirements, and limited information availability—that inhibit the synchronization of transportation with other supply chain activities. Further compounding the challenge is a variety of supply chain trends and external issues that must be addressed by the organization. Offshore manufacturing creates major transportation challenges. The reliance on global supply chains that extend from China, India, and other countries to your hometown leads to greater expenses, longer transit times, and higher risk of supply chain disruptions. One response is to hold higher levels of inventory. Another response is to shift manufacturing operations closer to markets. “On-shoring” and “near-shoring” strategies minimize the risk and expense of transporting goods vast distances. Changing customer requirements also affect the transportation function. Growing demand for smaller, more frequent deliveries will limit opportunities to move product in economic container load quantities. Compression of order cycle times results in higher delivery costs and extended fulfillment operation hours. Also, the desire for real-time shipment visibility requires technological strength. To meet these customer expectations, organizations must align their operations with high-quality carriers that support capacity, speed, and consistency requirements at a reasonable cost. Transportation capacity constraints pose another challenge to organizations needing to move freight through the supply chain. As the Supply Chain Profile indicated, major bottlenecks and delays occur when transportation demand outstrips carrier and facility capacity. During peak delivery season, port facilities must grapple with a surge of containers and highways are clogged with truck traffic. Carriers are also struggling to keep pace with freight growth, whether it be hiring and retaining enough truck drivers or putting enough locomotives into service. The outcomes of a capacity crunch include higher freight rates, shipment delays, and difficulty finding new carriers. Transportation rate variation adds to the complexity of the transportation function. Capacity, freight volume, and fuel costs each influence the rates charged by carriers. As volume increases and capacity becomes constrained, rate increases become a real possibility. Conversely, when freight volume decreases due to an economic slowdown or demand shifts, excess capacity results and rates tend to decrease. Realize that modal rates may not move in tandem. For example, air cargo rates may decline at the same time that truckload rates are on the rise. Transportation managers must monitor the changes and may need to shift freight between modes if the rates are dramatically different. The transportation industry is also impacted by governmental requirements that affect cost structures and service capabilities. Historically, government regulation of transportation has focused on competition and pricing. For decades, these rules limited opportunities and incentives for carriers to develop unique service offerings and tailored pricing. Economic deregulation of most modes by 1980 and ocean shipping in 1998 gave carriers the freedom to operate with little governmental intrusion, sparking much-needed competition based on services, price, and performance. Additional coverage of economic and safety regulation can be found in Appendix 11A. In contrast, regulation is growing in areas where the transportation industry has the potential to impact the safety of citizens, quality of life, and protection of commerce. Protection of the traveling public is a primary driver of transportation safety regulation. Federal and state laws limit the size of transportation equipment, combined freight and equipment weight, and travel speed. Regulations also exist to ensure that commercial carriers operate safely. For example, the Compliance, Safety, Accountability (CSA) initiative seeks to reduce crashes, injuries and fatalities related to commercial motor carrier vehicles. Using a new enforcement and operational model, the Federal Motor Carrier Safety Administration (FMCSA) measures carrier safety performance, evaluates high-risk behaviors, and intervenes with corrective actions and penalties as needed.3 Likewise, reductions in the commercial vehicle driver hours of service (HOS) rules seek to minimize the number of fatigued truck drivers on the roads. Drivers can no longer be on duty more than 14 consecutive hours followed by 10 hours off duty.4 Environmental sustainability is also addressed by governmental regulation. Laws aimed at reducing noise, air, and water pollution from the transportation sector have long been the focus of federal and state regulators. Additionally, governmental agencies have initiated campaigns to promote environmental stewardship among freight and passenger transportation companies. The National Clean Diesel Campaign and SmartWay are two voluntary programs that help businesses create more sustainable supply chains by moving freight in the cleanest most-fuel efficient ways possible.5 The ongoing threat of terrorism has led to security-focused legislation that directly impacts the transportation industry. Enhanced border security initiatives improve security but require increased cargo inspection, greater paperwork requirements, and longer Customs clearance times across all modes of transportation. Additionally, voluntary government-industry transportation security initiatives such as Customs-Trade Partnership Against Terrorism (C-TPAT) and Free and Secure Trade (FAST) seek to enhance transportation security and foster international trade. When making legislative moves that benefit society, lawmakers and government agencies must also work to mitigate the negative impact on commerce. Compliance costs must not be burdensome and the flow of legitimate trade must not be restricted. Ultimately, the inhibitors discussed above make it difficult to develop transportation processes that mesh well with supply chain requirements. Individual organizations must make a concerted effort to overcome these constraints to move freight in the most cost-efficient, customer-supportive manner possible. They must strategically leverage the mode and carrier options available. 3. What are the primary capabilities, advantages, and disadvantages of each of the basic modes? Motor carriage is the most widely used mode of transportation in the domestic supply chain. The sophisticated U.S. highway network permits trucks to reach all points of the country. The trucking industry is highly competitive and made up of 532,024 private, for hire, and other U.S. interstate motor carriers. There are no significant cost economies of scale that makes it possible for small carriers to compete. Most expenses are incurred as the result of moving freight; thus, trucking is a high-variable-cost, low-fixed-cost business. The highway network is maintained by the government so variable operating costs have a greater impact on the economics of motor carriers Motor carriers face daunting challenges in the future—rising costs, labor issues, and competition and while trucking companies have been able to pass along rising fuel and insurance costs, excess capacity may limit this ability. The shortage of truck drivers that has contributed to capacity shortages many only get worse. The railroad transport industry is dominated by a very small number of large firms. With merger and acquisitions, there are seven Class I railroads (Revenues in excess of $467 million) generating more than $70.5 billion, handling 28.8 billion car loads, including 12.8 million intermodal trailers and containers. This mode requires a large investment in terminals, equipment, and trackage to begin operation; and the accompanying huge capacity allows railroads to be a decreasing cost industry. As output (ton-miles) increases, the average per-unit production cost decreases. Rail transportation is primarily used for the long-distance movement of low value raw materials and manufactured products but they also handle some high-value goods, primarily automobiles and intermodal containers filled with imported finished goods. The rail industry is comprised of the following two carrier types: Linehaul freight carriers providing service between major markets, and short line and regional carriers providing the local and regional links between individual customers and the national rail network of the Class I railroads. Railroads can move almost any type of freight in very large quantities. Hopper cars, boxcars, intermodal well cars, gondolas, and other specialized equipment are available from railroads, railcar leasing companies, or private owners. Loads can be organized and transported in manifest trains containing a mixture of equipment and freight for multiple customers, unit trains moving an entire block of railcars carrying a single commodity, or intermodal trains. The rail industry faces a number of challenges moving forward. Capacity is a key issue as volume has surged. With the track infrastructure remaining largely unchanged, the additional freight, crews, and equipment have continued to clog the system. Interest in intermodal rail service is high but service quality is an issue among potential customers and the railroads must address their congestion issues and deliver goods on time. Historically, air cargo transportation was viewed as an expensive, emergency mode. The growth of e-commerce, global supply chains, and lean inventory initiatives changed this perspective and spurred demand for air transportation. The speed of airplanes combined with frequent scheduled flights can reduce global transit times from as many as 30 days by water carrier to one or two days by air carrier. Faster delivery leads to reduced inventory carrying costs, stockout risks, and packaging requirements that can be traded off against high air cargo freight costs. The result is a lower total logistics cost, as illustrated in Chapter 2. Air cargo transportation is specialized mode in terms of tonnage with U.S. spending at $28 billion in 2014 of which $12 billion is international cargo.17 Global air cargo revenue is expected to reach $63 billion in 2015 and the mode moves 35 percent of the value of world trade by value of goods. The air carrier cost structure consists of high variable costs in proportion to fixed costs. Similar to motor and water carriers, air carriers do not invest heavily in facility infrastructure or byways. The government builds terminals and provides traffic control of the airways. Air carriers pay variable lease payments and landing fees for their use. Equipment costs, though quite high, are still a small part of the total cost. Air transportation is used to ship small quantities of high-value, low-weight goods. Primary commodities handled by this mode include electronics, pharmaceuticals, perishable seafood and flowers, and designer apparel. Companies are willing to pay a high premium to transport these goods because they are time sensitive and need superior protection while in transit. A wide variety of aircraft is used to move air freight domestically and around the world. Propeller planes move letters and small packages from smaller markets to consolidation points and sort operations. Jets ranging in size up to the largest Boeing 747–400 freighter (capacity of nearly 27,500 cubic feet and 124 tons of freight) are used for long-range domestic and international service. Unique aircraft like the Anatov 225 can transport massive products as large as 45,900 cubic feet and 220 tons. Whatever the shipment requirement may be, an aircraft with an appropriate combination of payload, range, and speed is likely available. The air cargo industry faces numerous obstacles to profitable growth. First, demand is waning for products, such as notebook computers and boxed software, which previously moved in large volume via air. Second, mode-shifting of freight from air to ocean and new rail connections in Asia is limiting air freight growth. Finally, the strategies of near-shoring and on-shoring reduce the need for long-distance international air cargo service. Despite these challenges, industry advocates believe that international air cargo can reach annual revenues of $100 billion. Water transportation is a major facilitator of international trade. Water carriers offer tremendous capacity, efficient fuel consumption, and low cost. More than a billion tons of freight is handled annually by the domestic fleet. Ocean transportation is similar to that of airlines as these carriers require no investment for the right-of-way and government entities known as port authorities provide unloading and loading services, storage areas, and freight transfer facilities. The water carriers pay user fees for these port services only when used. Large ocean-going ships require significant capital investments, but cost is spread over a large volume of freight transported during the lengthy life span of most ships. The domestic carriers compete vigorously with railroads for long-distance movement of low-value, high-density, bulk cargoes that mechanical devices can easily load and unload. In contrast, water carriers handle a wider variety of goods. Every conceivable type of cargo is transported via international water carrier, from low-value commodities to imported automobiles and other imported consumer goods. Ocean transportation of goods ranging from crude oil to electronics is facilitated by a wide range of specialized ships such as: container ships, bulk carriers, tankers, general cargo ships, and roll-on/roll-off vessels. The major challenges faced by carriers in international water transportation relate to capacity, trade imbalances, and rising costs. Carriers have ordered new equipment to cope with capacity, but construction time for these ships is lengthy. The imbalance of international trade between export-dominant Asian countries and import-dominant North America creates equipment availability problems at the origin and destination port congestion issues. The industry is experiencing double digit cost increases due to security compliance and rising fuel expenses. These costs must be passed on to customers if ocean carriers are to maintain their slim profit margins. Pipelines handle a significant proportion of all intercity ton-mileage of freight. It is a unique mode of transportation as the equipment is fixed in place and the product moves through it in high volume. Pipelines effectively protect the product from contamination and also provide a warehousing function. Pipelines provide the most economical form of transportation with the lowest cost per ton of any mode. Pipeline costs are predominantly fixed as they must build their own right-of-way. Variable costs in the industry are very low as little labor is required to operate the pipelines and limited fuel is needed to run pumps. The construction of a pipeline becomes cost effective when product flows continuously, allowing the fixed costs to be spread over a high volume of goods. The vast majority of products moved by pipeline are liquids and gases, the economically feasible products to flow via this mode. The pipeline industry is comprised of for-hire and private carriers that maintain their own infrastructures. For-hire carriers of liquid products can move different products through their system at the same time, separated by a batching plug that maintains the integrity of individual products. Private carriers include petroleum and natural gas companies that use pipelines to move product to and from their refineries, processing plants, and storage facilities. The oil system is made up of the following three primary types of pipelines: gathering lines, trunk lines, and refined product pipelines. Natural gas pipelines use similar networks of gathering lines, transmission lines, and main distribution lines to move product closer to the market. The ongoing issues for the pipeline industry are safety and security. Compared to other modes, pipelines have enviable safety and environmental records with spills amounting to only one gallon per million barrel-miles. 4. Use the Business and Company Resource Center (http://www.swlearning.com/ bcrc/bcrc.html) to develop a basic overview report (primary service offerings, annual sales, current stock price, and recent news) for one domestic or international transportation company from each SIC code: a. SIC 4011—Railroads, Linehaul Operating b. SIC 4213—Trucking, Except Local c. SIC 4513—Air Courier Services d. SIC 4412—Deep Sea Foreign Transportation of Freight Evaluate each student on the merits of their work 5. Discuss the primary considerations and issues that must be factored into modal and carrier selection. A critical transportation management issue is modal selection; it affects how fast and economically product will flow across portions of the supply chain. Choosing among the six modal options is a function of three factors: modal capabilities, product characteristics, and modal freight pricing All modes provide the same basic service of moving freight from point to point in the supply chain. However, Table 11.1 indicated that the modes serve different customer requirements and goods in terms of value, tonnage, and ton-miles. This is because each mode has unique attributes and capabilities that affect its ability to fulfill customer requirements. Numerous studies have been conducted over the years to identify the most important performance capabilities in modal selection. These studies commonly identify accessibility, transit time, reliability, and product safety as the key determinants in choosing a mode. Cost is another essential consideration in modal selection. • Accessibility determines whether a particular mode is able to reach origin and destination points, as well as provide service over the specified route in question. The geographic limitations of a mode’s infrastructure or network and the operating scope that governmental regulatory agencies authorize also affect accessibility. Accessibility problems often eliminate a mode from consideration during the selection process. o Accessibility advantage: Motor carriage, because of its inherent ability to provide service to virtually any location. Given the road networks in most countries, motor carriage is more accessible to sellers and buyers than any other mode for domestic transportation. o Accessibility disadvantage: Air, rail, and water carriers face accessibility limitations due to infrastructure issues. Poor customer adjacency to airports, rail lines, and waterways limit use of these modes unless intermodal service is used. In these cases, air, water, and rail carriers provide long distance linehaul services while trucks provide origin pickup and destination delivery services. • Transit time is critical in supply chain management because of its impact on inventory availability, stockout costs, and customer satisfaction. Transit time is the total elapsed time that it takes to move goods from origin to destination. This includes the time required for pickup activities, terminal handling, linehaul movement, and customer delivery. Transit time is impacted by the speed of the mode and the ability of the mode to handle pickup and delivery responsibilities. o Transit time advantage: Air transportation is very fast for the linehaul move but loses some velocity as pickup and delivery activities must be handled by truck. Motor carriage is also relatively fast because it can provide more direct movement from origin to destination far more often than any other mode. o Transit time disadvantage: Rail, water, and pipeline are extremely slow with average transit speeds of 22 miles per hour, 5 to 9 miles per hour, and 3 to 4 miles per hour, respectively. • Reliability refers to the consistency of the transit time provided by a transportation mode. It is easier to forecast inventory needs, schedule production, and determine safety stock levels if it is known with some certainty when goods will arrive. Reliability is measured by the statistical variation in transit time. Modal reliability is affected by a variety of factors including equipment and labor availability, weather, traffic congestion, number of required stops, and other factors. Internationally, reliability is impacted by distance, port congestion, security requirements, and border crossings delays, especially when the two countries do not have a proactive trade agreement. o Reliability advantage: Motor carriers and air carriers, as they are the most reliable (variability relevant to average transit time). Numerous carriers in both modes achieve on-time delivery performance in the 98 percent or greater level. o Reliability disadvantage: Water carriers and rail carriers. Historically, they have been slow and consistent, but with the capacity and congestion challenges, they have become less consistent. As a result, some customers have reduced their use of these modes when possible. •Product Safety is critical to the achievement of customer service, cost control, and supply chain effectiveness. From a safety standpoint, goods must arrive at the destination in the same condition they were in when tendered for shipment at the origin. Proper precautions must be taken to protect freight from loss due to external theft, internal pilferage, and misplacement, as well as damage due to poor freight-handling techniques, poor ride quality, and accidents. Safety is often pursued through substantial protective packing. o Safety advantage: Air transportation and motor carriage have the best reputations for product safety. Their equipment provides excellent ride quality and protection from the elements. Faster transit times also reduce the opportunity for theft and other mishaps. o Safety disadvantage: Rail and water lag in the product protection area. Goods moving via rail encounter a great deal of vibration created by steel wheels on steel track, swaying, and jarring from freight cars being coupled at speeds of up to 10 miles per hour. Water transportation often exposes goods to the elements (corrosive salt water, heat, etc.), excessive movement (sway, pitch, roll, etc.), and rough handling during the loading and unloading processes. •The cost of transportation affects modal selection, especially when a low-value commodity needs to be moved. Transportation costs include the rate for moving freight from origin to destination plus any accessorial and terminal fees for additional services provided. A number of factors are taken into consideration when freight rates are developed, including weight of the shipment, distance from origin to destination, nature and value of the product, and the speed required. A detailed discussion of freight ratemaking is provided in Appendix 10B. o Cost advantage: The cost of transportation service varies greatly between and within the modes. In general, pipeline, water, and rail service are low-cost transportation methods. They move large quantities of product over extremely long distances at very reasonable rates, creating a very low cost per ton-mile for their customers. The tradeoff, of course, is slow speed. o Cost disadvantage: Motor carriage and air transportation are high-cost modes. On average, motor carriage is about 10 times more expensive than rail, and air service is more than twice the cost of motor carriage. Despite the premium paid for these modes, the faster speed can result in lower inventory investment and holding costs leading to a net lower landed cost. 6. Should the Internet be considered the sixth mode of transportation? Why or why not? Yes, the Internet should be considered the sixth mode of transportation. Traditional modes of transportation play a critical role in the movement of physical goods. In contrast, when products like movies, books, software, and music are converted to digital formats, the goods become data that no longer require physical transportation. They can be “transported” via the Internet for direct sale to consumers and the volume is growing. Sales of downloaded music were $6.85 billion in 2014 versus sales of CDs and vinyl albums at $6.82 billion. Sales of digital books reached $5.69 billion in 2014 and are projected to reach $8.69 billion in 2018. And the Netflix streaming subscriber base reached 69 million in the third quarter of 2015. Given the volume of books, CDs, DVDs, and packaged software that is shifting away from truck and air cargo to electronic formats and delivery, there are suggestions that the Internet should be considered the sixth mode of transportation. Robert Walton argues that delivery via the Internet fits the definition of a mode of transportation (the ability to move products from one location to another), provides time and place utility, and eliminates the cost of delivery. Additionally, this “mode” does not use fossil fuels, emit noise, or contribute to roadway congestion. Hence, it is a sustainable mode that does not have negative environmental or social impacts. In terms of modal capabilities, the Internet offers key strengths. As long as a consumer has a high speed Internet connection, global accessibility to digital products is unlimited. Near instantaneous product availability at low to no cost are also desirable features of the Internet. The primary drawbacks of this mode include a very narrow array of products that can be delivered via the Internet and bandwidth issues that may limit product transferability to due file size. These challenges notwithstanding, the Internet’s operating characteristics compare favorably to the traditional modes of transportation. Walton and others indicate that the Internet is the fastest mode of delivery, provides the greatest service dependability, and offers the best frequency of service as product can move instantaneously, 24 hours a day, 7 days a week. The only downside is its limited capability in the type of “freight” that can be moved. Based on these capabilities and cost advantages, both product sellers and consumers are wise to leverage this sixth mode of transportation for digital goods commerce. 7. Identify and discuss appropriate modes of transportation for the following items: a. Apple iPhones – Air and Truck are two appropriate modes of transportation for Apple iPhones. iPhones are high value, finished good items. Going through water and rail would be too risky with rail having a high damage rate and water more for low value bulk commodities. b. Under Armour running shoes – Truck and water would be the two top modes of transportation. Transporting the product over water can be done over air or water. The best option would be water, because air is too costly. These shoes are not time sensitive and it is a high volume item. Transporting the product over land, the four modes to choose from are air, truck, rail and pipeline. Air was already ruled out. A Pipeline is ruled out because the product needs to be in a liquid format. The last two options are rail and truck. Truck is the better choice because rail has a high damage rate, inconsistent service and isn’t always accessible. Under Armour running shoes is a high end brand which would require customer service and accessibility, which is more in line with what the trucking mode can offer. c. Organic fruits and vegetables – Truck and ocean are the best options. This is a perishable finished good that could be easily damaged. Thus, rail would not be an option. A Pipeline is ruled out because the product needs to be in a liquid format. Finally, air is ruled out because the volume required to transport fruits and vegetables would not be conducive for an airplane. d. Pressure treated lumber – The best mode of transportation if going over ground is rail. This item is bulky and low cost. However, once at a rail station it will then have to be trucked to the final destination. If the pressure treated lumber has to go over water, the best mode of transportation would be ocean. Again because it is a high volume, low cost item. 8. Use the Business and Company Resource Center (http://www.swlearning.com/ bcrc/bcrc.html) and company Web sites to compare the service offerings for the following carriers: a. J. B. Hunt (http://www.jbhunt.com) and New Penn (http://www.newpenn.com) b. Delta (http://www.delta.com) and Polar Air Cargo Worldwide,Inc. (http://www.polaraircargo.com) c. Maersk Line (http://www.maerskline.com) and Wallenius Wilhelmsen Logistics (http://www.2wglobal.com) d. Canadian National Railway Company (http://www.cn.ca) and Alaska Railroad (http://www.akrr.com) Evaluate each student on the merits of their work 9. Describe the purpose and value of freight documentation. Discuss the function of the following documents: bill of lading, freight bill, and freight claim. Shipments are accompanied by related documents that spell out the details of the shipment. The bill of lading is probably the single most important transportation document and is either negotiable or non-negotiable. A straight bill of lading is nonnegotiable and the carrier must deliver the goods only to the specific receiving organization and destination in return for freight charge payment. An order bill of lading is negotiable and serves as a title to the goods listed on the document. Bills of lading also differ by type of move whether domestic or international as well as a being unique to the mode. The freight bill is the carrier’s invoice for the fees the carrier charges to move a given shipment. The freight bill lists the shipment, origin and destination, consignee, items, total weight, and total charges A freight claims form is a document that the transportation buyer files with the carrier to recoup monetary losses resulting from the carrier’s failure to properly protect the freight. A number of other documents may also be required to move freight efficiently which could include a commercial invoice or the certificate of origin and documentation-based freight delays and disruptions can be minimized with attention to detail. 10. How would a transportation manager monitor the quality of service provided by the carriers used? What types of metrics would be used? A key requirement for service quality monitoring is information. The transportation manager must have information regarding the customer service demands and the service level that current carriers provide. Without it, the transportation manager cannot make a rational evaluation of performance. This information must be compiled from multiple sources—shipment date and cost from the freight bill, arrival date from the delivery receipt, and shipment damage information from the receiving party—to gain a full picture of delivery performance and carrier service quality. Numerous transportation metrics are used to consolidate all of the information from various sources and shipments into useful knowledge. A popular strategy for developing an objective, holistic view of carrier service quality is to develop standardized scorecards or evaluation reports. Most scorecards use a weighted point plan to emphasize key criteria for each carrier used. The transportation manager assigns weight factors to the criteria, measures carrier performance, and multiplies the results by the weighting factor or percentage. An overall carrier score is obtained by summing the weighted scores for the criteria. The scores are shared with carriers to identify service quality issues and performance improvement opportunities. The quality of transportation services is tangible—the key service requirements are generally observable and quantifiable. This allows organizations to monitor activities through transportation metrics or key performance indicators (KPIs). Transportation KPIs are objective measures of carrier or private fleet performance that are critical to the success of the organization. KPIs can be used to evaluate current performance versus historical results, internal goals, and carrier commitments. They can also be used to benchmark results against those achieved by competitors, world-class organizations, and other links in the supply chain. 11. What role does information technology play in the management of transportation planning, execution, and analysis? Software and information technology tools have been developed to support transportation planning, execution, and performance evaluation. Software tools related to the movement of goods across the supply chain are lumped together in a general category called transportation management systems (TMS) which is defined as information technologies used to plan, optimize, and execute transportation operations. The role that information technology plays in the management of transportation planning, execution, and analysis is discussed below: Planning - Critical TMS planning applications include the following: • Routing and scheduling—proper planning of delivery routes has a major impact on customer satisfaction, supply chain performance, and organizational success. • Load planning—effective preparation of safe, efficient deliveries can be accomplished via TMS load optimization programs to help managers build a database of package dimensions, loading requirements and equipment capacity. Execution - Three key TMS execution tools include the following: • Load tendering determines which carriers are eligible to move the freight and then tenders the freight to the best carrier. • Status tracking which maintains visibility of shipments as they move across the supply chain through delivery confirmation. • Appointment scheduling automates the scheduling function. Analysis - Two useful analytical applications are as follows: • Performance reporting and scorecarding—managing carrier performance and TMS tools can automate the collection of data, measurement of KPIs, and dissemination of periodic reports. • Freight bill auditing—payments made to carriers must reflect the agreed upon contractual rates and the services rendered. Case Studies CHAPTER CASE 11.1 Vibrant Videos 1. What responsibilities, control, and costs does V2 bear under each of the FOB terms offered? Student answers will vary but should demonstrate a logical reasoning and accurate information. That is, their explanation of ownership issues, freight claims, payment, cost, etc. should align with the information in Table 11.4 (excerpt below). FOB TERM AND FREIGHT PAYMENT RESPONSIBILITY WHO OWNS GOODS IN TRANSIT? WHO HANDLES FREIGHT CLAIMS? WHO SELECTS AND PAYS CARRIER? WHO ULTIMATELY BEARS FREIGHT COSTS? Speakers FOB Destination, Freight Collect & Allowed Seller Seller Buyer Seller. The buyer deducts freight cost from goods payment. Receiver FOB Origin, Freight Collect Buyer Buyer Buyer Buyer 2. What is the delivery cost and landed cost per unit for each speaker delivery option? Speakers Option 1 LTL Option 2 TL # of units delivered per month 800 800 # of deliveries per month 4 2 # units per delivery 200 400 Total cost per delivery $2,485 $2,946 Delivery cost per unit $12.43 $7.37 Purchase cost per unit $175 $175 Landed cost per unit $187.43 $182.37 3. Which delivery option do you recommend for the speakers? Student answers will vary depending on whether they think cost or time is the more important consideration, but their answers should demonstrate a logical rationale for their recommendations, including a focus on the shipment characteristics. They should also recognize that transportation cost is not the only issue – inventory carrying costs, potential damage issues, and product availability are all affected by the delivery method chosen. 4. What is the delivery cost and landed cost per unit for each receiver delivery option? Receivers Option 1 Ground Option 2 Airfreight # of units delivered per month 800 800 # of deliveries per month 4 8 # units per delivery 200 100 Total cost per delivery $2,169 $2,411 Delivery cost per unit $10.85 $24.11 Purchase cost per unit $225 $225 Landed cost per unit $235.85 $249.11 5. Which delivery option do you recommend for the receivers? Student answers will vary depending on whether they think cost or time is the more important consideration, but their answers should demonstrate a logical rationale for their recommendations. They should also recognize that transportation cost is not the only issue – inventory carrying costs, potential damage issues, and product availability are all affected by the delivery method chosen. In this case, the fragile nature of the goods and susceptibility to theft could make it worthwhile to pay the extra $13.26 per unit for airfreight services. 6. What other supply chain issues and costs must V2 take into consideration when making these transportation decisions? V2 will also need to consider the costs surrounding such issues as inventory management, carrier reliability, product safety, freight documentation, and warehousing capacity to hold TL deliveries. CHAPTER CASE 11.2 Bob’s Custom BBQs 1. Calculate the performance score for each of the three carriers. 2. Which carrier would you recommend that Bob consider for elimination? Why? Some students will choose Bestway based strictly on their lowest score of 360. They have issues with claims and load rejections but otherwise Bestway is a strong service provider. Better to work with them to resolve issues than to drop them and pursue new carriers. Other students may decide to drop CertainT based on its on-time delivery performance and customer satisfaction rating. Overall, it needs only to improve slightly to achieve high performance scores. Increasing its on-time performance and bulling accuracy should reduce customer satisfaction problems. It is likely that many students will look to give these two carriers another chance and a probationary period may be in order. 3. If Bob decides to keep all three carriers, what should each of them work to improve? Allied is a very strong carrier with an opportunity to reduce damage and the number of loads rejected. Bestway is a decent carrier but needs to significantly reduce damage claims and load rejections. With improvement in these areas, customer satisfaction scores should improve. Certain T is a decent carrier but needs to improve its on-time delivery consistency and billing accuracy. With improvement in these areas, customer satisfaction scores should improve. Solution Manual for Supply Chain Management: A Logistics Perspective John J. Coyle, John C. Langley, Robert A. Novack, Brian J. Gibson 9781305859975