Transportation

Michigan State

University

Transportation costs represented 6.3% of total U.S. GDP in 1990

Transportation costs represented over 50% of total U.S. logistics expenditures in 1990

Transportation accounted for 27% of total U.S. energy use and 63% of total U.S. petroleum use in 1990

Relative Transportation Costs

Economic Impact

Logistics contributes approximately 10.5% of GDP

U.S. industry spent $451 billion on freight transportation in 1996

U.S. industry spent $311 billion on warehousing, storage, and carrying inventory in 1996

Total logistics costs equals almost $800 billion

Why has logistics become increasingly important?

Cost reduction pressures are severe Logistics has a high impact on customer service A strong need exists for demand and supply

planning consistency A focus on core competencies has placed logistics

in the outsourcing “spotlight” Development of IT technology supports integrated

logistics management Government deregulation of transportation has

created new opportunities

Logistics Overview

Total Cost Concept The total cost concept recognizes that an optimum cost

in one area or function may not lead to an optimum total system cost

Total cost analysis requires the management of supply chain trade-offs

Logistical activity areas that drive total logistics costs: Customer service level costs Inventory carrying costs Lot quantity costs Order processing and information costs Warehousing costs Transportation costs

Customer Service Measures Order cycle lead time Stock availability/fill rates/stockouts/back

orders/partial shipments Record integrity Frequency of delivery Delivery reliability Order tracing capability Volume flexibility

Customer Service Measures Invoice accuracy Order status information Technical support responsiveness Unscheduled service

responsiveness Speed of product feature changes Product and service quality

Value-added Transportation Concept

Supplier Manufacturer Customer

Inbound Outbound

Product/Info Flows

Info/Return Goods Flows

Transportation-Related Service Elements

Speed: time-in-transit Availability: accessible to customers when

they want it Dependability: pick-up and delivery time

variability Flexibility: adjustment to shipper’s needs

Basic Modes of TransportationFixed Variable Traffic

costs costscomposition

Rail high low bulk food, mining,heavy mfg

Motor low medium consumer goods,medium/light mfg

Water medium low bulk food, mining, chemicals

Air low high high-value goods,rush shipments

Pipe high low petroleum, chemicals,

mineral slurry

Relative Operating CharacteristicsOperatingcharacteristics Rail Motor Water Air

PipeSpeed 3 2 4 1 5Availability 2 1 4 3 5Dependability 3 2 4 5 1Capability 2 3 1 4 5Frequency 4 2 5 3 1Composite 14 10 18 16 17

1 = best, 5=worst

Intermodal

Enables shippers to benefit from advantages of multiple modes of transportation

minimizes disadvantages of individual modes

Rail

Air Water

Truck

Transportation Decision Making in an Integrated Supply Chain

Supplier Manufacturer Customer

Inbound Outbound

Dec

isio

n F

low

Understand total network flows

Understand individual lane flows

Understand current carrier usage patterns

Make mode/carrier decisions

Routing/Scheduling, Load Planning, etc.

Strategic

Operational

Macro

Micro

Dec

isio

n S

cope

Transportation Costs

Product related density stowability ease or difficulty

of handling liability

Market related intramode/intermode

competition location of markets nature and extent of regulation balance/imbalance of freight

traffic seasonality of product

movements domestic vs. international

Transportation Economies

Economy of Scale

Cost

per

un

it

Volume/weightLTL TL

Transportation Economies

Economy of Distance

Cost

per

load

Distance

Tapering Principle

Shelf Standards Brand Consolidation Space Position Proper Groupings Price Schematic Housekeeping Point of Sale

Shelf Management Principles Place your wines at eye level or the best

position possible. 80% increase if moved from bottom to eye level 43% increase if moved from bottom to waist level

Place your wines next to the best selling competitive wines.

Place your wines next to wines that are priced higher than your wines.

Topics

Introduction Transportation

Infrastructure Transportation

Management

Introduction

Importance of Transportation

Value-added Role of Transportation

Transportation Role in Value Attainment Process

• Critical element of structure, capacity, and movement decisions

• Both between supply chain members and intra-organizational

Transportation Infrastructure

Modal Characteristics Changing Environment

Distribution of U.S. Intercity Freight (% of ton-miles)Rail Motor Water Air Pipe

1980 38% 22% 17% .2% 24% 1990 37% 26% 16% .2% 20%

Average Revenue per Ton-Mile

1980 $2.8 $18.0 $.77 $46 $1.0

1990 $2.7 $24.4 $.75 $140 $1.4

Changing Transportation Environment

Deregulation Time-based competition Expanding geographic coverage Information technology Social and environmental concerns

Selected Results of the Changing Environment - Economic Impact

Increased competition in individual markets - both within modes and between modes

More efficient carrier operations - less interlining, more direct routing, efficient pricing

Transportation costs declined in real terms and as percent of GDP

Transportation service quality improved

Selected Results of the Changing Environment - Industry Impact

Consolidation in rail, air and LTL trucking Proliferation of TL carriers Strong growth in regional trucking - networks TL growing faster than LTL Air freight growth Intermodal growth: rail-truck, air-truck, rail-ship Growth of “one-stop shopping” - 3PL Private fleet conversion

Selected Results of the Changing Environment - Market Impact

Demand for fast, dependable, responsive service at lower cost

Demand for a broader range of services to integrate supply chain functions

Core carrier concept - interdependence between shipper-carrier

Customized price/service packages/contracts

Relational view of transportation as a “value-added” service

Transportation Management

Network Freight Flows: Macro-Decisions

Micro-Decisions Information Systems Support

Network Freight Flows: A Fully Integrated Approach

Managing Inbound-Outbound flows in an optimal manner requires firm to have a good handle on the entire logistics process

Traditionally view transportation in a vacuum-- need to look at it in the context of the total logistics system

Greatest improvement opportunities lie in integrating transportation with other logistics functional areas such as purchasing, inventory control, forecasting and production scheduling

Approach to Analysis1 Analyze lane densities/frequencies:

what opportunities emerge for: inbound/outbound consolidation vehicle consolidation temporal consolidation network consolidation - cross dock

potential (hub and spoke systems)

Approach to Analysis (cont.)2 ) Once opportunities for consolidation

are visible, make mode/carrier selection based on service/cost mix Given similar service, are rates better on 1

mode/carrier than another? Does any mode/carrier have relative

strengths in a particular lane? Any backhaul opportunities?

3 ) If so, look to consolidate loads on mode/carrier with best cost structure - assign private fleet to most costly routes

Consolidation Opportunities

• Inbound-Outbound flow consolidation: look for opportunities to combine inbound/outbound freight

• Vehicle consolidation: use one vehicle/multi stops for LTL volumes vs. one shipment to each

• Temporal consolidation: hold orders until large volume shipment possible

Suggested Analyses

Network flows Lane densities, frequencies, consistency Freight distribution by mode, carrier Consolidation opportunities

Nodes and links in a Logistics System (W=warehouse, P=plant, M=market)M M

M WP W P

M W W

W P W

M W P M

Total freight flows

Lane Densities

Volume on a weekly basis Consistency of volume Volume + Consistency = Rate

bargaining power Identify LTL freight consolidation

opportunities

Inbound-Outbound Lane DensitiesSite State In # Avg Wt Out # Avg Wt

DC 1 CA 135 2024 592 989

DC 2 CA 110 625 465 654

DC3 CA 125 1690 572 1005

DC1 AZ 2 228 28 444

DC2 AZ 7 502 9 484

DC3 AZ 1 1135 36 622

DC1 NM 0 0 44 462

DC2 NM 0 0 42 418

DC3 NM 0 0 89 517

DC1 TX 598 971 1975 957

DC2 TX 911 3147 2125 693

DC3 TX 1631 1619 1368 1716

Mode/Carrier Profile Analysis

Understand freight distribution among carriers

by state

Identify potential for core carrier concept

North C

arolina TL

Van F

reight Distribution

C

AR

RIE

RW

T (k#)

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F

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13.39

PIQ

UA

2491.210.93

SO

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OK

E1914.4

8.40

N &

P1764.0

7.74

TR

AN

SD

YN

1546.26.78

KB

T1368.6

6.01

ITC

O1363.0

5.98

WR

IGH

T811.9

3.56

TE

LE

DY

NE

727.23.19

OS

BO

RN

723.13.17

SH

AF

FE

R421.3

1.85

TH

RE

E I

259.01.14

RO

CH

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T253.4

1.11

INT

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ST

AT

E250.3

1.10

SU

NF

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R232.0

1.02

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S190.2

0.83

MA

WS

ON

169.90.75

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XP

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0.73

PO

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0.56

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DS

OU

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124.10.54

NO

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123.60.54

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NC

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0.53

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86.20.38

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0.19

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ND

AL

43.60.19

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0.19

MC

GR

IFF

42.30.19

Summary

Identify:

Opportunities to achieve balanced flows - obtain

lower rates for providing loads both ways

Significant volumes for rate negotiation

Vehicle/temporal consolidation opportunities

Advantages of reducing number of carriers

Mode/Carrier Selectionstep 1

step 2Modal Choice basic mode Specific Carrier step 3 intermodal legal type Transport

individual carrier provider

Transportation Pricing

Function of: cost-of-service value-of-service

Prices and Volume

Per pound costs will decrease over volume/weight

Pri

ce p

er

pou

nd

Weight of load

Price and Density

Assuming no “weighing out,” denser products use space better

Product Densitycotton steel

Pri

ce p

er

pou

nd

Transportation Cost Structures

Variable: costs vary with services or volume: line-haul costs of fuel, labor and maintenance handling pickup and delivery

Fixed: constant regardless of activity Facilities, equipment and administration

Joint: “hand-in-hand” costs -- unavoidable Example: the backhaul move

Common: shared costs (“overhead”) need for Activity-based costing

Pricing Structures

Cost-of-service: “cost plus” method

Value-of-service: “market based” method

Combination: a middle of the road approach using cost (minimum) and value (maximum)

Net Rate Pricing: All-inclusive prices specific to customers’ needs (not discount-based)

maximum value of service demand

rate level

minimum cost of service supply

fully allocatedaverage variable

out-of-pocket

Limits on Rates

Routing and Scheduling

Goals: find best path a vehicle should follow through

networks of roads, rail lines, shipping lanes, and air routes

determine best pattern for stops, multi-vehicle use, driver layovers, time of day restrictions

Benefits: greater vehicle utilization improved and more responsive customer

service reduced transportation expenses reduced capital investment in equipment

Principles for Good Routing/Scheduling

load trucks with deliveries for customers closest to each other

stops on individual days arranged together start routes with farthest stops first circular routes - don’t cross paths use largest vehicles first if can be filled mix pickups in with deliveries, not at end if one stop far from other, use other truck avoid narrow stop time windows, or handle

separately

What Is Contract Logistics?

• It is a very confusing term because there are so many different descriptions of what it really is.

– “Contracting out the entire distribution function and the related information function”

– “Subcontracting specific logistics activities to a third-party specialist service provider.”

• A wide range of practices fall under these definitions

Services Provided by Third-party Logistics Providers

Transportation Warehousing Information management Human resources Management

Two Types of Providers

• Asset-based– Own their own warehousing, transportation,

computer systems, etc.• Data-based

– essentially asset free companies who sell logistics management capability through their computer systems and managerial skill

• There is frequently a bias against asset-based providers

Categories of Services Available

Exclusive Service Provider-devotes all resources to a single client

Consortium Service Provider-provides services to a small group of clients

Specialist Provider-provides services for products or clients who have specialized needs

National/Multinational Provider-provides services to many clients throughout the world

Business Drivers

“Stick to the knitting” “Vertical disintegration” “How to do more, with less”

Changing Business Environment

Debt reduction <> unleveraging Strategic focus of ...

Financial resources Human resources Information technology

Competition Faster (agility) Better (quality) Cheaper (low cost provider)

Investment Rationing

Advantages/Disadvantages

•Less asset investment, redeploy capital •Lower operating cost (service providerhas economies of scope and scale)•Time lag between increased costsand changing rates

•More attention for core business•Gather missing management knowledge•Provide higher service level•Increased flexibility

•Entry mode to new markets•Flexibility as environment changes

•“Switching costs”•Possible higher operating costs

•Less direct customer contact•Dependency•Loss of control

Information Systems Support

• Network analysis

• Electronic Data Interchange

• Freight rate maintenance and auditing

• Routing and scheduling

• Administration Produce/track bill of lading for each shipment

Automated bills of lading

Automate shipment data files

Carrier evaluation