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13 Chapter 2 The Role of Freight Transportation in Product Supply Chains Transportation services are needed to deliver raw and inter of its final demand (once again requiring that each production mediate materials to producers and to deliver final products site have smaller capacity). When transportation services to retailers and final customers. Supply chain management are improved, the firm can better optimize warehouse and (SCM) involves decisions about what to produce, what inputs production operations and maintain lower overall inventory to use, how to configure a distribution network, how much levels. Improvements in information technology also can inventory to maintain, and how to transport inputs and prod improve the utilization of transportation services, making ucts. Logistics management is the part of SCM that involves them more attractive relative to the use of other logistics decisions about how and when to get raw materials, inter inputs. An example of this complementary relationship is the mediate goods, and finished goods from their respective origins widespread adoption of just-in-time inventory management. to their destinations. Included in logistics management are With just-in-time inventory management, fast and reliable choices of modes of transportation (rail, truck, water, etc.), transportation has been combined with information tech shipment characteristics (less-than-load vs. full load, etc.), nology to reduce the need for maintaining large inventories, warehousing, and levels of inventories to maintain. These are improving the overall efficiency of the logistics process. interrelated and not independent decisions. In general, some shipper responses to changes in transporta This chapter provides an overview of the role of transporta tion costs and reliability are short-term in nature, while others tion in product supply chains, a description of the U.S. freight are for the longer run. For example, consider the impact of transportation system, and an illustration of how conflicts an increase in rail rates. In the short run, the producer might between freight and other land uses can disrupt supply chains. consider drawing down inventories with the plan to rebuild More details on these issues can be found on the EnvisionFreight them when rail rates come back down. If the rate increase is website, http://www.EnvisionFreight.com/. viewed as permanent, the producer might seek alternative modes of transportation and, to the extent possible, decrease use of rail transportation; but this might take a bit more time than Supply Chains and Transportation drawing on inventories. In the much longer run, the producer Many factors affect producers' logistical choices and supply could make changes to plant location and distribution design. chain configurations. These include the costs of transportation It should be noted, however, that even in the long run, some modes, reliability of transportation modes, the ease of switch shippers may still have limited options. For example, the site of ing between modes, the costs of holding inventory, and the a coal-burning electricity generating plant is essentially fixed amount of logistical costs as a share of total production, dis (although the plant operator has some flexibility in the use of tribution, and marketing costs. Some of these other logistics the plant's capacity and its dispatch order). A recent study by the inputs can be used as substitutes for freight transportation, U.S. General Accountability Office (GAO) discusses the adjust while others are complements. For example, if a firm cannot ments businesses may make in response to reduced freight rely on fast and reliable transportation, it can still accommo reliability in their supply chains. Adjustments could include date the demands of its customers by siting its warehouses carrying higher inventories in warehouses for meeting produc closer to its customers (while at the same time constructing tion needs, planning for longer-than-normal transit time, and warehouses with smaller capacity), increasing its inventory not serving specific markets that cannot be reliably accessed. levels so that it can respond to unexpected increases in final Furthermore, industries that use just-in-time production demand, and/or siting its production closer to the locations processes that rely on predictable transportation are especially