Global Supply Chain Management

Global Supply Chain Management Logistics A378 Fall 2004

Chapter #5 Global Transportation Systems

The Logistics System

Overview • We will examine the five principal modes of transport used in the logistics operation and a couple of others just emerging onto the logistics scene • We will briefly discuss deregulation and privatization of transportation • We will examine government’s role in transportation • Finally, we will take a quick look at inter-modal transportation

Introduction • To most people, transportation is the single most visible part of a logistics systems • Until recently, logistics was primarily concerned with the transport function • Historically, governments have exercised significant control over transportation through direct ownership, China, Great Britain, etc. and through laws that dictated how privately held transport companies ran their business

Classic Modes of Transportation • Traditionally, when we think of transportation, we think of one or more of the five classic modes of transportation: • Rail • Road • Pipeline • Water • Air

Rail • Rail transport is characterized by: • Cost-effectiveness • Energy-efficiency • Moving large amounts of product over long distances • Capable of moving large loads and huge quantities • Constrained by accessibility making it a poor choice for JIT systems generally • On time delivery • Frequency of service

Rail • Along their routes, railroad companies are essentially monopolistic although they do compete with other modes of transport • In many instances, rail requires changes of carriers and sometimes transfer of loads at borders • Different regulations • Different safety requirements • Physically different equipment • Etc.

Rail • Quality of service varies from country to country • In those countries with competitive carriers, transfer from one carrier to another has become a common practice essentially extending the network

Rail • Once the backbone of transportation in this country, rail has given way to other forms of transport for many goods • As part of an intermodal system, rail service has an important role world-wide today

Road • In most of the world, road transportation is the most visible form of transport • Provides the shipper with more flexibility than any other form of transport • Road systems reach virtually all of our markets (with the exception of areas of Alaska, Siberia, and numerous other remote locations around the world)

Road • Road systems are typically created and maintained by governments • Typically used for: • Higher-value cargo • Lower volume cargo • When compared to rail transport

Road • Cross border transport has increased significantly in recent years with new trade agreements like NAFTA • As with rail, laws and safety regulations make cross border transport an interesting issue • Social and environmental impacts are of increasing concern in developed countries

Pipelines • Pipelines are the most efficient mode of transport for suitable commodities • Like railroads, however, pipelines are constrained by their physical network and are generally custom built for a particular application • Product • Customer/Customer Set • Generally offer only one-way service

Pipelines • Cost effective and environmentally friendly…for the most part • Future use of capsule transport may give pipelines a bigger role in general transport • i.e. cargo moving pneumatic capsule systems

Air • The most expensive mode of transport, but very suitable for • Low-volume/high-value items • Short life products • Situations where customer service issues justify the cost • Provides the logistics manager fast, on-time service world-wide...even to remote Alaskan villages

Air • Industry is mostly privately owned and operated with a few government run companies • Low concern for environmental impact with the possible exception of noise in and around large urban areas

Water • Includes ocean and inland waterways transport of goods • As a logistics transport mode, water is most suitable for use: • Low-value/High-volume goods • Time insensitive products • When cost or transport is more important than speed

Water • In some countries with large navigable river and canal systems, water transport competes with rail transport of bulk goods • Industry is regulated by each country • Many large and small private carriers world wide

Water • International maritime industry has evolved to operate in carrier-supported organizations known as conferences • Links shippers and vessel operators together • Shippers get lower rates for using conference vessels • Conferences guarantee a shipping schedule supported by a combination of all conference shippers • Conference levels revenues on a periodic basis • Deregulation and increasing lower price competition is weakening the conference system

Deregulation • Most nations have historically regulated transportation similar to a public utility • Recently, we have begun to understand that regulation is • Ineffective • Costly to customers • Stifling to innovation

Deregulation • For the past two decades there has been an increasingly world-wide move by governments to deregulate their transport industries • Result is a more efficient and cost effective industry • Most of the deregulation to date has been internal • Cross border transport is still highly regulated

Deregulation Cross border issues usually handled by international agreements • Open-skies for airlines • NAFTA • European Union • Etc. • Most of the cross border/open border agreements have been made in the past decade

Deregulation • Big issue for governments is Cabotage • Cabotage is the transport of cargo or passengers within a country by a foreign carrier • JAL picking up passengers in Anchorage and taking them to Chicago • Foreign flag vessels transporting oil from the Valdez terminal to California

Deregulation • Cabotage was originally intended to protect a nation’s transport industry • Today, Cabotage works against minimal cost logistics system implementation

Privatization • Another aspect of the changing transport landscape is Privatization • Many nations owned and operated some or all of their nation’s transport industries • Trend is to privatize these industries

Privatization • The transition is not necessarily pretty as many of these carriers, as a result of government subsidies, are not: • Cost efficient or • Customer service oriented • And thus not very attractive to private investors

Future Trends • Deregulation and Privatization will continue • Deregulation is still limited to countries internally or in alliances…not in general • Multilateral transportation accords are inevitable as countries form economic unions-weakening of cabotage will occur • Deregulation does not imply unregulated • Enforcement of a competitive market place • Safety, environmental impact, etc.

Future Trends • Governments will continue to be involved in the transport industry for a variety of reasons including: • Huge source of employment • National pride • Military transport requirements • So…deregulation will continue, but regulation and subsidy support is likely to continue, albeit on a more selective level

Government's Role • We have already discussed regulation and state ownership…what other roles do governments typically have with respect to the transportation industry? • Infrastructure • Physically with roads, airports, ports, etc. including construction, maintenance and operation • Transport related with weather service, air traffic control, customs services

Government's Role • Governments enact and enforce laws • Safety • Environmental impact related • Citizens ultimately pay for these government services • Through taxes • Through higher prices for goods whose transport included the use of these services paid for by fees

Government's Role • Questions of fairness arise when the cost is carried by citizens and the industry is essentially a pass through as is often the case in the global market place, e.g. consider the nature of inter-modal transport in a bridging mode

Summary of Transportation Modes

Intermodal Transportation • Intermodal transportation is the movement of a shipment from origin to destination utilizing two or more different modes of transportation • More specifically, items are transferred from one mode to another in unit loads, e.g. standard 20 foot ISO container transferred from a ship to a trailer chassis to a rail car to a ship, etc. • Denotes a systematic transfer of goods from one mode to another in such a way as to minimize handling and total transit time

Intermodal Transportation • Without this systematic transfer, we use the term multi-modal to describe transport using more than one type of transportation • Most of the intermodal transportation today centers around the ISO standard metal container • 8x8.5 and either 20 or 40 feet long • Ship capacities measured in “TEUs”, i.e. Twenty Foot Equivalent Units

Intermodal Transportation • Containers are carried by ship, truck and railroads • Allow for a high degree of mechanization in the transfer • Allow for standardization in equipment • Allow for packaging considerations to minimize cost and damage • Higher degree of security

Intermodal Transportation • In global logistics, intermodal transportation is increasingly important • Combinations of transport to reach final destination • Land as a bridge between ocean legs • Some intermodal by air transport as well • Containers designed to fit in aircraft and transfer to trucks • No real effort to connect with ocean or rail • Would defeat the purpose of using the high-cost but fast air transport

Summary • Transportation is undergoing a great deal of change • Market place based • Deregulation • Increasing intermodal opportunities • New opportunities for logistics managers

Global Supply Chain Management