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Chapter 9:

The Transportation System

Chapter 9Management of Business Logistics, 7th

Ed. 2

Learning Objectives-After reading this chapter, you should be able to do the following:

Explain the economic role transportation plays in the economy.

Discuss the economic and service characteristics of the basic modes.

Describe the carrier selection process. Discuss the economic effect of rates,

transit time, reliability, capability, accessibility, and security in the carrier selection decision.


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Learning Objectives Compare the advantages and

disadvantages of using common, regulated, contract, exempt and private carriers --- the five legal classes of carriers.

Discuss the economic and service characteristics of intermodal transportation and explain the dominance of rail-truck (piggyback) intermodal service.


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Learning Objectives Discuss the economic rationale of using

containerization. Discuss the economic and service

characteristics of indirect and special carriers.


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Logistics Profile: Victoria’s Secret 33 to 35 percent of the $2.9 billion store,

catalog, and E-commerce sales ship via the United States Postal Service (USPS).

Victoria’s Secret uses Global Logistics, a package expeditor, to service its southeast USPS shipments, with the object of three to five day service.

All loads to the USPS are palletized and are standing appointments and live uploads.


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The Role of Transportation in Logistics

Transportation is the physical link connecting the firm to its suppliers and customers.

In a nodes and links scenario, transportation is the link between fixed facilities (nodes).

Transportation also adds value to the product by providing time and place utility for the firm’s goods.


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The Role of Transportation in Logistics As firms engage in global competition,

transportation costs are becoming even more significant.

In 1999, U.S. firms spent an estimated $554 billion to move freight, or 9.9% of the GNP1; this is up from 397 billion, or 6.3% of the GDP in 1993.


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The Role of Transportation in Logistics In 1999, as a percentage of sales,

transportation was 3.24%, warehousing 1.84%, customer service 0.48%, administration 0.38%, and carrying cost 1.52%.

Outbound transportation was clearly the largest component of total physical distribution costs.

Cost trade-offs abound in transportation and are typified by trading lower inventory costs for higher transportation costs.


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The Transport Selection Decision The Transportation – Supply Chain

Relationship Firms need to recognize that the

lowest cost carrier does not necessarily guarantee that this carrier will result in the lowest landed cost.

Therefore, firms need to keep the big picture in mind when attempting to select a carrier.


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The Transport Selection Decision The Carrier Selection Decision:

Various modes of transportation should be considered.

Choose a carrier or carriers within the selected mode, if there is a choice.

Carefully examine the service capabilities of the carrier as services can vary widely between carriers.


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Figure 9-1 The Carrier Selection Decision


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The Transport Selection Decision Carrier Selection Determinants:

Cost Transit time and reliability

Can be a competitive advantage Lowers customers’ inventory costs

Capability Accessibility Security


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Figure 9-2 Carrier Selection Determinants and User Implications


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The Transport Selection Decision The Pragmatics of Carrier Selection:

Transit time reliability Negotiated rates Consolidating shipments among a few

carriers Financial stability Sales rep Special equipment


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Figure 9-3 Importance Ranking of Carrier Selection Determinants


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The Basic Modes of Transportation3

The basic modes available to the logistics manager are rail, motor, water, pipeline, and air.

Distribution of ton-miles* for the various modes is outlined in Table 9-1.

*(a ton-mile is one ton of cargo carried one mile, and is a standard statistical measurement used in the transportation industry).


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Table 9-1 Modal Distribution of Ton-Miles


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The Basic Modes of Transportation: Railroads Capable of carrying a wide

variety of products, much more so that other modes.

Very small number of carriers; likely only one will be able to serve any one customer location.

Trend is to merge smaller companies into larger ones with ultimate goal of having perhaps two transcontinental rail carriers.


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The Basic Modes of Transportation: Railroads This would permit seamless

dock-to-dock service by one company; a distinct improvement over current systems.

Rail is a long haul, large volume system (high fixed costs; own rights-of-way).

Accessibility can be a problem. Transit times are spotty, but

are generally long.


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The Basic Modes of Transportation: Railroads Reliability and safety are

improving and are generally good. Premium intermodal services

Straight piggyback and containerized freight

Double stacks RoadRailer service

Unit train service Intermodal Marketing Company

(IMC)


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On the Line: It’s the Service, Stupid

It’s difficult to assess the railroad industry without getting into the subject of service…

Shippers complain; rail carriers say they are trying to improve.

Wall Street says that improving service is imperative.

Actual improvements are coming, but slower than the demand for faster, more reliable, and cheaper service. One problem is that standards continue to increase.


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The Basic Modes of Transportation: Motor Carriers

The motor carrier industry is characterized by a large number of small firms. In 1999, there were 505,000 registered motor carriers.

Low cost of entry causes these large numbers.

Used by almost all logistics systems and account for 82 percent of U.S. freight expenditures.

Consists of for-hire and private carriers.


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Figure 9-4 Overview of Interstate Motor Carrier Industry


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Large number of small firms; in 1999, there were 12,500 regulated carriers, only 7% of which had revenues >$10 million, with 76% having revenues <$3 million.

Characterized by low fixed costs and high variable costs.

Do not own their rights-of-way. Limited operating authority regarding service

areas, routes, rates and products carried.


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High accessibility Transit times faster than rail

or water. Reliability can be affected

greatly by weather. Small vehicle size coincides

with lower inventory strategies and quick replenishment (QR).

Relatively high cost compared to rail and water; trade-off is faster service.


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Figure 9-5 Overview of the Domestic Water Carrier Industry


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The Basic Modes of Transportation: Domestic Water Carriers Available along the Atlantic,

Gulf and Pacific coasts, along the Mississippi, Missouri, Tennessee and Ohio River systems and the Great Lakes.

Regulated common and contract carriers haul about 5% of the freight, while private and exempt carriers haul the other 95% of the ton-miles.


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The Basic Modes of Transportation: Domestic Water Carriers Relatively low cost mode;

do not own the rights-of-way; easy entry and exit.

Typically a long distance mover of low value, bulk-type mineral, agricultural and forest products

Low rates but long transit times

Low accessibility but high capability


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The Basic Modes of Transportation: International Water Carriers

General cargo ships Large high capacity cargo

holds Engaged on a contract basis Many have self-contained

cranes for loading/unloading Bulk carriers

Specially designed to haul minerals

Can handle multiple cargoes


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Tankers Specially designed for

liquid cargoes Largest vessels afloat,

some VLCCs at 500k+ tons

Container ships High speeds for ships;

increasingly more common and important

Larger vessels can handle up to 5,000 containers.


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RO-RO (Roll on-Roll off) Basically a large ferry that

facilitates the loading and unloading process by using drive on/off ramps

May also have the capacity to haul containers

Other OBO multipurpose carriers Barges (not transoceanic)


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The Basic Modes of Transportation: Air Carriers Limited number of large carriers earn about

90% of the revenue.

Any of the air carriers can carry air freight although some haul nothing but freight.

Cost structure is highly variable; do not own rights-of-way.

Transit times are fastest of the modes, but rates are highest.


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The Basic Modes of Transportation: Air Carriers Average revenue per ton

mile 18 times higher than rail; twice that of motor carriers.

Seek goods with a high value to weight ratio.

Accessibility is low as is capability.

Reliability subject to weather more than other modes.


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The Basic Modes of Transportation: Pipelines

Refers only to the oil pipelines, not natural gas

Not suitable for general transportation

Some research has been performed to move minerals in a liquid medium, but outside of a few attempts to transport slurried-coal via pipeline, no real successes have occurred.


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The Basic Modes of Transportation: Pipelines Accessibility is very

low. Cost structure is highly

fixed with low variable costs.

Own rights-of-way much like the railroads.

Major advantage is low rates.


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Table 9-2: Performance Rating of Modes

SelectionDeterminants

Railroad Motor

ModesWater Air

Pipeline

Cost 3 4 2 5 1Transit time 3 2 4 1 ---Reliability 2 1 4 3 ---Capability 1 2 4 3 5Accessibility 2 1 4 3 ---Security 3 2 4 1 ---


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Legal Classifications of Carriers: Common Carrier

For-hire carrier that serves the general public at reasonable rates and without discrimination.

Stringent economic regulation designed to protect the public.

Must transport all commodities offered... Commodities are limited to those that the

carrier’s equipment will handle.


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Legal Classifications of Carriers: Common Carrier Carrier is liable for damages to

products carried. Exceptions to liability include

acts of God, acts of the public enemy, acts of public authority, acts of the shipper and defects inherent in the goods.

Continued service is assisted by ceiling and floor limits on the rates charged.

Backbone of the transportation industry.


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Legal Classifications of Carriers: Regulated Carrier Regulated carriers are found in motor and

water carriage. The ICC Termination Act of 1995 eliminated

most of the common carrier economic regulation for these two modes, including entry controls, reasonable rates, and nondiscrimination provisions.

When acting as a contract carrier, not subject to STB economic regulations.

Must provide safe and adequate service.


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Legal Classifications of Carriers: Contract Carriers For-hire carrier that does

not have to serve the general public.

May serve one or a few shippers exclusively.

May offer specialized equipment. Not subject to regulation on services;

rates usually lower than common or regulated carriers.


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Legal Classifications of Carriers: Contract Carriers Other aspects of the carrier/shipper

relationship are made a part of the contract between the two parties.

Becoming more popular as logistics managers use contract carriage to assure rates and service levels.


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Legal Classifications of Carriers: Exempt Carriers

For-hire carrier exempt from economic regulation regarding rates and services.

Limited entry controls; low rates. Usually haul agricultural

products, but there are special rules as to what may be hauled by each mode of transportation, e.g., rail piggyback is exempt..

Limited number of carriers restricts availability.


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Legal Classifications of Carriers: Private Carriers Private carriage is the firm’s own

transportation. Not for-hire and not subject to

Federal regulations. May not be the firm’s primary

business but can charge a intracompany fee for transportation services.

Almost exclusively motor, but some rail, air and water also exist.


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Legal Classifications of Carriers: Private Carriers Firms gain ultimate control

over shipments and achieve maximum flexibility in moving goods.

Backhauls are usually empty or return materials to the firm’s plants and/or warehouses.

Requires a large capital investment. Requires management time and expertise.


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Intermodal Transportation Refers to use of two or

more modes of transportation cooperating on the movement of shipment by publishing a through rate.

Logistics managers are looking for the best way to move shipments and these often attempt to take advantage of multiple modes of transportation, each of which has certain useful characteristics.


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Figure 9-6 Types of Intermodal Services


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Intermodal Transportation Biggest disadvantage

is that carriers are reluctant to participate.

Cultural bias towards using only one mode and this makes change more difficult.

Certain types have been fairly well developed, such as rail/water, motor/water, rail/motor, and motor/air.


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Intermodal Transportation: Containerization

Referred to as Container-on-Flat-Car (COFC); goods are placed in a large box, where they are untouched until they arrive at the consigee’s unloading dock.

Reduces theft, damage, multiple handling costs and intermodal transfer time.

Changes materials handling from labor intensive to capital intensive and may reduce costs from 10 to 20%.


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Intermodal Transportation: Containerization

“Land bridge” concept may apply for international shipments where oceans are separated by a large land mass.

For example, containers moving from Japan to Europe may dock at Long Beach, CA, transfer the containers to a railroad, and reload the containers onboard another ship in Norfolk, VA., continuing on to a European port.


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Intermodal Transportation: Piggyback Trailer-on-Flat-Car (TOFC) Over the road trailers ride

in special rail cars. Takes advantage of motor

flexibility and rail’s long haul economic advantage.

Multiple service plans for shippers. Some railroads provide varying levels of

service, differentially priced.


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Intermodal Transportation: RoadRailers

Newest concept referred to as a “RoadRailer” Essentially a trailer that has been reinforced to

ride on a rail bogey and be coupled together directly without first being placed on a rail flat car

Saves weight and locomotive power and thus fuel for the railroad

Special lower rates Motor competitive transit times


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Indirect and Special Carriers Small-Package Carriers

Evolved to carry small, irregular shipments

Fast service, premium rates examples are UPS, FedEx, RPS, etc.

Consolidators and Freight Forwarders Consolidates many small shipments Saves shippers by using CL or TL rates


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Indirect and Special Carriers Shippers Associations

Acts as a consolidator for members Object is also to get lower rates

Brokers Acts as an intermediary May be licensed by STB Often used to provide backhauls for

private carriers


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Indirect and Special Carriers Intermodal Marketing Companies (IMC)

An intermediary that solicits shipments for rail/motor intermodal service.

Can speed traffic through consolidation (fills the normal two-trailer load on an intermodal flat car, avoiding delays waiting for another trailer going to the same destination).

Particularly advantageous for small (one trailer) shippers.

Chapter 9: Summary and Review QuestionsStudents should review their knowledge of the

chapter by checking out the Summary and Study Questions for Chapter 9.

End of Chapter 9 Slides

The Transportation System

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