TRANSPORTATION Largest cost component of logistics

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TRANSPORTATION Largest cost component of
logistics

• SEPTEMBER 12, 2002

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Six Modes of Transportation

• Water
• Rail
• Truck--motor carrier
• Air
• Pipeline
• Intermodal

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Intermodal

• Combined rail and truck
• takes advantage of
• low cost of rail (long haul) and
• on-time delivery by truck

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Components of Transport Cost

• Loading/Unloadingunrelated to mileage
• Travelrate per mile

Cost per unit
Transport cost fn
Distance, miles
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Benefits to Consumers of Improved Transport

• Direct--lower transport cost
• for inputs
• for final products
• Indirect--larger geographic markets
• greater competition
• goods available from markets once not feasible
• Producers can exploit economies of scale more
  fully
• decouple markets from production sites
• more intense use of facilities
• more labor specialization

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Cost-service Trade-off

• Determines shipping mode
• Cost per mile (in increasing order)
• water, rail, truck, air
• Service (starting with highest)
• air, truck, rail, water
• Railcheap long hauls
• coal unit trains and grain to export terminals
• Intermodal merchandise on destination trains.

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Truck vs. Rail
Transport cost functions
Cost per unit
Truck
Rail
400
Distance, miles
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BackhaulA Critical Consideration

• Goal minimize time equipment is not generating
  revenue
• Avoid running equipment empty
• Important source of savings

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Shipping Documents

• Freight bill
• Freight claims form
• Bill of lading

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Bill of Lading

• Legal contract between shipper and carrier for
  movement to a specific destination, free of
  damage
• Purpose
• receipt for goods
• contract of carriage
• documentary evidence of title

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Two Forms of the Bill of Lading

• Straight bill of lading--nonnegotiable
• Order bill of lading--may be sold or traded by
  endorsing to another

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Developments That Have Impacted Number and
Location of Plants

• Unit trains
• Intermodal and containers
• Deregulation
• Intra-firm competition on part of shippers
• Backhaul
• Trunk lines vs. branch lines
• Value-added logistics

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Regulation/Deregulation History

• Impetus for regulation
• monopoly power of railroads in 19th century
• concern for destructive competition--over
  capacity
• Regulation was based on providing adequate,
  reasonably priced services to all on a
  non-discriminatory basis.
• Common carriage was the key principle

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Key Legislation

• Interstate Commerce Commission Act of 1887--
  established ICC to regulate railroads
• 1935 public truck transportation placed under ICC
• 1938 Civil Aeronautics Board (CAB) formed

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Characteristics of Regulation

• Service to all
• required cross subsidization from profitable
  routes to unprofitable ones.
• Control
• carrier entry and exit, carrier prices, service
  offerings and mergers
• Published rates
• no privately negotiated rates

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Costs of Regulation

• Operating and pricing inefficiencies
• NO intramodal competition
• Financial decline of railroads
• prevented restructuring
• protected unions
• failed to recognize that the major cost of
  railroads was fixed--rail beds

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Deregulation

• 1977, air freight
• 1978, air passenger
• 1980, trucking
• 1980, rail--Staggers Rail Act.

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DEREGUATIONFreedoms Granted Carriers

• Pricing latitude
• Ability to enter long-term contracts with
  shippers
• more freedom to enter and exit a market
• easier to merge or consolidate

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Impacts of Deregulation

• Demise of Common Carrier concept
• Closer relationship between rate and cost to
  provide the service
• Slowed transport rate increases
• Increased, initially, number of motor carriers
• Increased merger activity

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Staggers Rail Act led to

• Shedding of branch lines
• Reduced rate regulation
• Zone of freedom-- rate/variable costs less than
  or equal to 180
• More private contracts
• Coal 62 under contract--coal accounts for 44
  tonnage and 22 of rail revenue
• Grain 63 under contract, carriage related to
  exports

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Motor Carrier Deregulation

• Transportation marketing important because of
  route competition
• Closer shipper/carrier relations
• deregulation allows it
• needed for JIT
• quality emphasis means process orientation
• more long-term contracts, less transactional
• Increase in ICC-regulated carriers

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Motor Carrier Dereg., continued

• Increased concentration in LTL industry
• Less commodity and regional restrictions for
  carriers
• Multitude of rate/service offering means
  increased transaction cost for shippers seeking
  best deal
• Value-added carrier services
• Greater role for transport brokers

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Transport Broker

• Source of shipping information
• can audit shippers freight bills for correctness
• verify that carrier is certified, licensed
  insured
• track shipments
• handle damage claims
• provide storage /or local pickup

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Market-based Railcar Allocation

• COTS PERX
• shorter term, auction-based rate and car
  guarantees
• SWAPs GEEPs
• pool programs that provide longer term
  contractual car guarantees

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COTS ( PERX)

• COTS is the BNS program
• Guarantee of freight and lock in rate
• Purchase service by corridor, unit size, by time
  period--first or second half of month--and grain
• Purchase certificate up to 6 months in advance
• Certificates may be resold

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Guarantees

• When shipper fails to use equipment, shipper
  loses payment for certificate.
• When carrier fails to place car, shipper
  penalized 50 per car per day up to max of 400
  per car
• COT orders may be swapped among stations along
  the same corridor at a cost of 30 per car

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Pool ProgramsSWAPS (BNS) and GEEPS (UP)

• Shipper leases rail cars to carrier for a
  negotiated fee and a guaranteed number of trips
  per month for the shipper (Annual contract)
• Penalties for cancellation or nonperformance
• Applies to carrier and shipper
• Pool provides shipper options for strategically
  integrating logistics and merchandising decisions

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Summary

• Note the changes in the transport industry and in
  the regulation of the industry
• New institutions are being developed to improve
  market efficiency and enhance logistics operations