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Michigan State University. Transportation. Relative Transportation Costs. Transportation costs represented 6.3% of total U.S. GDP in 1990 Transportation costs represented over 50% of total U.S. logistics expenditures in 1990

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relative transportation costs
Relative Transportation Costs
  • Transportation costs represented 6.3% of total U.S. GDP in 1990
  • Transportation costs represented over 50% of total U.S. logistics expenditures in 1990
  • Transportation accounted for 27% of total U.S. energy use and 63% of total U.S. petroleum use in 1990
economic impact
Economic Impact
  • Logistics contributes approximately 10.5% of GDP
  • U.S. industry spent $451 billion on freight transportation in 1996
  • U.S. industry spent $311 billion on warehousing, storage, and carrying inventory in 1996
  • Total logistics costs equals almost $800 billion
logistics overview
Logistics Overview

Why has logistics become increasingly important?

  • Cost reduction pressures are severe
  • Logistics has a high impact on customer service
  • A strong need exists for demand and supply planning consistency
  • A focus on core competencies has placed logistics in the outsourcing “spotlight”
  • Development of IT technology supports integrated logistics management
  • Government deregulation of transportation has created new opportunities
total cost concept
Total Cost Concept
  • The total cost concept recognizes that an optimum cost in one area or function may not lead to an optimum total system cost
  • Total cost analysis requires the management of supply chain trade-offs
  • Logistical activity areas that drive total logistics costs:
    • Customer service level costs
    • Inventory carrying costs
    • Lot quantity costs
    • Order processing and information costs
    • Warehousing costs
    • Transportation costs
customer service measures
Customer Service Measures
  • Order cycle lead time
  • Stock availability/fill rates/stockouts/back orders/partial shipments
  • Record integrity
  • Frequency of delivery
  • Delivery reliability
  • Order tracing capability
  • Volume flexibility
customer service measures1
Customer Service Measures
  • Invoice accuracy
  • Order status information
  • Technical support responsiveness
  • Unscheduled service responsiveness
  • Speed of product feature changes
  • Product and service quality
value added transportation concept
Value-added Transportation Concept

Product/Info Flows






Info/Return Goods Flows

transportation related service elements
Transportation-Related Service Elements
  • Speed: time-in-transit
  • Availability: accessible to customers when they want it
  • Dependability: pick-up and delivery time variability
  • Flexibility: adjustment to shipper’s needs
basic modes of transportation
Basic Modes of Transportation

Fixed Variable Traffic

costs costs composition

Rail high low bulk food, mining,

heavy mfg

Motor low medium consumer goods,

medium/light mfg

Water medium low bulk food, mining,


Air low high high-value goods,

rush shipments

Pipe high low petroleum, chemicals,

mineral slurry

relative operating characteristics
Relative Operating Characteristics



Speed 3 2 4 1 5

Availability 2 1 4 3 5

Dependability 3 2 4 5 1

Capability 2 3 1 4 5

Frequency 4 2 5 3 1

Composite 14 10 18 16 17

1 = best, 5=worst

  • Enables shippers to benefit from advantages of multiple modes of transportation
  • minimizes disadvantages of individual modes





transportation decision making in an integrated supply chain

Decision Flow






Transportation Decision Making in an Integrated Supply Chain


Understand total network flows


Understand individual lane flows

Understand current carrier usage patterns

Decision Scope

Make mode/carrier decisions

Routing/Scheduling, Load Planning, etc.



transportation costs
Product related



ease or difficulty of handling


Market related

intramode/intermode competition

location of markets

nature and extent of regulation

balance/imbalance of freight traffic

seasonality of product movements

domestic vs. international

Transportation Costs
transportation economies
Transportation Economies
  • Economy of Scale

Cost per unit




transportation economies1
Transportation Economies
  • Economy of Distance

Tapering Principle

Cost per load


shelf standards
Shelf Standards
  • Brand Consolidation
  • Space
  • Position
  • Proper Groupings
  • Price
  • Schematic
  • Housekeeping
  • Point of Sale
shelf management principles
Shelf Management Principles
  • Place your wines at eye level or the best position possible.
      • 80% increase if moved from bottom to eye level
      • 43% increase if moved from bottom to waist level
  • Place your wines next to the best selling competitive wines.
  • Place your wines next to wines that are priced higher than your wines.
  • Introduction
  • Transportation Infrastructure
  • Transportation Management
  • Importance of Transportation
  • Value-added Role of Transportation
transportation role in value attainment process
Transportation Role in Value Attainment Process
  • Critical element of structure, capacity, and movement decisions
  • Both between supply chain members and intra-organizational
transportation infrastructure
Transportation Infrastructure
  • Modal Characteristics
  • Changing Environment
distribution of u s intercity freight of ton miles
Distribution of U.S. Intercity Freight (% of ton-miles)

Rail Motor WaterAir Pipe

1980 38% 22% 17% .2% 24%

1990 37% 26% 16% .2% 20%

Average Revenue per Ton-Mile

1980 $2.8 $18.0 $.77 $46 $1.0

1990 $2.7 $24.4 $.75 $140 $1.4

changing transportation environment
Changing Transportation Environment
  • Deregulation
  • Time-based competition
  • Expanding geographic coverage
  • Information technology
  • Social and environmental concerns
selected results of the changing environment economic impact
Selected Results of the Changing Environment - Economic Impact
  • Increased competition in individual markets - both within modes and between modes
  • More efficient carrier operations - less interlining, more direct routing, efficient pricing
  • Transportation costs declined in real terms and as percent of GDP
  • Transportation service quality improved
selected results of the changing environment industry impact
Selected Results of the Changing Environment - Industry Impact
  • Consolidation in rail, air and LTL trucking
  • Proliferation of TL carriers
  • Strong growth in regional trucking - networks
  • TL growing faster than LTL
  • Air freight growth
  • Intermodal growth: rail-truck, air-truck, rail-ship
  • Growth of “one-stop shopping” - 3PL
  • Private fleet conversion
selected results of the changing environment market impact
Selected Results of the Changing Environment - Market Impact
  • Demand for fast, dependable, responsive service at lower cost
  • Demand for a broader range of services to integrate supply chain functions
  • Core carrier concept - interdependence between shipper-carrier
  • Customized price/service packages/contracts
  • Relational view of transportation as a “value-added” service
transportation management
Transportation Management
  • Network Freight Flows: Macro-Decisions
  • Micro-Decisions
  • Information Systems Support
network freight flows a fully integrated approach
Network Freight Flows: A Fully Integrated Approach
  • Managing Inbound-Outbound flows in an optimal manner requires firm to have a good handle on the entire logistics process
  • Traditionally view transportation in a vacuum-- need to look at it in the context of the total logistics system
  • Greatest improvement opportunities lie in integrating transportation with other logistics functional areas such as purchasing, inventory control, forecasting and production scheduling
approach to analysis
Approach to Analysis
  • Analyze lane densities/frequencies: what opportunities emerge for:
    • inbound/outbound consolidation
    • vehicle consolidation
    • temporal consolidation
    • network consolidation - cross dock potential (hub and spoke systems)
approach to analysis cont
Approach to Analysis (cont.)
  • ) Once opportunities for consolidation are visible, make mode/carrier selection based on service/cost mix
    • Given similar service, are rates better on 1 mode/carrier than another?
    • Does any mode/carrier have relative strengths in a particular lane?
    • Any backhaul opportunities?
  • ) If so, look to consolidate loads on mode/carrier with best cost structure - assign private fleet to most costly routes
consolidation opportunities
Consolidation Opportunities
  • Inbound-Outbound flow consolidation: look for opportunities to combine inbound/outbound freight
  • Vehicle consolidation: use one vehicle/multi stops for LTL volumes vs. one shipment to each
  • Temporal consolidation: hold orders until large volume shipment possible
suggested analyses
Suggested Analyses
  • Network flows
  • Lane densities, frequencies, consistency
  • Freight distribution by mode, carrier
  • Consolidation opportunities
nodes and links in a logistics system w warehouse p plant m market
Nodes and links in a Logistics System(W=warehouse, P=plant, M=market)







lane densities
Lane Densities
  • Volume on a weekly basis
  • Consistency of volume
  • Volume + Consistency = Rate bargaining power
  • Identify LTL freight consolidation opportunities
inbound outbound lane densities
Inbound-Outbound Lane Densities

Site State In # Avg Wt Out # Avg Wt

DC 1 CA 135 2024 592 989

DC 2 CA 110 625 465 654

DC3 CA 125 1690 572 1005

DC1 AZ 2 228 28 444

DC2 AZ 7 502 9 484

DC3 AZ 1 1135 36 622

DC1 NM 0 0 44 462

DC2 NM 0 0 42 418

DC3 NM 0 0 89 517

DC1 TX 598 971 1975 957

DC2 TX 911 3147 2125 693

DC3 TX 1631 1619 1368 1716

mode carrier profile analysis
Mode/Carrier Profile Analysis
  • Understand freight distribution among carriers by state
  • Identify potential for core carrier concept


COTTON 4261.4 18.7

WARD’S 3050.7 13.39

PIQUA 2491.2 10.93

SO.BROKE 1914.4 8.40

N & P 1764.0 7.74

TRANSDYN 1546.2 6.78

KBT 1368.6 6.01

ITCO 1363.0 5.98

WRIGHT 811.9 3.56

TELEDYNE 727.2 3.19

OSBORN 723.1 3.17

SHAFFER 421.3 1.85

THREE I 259.0 1.14

ROCHEST 253.4 1.11

INTERSTATE 250.3 1.10

SUNFLOWER 232.0 1.02

SOS 190.2 0.83

MAWSON 169.9 0.75

LEE EXPR 165.4 0.73

POOLE 127.0 0.56

OLDSOUTH 124.1 0.54

NOBLETRK 123.6 0.54

CONCEPT 121.5 0.53

VICTORY 86.2 0.38

RBX 69.7 0.31

S & M 44.0 0.19

NORANDAL 43.6 0.19

PERFORM 43.1 0.19

MCGRIFF 42.3 0.19

North Carolina TL Van Freight Distribution



  • Opportunities to achieve balanced flows - obtain lower rates for providing loads both ways
  • Significant volumes for rate negotiation
  • Vehicle/temporal consolidation opportunities
  • Advantages of reducing number of carriers
mode carrier selection
Mode/Carrier Selection

step 1

step 2

Modal Choice

basic mode Specific Carrier step 3

intermodal legal type Transport

individual carrier provider

transportation pricing
Transportation Pricing

Function of:

  • cost-of-service
  • value-of-service
prices and volume
Prices and Volume
  • Per pound costs will decrease over volume/weight

Price per pound

Weight of load

price and density
Price and Density
  • Assuming no “weighing out,” denser products use space better

Price per pound



Product Density

transportation cost structures
Transportation Cost Structures
  • Variable: costs vary with services or volume:
    • line-haul costs of fuel, labor and maintenance
    • handling
    • pickup and delivery
  • Fixed: constant regardless of activity
    • Facilities, equipment and administration
  • Joint: “hand-in-hand” costs -- unavoidable
    • Example: the backhaul move
  • Common: shared costs (“overhead”)
    • need for Activity-based costing
pricing structures
Pricing Structures
  • Cost-of-service: “cost plus” method
  • Value-of-service: “market based” method
  • Combination: a middle of the road approach using cost (minimum) and value (maximum)
  • Net Rate Pricing: All-inclusive prices specific to customers’ needs (not discount-based)
limits on rates
Limits on Rates

maximum value of service demand

rate level

minimum cost of service supply

fully allocated

average variable


routing and scheduling
Routing and Scheduling


  • find best path a vehicle should follow through networks of roads, rail lines, shipping lanes, and air routes
  • determine best pattern for stops, multi-vehicle use, driver layovers, time of day restrictions


  • greater vehicle utilization
  • improved and more responsive customer service
  • reduced transportation expenses
  • reduced capital investment in equipment
principles for good routing scheduling
Principles for Good Routing/Scheduling
  • load trucks with deliveries for customers closest to each other
  • stops on individual days arranged together
  • start routes with farthest stops first
  • circular routes - don’t cross paths
  • use largest vehicles first if can be filled
  • mix pickups in with deliveries, not at end
  • if one stop far from other, use other truck
  • avoid narrow stop time windows, or handle separately

What Is Contract Logistics?

  • It is a very confusing term because there are so many different descriptions of what it really is.
    • “Contracting out the entire distribution function and the related information function”
    • “Subcontracting specific logistics activities to a third-party specialist service provider.”
  • A wide range of practices fall under these definitions
services provided by third party logistics providers
Services Provided by Third-party Logistics Providers
  • Transportation
  • Warehousing
  • Information management
  • Human resources
  • Management

Two Types of Providers

  • Asset-based
    • Own their own warehousing, transportation, computer systems, etc.
  • Data-based
    • essentially asset free companies who sell logistics management capability through their computer systems and managerial skill
  • There is frequently a bias against asset-based providers
categories of services available
Categories of Services Available
  • Exclusive Service Provider-devotes all resources to a single client
  • Consortium Service Provider-provides services to a small group of clients
  • Specialist Provider-provides services for products or clients who have specialized needs
  • National/Multinational Provider-provides services to many clients throughout the world
business drivers
Business Drivers
  • “Stick to the knitting”
  • “Vertical disintegration”
  • “How to do more, with less”
changing business environment
Changing Business Environment
  • Debt reduction <> unleveraging
  • Strategic focus of ...
    • Financial resources
    • Human resources
    • Information technology
  • Competition
    • Faster (agility)
    • Better (quality)
    • Cheaper (low cost provider)

Investment Rationing

advantages disadvantages
  • Less asset investment, redeploy capital
  • Lower operating cost (service provider
  • has economies of scope and scale)
  • Time lag between increased costs
  • and changing rates
  • More attention for core business
  • Gather missing management knowledge
  • Provide higher service level
  • Increased flexibility
  • Entry mode to new markets
  • Flexibility as environment changes
  • “Switching costs”
  • Possible higher operating costs
  • Less direct customer contact
  • Dependency
  • Loss of control
information systems support
Information Systems Support
  • Network analysis
  • Electronic Data Interchange
  • Freight rate maintenance and auditing
  • Routing and scheduling
  • Administration
    • Produce/track bill of lading for each shipment
    • Automated bills of lading
    • Automate shipment data files
    • Carrier evaluation