Transportation

Seventh Edition
Coyle, Novack, Gibson & Bardi
© 2011 Cengage Learning

Chapter 1
Transportation:
Critical Link in the
Supply Chain

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duplicated, or posted to a publicly accessible website, in whole or in part.
 Introduction
• Chapter focus: The role transport plays in:
– Fostering improved supply chain integration
• Integration is not achievable without effective transport
– Helping organizations to be more efficient and
effective
• Chapter organization
– Conceptual dimensions of transport
– Fundamentals of supply chain management
– Role of transport in the supply chain
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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Introduction
Economics of Transportation
• Transportation
– Pervasive element of daily life
– Impacts citizens’
• Economic well being
• Safety
• Social interaction
• Quality of physical environment
• Quality of daily life
– Chapter focuses on the economic impact
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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Per Capita Transportation
Expenditure by Mode (USD)
Year 2009
Total 791.35
Highway 402.76
Transit 177.00
Railroads 6.12
Air 155.80
Water 44.84
Pipeline 0.32
General Support 4.51
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or duplicated, or posted to a publicly accessible website, in whole or in part.
National Transportation Statistics 2012
 Safety

2009 Fatalities Injured

Total 35929 2250698
Air 547 301
Highway 33808 2217000
Railroad 695 7979
Transit 230 21420
Waterborne 886 3931
Pipeline 13 67
National Transportation Statistics 2012
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 Social Interaction

• Personal relations
• Formation of settlements
• Size and pattern of settlements
• Growth of urban centers
• Political role of transportation
– Administration of an area
– Political choices in transport
Introduction to Transportation Engineering Tom V. Mathew and K V Krishna Rao
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 National Average Vehicle Emissions
2010
Air Emission Per Vehicle (Grams per mile)
Total HC 0.889
Exhaust CO 9.365
Exhaust Nox 1.298

National Transportation Statistics 2012

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 Emergency Transport

• Medical, Fire & Police

• Evacuations before, during or after an
event.
• Delivery of emergency supplies & services.
• Search and rescue operations.
• Quarantine.

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Percent reporting expenditure and amount spent, average quarter, 2010
$1,968.02/Purchaser

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Introduction
Demand for Transportation
• Regions or areas tend to specialize in certain economic
activities
– Wisconsin :: Cheese Other??
• This specialization creates physical gap between markets
and areas of production for a given good
• This gap creates a demand for transport
– Derived Demand!
• Fundamental economic role of transport is to bridge this
supply-demand gap
– Transportation is the Glue that holds supply chain together
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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Introduction
Transport Measurement Units
• Typical measurement units
– Ton-miles (freight) and passenger-miles (people)
– Caution: Both units are heterogeneous. Two units
may have
• Very different costs of production
• Very different service requirements
• Levels of measurement unit aggregation
– Total transport output (freight or passenger)
– Transport output by mode (mode share)
– Transport output by carrier (market share)
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied 11
or duplicated, or posted to a publicly accessible website, in whole or in part.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied 12
or duplicated, or posted to a publicly accessible website, in whole or in part.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied 13
or duplicated, or posted to a publicly accessible website, in whole or in part.
 Introduction
Price Elasticity of Demand
• Sensitivity of demand to price change
• Relative measure between price change and
quantity change. Measured as:
% change in quantity  % change in price
• Terminology
– Price elastic: demand is sensitive to price change
– Price inelastic: demand is insensitive to price
change
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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Price Elasticity of Demand

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied 15
[Link]
or duplicated, or posted to a publicly accessible website, in whole or in part.
2009/12/[Link]
 Introduction
Price Elasticity of Demand
• If % change in quantity < % change in
price, then demand is price inelastic
(insensitive to price change)
– Price increase leads to revenue increase
– Price reduction leads to revenue reduction
• If % change in quantity > % change in
price, then demand is price elastic
– Price increase leads to revenue reduction
– Price reduction leads to revenue increase
© 2011Cengage Learning. All Rights Reserved. May not be scanned, copied or 16
duplicated, or posted to a publicly accessible website, in whole or in part.
 Introduction
Price Elasticity of Demand
• Aggregate demand for freight transportation
tends to be price inelastic (e.g. otherwise?)
– Cost for transport generally small % of
product’s landed cost
• Demand for particular mode or carrier tends
to be price elastic
– Often, substitutes are available (e.g.?)
• Service (as opposed to price) elasticity
– Change in service causes change in quantity
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[Link]
ppingfacts/worldtrade/the-
low-cost-of-transporting-
[Link]

18
 Freight Transportation
Derived Demand

• Definition of derived demand

– Demand for transport service to move a product
to a given location depends upon the existence
of demand to consume (use) that product at that
location
• Remember, demand is a relationship between price
and quantity demanded
– Aggregate demand for freight transport cannot
be easily affected by individual carrier actions

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 Implications
for planning?

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 Value of (Transport) Service
• Transport cost is a component of landed cost
– Landed cost includes:
• Cost of production
• Transport cost from production point to market
– Transport costs influence a producer’s landed cost
advantage/disadvantage vs. competitors, thus
determining the market value of the transport service
• Similar to place utility concept (see Ch. 2)
– Landed cost also determines extent or range of a
producer’s market area (Lardner’s Law) and thus the
value of transport service
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied 21
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© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied 22
or duplicated, or posted to a publicly accessible website, in whole or in part.
 90.9 miles 109.1 miles
<

$50 + $0.6 (X) = $50 + $0.5 (200-X)

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Value of (Transport) Service
Service Components of Freight Demand
• Critical service characteristics and related
supply chain cost impacts
– Transit time
• Volume and cost of holding inventory
• Potential stockout and/or safety stock costs
– Reliability or consistency of transit time
• Safety stock and/or stockout costs
– Accessibility: impacts transport cost and time
– Capability: “special” service requirements
– Security: safety stocks and/or stockout costs
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 Level-of-Service Variables
Freight Travelers
• Price • Price
• Travel Time • Travel Time
• Service Reliability • Service Frequency
• Availability of Specialized Equipment • Comfort
• Probability of Loss And Damage • Reliability
• Rate Structure • Waiting Time
• Service Frequency • Safety and Security
• Shipment Size • “Intangibles”
• Information
• Flexibility

25
Sussman, J. M. (2000). Introduction to Transportation Systems. Boston, Artech House.
 Differences between Traveler and
Freight Transportation
• The Transportation Process
• Safety and Security
• Level-of-Service Variables
• Groups
• Motivation for Travel
• Travel as Discretionary
• Success in the Marketplace
26
Sussman, J. M. (2000). Introduction to Transportation Systems. Boston, Artech House.
 Level-of-service is a function of
volume

27
Sussman, J. M. (2000). Introduction to Transportation Systems. Boston, Artech House.
 Value of (Transport) Service
Location of Economic Activity
• Historically, transportation influences location
of cities, particularly ports (London …?)
• For firms, transport influences the location of
manufacturing plants and distribution facilities
– Influences very pronounced for firms producing or
marketing globally
• Influences are dynamic
– As economic activity locations shift, the pattern of
transport demand also shifts and vice versa (Shift in
Manufacturing)
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 Supply Chain Concept
Development of the Concept

• Concept evolves in three phases

– 1960s: physical distribution concept
– 1980s: business logistics or integrated logistics
– 1990s: supply chain management concept
• A systems approach to analysis and
decision-making is common to all three
phases

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Supply Chain Concept
Development of the Concept

• Physical distribution concept

– Focuses on physical distribution system costs and
tradeoffs
– Objective was to find lowest total physical
distribution system cost
– Example: transportation mode or carrier selection
• Involves tradeoffs between transport, inventory,
materials handling, and packaging costs

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 Variation of Stock Over Time
Stock Arrival Point
Average demand

Supply Lead Time

Reorder Quantity
Reorder Point
Stock Level

Reorder Level Surge in demand

Safety Stock
Reorder Interval Delay in supply

Time
 Variation of Stock Over Time
Stock Arrival Point
Average Demand

Supply Lead Time

Reorder Quantity
Reorder Point
Stock Level

Reorder Level Surge in Demand

Gradual Stocking Safety Stock

Reorder Interval Delay in supply

Time 32
 Supply Chain Concept
Development of the Concept
• Business logistics concept
– Adds analysis of inbound or sourcing side to the
outbound physical distribution side
– Development facilitated by
• Economic deregulation of transport in U.S.
• Rising degree of international or global sourcing
• Both create additional opportunities for cost savings
through integrated management and coordination
– Notion that logistics contributes to customer
service and revenue generation begins to emerge
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 Supply Chain Concept
Development of the Concept
• Supply chain management concept
– Key underlying principles
• Systems analysis and management
• 3 key flows: product, information, and cash
• Integrated management of extended enterprise
• Focus on ultimate consumer of end product
– Transport: most direct influence on product flow
• Product flow is two way
• Growing importance of reverse logistics systems

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 Extended Enterprise

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 Supply Chain Concept
Development of the Concept
– Information flow
• Sales trigger replenishment orders flowing upstream
• Traditionally, replenishment orders used by upstream
supply chain members to forecast downstream demand
– Long intervals between orders create demand uncertainty
– Safety stocks used to buffer against uncertainty
– Magnitude of uncertainty and safety stocks amplify upstream in
a phenomenon known as the bullwhip effect
• SC compression via improved two-way information flow
reduces uncertainty and cost impact of bullwhip effect
– Transport carriers contribute to uncertainty reduction (reliable
and fast deliveries) and improved two-way info flow (advanced
shipment notices, bar codes, radio frequency tags)
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 Bullwhip Effect

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 Supply Chain Concept
Development of the Concept

– Financial or cash flow

• Payments flowing upstream for goods ordered
• If order and replenishment cycles shorten (orders
and product flow faster) then cash flows faster
• Faster cash flow reduces working capital
requirements for financing operations and processes
and contributes to improved profitability
– “free” cash flow cycle (Advance payment e.g. Dell)
• High transport service levels contribute to improved
customer service and faster cash flow
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