6

Management of Business Logistics

The transportation
system
Learning outcomes
• 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.

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 Page 418

Supply chain profile

A transportation “perfect storm”
• If inventory is the life blood of supply chains, then transportation is the pumping
heart that moves products throughout the system.
• Effective product movement is essential for the success of manufacturers,
distributors, and retailers.
• Retailers, in particular are challenged to maintain consistent product flows from
global suppliers to retail distribution centers, stores, and customers’ homes.

• The flow of products can be disrupted by facility congestion, equipment

shortages, and labor availability issues. All three problems become acute prior
to peak selling season as retailers seek to fill their shelves for holiday customers.

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Supply chain profile Page 418
A transportation “perfect storm”

• In 2014, a “perfect storm” hit the industry as a confluence of negative factors hit the
transportation industry.
• Many months of labor contract negotiations and disputes at 29 U.S. Pacific Coast ports led
to massive work slowdowns and several days of operation suspension.
• This led to a backlog of work that hampered 2014 holiday sales.
• Also, trucking industry capacity was stretched very thin as the number of available drivers
and trucks continued to shrink.
• Finally, intermodal congestion grew significantly as retailers and other shippers shifted
freight to gain cost advantages and to avoid trucking industry capacity problems.
During 2014, intermodal transit times nearly doubled in many key corridors.

Management of Business Logistics 4

Supply chain profile
Textbook
A transportation “perfect storm” Page 418

• Although the freight backlog at Pacific coast port operations was finally cleared in May
2015, many of the “perfect storm” challenges are here to stay.
• Retail supply chain executives worry that their transportation capacity issues will increase
over time. They believe that port labor challenges will occur with every contract
negotiation, that few viable solutions exist for the truck driver shortage, and that rail
infrastructure will remain stressed.
• Rather than passively ride out the “perfect storm,” retailers are taking steps to mitigate
their transportation problems.
• These strategies, which can be leveraged by any type of freight shipper, include:

Management of Business Logistics 5

 Supply chain profile Page 418
A transportation “perfect storm”
These strategies, which can be leveraged by any type of freight shipper, include:
• Re-route freight flows – Retailers are moving more imported freight through ports on the
Atlantic and Gulf coasts to reduce reliance on often congested Ports of Los Angeles and Long
Beach in California.
• Ship product earlier – Retailers are moving more freight prior to the late summer and early
fall peak seasons. This avoids some port congestion and peak pricing but forces the retailer to
hold inventory for longer time periods.
• Use technologically advanced port – By moving freight through ports that are highly
automated, retailers can avoid some congestion problems and minimize the risks associated
with labor disputes.
• Provide “driver friendly” freight – With more work than they can handle, carriers avoid
retailers who are costly to serve. Their freight must be easy to handle and retailers must
quickly turnover equipment to cut carrier wait time.
• Become a “carrier friendly” customer – To secure the services of quality carriers, retailers
must prioritize service over price, collaborate on capacity requirements, and properly
compensate carriers.

Management of Business Logistics 6

Supply chain profile
A transportation “perfect storm” Page 418

Retail supply chain executives realize that transportation is a

dynamic function and that new challenges will emerge. Today’s
innovative strategies will be tomorrow’s standard operating
practices.
The best performing retailers will be those who continuously
monitor the transportation environment, adapt their processes to
changing conditions, and have the foresight to mitigate disruptions.

Source: Brian J. Gibson, C. Clifford Defee, and Rafay Ishfaq, State

of the Retail Supply Chain: Essential Findings of the Fifth Annual
Report (Auburn, AL: Auburn University Center for Supply Chain
Innovation, 2015): 13–17.

Management of Business Logistics 7

AIC
• Freight transportation
• Distribution
• Logistics

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AIC
• Freight transportation
• Actual movement of goods from one location to another
• Using mean or vehicle of transport and transportation infrastructure
• Distribution
• All activities relevant to physical movement of goods
• Including transportation, transshipment and warehousing
• Logistics
• All activities related to the movement and coordination of goods from their
source of origin to the final point of delivery
Movement corresponds to physical movement of goods and the flow of
information
• Including distribution, procurement, demand management, etc.
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AIC

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Actors in freight transportation (1)
1. Shippers
• Generate the demand for freight transportation
• Have a logistics strategy
• Operate their own fleet vs. outsource the logistics and distribution
activities
• Choose the mode(s) of transport
• Three-level decision structure
• Long-term: strategies in line with the customer network and production
activities
• Medium-term: levels of inventories, warehousing, and distribution
facilities, frequency and amount of shipping and flexibility of service
• Short-term: the attributes of the services required for its shipments, such
as maximum rates, transport time, reliability and safety

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Actors in freight transportation (2)
2. Carriers
• People, businesses or organisations that operate and offer transportation services for
shippers
• Customised service
• A vehicle or a fleet will be dedicated exclusively to a particular customer
• Operate on the basis of consolidation
• Each vehicle contains several pieces of freight for different customers with possibly
different origins and destinations
• Operate their services according to a published timetable, which prescribes routes,
schedules and rates they offer

3. Intermediaries
• Freight forwarder – intermediary person or organisation that acts as a third party and
manages the shipments on behalf of the shipper
• Contracting one or several carriers
• Identifying a suitable mode or a combination of modes for the shipper

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The Role of Transportation
• Transportation involves the movement of people and goods between
origin and destination points

• 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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Nodes and links

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The Role of Transportation
• As firms engage in global competition, transportation costs are becoming
even more significant.
• In 2014
• U.S. firms spent an estimated $907 billion to move freight.
• ~ 63% of total logistics expenditures.
• far exceeding the amount of money spent on warehousing, inventory
management, order processing, and other fulfillment.

Thus, transportation costs must be taken into account during the

development of supply chain management (SCM) strategies and
processes.

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The Role of Transportation
• Transportation provides the critical links between these
organizations, permitting goods to flow between their facilities.

• Through transportation, organizations can 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.

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The Role of Transportation
• Transportation service availability is critical to demand fulfillment in the supply chain.
• a shortage of transportation capacity can strand inventory in the system, leading to empty
shelves and lost sales.
• Transportation efficiency promotes supply chain competitiveness:
• Availability, efficiency, quality, time, flexibility …
• Higher quality materials
• Lower price materials
• Promotes production economics of scale. High-quality, customer-focused
• Improve demand fulfillment opportunities transportation has a direct impact on an
• Lower product’s landed cost organization’s success as it delivers the
• On time delivery right product at the right time, in the right
• Damage free delivery quantity and right quality, at the right
• Correct places cost, right conditions, and to the right
• … destination.

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The Role of Transportation
• Transportation also influences supply chain design, strategy
development, and total cost management.
• Transportation service availability, capacity, and costs affect the
number and location of supply chain facilities in a network.
• Transportation capabilities must align with the company’s goals.
• Intentional tradeoffs should be made between transportation and
related activities to optimize supply chain efficiency.

• 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.

(*) A carrier is a company or a firm or a person that is legally entitled to transport

goods by air, water, and land.
Usually, the carrier works with shippers to ship goods from one place to the other.
Some popular examples of carriers are airline, shipping line, trucking company,
parcel/express company, and railroads.

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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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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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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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The Transport Selection Decision
• Later research focus on
• Frequency and flexibility
• International dimension,
• Environmental concerns and energy use
• Integration with the supply chain and information technologies
• The use of the Internet

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Transportation modes
• The basic modes available to the logistics manager are:
• Rail,
• Motor,
• Water
• Coastline
• Inland waterway
• Air
• Pipeline

*(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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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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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.

• Reliability and safety are improving and are generally good.
• Premium intermodal services
• Straight piggyback and containerized freight
• Double stacks
• Road Railer service

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Motor Carriers
• The motor carrier industry is characterized by a large number of small firms.
• 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.
• 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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Motor Carriers
• 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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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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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
• 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 21,000 containers.
• 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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Air Carriers
• Limited number of carriers
• 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.
• 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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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
slurred-coal via pipeline, no real successes have occurred.
• 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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Performance Rating of Modes
Selection Modes
Determinants Railroad Motor Water Air Pipeline
Cost 3 4 2 5 1
Transit time 3 2 4 1 ---
Reliability 2 1 4 3 ---
Capability 1 2 4 3 5
Accessibility 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.
• 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.
• 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 an
intracompany fee for transportation services.
• Almost exclusively motor, but some rail, air and water also exist.
• 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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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 consignee’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%.
• “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

• 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

• 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.

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 Shipment options
1. Direct and customised shipments
• Goods are shipped from the source
of supply to the demand point
without the use of any intermediate
facilities
• Full-load trucking/ Truckload
(TL)
• Flexibility in adapting to a
highly dynamic environment
and uncertain future demands
• Reliability in service and low
tariffs
2. Consolidated shipments
• Serving a number of demand
points using a particular service
• Trade-offs between volume
and frequency of shipping
• Transportation cost
Distribution
structures
1. Single-echelon (or single-
tier)
Does not involve the use of
any intermediate facilities
between the source(s) of supply
and the source(s) of demand

2. Multi-echelon (or multi-tier)

Includes several layers of
intermediate facilities, such as
warehouses, consolidation
facilities, distribution centres and
cross-docks

Bektaş (2017)
Main problems

• Location problems
• Network design problems
• Routing problems
• Integrated routing problems
• Green freight distribution
• Collaboration in freight
transportation
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