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13 Transportation services are needed to deliver raw and interÂ mediate materials to producers and to deliver final products to retailers and final customers. Supply chain management (SCM) involves decisions about what to produce, what inputs to use, how to configure a distribution network, how much inventory to maintain, and how to transport inputs and prodÂ ucts. Logistics management is the part of SCM that involves decisions about how and when to get raw materials, interÂ mediate goods, and finished goods from their respective origins to their destinations. Included in logistics management are choices of modes of transportation (rail, truck, water, etc.), shipment characteristics (lessÂthanÂload vs. full load, etc.), warehousing, and levels of inventories to maintain. These are interrelated and not independent decisions. This chapter provides an overview of the role of transportaÂ tion in product supply chains, a description of the U.S. freight transportation system, and an illustration of how conflicts between freight and other land uses can disrupt supply chains. More details on these issues can be found on the EnvisionFreight website, http://www.EnvisionFreight.com/. Supply Chains and Transportation Many factors affect producersâ logistical choices and supply chain configurations. These include the costs of transportation modes, reliability of transportation modes, the ease of switchÂ ing between modes, the costs of holding inventory, and the amount of logistical costs as a share of total production, disÂ tribution, and marketing costs. Some of these other logistics inputs can be used as substitutes for freight transportation, while others are complements. For example, if a firm cannot rely on fast and reliable transportation, it can still accommoÂ date the demands of its customers by siting its warehouses closer to its customers (while at the same time constructing warehouses with smaller capacity), increasing its inventory levels so that it can respond to unexpected increases in final demand, and/or siting its production closer to the locations of its final demand (once again requiring that each production site have smaller capacity). When transportation services are improved, the firm can better optimize warehouse and production operations and maintain lower overall inventory levels. Improvements in information technology also can improve the utilization of transportation services, making them more attractive relative to the use of other logistics inputs. An example of this complementary relationship is the widespread adoption of justÂinÂtime inventory management. With justÂinÂtime inventory management, fast and reliable transportation has been combined with information techÂ nology to reduce the need for maintaining large inventories, improving the overall efficiency of the logistics process. In general, some shipper responses to changes in transportaÂ tion costs and reliability are shortÂterm in nature, while others are for the longer run. For example, consider the impact of an increase in rail rates. In the short run, the producer might consider drawing down inventories with the plan to rebuild them when rail rates come back down. If the rate increase is 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 drawing on inventories. In the much longer run, the producer could make changes to plant location and distribution design. It should be noted, however, that even in the long run, some shippers may still have limited options. For example, the site of a coalÂburning electricity generating plant is essentially fixed (although the plant operator has some flexibility in the use of the plantâs capacity and its dispatch order). A recent study by the U.S. General Accountability Office (GAO) discusses the adjustÂ ments businesses may make in response to reduced freight reliability in their supply chains. Adjustments could include carrying higher inventories in warehouses for meeting producÂ tion needs, planning for longerÂthanÂnormal transit time, and not serving specific markets that cannot be reliably accessed. Furthermore, industries that use justÂinÂtime production processes that rely on predictable transportation are especially C h a p t e r 2 The Role of Freight Transportation in Product Supply Chains
14 likely to be affected by diminished freight transportation reliability (U.S. General Accountability Office 2008, 21). Figure 2Â1 illustrates the vital link between freight transportaÂ tion in supply chains and economic performance. ImproveÂ ments in freight transportation efficiency, reliability, and level of service have numerous economic benefits for production efficiency, optimization of distribution networks, and product choice and cost to consumers. As improvements are made in transportation infrastructure, producers are able to centralÂ ize their production operations and site their operations in lowerÂcost areas, because the uncertainties concerning the movement of goods to customers are reduced. Improvements in transportation infrastructure also allow a more efficient design of the distribution network. The cost of inventories can be reduced as the needed hedge against transportation uncertainties is reduced. This also allows firms to change their inventories quickly in response to customersâ changing needs or desires. This ultimately leads to lower cost and greater product variety for customers. Figures 2Â2 through 2Â4 provide examples of the role of transportation product supply chains. Figure 2Â2 shows the various stages of automotive manufacturing. Connections between the stages consist of some mode of transportation. In the case of auto manufacturing, truck and rail are the primary modes of transportation between the stages of production. Figure 2Â3 shows the top ports through which imported containerized goods enter the United States. These goods, which range from consumer goods to parts and unfinished goods for further processing, reach inland destinations via truck, rail, and/or water over the domestic transportation infrastructure. Figure 2Â4 illustrates the role of transportation in the export of grain from the production stage to its arrival in the destination country. In this supply chain, truck, rail, barge, and ship are the modes of transportation that are typically involved. Examples of the role of transportation in the supply chains of various commodities can be found in a series of case studies on the EnvisionFreight website at http://www.Envision Freight.com/value/. These include short commodity, imported containerized goods, and grain. The U.S. Freight Transportation System In 2008, 4.5 million people were employed in transÂ portation and warehousing industries in the United States, a little over 3 percent of total U.S. employment. Trucking was the largest employer within the forÂhire transportation section with almost 1.4 million employed. The railroad indusÂ try employed 231,000, and water transportation employed 67,000. Another key component of logistics services and supÂ ply chains, warehousing and storage, employed 672,000 (U.S. Department of Transportation RITA/BTS 2010, Table 3Â19b). The latest available data (2007) show that there were almost 220,000 employer establishments in the transportation and warehousing sector of the U.S. economy with revenues of alÂ most $640 billion and annual payrolls of more than $173 bilÂ lion. In addition, there were more than 1 million nonÂemployer establishments with revenues of almost $67 billion (U.S. Census Bureau 2007). A study prepared for FHWA reports that transportation costs accounted for 63 percent of 2002 logistics costs, invenÂ tory carrying costs (including warehousing, interest costs, taxes, obsolescence, depreciation, and insurance) accounted for 33 percent, and administration accounted for 4 percent. In 2002, transportation costs were composed of intercity truck (50 percent), local truck (27 percent), railroad (6 percent), logistics administration (6 percent), water (4 percent), air (4 percent), oil pipelines (1 percent), and shipperÂrelated costs (1 percent). Relative to the overall economy, total logistics costs were equal to almost 9 percent of U.S. gross domestic Source: Christensen Associates. Figure 2-1. The role of freight transportation in efficient production and distribution.
15 product (GDP) in 2002 (MarcoSys Research and TechnolÂ ogy 2005, 7Â8). An update of these figures indicates total logistics costs climbed to 10.1 percent of GDP in 2007 and fell to 7.7 percent of GDP in 2009 (Material Handling & Logistics 2010). The U.S. surface freight transportation network includes 4,016,741 miles of highways, 94,942 miles of Class I freight railroad tracks, 46,474 miles of regional and shortline railroad tracks, and 26,000 miles of navigable inland waterways (U.S. Department of Transportation RITA/BTS 2010, Table 2Â1Â1). Other important components of the freight transportation network include air freight and pipelines. An illustration of the importance of U.S. freight transÂ portation corridors and transportation modes is found in FigÂ ure 2Â5, which shows freight tonnage on U.S. highways, railroads, and inland waterways. Figure 2Â5 illustrates two key features of Source: Christensen Associates. Transmission & Power Train Parts Electrical & Electronic Equipment Metal Stamping Brake System Steering & Suspension Components Seating & Interior Trim Gasoline Engine & Engine Parts Automobile & Light- Duty Motor Vehicle Heavy-Duty Truck Truck Trailer Tire Manufacturing Motor Vehicle Plastic Parts Manufacturing Motor Vehicle Body Motor Vehicle Manufacturing Motor Vehicle Parts Manufacturing Motor Vehicle Body & Trailer Manufacturing Automotive Manufacturing Other Motor Vehicle Supply Chain Players Figure 2-2. Automotive manufacturing supply chain.
16 todayâs transportation network. First, the figure illustrates how supply chains extend across the country and into other parts of the world via key ports such as Los Angeles/Long Beach and New York/New Jersey, which are gateways to foreign trade as well as the origins and destinations of substantial shipments throughout the United States. Second, the figure shows that a substantial amount of freight is transported along a handful of key corridors. In addition to the rail traffic coming out of the Power River Basin in Wyoming and water traffic along the Mississippi and Ohio rivers, there are dense corridors of highÂ way traffic throughout the eastern part of the United States and along the West Coast. Figure 2Â5 also illustrates the importance of the Chicago area as a key U.S. freight transportation hub. In terms of volume of freight hauled by transportation mode, Figure 2Â6 illustrates the growing importance of truck and rail relative to other modes of freight transportation, because their shares of domestic tonÂmiles of freight inÂ creased significantly between 1980 and 2007. Associated with the increased proportions of rail and truck tonÂmiles were Source: Christensen Associates. Figure 2-4. Typical modal flow of grain exports. Figure 2-3. Top 25 container ports for U.S. international maritime freight, 2008 (U.S. Department of Transportation RITA/BTS 2009a).
17 Figure 2-5. Tonnage on U.S. highways, railroads, and inland waterways (U.S. Department of Transportation FHWA FM&O 2007). 0.1% 28.6% 39.5% 18.5% 27.1% 26.9% 27.4% 19.6% 12.0% 0.3% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% Air Truck Rail Water Pipeline 1980 2007 Figure 2-6. Shares of domestic ton-miles by mode, 1980 and 2007 (U.S. Department of Transportation RITA/BTS 2010, Table 1-46b).
18 significant pieces of legislation that largely deregulated these industriesâthe Staggers Rail Act of 1980 and the Motor Carrier Act of 1980. Intermodal shipments also are growing in importance, particularly truck and rail, in terms of tonÂmiles, and truck and air for highÂvalue and/or timeÂsensitive shipÂ ments (e.g., UPS and FedEx). The U.S. Commodity Flow Survey (CFS), produced through a partnership of the Bureau of Transportation Statistics and the Census Bureau, provides a comparison of the value of shipments and the weight and distance of shipments (e.g., tonÂmiles) by various transportation modes. For example, while rail accounted for about 40 percent of CFS tonÂmiles, rail shipments composed only about 4 percent of CFS shipÂ ment value in 2007. These figures reflect that rail shipments largely consist of lowerÂvalue commodities that are shipped relatively longer distances (e.g., coal). In contrast, trucking accounted for 29 percent of CFS tonÂmiles but over 70 perÂ cent of CFS shipment value in 2007. Intermodal shipments (not shown in Figure 2Â6) accounted for about 12 percent of CFS tonÂmiles and 16 percent of CFS shipment value in 2007 (U.S. Department of Transportation RITA/BTS 2009a). Figure 2Â7 illustrates the top gateways (by value) for U.S. foreign trade. The top water gateways are the Ports of Los Angeles and Long Beach on the West Coast, the Port of New York and New Jersey on the East Coast, and the Port of Houston on the Gulf Coast. The top air gateways are JFK International Airport in New York, OâHare International Airport in Chicago, and Los Angeles International Airport. The top land gateways are Detroit, Michigan; Laredo, Texas; and Port Huron, Michigan. A description of the various freight transportation modes and some of the major conflicts and forms of encroachment they face can be found on the EnvisionFreight website at http://www.EnvisionFreight.com/modes/. The Effects of Capacity and Congestion on Freight Transportation The expected travel times of shipments and the variance of these expected travel times (i.e., reliability) is a reflection of the transportation networkâs capacity and the degree of network congestion. Both capacity and congestion can be affected by the conflicting land uses with freightÂtransportationÂrelated services, such as the degree of encroachment of freight corÂ ridors and facilities. If congestion increases the average travel time or its variance, the level of transportation service declines. The degree to which shippers respond to increased congestion with changes in logistics choices is dependent upon the degree Figure 2-7. Top 25 foreign trade gateways by value, 2007 (U.S. Department of Transportation FHWA 2007).
19 to which logistics inputs, including alternative transportation modes, can be substituted for each other. The responsiveness of transportation demand with respect to changes in congesÂ tion is typically smaller in the short run than in the long run. For example, suppose that there is a reduction in congestion levels for a particular rail corridor due to the resolution of encroachment issues, such as the elimination of grade crossÂ ings. In the very short run, contractual commitments and production schedules may limit the degree to which the firm can take advantage of this reduced congestion. In a slightly longer timeframe, the firm may be able to shift some of its highway transportation to this now less congested rail corridor. In the longer run, firms may decide to relocate production operations and warehouses to make further use of that rail corridor. This will lead to further shifts in transportation utilization across modes and corridors. Given that most corridors are shared use, congestion is caused by a combination of both freight and passenger volumes. However, major contributions to congestion also include insufficient transportation capacity and/or inability to expand capacity. These capacity constraints are often related to encroachment issues such as physical barriers and incompatible adjacent land uses, particularly in densely populated areas. The GAO study reports that areas surroundÂ ing critical freight infrastructure are increasingly dense with development, making it more difficult and expensive to build or expand centrally located freight facilities. The GAO study notes that land near the Port of New York that was previously vacant or used for freight warehouses has recently been redeveloped into highÂvalue commercial and residential propÂ erty. As a result, freight distribution centers have moved away from the urban core to the New Jersey suburbs and eastern Pennsylvania where land values are comparatively low. HowÂ ever, access to ports is more difficult from these locations (U.S. General Accountability Office 2008, 14â15). Congestion that affects freight mobility has direct effects on users of freight transportation such as producers and end users of the products. Transportation costs and increases in these costs due to congestion are factored into the prices of the goods being transported. The GAO study cites one study that estimates that roadway congestion delays cost shippers approximately $10 billion per year and notes that although the freight sector experiences about 27 percent of congestion costs, truck traffic represents only 5 percent of total vehicle miles (U.S. General Accountability Office 2008, 18â19). A study by Winston and Shirley analyzed the impact of highway conÂ gestion on shippersâ inventory costs. These costs are related to the importance of timeliness of the goods being shipped and the consequences of additional transit times. Congestion also forces a shipper to hold higher inventories, which increases inventory holding costs. The authors concluded that $7 billion is the best estimate of inventory costs incurred by shippers for delays of shipments due to highway con gestion (Winston and Shirley 2004, 1). There are a number of indirect effects of freight transportation congestion as well. Such indirect effects include the costs of congestion on passenger traffic and negative enviÂ ronmental effects, such as increased air pollution. The effects of congestion on freight mobility, reliability, and costs have future implications for supply chains and logistics. For example, the GAO study observes that current supply chain strategies may not be economically beneficial in the future should freight mobility decline, and there are increasÂ ing costs in the form of higher transportation costs, higher warehousing and operational costs, or missed opportunities for other investments of production (U.S. General Accountability Office 2008, 21). The costs associated with encroachment can affect a variety of producers and consumers distributed over wide geographic regions. The fact that these costs are dispersed and encroachment issues may not be particularly newsworthy can create situations in which planners may not be aware of the full economic impact of encroachment. Furthermore, because the importance of freight transportation in supply chains often spans broad geographic expanses, the widely dispersed benefits of preventing or relieving freight corÂ ridor encroachment also are difficult to assess from a more localized perspective. Costs and benefits of encroachment can be viewed from two perspectivesâthe costs and benefits associated with the status quo, and the costs and benefits assoÂ ciated with changes to the current situation (e.g., preventing or alleviating encroachment). It is these two perspectives that provide the framework for properly assessing encroachment issues. Without the appropriate perspective and tools, there is a high probability of inadequately assessing both the costs of encroachment and the economic benefits derived from freight corridors.