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TRANSPORTATION OPERATIONS MANAGEMENT TRANSPORTATION OPERATIONS MANAGEMENT DARRENJ.PROKOP
ProfessorofLogistics,CollegeofBusinessandPublic Policy,UniversityofAlaskaAnchorage,Anchorage,AK, UnitedStates
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ISBN:978-0-12-815415-1
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Dedication Thisbookisdedicatedtomywife,Stephanie,whoseloveandsupportwere instrumentalinhelpingmegetthisbooktothefinishline.
1.Introductiontothetransportationproblem1
Theroleoftransportationinoperationsmanagement1
Transportationvaluevs.cost12
Introductionoftheplayers13
2.Theeconomicsoftransportationoperations23
3.Transportationandsupplychainmanagement55
4.Location,networks,andcongestion81
Theroleofgeography81
Locationtheory85
Transportationnetworks89
Managingcongestion97
Issuesandproblemsgoingforward111 References112 Furtherreading112
5.Transportationfleetmanagement113
Privatefleetvsfor-hire113
Avoidingfixedcosts116 Front-haulvsback-haul122 Fleetmanagement125
Issuesandproblemsgoingforward128 References129
6.Theroleofinformationtechnologyintransportation131 Fromsteamtodata131
Digitizationandtransportation133
Predictiveanalytics137 Artificialintelligence141 Blockchain145
Electronicbillsoflading147
Datasharingandcustomerservice149
Adoptionanddiffusion151
Issuesandproblemsgoingforward153 References154
7.Problemsintransportationcosting155
Jointcostvscommoncost155
Totalcostofownership160
Thecostofdemurrageanddetention162
Costofregulatorycompliance165
Issuesandproblemsgoingforward171 References171
Author’sbiography DarrenJ.ProkopisProfessorofLogisticsintheCollegeofBusinessand PublicPolicyattheUniversityofAlaskaAnchorage.Heisanactiveconsultanttogovernmentandbusinessandhaspublishedseminalresearchinthe microfoundationsoflogistics,cabotageregulations,aircargologistics,and supplychainsecuritymodeling.Hisotherbooksinclude TheBusinessof Transportation, ConceptsofTransportationEconomics,and GlobalSupplyChain SecurityandManagement.
Preface Transportationoperationsmanagementisacriticalelementoflogistical processesthatsupporteverylinkalongasupplychain.Withoutcarefulplanningandmanagementoftransportationoperations,commercialmarkets— fromrawmaterialextractionthroughtoretaildeliveryandfinal consumption—wouldnotfunctionproperly.Inshort,alltrade,fromlocal tointernational,wouldslowdownorevenshutdown.Evengovernments, intimesofemergency,relyonhavingsoundtransportationoperationsin placeinordertomaintainorrestorethesocioeconomicfabriconwhich allcommercialmarketsdepend.
Itisinterestingtoconsiderthecuriouspositionthattransportationholds inthebusinessworldandinbusinessschools.Tomanyitisaninvisible industry—ablackboxinbetweenpickupsanddeliveries.Aslongasthe shipmentarrivesintactandontime,whythinkmuchaboutwhatgoeson inside?Ofcourse,iftheshipmentdoesnotarriveorisdamagedalongthe way,theconsequencescouldbedire.Atthatpoint,consternationreplaces complacency.Certainly,whenitcomestodoingbusiness,noonethinksthat ignoranceisbliss.Yet,sincetransportationoperationsaresospecialized,itis notexactlyastraightforwardactivityfornonspecialiststothinkabout.
Perhapsonereasonforthisblackboxattitudeisthat,despiteitsseeming invisibility,transportationoperationscanbehighlycomplex.Thisleads nonspecialiststowanttoleaveittoexperts.However,transportationoperationsarevulnerabletoriskanduncertaintyfrommanysources.Inother words,ashipmentfrompointAtopointBmaytravelonmultipletypes ofconveyances,overland,air,andwater.Severalfor-hirecarriersmaybe responsiblefortheshipmentalongtheway.Variousportsofcallmaybevisitedastheshipmentistransferredfromcarriertocarrier.Inotherwords,alot ofthingscanimpacttheintegrityoftheshipmentorthedeliveryschedule.
Thisbookoutlinestransportationoperationsnotasaunilateralexercise handledbyfor-hirecarriersbutasacollaborativeactivitythatfacilitatestrade betweenbuyersandsellersofrawmaterials,subassemblies,andfinished goods.For-hiretransportationisacontractualactivity;therefore,itisopen tocriticalanalysisjustlikeanyotherbusinessactivitybetweentwoormore parties.Ofcourse,transportationoperationscanleadtouniqueproblemsin costingandpricing.Sincetransportation,likeanyotherproductionprocess, isbuiltintothepriceafinalcustomerpays,itisimportanttoconsider
for-hirecarriersassupplychainpartnersratherthanasnecessary,butmerely transactional,agentsbetweenbuyersandsellersoftangibleitems.
Thisbookisanattempttodelveintothenutsandboltsoftransportation operationsmanagementinordertomaketheinvisiblevisibleforthosebusinessmanagersandstudentswhowishtoshinealightintothismetaphorical blackbox.Thisopensupawidearrayofchallengesandopportunitiesforall businessmanagers.Forstudents,itappliessimilartoolsofanalysistothe transportationindustrywhichis,bydesignandbyregulation,nonhomogenousacrossthefivebasicmodesoftransport—motorcarrier,watervessel,air, rail,andpipeline.
Nobusinessorgovernmentorganizationcanmanageitsactivitieswithoutreliabletransportationoperationsusingsuitableinfrastructure.Theonly exceptionisafancifulorganizationwhereallinputsupplyandconsumer demandwerelocatedinthesamesmallarea.Thiscertainlydoesnotapply tomoderneconomicactivityintheageofhigh-techmanufacturing,informationtechnology,globalization,andthedesirefortravel.
Tointroducethetransportationproblem, Chapter1 outlinessomekey foundationalconcepts.Supplychainmanagementisdefinedincludinghow transportationimpactsit.Issuesareexploredthatinvolvetransportnetwork design,pricingatvalueversuscost,andcontractualobligations.Therelationshipbetweentheconsignoroftheshipmentandthefor-hirecarrierwill beamajorthemethroughoutthebook.Sincetransportationisnotahomogenousactivity,distinctionsinoperationswillbemadefromamongthefive basiccarriermodes.Thecomplexitiesoftransportationplanningthatwillbe touchedupondeservetheattentionofthebuyersandsellersoftheitemsto beshipped.Theymayhavetoresorttooutsourcingthisfunctiontoanintermediarythatwouldarrangefortransportationontheirbehalf.Issueswill arisewhenitcomestonegotiatingfreightrates,termsofpayment,and thecontentsofthecontractofcarriageknownasthebilloflading.Transportationrepresents,therefore,yetanotherimportantdimensioninthe negotiatingandcontractingprocessesfoundinmodernsupplychain management.
Theroleoftransportationintheeconomy—specifically,itsroleasafacilitatorofproductionandtrade—isthesubjectof Chapter2.Balancingtransportationoperationsgiventhattherearemultiplecompetingsourcesof economiesofscaleanddiseconomiesofscaleishighlighted.Theroleof governmentisoutlinedintermsofmarketintervention.Thiscreatesa distinctionbetweenprivateefficiencyandsocialefficiency.Tohighlight thiscomplicatedrelationship,someuniqueexamplesoftransportation
regulationsarediscussed.Thesemaybeseenasoperationalconstraintsthat affecthowtransportationnetworksaredesignedandtheroutestakenalong them.Basically,allfor-hirecarriersmustdevotetimeandmoneytoward regulatorycompliance.
Transportationoperationsareexaminedin Chapter3 withinthecontextsofdeterminingsupplychainefficiencyandresiliency.Ofcourse,these twocontextsneednotbeinterdependent.Transportationfacilitatesvalueaddingactivitiessuchasprocurement,production,inventorymanagement, anddistribution.Eachoftheseactivitiesrequiresadjustmentstobemadeto transportationprovision.Shipperandfor-hirecarrierrelationshipsarealso examinedwithinthecontextofbillsoflading.Ofcourse,informationgatheringandsharingamongthesevariousplayershelpmitigatesupplychaindisruptions.Thefivebasicmodesoftransportandtheirdifferentsupport infrastructureareunderincreasedpressuretoprovidecustomerfulfillment. Thisnecessarilyrequiresimprovementsinsupplychainresiliencyandcooperationalongthesupplychain.
Chapter4 considerstheinterfacebetweenlong-distancetransportation operationsandphysicalgeography.Therearelogisticalimplicationsofdoing businessonaround,nonhomogenousearthwithapopulationthatis unevenlydistributed.Seasonalpatternsandroutingviaorthodromesarediscussed.Managingnetworkchokepointsandtrafficcongestionisanecessary consequenceofgeographyandlimitedinfrastructure.Thisisexaminedfrom agame-theoreticperspective.Transportationtechnologymayimproveover time,butseasonalityandtheearth’stopographywillremainconstraintsto stabilityintransportationmarkets.Thecomplexityoftrafficplanningis examinedintermsofagrowingtensionbetweenself-interestandauthoritativecontrol.Addingtothechallengeisthateachmodeoftransporthas differentmixesofprivatecontrolandgovernmentregulation.Assuch,each modeisnotlikelytoadoptnewtechnologiesinthesamewayandatthe samespeed.
In Chapter5,fleetmanagementtechniquesareexaminedandtheir modaldifferenceshighlighted.Inparticular,thechoicebetweenashipper developingaprivatefleetandusingfor-hirecarriersisconsidered.Regardingconveyancesthemselves,thereisalsothechoicebetweenowningand leasing.Nomatterwhichchoicesaremadetherewillstillbethefundamental problemofbalancingfront-haulandback-haulshipments.Thisisexamined inthecontextofmarketcompetitionandthenatureofthelogisticalconstraintsoftime,physicalspace,andlocation.
Chapter6 examinesthedegreetowhichgeneratingandsharingdatais transformingtransportationoperations.Inparticular,theprocessesofdigitization,artificialintelligence,machinelearning,andblockchaintechnology areevaluated.Theanalysisistakeninthecontextofdataasaninputtoproductionandasaprice-excludiblepublicgoodorclubgood.Thereare incentivesanddisincentivestosharingdataamongthevariousplayerswithin transportationmarkets.Issuessurroundingsecurity,electronicdocumentation,contracting,andcustomerserviceareoutlined.Theuseanddiffusion ofthesevarioustechnologiesacrossthedifferentmodesoftransportarenot likelytobeuniform,andthiscreatesparticularchallengesininternational transportation.
Problemsinmeasuringthecostoftransportationareexploredin Chapter7.Theseincludedistinguishingbetweenjointcostsandcommon costs,whichopensadebateonthenatureofwhattransportationasaservice issupposedtoachieve.Also,thefullsetofcostsinvolvedinarrangingforand providingtransportationareconsideredinthecontextofthetotalcostof ownershipfromtheperspectivesofconsignors,for-hirecarriers,andconsignees.Thecostsofdemurrageanddetentionareusedtoillustratetheproblemoftimingandcoordinationininternationaltransportation.Several examplesofthecostofregulatorycomplianceareoutlinedtocontrast howefficiencyandfairnessarehandled.Allmodesoftransportationareregulatedandtovaryingdegrees.Thismeansthefullcostoftransportationcan bequitedifferentacrossmodes.
Chapter8 coversproblemsinmeasuringrevenueflowsintransportation. Increasingrevenueneednotmeanincreasingprofit.For-hirecarriers,therefore,haveastrategicdecisiontomakewhentheyconsiderhowtopricetheir productsandservices.Revenueiscomparedtocostinordertodetermine thelevelofprofitoverarangeofsupply.Thecomponentsofrevenuemanagementsystemsareexaminedinpassengerandcargocontexts.Thepractice ofpricediscriminationisexaminedfromarevenueperspective.Adegreeof revenuecertaintyintransportationisbestcharacterizedbythelimitedantitrustimmunitygrantedbytheUSgovernmenttointernationalcontainershiplineshandlingUSexportsandimports.Standardandreverseauctions areexploredasamethodtopromotecompetitionthroughfindingasuitable priceratherthanhavingthefor-hirecarriersetitindependently.Inthis regard,acriticalpieceoftheprocessbetweenthefor-hirecarrierandthe consignorswishingtoenterbidsisadetailedrequestforproposalthatforms thebasisoftheeventualcontractwiththewinningconsignor.
Distinguishingbetweenriskanduncertaintyisthesubjectof Chapter9 Bothareunavoidable,yettheireffectsaremanageabletosomedegree.The roleoftransportationisexploredintermsofthesupportitprovidestonormalmarketactivitiesandtoemergencymanagement.Riskanduncertainty, whentheyimpacttransportation,canpermeatethroughmultiplesupply chainsleadingtosignificantconsequences.Riskassessmentproceduresare introducedwiththepurposeofdevelopingariskmanagementplan.Supply chainpartnershipsofferopportunitiestoshareinriskmitigationprovided,of course,thattrustandinformationsharingarewelldeveloped.Servicecontractsareanattempttocodifytheserelationships.Theconceptsofforce majeureandgeneralaveragehighlightspecialconditionsthatcanhavesignificantimpactsontransportationdespitehavingwell-thought-outplans inplace.
Finally, Chapter10 lookstothefutureoftransportationoperations.It pullstogethersomecommonthemesfromthebookandshowsthatmany ofthechallengesfacingtransportationoperationstodaywillremaininthe future.Ofcourse,degreesmayvaryintheyearsahead.Thephysicalenvironment,infrastructure,supporttechnology,thedemandsofconsignors, andfinalcustomersattheendofthesupplychainwillalwaysbeasource ofcoordinationproblemsleadingtoriskanduncertainty.Thechapterlooks aheadandexploresautomationandenergyusage:twoconceptsthatbring togethermanyoftheforcesandconstituenciesthatcharacterizefor-hire transportation.
CHAPTER1 Introductiontothetransportation problem Theroleoftransportationi noperationsmanagement
Whatisoperationsmanagement? Operationsmanagementinvolvestheapplicationofpurposefullydesigned processesorsystemsinordertobetterunderstandorimprovespecificbusinessactivities.Theactivitythattendstobethemostprominentinoperations managementistheproductionprocess(i.e.,turninginputsintooutputs). Thisisbecausesuccessfulproductionservingtoday’smarketplacetakesplace whenthereisaproductionplanorsysteminplace.Imaginetryingtoproducesomethingascomplexasanautomobile—orevensomethingmuch simplerlikethepieceofglassusedinitsrearviewmirror—withouta step-by-stepprocessinplace.Usingthepieceofglassasanexamplethefollowingquestionsneedtobeaddressedfortheproductionprocesstobepurposefulasopposedtohaphazard:
(1) Whatarethespecifications(i.e.,sizeandthickness)oftheglassforitto fitintothemirror’sframe?
(2) Istheglassmadein-houseorboughtfromavendor(i.e.,anupstream supplychainpartner)?Ifitwasthelatterwhatcriteriawasusedto chooseaparticularvendor?
(3) Howmanyfinishedpiecesofglassaretobeonhandforinstallationper workday?Wherewilltheglassbestoredandwhatmaterialsare requiredinstoringandmovingittotheassemblyline?
(4) Howmanypiecesofglassshouldbeheldininventory(toguardagainst shortages,andtoreapanysavingsfrombuyinginbulk)?Apartfromthe issueofstorageandmaterialsnotedinquestion3,shouldanyinventory notlikelytobeusedovermanyworkdaysbestoredattheproduction facilityoratsomeotherlocale(giventhattheremaybemultipleproductionfacilitiesacrosstheregionorcountrywhichdrawsdownthis inventory)?
Theanswerstoallofthesequestionswillbebasedonthenecessitiesofthe productionprocess(i.e.,wheretheinputsaredrawnfrom,wheretheycan
beused,andwherethefinisheditemsaresold),andthemarketplace(i.e., whattheinputscostandwhatthecustomersarewillingtopayforthe finisheditems).
Theanswertoquestion2mostlikelywillbethattheglassispurchased fromavendorspecializingintheproductionoftemperedglassforcarmirrors.Infact,mostproductionprocessesarenotself-sufficient.Resource needsareoutsourcedsothatfirmscanconcentrateontheircorecompetencies.Thecarmanufacturerspecializesinthedesign,functionality,andfitand finishofcars.Outsidevendorsdealingwithspecialtyitems(notonlyglass, butalsotires,paint,brakes,andcountlessmore)usetheirexpertisetotryto meetthemanufacturer’sspecifications.Therefore,relationshipsamong manyseparatepartiesarenecessaryfortheproductionprocesstobeefficient. Thesebusinessconnectionsformwhatisknownasasupplychain.
Whatissupplychainmanagement? Supplychainmanagementinvolveslinkingorganizationstogetherinorder tofulfillsomestrategicpurpose.Thelinkagescouldbebasedonmergerand acquisition(M&A)oronindependententitiessettingupcontractual arrangements.M&Asupplychainsimplythatoperationsarecharacterized moresobycommand-and-controlratherthanthemarketsignalsofprice andcost.Thisarrangementmaymakesenseifavendorissupplyingacritical resourceintheproductionprocessanditisdesirabletohavetightcontrol overitssupply.Thecontractualarrangement,ontheotherhand,givessupplychainpartnersmoreflexibilityinthateachhastofulfillexpectationsfor theotherasenshrinedinthelegalcontract.Precontractnegotiationscansort outwhattheseexpectationsare.Also,ifonepartyisnotprovingtobeavaluablepartnerthecontractcouldbeallowedtolapseandotherpartnerships couldform.Thisarrangementisparticularlyusefulwhenthemarketfor vendorsorforcustomersiscompetitiveandmadeupofmanyplayers.
Considerthestructureofasupplychainasshownin Fig.1.1 a Thisisa standardrepresentationthatincorporatesseveralsupportandconstraintprocessesaswellaslogistics(tobediscussedinsection“Whatislogistics?”).The transportationfunctionisnotreadilyapparentbutitisimplicithere.Thereare fiveprimaryprocessesproceedingfromrawmaterialvendorstothefinalcustomer;thatis,fromproductionleadingtoconsumption.Eachstageaddsvalue tothesuccessivecustomerswhoformtheinterdependentpartnershipsalong thesupplychain.Again,thiscouldinvolvejustoneverticallyintegratedfirm
a Thisisbasedonthevaluechainasfirstproposedby Porter(1985)
(formedthroughM&A)sellingtoanendcustomerattheretaillevelormultiplefirmsallundercontracttosupplytheirrespectiveproductsandservices.
Inboundlogisticsinvolvespurchasingandtransportingallnecessary inputsfromthepointoforigintothepointofstorageandproduction. Theproductionprocessusesthecollectedinputsincombinationsnecessarytoproducesubassembliesand/orfinishedproductsforimmediate saleorstorage.Ifproductiontakesplaceatmultiplefacilities,transportationwillbenecessaryinordertofulfilltheproductionplan.Outbound logisticsinvolvesthepurchasingandtransportationofthefinished products.
Ofcourse,thesethreeprimaryprocessesinvolvebuyingandselling.The customerbuysfromanupstreamvendor.Likealltransactions,informationis exchangedbeforeanybuy-sellagreementismade.Thisiswheretheother twoprimaryprocessescomein.Marketingfacilitatessaleswhensellerssignal theattributesoftheirsuppliesrelativetothedemandsignalssentbytheir customers.Price,cost,quality,availability,etc.,arethesignalssentback andforth.Customerservicegoesbeyondmarketingandtiesalloftheother primaryprocessestogethersothatthecustomerfeelsfulfilled.Thismeans thepromisescontainedinthemarketingfunctionaretobeturnedintorealitybycombiningthemwiththelogisticsofdeliverytothecustomeratthe appropriatetimeandplace.Forexample,marketinginvolvespromotinga producttoapotentialcustomerbase.Customerserviceinvolvesmakingsure thedistributionnetwork(i.e.,theoutboundlogistics)isabletofulfillthe marketingmessage.Thinkofitthisway,marketingtellsthepotentialcustomerallaboutsomethingthatisnotyetinthelatter’spossession.Anexpectationisnowplantedinthepotentialcustomer’smind.Ifthefinished product,whenboughtandinthecustomer’spossession,meetsthose
Fig.1.1 Thesupplychainwithsupportandconstraintprocesses.
expectations,customerserviceissuccessful.b Anotherimportantitemincustomerserviceistheposttransaction.Hereissuesrelatedtowarranties,repairs, exchanges,andproductrecallsaddtothelevelofcustomerfulfillment.
Therearefoursupportprocesseswhich,intheirownway,applytothe primaryprocessesasthoseaddvalue.Again,transportationisimplicitin these.Procurementofmaterial,implementationandmaintenanceofthe hardwareusedinmachinetechnology,connectivityofhumanresources overaphysicalnetwork,andthemaintenanceofthefirm’sinfrastructure (i.e.,buildings,roads,etc.)allrequiretransportationtotheextentthatitems andpeoplemustbetransportedfromwheretheyaretowheretheyare needed.Inasense,transportationsupportstheothersupportprocesses shownin Fig.1.1
Intandemwiththesupportprocessesaretwosourcesofconstraintsto thevalue-addingprocess.Theseare governmentregulationsandmarket failures.Operationsmanagementwouldnotbetoohardiftherewere noconstraintstoforcechoicestobemadeamongavailablealternatives. Theconstraintsshownin Fig.1.1 arenotthoseresultingfromthelaws ofphysics(e.g.,machinerywilldepreciatewithuse)orthemarketplace (e.g.,ifanitembecomesscarcerelativetodemanditwillbecomemore expensive);rathertheseinvolvehow operationsareill-affectedintheir smoothnessorsimplicitybygovern mentand/orbymarketsnotworking properly.
Transportationisahighlyregulatedindustry.Why?Threereasonsare: itcontributestocongestiononpublicroadways,waterways,andairspace; itproducessignificantenvironmentalpollution;anditrequiresthebuildingofextensiveinfrastructure(oftenattaxpayerexpense).Allofthese by-productscannegativelyaffectthehealthandsafetyofthegeneralpublic.Totheextentthattheyinterferewiththeleisurelyenjoymentorbusinessactivitiesofthegeneralpublictheyarecontributorstowhat economistscallmarketfailures.Oftengovernmentsrespondbyusingregulationstomitigatethesecausesofmarketfailures.Examplesinclude standardsforvehiclemaintenance,limitationsofhours-of-serviceon
b Successfulcustomerserviceshouldnotbeconfusedwithperfectionor100%fulfillment. Withmultiplecustomers,eachwiththeirownvaluationsandaversionstocostandrisk, itisimpossibletosatisfyallcustomers.Totrywouldbetoocostly.Forexample,toguard againstallpossibilitiesofastock-outrequiresanexcessivesafetystock.Thetrade-offis betweentheactualcostofsafetystockvs.theprobablecostofsomecustomersdemanding morethanusual.Eachunitofsafetystockis,therefore,subjecttodiminishingreturns.The artistostriketherightbalanceintermsofcostcontrol.
theroad,routingairplanesawayfromsuburbanareasatnight,etc.These man-madeconstraintsmaybringaboutsolutionstooperationalproblems thatappearcounterintuitiveatfirst.Onesuchexamplemightrequirea shipmentusingtwotrucks(andtwodrivers)insteadofoneifthejurisdictiondoesnotallowdouble-trailertrucks.Ofcourse,regulationsmay bepurelypoliticalandhavenorelationshipatalltomarketfailures.An exampleherewouldbeaUS-basedoceanvesselcompanybuyinghigherpricedvesselsfromUSshipyardsbecauseforeign-builtvesselsareprohibitedunderfederallaw.c
Transportationhasauniqueplaceinthesupplychain.Infact,all supplychainsrequiretransportatio ninordertofulfilltheiroperations andachievetheirgoals. d Forproofsimplyconsiderthetypeofsupply chainwherenotransportationisre quiredatall.Nomatterwhatphysicalitemorintangibleservicethesupplychainistoproduceandsell,if thereisnotransportationrequiredt henallsupply(i.e.,rawmaterials, utilities,workers,etc.)andallendc ustomersmustbewithincloseproximity.Ifthisweretrue,acarbuyeranddealer,forexample,wouldhave tobenearanironoremine(whichisthesourceofthecar’ssteel).Of course,theywouldalsohavetobenearbysourcesofrubber,aluminum, glass,etc.Sinceallofthesesourcesare,themselves,notinthesame placesomethingand/orsomeoneisgoingtohavetobemovedfrom itsorigintowhereitisneededintheproductionprocess.Thisiswhere transportationcomesin.Itallowss upplychainstobespreadoutover longdistancesandacrossmanydifferentcountriesandcontinents. Withouttransportationtherewouldbenointernational,interstate,or intrastatetrade.
Transportationisanactivityrequiringspecialequipment,trainedoperatorsoftheconveyancesused,andeacharesubjecttoavarietyofgovernmentregulationsatfederal,state,andlocallevels.Usingthechoicebetween M&Aandcontracting,supplychainpartnersneedtothinkaboutwhichof thetwowouldprovidemoreefficienttransportation.Aproduceroftangible itemscouldprovideitsowntransportationservicesbyestablishingaprivate fleetofconveyances,oritcouldacquireatransportationcarrierthrough M&A.Asnotedabove,thismaymakesenseiftransportationisacritical
c ThisisknownasananticabotageregulationwhichhasbeenthebasisofUSlawsincethe MerchantMarineAct(1920)alsoknownastheJonesAct.Foramoredetailedexplanation see Prokop(2014a)
d Foranintroductoryoverviewofthetransportationmarketsee Prokop(2014b)
processandthemarketplaceforsuchservicesisnotverycompetitive.Onthe otherhand,ratherthanbeingburdenedwithmaintainingafleetofconveyances,theproducercouldcontractoutitstransportationneedstoafor-hire carrier.Inthiscase,notonlydoestheproducerhavetheflexibilityafforded bycontractualarrangementsbutcosts(intheformoffreightrates)maybe lowerthanthecostsincurredin-house.Ifthisissothenafor-hirecarrier wouldbeanotherpartnertobeaddedtothelistofsupplychainpartners. Ofcourse,themorethetypesoftransportationnecessarytomovesomethingfromorigintodestinationthemorefor-hirecarrierpartnerswill beneeded.
Whatislogistics? Logisticsistheartandscienceofman agingtheconstraintsoftime,physicalspace,andlocation.Whilesupplychainmanagementisaboutthe structureandlinkagesoforganizations,logisticsisabouttheflowofitems withinthatstructureinordertofulfillthemutualgoalsofthesupply chainpartners.Transportationisal ogisticsactivitythatissynonymous withflow.Alloftheprimaryprocessesshownin Fig.1.1 requireitwhen anitemgoesfromorigintodestination;movingfromwhereitistowhere itisneeded.
Intermsofflow,logisticscanbeseenasfulfilling“sevenrights”todownstreamcustomersalongthesupplychain.Thisinvolves:
(1) makingsuretherightproduct
(2) ispackagedintherightquantity
(3) deliveredintherightcondition
(4) totherightcustomer
(5) attherighttime
(6) intherightlocation
(7) anddoingallofthisfortherightprice
Gettingalloftheserightrequirescarefulplanning,knowledgeofwhatthe supplychainpartnerswantandwhattheyarecapableof,andbeingflexible whensomethingshouldchangethatisbeyondone’scontrol.Logisticsplanningmeansunderstandingpointsoforiginanddestination,whatcouldhappenin-between,andwhichmodeormodesoftransportationarebest equippedtofulfilltheseven“rights.”Whatevertheproductis,points 1–2requireconsiderationofthesizeandconfigurationoftheconveyance transportingtheshipments.Point3relatestostoragetechnology.Points 4–6relatetotheinfrastructureofthetransportationnetworkandroute
chosen.Point7meansthattheothersixpointswherehandledefficiently withnounnecessarywaste.e
Itwasnotedinsection“Whatissupplychainmanagement?”thatproductioncostsmaybeloweriftransportationiscontractedout.Whyisthis thecase?Basically,transportationisthemostoutsourcedlogisticalactivity. Supplychainpartnerstypicallydonotwanttomaintainaprivateconveyanceletaloneanentirefleetofthem.Atthesametime,transportationis oftenseenbynonspecialistsasa“blackbox”whereitemsareshippedfrom origintodestinationwithsupplychainpartnersonlyconcerningthemselves aboutwhatishappeningduringthisprocesswhensomethinggoeswrong alongtheway(e.g.,thedeliveryisprojectedtobelate).Inotherwords, transportationisaspecialactivityrequiringspecializedtechnology,trained operators,andsubjecttospecificregulationsatalllevelsofgovernment.Itis littlewonder,then,thatmanycompaniesinvolvedinmanufacturingwould ratherhirethisservicethanperformitin-house.
Theblackboxoftransportation Whensomethingorsomeonemustbetransportedfromorigintodestination whatsortofplanningisinvolved?Firstthereisapresuppositionthatthis movewilladdvalue(beitfinancial,personal,orsocial).Anotheristhat theactualcostofthemoveislessthanthevaluetobeadded.Inotherwords, thereshouldbenetvalueadded.Whodetermineswhetherornotthereisa netvalue?Basically,itisthepersonmakingthearrangementsfortransportation.Asasimpleexample,considertravelingalongajammedfreewayor throughacrowdedairport.Whywouldsomeoneputupwiththeinconvenience?Presumably,itisbecausethevalueaddedatthedestinationmore thancompensatesforthetimeandenergyusedupwhilewaitinginaqueue. Also,travelersandshipmentsmaynothavemuchflexibilitywiththeir
e Ausefulwaytothinkaboutefficiencyisintermsofproductionandallocationofresources. Productiveefficiencymeansthattheactivitywashandledintheleast-costlyway.Inother words,noothermodeoftransportorroutecouldhavemovedtheproductfromoriginto destinationatalowercost.Allocativeefficiencymeansthattheactivitywashandledto meetalltheexpectationsofthecustomer.Forexample,ifspeedisparamountthenairdeliveryismoreefficientthan,say,motorcarrierwhenthedistanceisinthousandsofmiles. Noticethatallocativeefficiencyistheprecursortoproductiveefficiency.Therighttime andrightconditionofashipmentmayrequireaseeminglymoreexpensiveformoftransportation;butitisefficienttouseitsolongasthecustomeriswillingtopayextrafora speedydelivery.
