TransportationInfrastructure

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

McGraw-Hill/Irwin

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Overview of transportation infrastructure

• Transport functionality, principles and participants

• Transportation regulation• Transportation structure• Transportation service

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Transportation infrastructure supports the flow of our nations economy

Table 8.1 The Nations’ Freight Bill ($ billions)

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Transport functionality primarily consists of product movement services

• Product movement is the movement of inventory to specified destinations– Restrictive element—in-transit inventory is “captive”, usually

inaccessible during transportation– Flexible element—inventory can be diverted during shipment to a

new destination• Transportation consumes time, financial, and environmental

resources– Transportation is more than 60% of the cost of logistics– One of largest consumers of oil and gas in US– Impacts traffic congestion, noise and air pollution

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Transport also functions as storage services for products while in a vehicle

• In-transit inventory is captive in the transport system– Managers strive to reduce in-transit inventory to a minimum

• Product can also be stored in vehicles at origin or destination (trailers, trucks, railcars, etc)– Usually more expensive than traditional warehousing

• Must pay rental or demurrage charges on vehicles used for storage

• Diversion occurs when a shipment destination is changed after a product is in transit

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Two fundamental transport principles

• Economy of scale is the cost per unit weight decreases as the size of the shipment increases– At least until you totally fill the carrying vehicle!– Cost decreases because the fixed cost of the carrier is allocated over a larger

weight of shipment

• Economy of distance is the cost per unit weight decreases as distance increases– Often called the tapering principle– Longer distances allow fixed cost of the carrier to be spread over more miles,

lowering the per mile charge

• Goal is to maximize the size of the load and distance shipped while still meeting service expectations

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Transport participants

• Shipper• Consignee (Receiver)• Carrier and Agents• Government• Internet • Public

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Major relationships among transportation participants

Figure 8.1 Relationship Among Transportation Participants

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Role and perspective of participants

• Shipper and consignee have a common interest in moving goods from origin to destination within a given time at the lowest cost

• Carriers desire to maximize their revenue for movement while minimizing associated costs

• Agents (brokers and freight forwarders) facilitate carrier and customer matching

• Government desires a stable and efficient transportation environment to support economic growth

• Internet is used to share real-time information with customers and suppliers.

• Public is concerned with transportation accessibility, expense, and standards for security, safety and the environment

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Role of the Internet in transportation

• The Internet now provides the vital communications links between the transactional participants (shipper-carrier-consignee)– Replacing phone and fax technologies

• Web-based enterprises provide information marketplaces– Freight matching– Fuel, equipment, parts and supplies purchases

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Transportation regulation by the government focuses on

• Economic regulation seeking to make transportation equally accessible and economical to all without discrimination– Government created infrastructure (roads, canals, ports)– Intended to prevent carriers from taking advantage of suppliers while ensuring

long-term financial stability for carriers

• Social regulation which takes measures to protect public safety and environment– Department of Transportation (DOT) (1966) has active role in hazardous

material safety and driver safety– Hazardous Materials Transportation Uniform Safety Act (1990) took

precedence over state and local regulations

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History of transportation regulation

• In 1800’s, rise of steamships and railroads created immense wealth and monopolies – (e.g. Commodore Vanderbilt and the railroad “barons” )

• Interstate Commerce Commission (ICC) created in 1887 to oversee regulation of interstate transportation– To stop the railroad monopolies

• Other regulatory acts passed from 1906 to 1973 placed motor carriers, shipping, air transport and pipeline transport under ICC oversight

• By 1970, ICC had oversight on 100% of rail and air, 80% of pipeline, 43% of trucking and 6% of water carrier operations

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Transportation deregulation (1980)

• Motor Carrier Act of 1980 deregulated the motor carrier industries– Entry restrictions for new businesses were relaxed– Restrictions for types of freight and range of services were abolished– Individual carriers were given the right to price their services– Trucking industry’s collective rate-making practices were abolished

• Staggers Rail Act of 1980 deregulated the rail industry– Provide railroad management with freedom necessary to revitalize the industry– Rail carriers were authorized to use selective pricing to meet competition and

cover operating costs– Carriers given increased flexibility with respect to surcharges– Contract rate agreements between individual shippers and carriers were

legalized– Rail management given liberal authority to proceed with abandonment of

poorly performing rail service

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Transportation regulation in the new millennium is stimulated by technology and global issues

• Electronic Signatures in Global & National Commerce Act of 2000– Gave digital signatures legal status

• Patriot Act of 2001– Increased inspections at ports, airport security, and increased

security at border crossings• Continued Dumping and Subsidy Act

– Fines for artificial underpricing and “dumping” of foreign goods in U.S. markets

• Jones Act– Only U.S.-built ships operating under a U.S. flag with U.S. crews can

ship goods directly from a U.S. port to another U.S. port

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Transportation structure

• Consists of rights-of-way, vehicles, and carriers operating within five basic modes

• A mode identifies basic transportation method or form– Rail– Highway– Water– Pipeline– Air

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Truck share of domestic freight market exceeds all other modes combined

Table 8.2 Domestic Shipments by Mode and Volume

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Rail mode has historically handled the largest number of ton-miles within continental US

• Track mileage has declined by over half since 1970

• Traffic shifted from broad range of commodities to hauling specific freight in traffic segments– Carload– Intermodal– Container

• New technologies include articulated cars, unit trains and double-stack cars

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Rail

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Truck mode has expanded rapidly since the end of World War II

• Nearly 1 million miles of highways in U.S.

• Key benefits include– Speed of transit– Ability to operate door-to-door

• More efficient than rail for small shipments over short distances

• Dominate freight moves under 500 miles and from manufacturing to wholesalers to retailers

• Many companies run their own truck fleets as well (e.g. WalMart)

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Water mode is the oldest form of US transport dating back to the birth of our nation

• Percentage of ton-miles has stayed between 19 and 30% since 1960’s

• Ranks between rail and truck in fixed cost

• Right of way (canals and rivers) maintained by Federal government

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Pipeline mode accounts for about 68 percent of all crude and petroleum ton-mile movements in US

• Have the highest fixed cost and lowest variable cost of all modes

• Unique transportation mode– Can operate 24 hours a

day, 7 days a week– No emissions– No empty container or

vehicle to return• Not flexible, and limited to

liquids and gases

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Air mode is the newest and least utilized transport mode for freight

• Accounts for only 1% of intercity ton-miles

• Fastest of all the modes• Fixed cost is 2nd lowest but

variable costs are extremely high

• Most products air-shipped have high value, high priority or extreme perishability

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Comparison of fixed and variable cost structure of each transport mode

Table 8.4 Cost Structure For Each Model

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Operating characteristics used to classify transport modes

• Speed is the elapsed movement time from origin to destination

• Availability is ability of a mode to service any given pair of locations

• Dependability is the potential variance from expected delivery schedule

• Capability is the ability to handle any load size or configuration

• Frequency is the quantity of scheduled movements a mode can handle

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Highway transport is appealing partly due to its relative ranking across characteristics

Note: Lower is better

Table 8.5 Relative Operating Characteristics by Mode

Lowest rank is best

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Highway transport is appealing partly due to its relative ranking across characteristics

Note: Lower is better

Table 8.5 Relative Operating Characteristics by Mode

Lowest rank is best

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Highway transport is appealing partly due to its relative ranking across characteristics

Note: Lower is better

Table 8.5 Relative Operating Characteristics by Mode

Lowest rank is best

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Highway transport is appealing partly due to its relative ranking across characteristics

Note: Lower is better

Table 8.5 Relative Operating Characteristics by Mode

Lowest rank is best

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Highway transport is appealing partly due to its relative ranking across characteristics

Note: Lower is better

Table 8.5 Relative Operating Characteristics by Mode

Lowest rank is best

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Highway transport is appealing partly due to its relative ranking across characteristics

Note: Lower is better

Table 8.5 Relative Operating Characteristics by Mode

Lowest rank is best

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Highway transport is appealing partly due to its relative ranking across characteristics

Note: Lower is better

Table 8.5 Relative Operating Characteristics by Mode

Lowest rank is best

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Infrastructure in crisis – US needs a National Transportation Plan

• United States aggressively invested in highway construction after World War II– However, this highway system is in need of widespread repair to sustain the

safe movement of over 26 million trucks

• August 1, 2007 a major bridge span of interstate I-35 over the Mississippi River collapses– Watch video of aftermath by selecting this link (slideshow mode)

• Roughly 12 percent (or 79,000) of public road bridges on the National Bridge Inventory are classified as structurally deficient

http://www.metacafe.com/watch/1659007/i_35_bridge_collapse/

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Transportation service is achieved by combining modes

• Traditional carriers are firms that provide service using only one of the five basic transport modes– E.g. trucking firm or an airline

• Package service uses intermodal transportation (ground and air) to handle small shipments or parcel deliveries– E.g. USPS, Fedex, or UPS

• Intermodal transportation combines two or more modes to take advantage of the inherent economies of each and provide an integrated service at a lower total cost– E.g. piggyback service integrating rail and motor service

• Nonoperating intermediaries include several business types that do not own or operate equipment– Act to broker services by other firms

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Package service provides both regular and premium service

• Package service is growing rapidly with the rise in e-Commerce and Internet consumer sales

• Ground package service offers regular delivery within metropolitan areas and between cities– United Parcel Service (UPS), Federal Express Ground and United

States Postal Service (USPS)• Air package service is a premium service to deliver certain

packages door-to-door by next-day or second-day– Integrates truck and air modes seamlessly

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Piggyback is an intermodal transport that integrates rail and motor service

• Most widely used systems are– Trailer on a flatcar (TOFC)– Container on a flatcar (COFC)

• Trailer or container is hauled by truck at origin and destination– Railcar hauls for portion of

intercity travel

• A variety of coordinated service plans have been developed

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Containerships are oldest form of intermodal transport

• Loads a truck trailer, railcar or container onto barge or ship for the line-haul movement on inland waterways

• Land bridge concept moves containers in a combination of sea and rail transport

– Common for containers moving from Europe to Pacific Rim

• Transfer of freight between modes often requires handling containers and imposition of duties

– Function of ports is to make this seamless and fast

• Port throughput is big concern for supply chain managers

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Coordinated air-truck is commonly used to provide premium package services

• Many smaller cities lack airfreight services

• Costs can leveraged with delivery time by linking the modes

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Non-operating intermediaries do not own their own equipment

• Freight forwarders—businesses that consolidate small shipments from various customers into bulk shipment for a common carrier for transport

• Shipper associations and agents—groups of shippers who employ an agent to consolidate purchases and shipments for them

– E.g. garment industry in New York• Brokers—intermediaries that

coordinate transportation arrangements for shipper, consignees and carriers, operating on a commission basis

Sampling of Non-operating Intermediaries