Chapter one :

Transportation, supply chain and

the Economy
 What is transportation?
• It refers to the movement of product from one location to
another as it makes its way from the beginning of a supply
chain to the customer.
• Transportation:
– involves the physical movement of goods between origin and
destination points.
– links geographically separated partners and facilities in a company’s
supply.
– facilitates the creation of time and place utility in the supply chain.
– has a major economic impact on the financial performance of
businesses
 Transport Functionality
• Transportation enterprises provide two major services:
– product movement :- raw materials, components, work-in-process, or
finished goods, the basic value provided by transportation is to move
inventory to the next stage of the business process.
– product storage: A less visible aspect of transportation is product storage.
While a product is in a transportation vehicle, it is being stored. Transport
vehicles can also be used for product storage at shipment origin or
destination, but they are comparatively expensive storage
 Principles of transportation
• There are two fundamental economic principles that impact
transportation efficiency:
– economy of scale:- in transportation is the cost per unit of weight decrease as
the size of a shipment increases. For example, truckload shipments that
utilize an entire vehicle's capacity have lower cost per than kg smaller
shipments that utilize a limited portion of vehicle capacity.
– economy of distance:- Economy of distance refers to decreased transportation cost per
unit of weight as distance increases. For example, a shipment of 800 miles will cost less to
perform than two shipments of the same weight each moving 400 miles.
– Transportation economy of distance is often referred to as the tapering principle. The
rationale for distance economies is similar to economies of scale.
 Demand for Transportation
• Rises when firm produce larger than local market (mass production) to
gain advantage of economies of scale leads firm to search for areas
where short supply.
• The interrelationship between transportation and mass production
points out the dependency of our global economy upon transportation.
• Demand behavior
• Demand is inelastic for transportation on the aggregate base but elastic
among modes.
• Transportation Demand is dependent or derived demand
 Transportation System
• It can be defined as a planned network of elements or physical components
that play different roles in the transportation of goods and persons from one
place to another.
• The elements or physical components of a transport system are referred to
as the facilities.
• A transport system can therefore be considered as consisting of fixed
facilities, the flow entities, and control system that permit people and goods
to overcome the friction of geographical space efficiently in order to
participate in a timely manner in some desired activity.
 Fixed Facilities
• The fixed facilities are the physical components of the system that are fixed
in space and constitutes the network of links and nodes of the transportation
system.
• For example, the links could be roadway segment and railway track and the
nodes could be intersections, interchanges, transit terminals, harbours, and
airports
• The design of these fixed facilities has traditionally been within the realm of
civil engineering.
• The design includes soil and foundation engineering design, structural
engineering design, the design of drainage systems, and geometric design,
which is concerned with the physical proportioning of the elements of fixed
facilities.
 Flow Entities
• Flow entities are the units that traverse the fixed facilities. These include
people, vehicles, container units, railroad cars, and so on.
• In the case of a road system, the fixed facilities are expected to
accommodate a wide variety of vehicle types, ranging from bicycles to
large tractor-trailer combinations.
 Mobility & Accessibility
• Mobility refers to the ability to move between different activity sites
– If a facility could move people and goods very fast then that facility provides very high
mobility
• Accessibility refers to the number of activity sites connected by the facility
– If a facility provides connection to large number of residences, commercial places and
industrial places then it provides very high accessibility
• Mobility and accessibility are inversely related.
 Transportation Participants

I need something shipped

at the lowest possible
cost!
 Transportation Participants

I need something shipped

at the lowest possible I need something
cost! delivered at the lowest
possible cost!
Transportation Participants

Carriers: We have the

equipment!
 Transportation Participants

Carriers – we can find a shipper!

Shippers – we can find a carrier!
 Transportation Participants

the transportation system is

vital for the country’s
economic health
 Transportation Participants

purchase fuel,
transportation
equipment, supplies
 Transportation Participants

track shipments

purchase fuel,
transportation
equipment, supplies
 Transportation Participants

track shipments

purchase fuel,
transportation match products needing to
equipment, supplies be shipped with available
capacity
Transportation Participants
Creates demand for
transportation by
purchasing products
 I. Third Party Providers

• The offering of nearly any form of transportation to a

shipper or receiver as part of a total package of logistics
services

• Shipper or user avoids capital outlays and investment

• Focus on core competency--let experts do logistics

 II. Freight Forwarders
• Formerly common carriers
– non-asset owning

• Earn difference between what they charge (LTL, LCL) and what
they pay (CL, TL)

• Issue bill of lading

 Forwarder Operations

For-hire
Consignees

Forwarder carrier Forwarder LTL

Terminal Terminal Shipper

Breakbulk Linehaul Consolidation Pickup

 III. Owner-Operator

• Own or lease a truck and trailer and make services available to

for-hire carriers

• Contract out their services to non-union carriers

• Provide overflow capacity and flexibility

• Reduce financial risk to carriers

 IV. Freight
IV. Freight BrokersBrokers
• Intermediaries who bring shippers and carriers together for a fee
• Find customers for carriers or carriers for shippers
• Reduce burden for carriers & shippers
• Find best means/rate for shippers
• Help maximize capacity for carrier
• Information Systems expanding opportunities
 V. Express & Courier

• UPS, FEDEX, DHL

• Fast, door-to-door service
• Operate large network of terminals, pick up and delivery
vehicles, and line haul
• Typically under 200 lbs
• Compete with Postal Service
• Future good due to expansion and innovative practices
 Transportation and economy
• Transportation is a pervasive and extremely vital function in all
industrialized economies.
• Transportation systems provide the necessary critical links between
producers and consumers both domestically and globally.
• It reaches and touches every phase and facet of our wellbeing. Viewed
in totality from a historical, economic, social, and political perspective,
it is the most important industry in the world.
• Without transportation, you could not operate a retail store or win a
war.
 Why trade?
• Traditional factors or reasons for trade are:
– Absolut and comparative advantage which initiates the concepts of trade
among nations or countries.
• In today’s more complex, global economy, that can give advantages to countries
and provide a basis for global trade flows are:
• factors of production (land, labor, capital, and entrepreneurship)
• improved global transportation,
• faster communication with lower costs,
• population growth, and
• technology advancement.
 Demand for Transportation
• Rises when firm produce larger than local market (mass production) to
gain advantage of economies of scale leads firm to search for areas
where short supply.
• The interrelationship between transportation and mass production
points out the dependency of our global economy upon transportation.
• Demand behavior
• Demand is inelastic for transportation on the aggregate base but elastic
among modes.
• Transportation Demand is dependent or derived demand
 Trends affecting transport

• Globalization and Global Supply Chain Management

• Trade liberalization – Facilitation – Security
• Technical and technological changes
• Changing role and scope of the public sector
• Environmental awareness - growing responsibility for
sustainable development

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 Supply chains - Transport - Competitiveness

• Globalization is putting increased pressure in the

organization of supply chain
• Specialization, utilization of superior resources, and
economies of scale in production and distribution are
important
• All depend on efficient freight movement to be successful
• Freight movement is fundamental to the functioning and
competitiveness of a modern economy
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Challenges to Carrying out transportation role:
– competing goals among supply chain partners
– supply chain complexity
– changing customer requirements
– limited information availability
– synchronizing transportation with other supply chain activities
– Transportation capacity constraints pose a challenge.
– Rising transportation rates present another major concern for organizations.
– The transportation industry is impacted by governmental requirements that
affect cost structures and service capabilities.