CHAPTER 9 — DOMESTIC AND INTERNATIONAL TRANSPORTATION Principles

CHAPTER 9 - DOMESTIC AND INTERNATIONAL TRANSPORTATION Principles of Supply Chain Management: A Balanced Approach Prepared by Daniel A. Glaser-Segura, Ph. D

Learning Objectives You should be able to: – Understand the strategic importance of transportation. – Identify the various modes of transportation. – Discuss the international aspects of transportation. – Describe how transportation impacts supply chain management. – Examine the interrelatedness of transportation, warehousing, & material handling. – Identify third-party transportation service providers. – Summarize aspects of transportation regulation & deregulation. – Discuss e-commerce issues in transportation mgmt. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing 2

Chapter Nine Outline Impact of Transp. on SC Mgmt Fundamentals of Transportation Objectives of Transp. Legal Forms of Transp. Intermodal Transp. Third-Party Logistics Services Transp. Pricing Transp. Regulation/Deregulation Warehousing Types of Warehouses Risk & Warehouse Loc. Just-in-Time Warehousing International Transp. Issues International Freight Security International Intermediaries Land Bridges Foreign Trade Zones NAFTA Transportation Management Transp. SBase Reduction Mode & Carrier Selection Contracting Transp. Svcs Outsourcing Transp. Measuring Transp. Performance Creating Strategic Alliances Performing Transp. Audits E-Commerce & Transportation Elec Invoice Payment SC Visibility Technologies 3 rd party Elec. Transaction Offshore IT Outsourcing Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing 3

Introduction Transportation is necessary to: Move purchased goods from suppliers to buyers Move finished goods to the customer. – Products have little value to the customer until they are moved to the customer’s point of consumption. – Transportation is what creates the efficient flow of goods between supply chain partners. U. S. freight transportation amounts to 6 % of GDP. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing 4

Impact of Transportation on Supply Chain Management Time utility- products are delivered at the right time. Place utility- products are delivered to the desired location. Transportation & storage, getting through customs, delivering to foreign locations Firms are often use outside agents or third-party transportation services to work in foreign locations. Poor transportation management can bring a supply chain to its knees!! Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing 5

Fundamentals of Transportation The Objective of Transportation- Satisfying customers while minimizing costs & making a profit contribution. Legal Forms of Transportation- Transportation service companies are classified legally as either common, contract, exempt, or private carriers. – Common carriers- offer transportation services to all shippers at published rates between designated locations without discrimination. – Contract carriers- not bound to serve the general public. Contract carriers serve specific customers under contractual agreements. – Exempt carriers- exempt from regulation of services & rates & if they transport certain exempt products like produce, livestock, coal, or newspapers. – Private carrier- not subject to economic regulation & typically transports goods for the company owning the carrier. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing 6

Fundamentals of Transportation- Cont. The Modes of Transportation Motor Carriers (trucks)- most flexible mode of transportation & account for over 80 % of U. S. freight. Trucks compete w/rail & air for short-to medium hauls. Weather is primary disadvantage. • Less-than-truckload (LTL) carriers or truck-load (TL) carriers. LTL carriers move small shipments & fees are higher. • General freight carriers carry the majority of goods shipped & include common carriers. • Specialized carriers transport liquid petroleum, household goods, building materials, & other specialized items. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing 7

Fundamentals of Transportation- Cont. The Modes of Transportation Rail Carriers- compete most favorably when the distance is long & the shipments are heavy or bulky. – Rail relatively slow & inflexible, rail roads have begun purchasing motor carriers & can thus offer point-to-point pickup & delivery service known as trailer-on-flatcar (TOFC) service. – Rail companies use each other’s rail cars. Keeping track of rail cars & getting them where they are needed can be problematic. – Railroad infrastructure & aging equipment are also problems for the railroads. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing 8

Fundamentals of Transportation- Cont. The Modes of Transportation Air Carriers- Very expensive relative to other modes but also very fast. Air carriers transport about 5 % of the U. S. freight bill. – Airlines cannot carry extremely heavy or bulky cargo. – For light, high value goods that need to travel long distances quickly, most small cities & towns do not have airports. – Half of the goods transported by air are carried by freight–only airlines, Fedex. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing 9

Fundamentals of Transportation- Cont. The Modes of Transportation Water Carriers- Inexpensive, slow & inflexible. Include inland waterway, coastal & intercoastal, & deep-sea. – Inland waterway transportation is used for heavy, bulky, low-value materials (e. g. , coal, grain). Competes w/rail & pipeline. – Water carriers are paired w/trucks to enable door -to-door delivery. – Supertankers are +1, 500 ft long & 200 ft wide. Pipeline Carriers- Limited in variety they can carry. Little maintenance once pipeline is running. Materials hauled in a liquid or gaseous state. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing 10

Fundamentals of Transportation- Cont. Intermodal Transportation- Combinations of the various transportation modes, is becoming an extremely popular method. – Trailer-on-flatcar (TOFC), containeron-flatcar (COFC), piggy-back service. The same containers can be placed on board containerships & airliners. – ROROs or roll-on-roll-off containerships truck trailers & containers to be directly driven on & off the ship, without the use of cranes. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing 11

Fundamentals of Transportation- Cont. Third-Party Logistics Services- intermediaries facilitate use of the transportation alternatives. – Freight forwarders- consolidate shipments to fill trucks or rail cars. – Transportation brokers- handle transportation requirements of shippers. legally authorized to act as agents on shippers behalf. – Shipper’s Associations- non-profit orgs that move member’s cargo. Consolidate members’ shipments to get volume discounts. – Intermodal marketing companies (IMCs) act as intermediaries between intermodal rail carriers & shippers. – Integrated logistics service providers provide services for a fee. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing 12

Fundamentals of Transportation- Cont. Transportation Pricing – Cost-of-service pricing- vary based on fixed & variable costs. As volume increases, the fixed costs portion goes down. – Value-of-Service Pricing- services priced at market bearing competitive levels. A profit maximizing pricing approach. – Terms of Sale- price includes transportation FOB destination free on board to the shipment’s destination. – Pricing Negotiation- Since the deregulation, negotiating prices is more common. – Rate Categories- rates can be classified a number of different ways. Classified as class rates, exception rates, commodity rates, & miscellaneous rates. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing 13

Fundamentals of Transportation- Cont. Transportation Regulation & Deregulation – Pro- Government regulation is good in that it tends to assure adequate transportation service throughout the country while protecting consumers in terms of monopoly pricing, safety, & liability. – Con- Transportation deregulation is good because it encourages competition & allows prices to adjust as demand & negotiations dictate. – Today, U. S. transportation industry remains essentially deregulated Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing 14

Fundamentals of Transportation- Cont. Transportation Regulation – Granger laws of the 1870 s broadly regulate the RRs. – Interstate commerce Act of 1887 - Created the Interstate Commerce Commission (ICC). – Transportation Act of 1920 - Made changes to IC act of 1887. – Motor Carrier Act of 1935 brought motor carriers under ICC control. – Transportation Act of 1940 establishing ICC control over domestic water transportation. – Federal Aviation Act of 1958 created to prescribe air traffic rules, make safety regulations & plan the national airport system. – Department of Transportation Act 1966 to coordinate the executive functions of all transportation-related matters. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing 15

Fundamentals of Transportation- Cont. Transportation Deregulation – – Railroad Revitalization & Regulatory Reform Act, passed in 1976. Rail-roads could change rates w/o ICC approval. Air freight was deregulated in 1977. Motor carriers were deregulated in 1980 to promote competitive, safe & efficient motor transportation. – The shipping Act of 1984 allowed ocean carriers to pool or share shipments, assign ports, publish rates, & enter into contracts with shippers. – ICC Termination Act of 1995 & the Ocean Shipping Reform Act of 1998 Interstate Commerce Commission was eliminated, requirement for ocean carriers to file rates with the Federal Maritime Commission also came to an end. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing 16

Warehousing Crossdocking- to receive, breakdown, repackage, & distribute components to a manufacturing location or finished products to customers warehouse. Today’s warehouses are more correctly referred to as distribution centers. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing 17

Warehousing- Cont. The Importance & Types of Warehouses – Warehouses support purchasing, production, & distribution. – Consolidation warehouses collect large numbers of LTL shipments then transported in TL or CL quantities. Private Warehouses- Refers to warehouses that are owned by the firm storing the goods. – This arrangement reduces the cost of warehousing, offers greater control, provides better workforce utilization, & can generate income & tax advantages through leasing of excess capacity &/or asset depreciation. – Nonetheless, owning a private warehouse represents a financial risk & loss of flexibility. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing 18

Warehousing- Cont. Public Warehouses- owned by for profit organizations that contract their services to other companies. – Breakbulk: shipments are broken down & items are combined into specific customer orders. – Repackaging: items are repackaged for specific customer orders. – Assembly: final assembly operations to satisfy customer requests. – Quality inspections: perform incoming & outgoing quality inspections. – Material handling, equipment maintenance, & documentation services. – Storage. • Pro- Provide the flexibility & investment cost saving. • Con- Disadvantage lack of control. • Reverse logistics services disposition of returned products Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing 19

Warehousing- Cont. Risk Pooling & Warehouse Location – As the number of warehouses increases, the system becomes more decentralized. Responsiveness & delivery service increase. – However, warehousing operating & inventory costs also increase. Trade-off between costs & customer service must be considered. Risk Pooling – Describes the relationship between the number of warehouses, inventory, & customer service. – Risk pooling is estimated by square-root rule Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing 20

Warehousing- Cont. Risk Pooling & Warehouse Location – square-root rule √N 2 S 2 = √N 1 (S 1) Where: S 1 = Total system stock for the N 1 warehouses S 2 = Total system stock for the N 2 warehouses N 1 = Number of warehouses in the existing system, and N 2 = Number of warehouses in the proposed system Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing 21

Warehousing- Cont. Warehouse Location Strategies proposed by Edgar Hoover – Market-positioned strategy- warehouses close to customers to maximize distribution svcs & improve transp. economies of scale. – Product positioned strategy- warehouses close to the sources of supply to enable the firm to collect goods & consolidate these. – Intermediately positioned strategy- warehouses midway between the sources of supply & the customers when distribution requirements are high & product assortments come from various locations. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing 22

Warehousing- Cont. Warehouse Location- Theories – Von Thunen - transportation costs should be minimized when considering facility location. Market prices & production costs would be identical regardless of the location of the warehouse. – Greenhut- based on profit instead of transportation costs. The optimum location would be the one that maximized profits, which may not coincide with the minimum cost location. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing 23

Warehousing- Cont. Just-in-Time Warehousing Emphasis on warehousing to support JIT operations: – A commitment to customers & service quality – Reduced lot sizes & shipping quantities – Greater emphasis on cross docking – Increased automation – Increased assembly operations Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing 24

International Transportation Issues International Freight Security- Conflict between U. S. govt. & industry toward more security & restrictions for inbound shipments. International Intermediaries – Customs Brokers- move shipments through customs & handle documentation. – International Freight Forwarders- move goods from production to foreign destination w/ surface & air transportation. – Trading Companies- Put foreign buyers & sellers together & handle all of the export/import arrangements. – Non-Vessel-Operating Common Carriers- operate like freight forwarders but use scheduled ocean liners. – Global Logistics Service Providers- Companies like DHL & UPS offer total global logistics solution. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing 25

International Transportation Issues- Cont. Land Bridges- Intermodal movements between Europe & East Asia utilize the United States as a land bridge. Foreign Trade Zones (FTZs) secure sites in U. S. under supervision of U. S. Customs. FTZs bring goods into the site & offer storage, exporting, manufacturing, assembly, repacking, testing, & repairing services. North American Free Trade Agreement began on January 1, 1994, & removes most barriers to trade & investment among U. S. , Canada & Mexico. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing 26

Transportation Management • Transportation Supply Base Reduction- Use fewer providers & pick best-performing suppliers. • Mode & Carrier Selection- Identify transportation modes & carriers using a decision model, such as weighted factor analysis. • Contracting Transportation Services. Benefits for shipper- contract assures pkg of services & prices. Benefits for carrier- ability to plan capacity and staffing • Outsourcing Transportation- Firms increase service, decrease costs, improve int. processes, & apply resources to core functions. • Measuring Transportation Performance- Allows the firm to identify problem areas & then make changes. • Performing Transportation Audits- Study of constraints to determine improvements. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing 27

E-Commerce and Transportation Electronic Invoice Presentment & Payment- A recent development designed to create greater efficiency among companies. Supply Chain Visibility Technologies- Time managed benefit. Consisting of planned movement of freight; immediate rates & special service fees; make orders; trace shipments; manage other elements of shipments. Third-Party Electronic Transaction Platforms- Allow shippers & carriers to perform various transactions over the Web. These sites provide freight matching services, auctions, & on–line communities or marketplaces. Offshore Information Technology Outsourcing- U. S. IT service providers are contracting with offshore IT providers for software development services. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing 28