Solution and Answer Guide for Transportation A Global Supply Chain Perspective, 10th Edition Robert

Solution and Answer Guide for: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 1: Global Supply Chains: The Role and Importance of Transportation

Solution and Answer Guide for Transportation A Global Supply Chain Perspective, 10th Edition Robert A. NovackBrian GibsonYoshinori Suzuki Chapter 1-13

NOVACK, T RANSPORTATION : A GLOBAL SUPPLY CHAIN PERSPECTIVE , 10E, 2024, 9780357908549; CHAPTER 1: GLOBAL SUPPLY CHAINS: T HE ROLE AND IMPORTANCE OF T RANSPORTATION

TABLE OF CONTENTS Content Type ............................................................................................................................................... 1 [Study Questions]...................................................................................................................................... 1 END OF SECTION EXERCISE SOLUTIONS .................................................................................................... 4 [CASE QUESTIONS].................................................................................................................................... 4

CONTENT TYPE [STUDY QUESTIONS] 1.

Transportation has sometimes been described as the glue that holds global supply chains together. What is the meaning of this statement and do you agree? Why or why not?

Solution: Most students will probably agree that transportation is the ―glue‖ of the supply chain since it connects the individual parts of the chain. Still, they should point out that information is also important to hold the supply chain together. The essence of the statement is that supply chains are extended enterprises with many parts, and the final outcome is a product delivered on time to a particular location without damage or delay. Transportation and information flows are key to this outcome. They should also point out that transportation and information can provide a strategic advantage, so they should be an important part of the planning process. Overall, supply chains play an important role in helping organizations gain a strategic advantage in the global economy of the 21st century.

2.

During the last 20 to 30 years, there have been a number of countries whose economies have experienced important economic expansion and development. One group of countries has been labeled the BRIC countries and the other the VISTA countries. Identify each of the nine countries and provide some insights about their economies and economic importance.

Solution: BRIC countries are Brazil, Russia, India, and China. The VISTA countries are Viet Nam, Indonesia, South Africa, Turkey, and Argentina. The BRIC group is generally considered to be the most advanced economy. China is clearly the most important, as indicated by the grade flow data in the chapter.

They are important for manufactured production well as resources. India has advanced rapidly through their

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Transportation A Global Supply Chain Perspective, 10th Edition Robert A. NovackBrian GibsonYoshinori Suzuki: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 1: Global Supply Chains: The Role and Importance of Transportation

educated and industrious citizens and technology, and organizations in India have become an important part of many supply chains. Russia and Brazil both have vast resources that can be the basis for funds, but they are also developing more advanced manufacturing sectors. They are challenged by their geography, size, and political factors. The VISTA countries have established themselves as countries for sourcing some basic manufacturing because of low labor costs. They also provide agricultural products and other resources for exporting. The key dimension for both the BRIC and VISTA countries is that establishing global supply chains has allowed them to be a part the global economies.

There is abundant information about the BRIC and VISTA countries on the internet if you want to make this question a special assignment or extra credit.

3.

The theories of absolute and comparative advantage have been offered as an economic rationale for trade between and among regions and countries. Compare and contrast the two concepts. Which of the two do you think is more important for explaining the growth in global trade during the last 25 years? Why? Solution: Both theories are offered as a rationale for expanded trade between and among regions and countries to promote growth and development. Absolute advantage is the oldest concept and easiest to explain, since each country has an advantage in the production of one or more products in the two-country scenario.

Comparative advantage postulates that even if one country has an advantage in both products, trade can still be advantageous. Comparative advantage has probably been the most important for overall development in our complex global economy since countries can produce so many products that are competitive with other countries, to some degree. However, complete advantage is still important to rationalize some major work flows, especially for basic materials and agricultural products. There are also seasonal and weather-related factors that provide advantages at particular times of the year for different regions.

4.

The overall growth of global trade has more than doubled since 2000. Why? What has been the most important factor prompting this growth? Is this rate of growth likely to continue in the future? Why or why not?

Solution: There are several reasons for this growth. Some of it can be explained by population growth and improved education systems in developing countries. Capital for development has become more widely available from private and public sources. There is also more acceptance of products manufactured in other countries. But probably the most important reasons are trade agreements and lower tariffs on imported products. These have been greatly expanded because of the recognition of how important global trade can be to economic development and the health and welfare of the citizens of the country. One of the biggest challenges to progress in promoting global trade is the political instability and terrorism that have developed in some areas of the world, such as Africa and parts of the Middle East. These factors undermine the benefits that can accrue from the growth in global trade. One can argue that the growth will continue because of the economic and political forces at work in the global economy, but there will be ups and downs or bumps along the road because of human error and greed.

5.

The size of a country’s population and the associated age distribution can be causal factors for economic growth. Why is the size of the population important to economic development? Can size be a disadvantage?

Why is age distribution important?

Solution: The sheer size of the population can be very important because labor is one of the prime factors for economic growth, and population numbers indicate the availability of labor. The size of the population can also indicate the market size and potential for selling products. Size can be a disadvantage if the economy cannot provide employment opportunities. Large size can also challenge the education system and may require government resources to sustain the basic needs of the citizenry. Age distribution affects the size of the labor pool of available employees. Also, older populations require more medical assistance and other services, which can drain the resources of individuals or government agencies. The population data and commentary in the chapter provide the basis for some interesting discussion. Again, this topic has abundant

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Transportation A Global Supply Chain Perspective, 10th Edition Robert A. NovackBrian GibsonYoshinori Suzuki: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 1: Global Supply Chains: The Role and Importance of Transportation

information available on the internet and could be the basis of a special assignment. The differences in population size, growth rates, age distribution, and education levels are all factors for economic development.

6.

Energy, food, and water are frequently cited resources that are critical for economic development. Explain the importance of each one to economic development. What disparities exist among countries with respect to these three resources? How can these challenges be resolved?

Solution: Energy is a primary ingredient to support agriculture, manufacturing, and transportation. Consequently, if much of the needed energy has to be imported, it will increase the cost of producing products and may put a country at a disadvantage in producing and exporting products. Food is almost self-explanatory since it is needed to sustain the citizenry of the country. When there is a food shortage, a country will be challenged unless it can offset this shortage with advantages in other areas, such as mineral resources or labor productivity. Water is a critical resource for individuals, agriculture, manufacturing, and other businesses and organizations. The absence of an adequate water supply is one of the most debilitating conditions for an economy. There are major differences around the globe regarding the availability and quantity of these resources. Technology may be able to solve some degree of this problem, but not all of it.

7.

Technology can impact economic development on both a macro and a micro level. What types of technology do we need to have such impacts on a macro basis? On a micro basis?

Solution: On a macro basis, technology is needed to increase the productivity of agriculture and manufacturing in many parts of the world. Improvements can also be made in the supply chains, especially in transportation.

On a micro basis, technology can improve the quality of life for many people through medical treatment, safety, and aids for seniors. We have made significant progress with technology, but some individuals feel that we have only scratched the surface of the potential to improve economic development. The supply chain has been the beneficiary of technology, especially information technology, to improve efficiency, effectiveness, and execution. However, in the last decade, technology's ―hard side‖ has been receiving more attention in transportation, warehousing, and manufacturing to improve efficiency and effectiveness.

8.

Robotics has attracted more attention in recent years. Why? How are robots being used in supply chains?

Solution: Robotics has indeed received more attention in many areas, especially health care, manufacturing, and distribution. Some people see robotics as a replacement for labor, but now robots are being viewed as complementary. It will improve manufacturing, distribution, health, and welfare of the population. Robots are being used in warehouses for shelving, order picking, loading, and unloading. Robots have potential in other areas of the supply chain, especially transportation.

9.

The economic integration associated with globalization can provide an opportunity for more widely dispersed development. Why is this possible? What are the major stumbling blocks to such integration?

Solution: Economic integration can release the power of comparative advantage and provide more growth, development, and prosperity. The major stumbling blocks are ―fear‖ and ―terror,‖ which are associated with individuals and groups who will exercise their ability to thwart trade flows for selfish or self-serving agendas. Collaboration among organizations in a global supply chain can be a driving force for more efficiency and effectiveness.

10. Supply chain management has enabled some companies to operate more efficiently and compete more effectively on a global basis. What inherent characteristics of supply chain management contribute to these outcomes?

Solution:

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Transportation A Global Supply Chain Perspective, 10th Edition Robert A. NovackBrian GibsonYoshinori Suzuki: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 1: Global Supply Chains: The Role and Importance of Transportation

Supply chains that are efficient, effective, and well executed can make companies more competitive. The basis of this outcome is related to systems analysis and trade-off analysis, which allow organizations to do what they can do best and depend on other organizations to provide the rest. The coordination and collaboration that should be inherent in supply chains are important ingredients for efficiency and effectiveness.

END OF SECTION EXERCISE SOLUTIONS [CASE QUESTIONS] Case 1-1 Off-Shoring? Near-Shoring? On-Shoring?

1.

Discuss the advantages and disadvantages of off-shoring, near-shoring, and on-shoring for these three industries.

Solution: From a supply chain perspective, the advantages/disadvantages will be the same for the three industries.

Off-shoring The obvious advantage of off-shoring is the labor cost advantage many other countries have. Another advantage is that the suppliers for these three industries have developed technical expertise and gained economies of scale in their production processes.

The biggest disadvantage, as seen as a result of the pandemic, is the distance to U.S. markets. Couple this with borders being shut down and U.S. tariffs on certain imports, and it is easy to see why off-shoring can present challenges.

Near-Shoring The advantage of bringing suppliers back to North America is the trade agreements the U.S. has with Canada and Mexico. These agreements facilitate border crossings and eliminate/minimize tariffs and duties. Another advantage is the relatively short distance among the three countries.

The disadvantage could be the lack of qualified suppliers and/or production processes in Canada and Mexico that could fulfill the needs of these three industries.

On-Shoring The obvious advantage to bringing production back to the U.S. is distance and the avoidance of border closings and tariffs.

The disadvantage could be the lack of qualified suppliers/production processes available in the U.S.

2.

What could the federal government do to convince firms in these industries to change their global trade patterns?

Solution: The biggest incentive the federal government could give firms in these industries would be tax breaks to relocate. The government could also provide subsidies, or seed money, to incentivize firms to relocate production to the U.S.

CASE 1-2 TEA Logistics Services, Inc. 1.

What opportunities do you see for TEA to expand globally, specifically to South Africa?

Solution:

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 2: Transportation And The Economy

Many U.S. companies are global in scope and need 3PL services wherever they locate. Following Systa’s move to South Africa gives TEA the opportunity to expand its current domestic operations. South Africa is particularly attractive because of the expected growth of global manufacturing that will be positioned there.

2.

What challenges do you see facing TEA in making this operating expansion?

Solution: When locating operations in another country, several issues might face TEA. First is the availability and condition of the transportation infrastructure to be able to move products inland and to the ports. Second is the availability and skill level of the local workforce. Third is the ability to secure both transportation equipment and warehousing space. Fourth is the cultural differences in South Africa that could pose problems for TEA. Finally, government regulations in South Africa might not be conducive to conducting business as a 3PL.

3.

If TEA were to accept the offer, how would you suggest that TEA enter the South African market when establishing operations?

Solution: TEA could partner with an existing 3PL in South Africa to begin operations.

Solution and Answer Guide NOVACK, T RANSPORTATION : A GLOBAL SUPPLY CHAIN PERSPECTIVE , 10E, 2024, 9780357908549; CHAPTER 2: T RANSPORTATION AND T HE ECONOMY

TABLE OF CONTENTS Content Type ............................................................................................................................................... 6 [Study Questions]...................................................................................................................................... 6 End of Section Exercise Solutions.............................................................................................................. 9 [Case Questions] ....................................................................................................................................... 9

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 2: Transportation And The Economy

CONTENT TYPE [STUDY QUESTIONS] 1.

There is much discussion on the local, state and federal levels about the need to repair and improve the Interstate Highway System. Provide rationale for meeting this need.

Solution: Investing in an improved transportation system would have an overall positive impact on multiple sectors of society. With transportation being key to economic stimulation, better infrastructure would improve businesses' ability to make products and provide services. It would ensure more efficient versatility in transportation opportunities, providing flexibility to determine the best routes and costs. Having the right products in the right place at the right time enables companies to maximize their revenue opportunities by adding extra value to their process. Transportation providers also play an influential role in national defense by moving military supplies domestically and internationally. Improved infrastructure ensures that our national defense forces can attain the supplies they need to protect our country in a timely matter.

Furthermore, improved infrastructure is necessary for the world to continue its push towards a more environmentally friendly society. When companies can save transportation costs, they can invest in areas that reduce their environmental impacts. Finally, an improved transport system results in social benefits.

Socially, a good transportation system can enhance the health and welfare of a population. Though it is not a significant problem in the United States, having the ability to transport food and other necessities throughout the country in an efficient manner can influence poverty and famine levels. Well-developed transportation also contributes to improved health and education delivery systems and effective communications among regions of a country.

2.

―Transportation is the most important factor in economic development.‖ Do you agree or disagree with this statement? Why or why not?

Solution: Transportation systems provide critical links between producers and consumers domestically and globally.

The citizens of industrialized countries depend on transportation systems to move products from distant locations where they are produced to markets where they are needed. It has long been recognized that one of the critical ingredients for underdeveloped countries to improve economically is investment in transportation infrastructure. This investment is frequently referred to as social capital; that is, society is the beneficiary of such investment because of the economic benefits associated with new businesses, higher wages, and more jobs.

3.

The opening of the Erie Canal and the building of the transcontinental railroad in the 19th century were described as significant milestones for economic development in the United States. Explain their importance individually and collectively.

Solution: The Erie Canal provided a link from the East Coast (specifically New York) to the Upper Great Lakes Region, which provided access to the Midwest. It was a bonanza for the manufacturers of the East to access those markets, and a pipeline to Midwest agriculture and mineral resources. While the Erie Canal was a ―man-made‖ public works, it was built cheaply (mostly with prison labor), and the tolls were minimal. The success of the Erie Canal spurred interest in other canals, but as pointed out in the text, none of them were as successful, and the railroads soon provided a more efficient and effective alternative to canals. The transcontinental railroad had essentially the same impact, connecting the eastern manufacturers with markets for their products and a supply of food and other resources for the more densely populated Eastern Seaboard. It was a classic win-win, but had some ―bumps and bruises‖ with political and individual greed leading to excesses. The Transcontinental rail system had a much larger impact when completed in 1866 than had the Erie Canal. Still, both were monumental stepping stones for the economic development and

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 2: Transportation And The Economy

growth of the United States, along with the social and political impact of connecting the citizenry of the country.

4.

The highways and other metropolitan transportation services are frequently described as the lifelines of metropolitan areas. Do you agree with this statement? Why or why not?

Solution: Transportation systems have a major impact on population patterns and urban economic development. A city would not be able to survive without its internal transportation system and the connecting transportation system to external markets and producers. Even the suburban areas surrounding the city are dependent on transportation systems. Transportation services add value to the goods shipped from the urban areas to markets, and provide the economic livelihood of the urban areas. On the other hand, urban areas need food and other supplies to sustain their populations. The cities could not exist without the efficiency of transportation systems into and out of the city.

5.

Compare and contrast time and place utility, and explain how they contribute to the value of products.

What is the importance of time and place utility in our global economy?

Solution: Place utility is created when a product is moved from a point where it is produced to a point where there is demand for it, and the buyer is willing to pay a price that covers the landed cost of the product and sufficient profit for the producer. The more efficient the method of transportation, the greater the potential market area and the greater place utility. Reductions in transportation cost permit market areas to purchase products from distant suppliers that might otherwise only be produced locally at a higher price. Time utility is aligned with place utility. The demand for a particular commodity may only exist during certain periods of time. If a product arrives in a market at a time when there is no demand for it, then it possesses no value.

Effective transportation can create time utility by ensuring that products arrive WHERE (place utility) and WHEN (time utility) they are needed. The increased emphasis on just-in-time and scheduled deliveries and lean inventories has heightened the importance of time utility, especially for high-value products and emergency shipments. Time and place utility are even more important for global supply chains, which face many challenges and more uncertainty because of the greater distances.

6.

Adam Smith stated the specialization of labor was limited by the extent of the market and that transportation helps to expand the market. Explain the meaning and importance of this statement.

Solution: The concept of geographic specialization assumes that each nation, state, or city produces products and services for its citizens with its capital, labor, and raw materials. Since most areas cannot produce all of the needed products for their citizens, transportation is necessary to exchange (buy and sell) the goods that can be produced more efficiently at another location in return for different goods produced locally. Gain from the specialization of goods will be mutually advantageous when the cost ratios of producing two commodities differ in other areas. The development of specialization usually leads to lower prices and increased productivity (read greater output). If there is insufficient demand for the increased output, the producer will have an excess supply with no value. The availability of efficient transportation networks to move the products/output to other geographical markets justifies the specialization and the advantages of scale economies. In other words, without the transportation system, the production efficiencies from specialization would be lost. The raw materials for production need to be transported to a manufacturing facility, and the finished products must be transported out of an area at reasonable costs to markets and consumers.

7.

Economists often point to the impact of improved transportation on land values and related economic development. What is the nature and significance of the transportation impact?

Solution: Transportation improvements can enhance an area's economy and increase the value of land adjacent to or served by transport improvements because the land becomes more accessible and potentially useful.

Suburban centers provide excellent examples. The value of the land in these areas has increased to reflect

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 2: Transportation And The Economy

the advantageous lifestyles that the new or improved transportation systems have made possible. The land values within the city are also enhanced by economic development. Another good example is along the major interstate highway systems that pass through remote, undeveloped areas. However, when you reach an interchange area, you usually see evidence of commercial establishments such as hotels, restaurants, service stations, shopping centers, and even industrial activity. The land at those interchanges greatly increased in value when the highway was developed and the interchange was established.

The Erie Canal and the transcontinental railroads mentioned previously had a major impact on land values in areas contiguous to these transportation systems. This was particularly true of the transcontinental railroad, which opened up the Western States as market areas and the source of many agricultural and mineral products.

8.

While improved transportation systems provide economic benefits, there may be some associated environmental costs. What are the major environmental costs associated with transport systems and what are their potential negative impacts?

Solution: Noise, air quality, and pollution are most frequently mentioned as potential negative impacts of transportation systems. If these impacts are too negative, they can negate the economic benefits of improved transportation. Sustainability and Green systems are frequently mentioned today, and there is no question that transportation and related supply chain activities have a major impact here. Much effort is underway to reduce the carbon footprint of transportation and supply chain activities through reduced truck miles, fewer packaging materials, etc. While not usually considered an environmental factor, transportation safety is also an issue and can have a negative impact on modern transportation systems.

Transportation systems can pollute the environment and exploit natural resources. The debate about the overall benefits provided by transportation exceeding the costs continues. The environmental challenges of the future will be to assess the relationship between industrial and consumer benefits, and to compare the construction and external societal costs of transportation improvements. Green supply chains – the balance between a sound and efficient transportation system and a safe and clean environment – have become part of our vocabulary. Pollution from internal combustion engines, acid rain which contains more pollutants from industrial and commercial processes, vehicle emissions, oil spills, and ship-generated garbage all have and will continue to have adverse effects on the environment.

9.

―Improved transportation systems can also have social and political significance.‖ Why are these important considerations for evaluating existing or proposed additions to the transportation system?

Solution: A good transportation system can enhance the health and welfare of a population and offer educational opportunities and effective communications among regions of a country. Adequate transportation is needed to create national unity; the transportation network permits government leaders to travel rapidly to and communicate with the people they govern. Information technology has enhanced opportunities to communicate and help unify a nation. Transportation also plays a role in bringing people together and exposing them to products and services from other regions of the country, which helps reduce regional social and political barriers.

10. The service characteristics of freight movements are considered by some shippers to be as important as or more important than the freight rate. Discuss the various service characteristics for freight demand. Do you agree with the statement that they may be as important as or even more important than the freight rate?

Why or why not?

Solution: Service characteristics of carriers have become much more important to shippers over the last thirty years, as they have recognized the cost trade-offs for improved service, such as lower inventory costs, reduced warehousing costs, lower loss and damage, lower landed cost, fewer stock outs, and better customer service. In effect, the freight rate had to be evaluated along with the service provided to determine the best alternative. Three modes of transportation usually have an advantage in terms of the lowest line-haul rates

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 2: Transportation And The Economy

between two points—rail, water carrier, and pipeline. Still, in general, they are at a disadvantage with respect to service. Whereas the motor and air carriers have some advantages for service, their rates are higher than the other three, especially the air carrier. As the value of the products increases, the importance of the service characteristics increases because the trade-offs are greater for inventory cost, warehousing, customer service, etc. The freight rate gets the most attention when the product values are low; e.g., coal, crude oil, and agricultural products.

END OF SECTION EXERCISE SOLUTIONS [CASE QUESTIONS] Case 2.1 Bipartisan Infrastructure Law 1.

The President has asked you to create the ―master plan‖ for implementation of these improvements.

Assuming that funding is available for all of them, which one(s) would you start first? Why? Which one(s) could wait until the end of the timeline (2026) to implement? Why? Solution: There is no one answer to this question. The students are being asked what order the improvements should be made. The students must provide an objective rationale for their answers.

Another part of the answer should be ―who‖ in the government will be responsible for the implementation?

Even though it is federal funding, it will be provided to the states to invest. The questions below should be answered.

1) Does the federal government or the state governments decide the priority and amount?

2) Which government committee(s) will be responsible for making these decisions?

2.

Are there any areas of ―infrastructure‖ not included for funding in this law that you think should be?

Explain your answer.

Solution: As in question 1, there is no correct answer to this question. The student will need to use creativity to decide what should be added. ―Infrastructure‖ can be loosely defined for this answer. Pipelines are not covered in the original law but could be eligible for public investment, even though they are privately owned. The school system, even though it is not transportation related, has infrastructure that, in many areas of the U.S., is in significant physical decline.

Case 2.2 Transportation and Economic Activity Also unique to these two cities was their manufacturing specialization: steel in Pittsburgh and automobiles in Detroit. Using the information contained in this chapter: 1.

Explain what role transportation played in the development of these two cities.

Solution: Both cities have access to the Great Lakes and the river system to move raw materials to their production facilities. Both also have access to the rail system as well as the highway system to move raw materials and finished goods.

2.

Discuss what factors would lead to their manufacturing specialization.

Detroit was where automobile assembly began in the United States. As such, it enjoyed comparable wages and manufacturing skills in its labor force. Pittsburgh has local access to bituminous coal, which is used in the making of steel.

3.

Identify any other benefits to a city or geography that manufacturing specialization would create.

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 3: Transportation Technology and Systems

• • • • • •

Pittsburgh manufactured steel (place and time utility).

Detroit manufactured automobiles and therefore needed a supply of steel.

Transportation characteristics such as transit time, reliability, accessibility, and capability all made Pittsburgh a cornerstone in providing steel to Detroit’s auto plants.

Geography also played a large role – proximity of Pittsburgh to Detroit.

Coal plays a large role in steel production, and PA had coal.

Canals, rivers, railroads, and Lake Erie all played roles in the manufacturing specialization, as Pittsburgh could fairly easily ship steel to Detroit via those modes.

Solution and Answer Guide NOVACK, T RANSPORTATION : A GLOBAL SUPPLY CHAIN PERSPECTIVE , 10E, 2024, 9780357908549; CHAPTER 3: T RANSPORTATION T ECHNOLOGY AND S YSTEMS

TABLE OF CONTENTS Content Type ............................................................................................................................................. 10 [Study Questions].................................................................................................................................... 10 END OF SECTION EXERCISE SOLUTIONS .................................................................................................. 14 [CASE QUESTIONS].................................................................................................................................. 14

CONTENT TYPE [STUDY QUESTIONS] 1.

Discuss the role of transportation information and how it supports network visibility, control, and service consistency.

Solution: - Visibility is key to maintaining cross-chain knowledge, assessing situations, and taking appropriate corrective actions; correct information is a must for visibility.

- Information is needed to maintain control and promote safe, timely, and cost-efficient transportation.

- Rapid delivery service is the norm in many supply chains; access to transportation information must expand.

2.

Describe the attributes of information quality and how they impact transportation decision making.

Solution: Information quality is a critical characteristic of the vast amounts of data flowing across a transportation network. Value trumps volume, and transportation professionals must be sure that they are basing decisions on correct information.

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 3: Transportation Technology and Systems

To ensure that actionable knowledge readily flows among shippers, carriers, and customers, information must display a variety of key characteristics. Chief among these attributes are accuracy, accessibility, relevancy, timeliness, and transferability. Also important are issues of usability, reliability, and value.

3.

Explain how a TMS enables delivery process planning, execution, and control.

Solution: The planning and flow of materials across the supply chain are handled by a Transportation Management System (TMS). The core set of business needs handled by a TMS includes routing and rating, executing the shipment across multiple modes, tracking and tracing loads, and freight settlement. This simple booking, execution, and payment perspective focuses on freight management, but a TMS can be much more than a transaction-focused tool. Leading-edge TMS suites provide hybrid planning–execution–evaluation capabilities, and a wide array of functionality to generate numerous benefits across the entire shipping process.

As the capabilities and scope of a TMS expand, the software moves from being a routine decision support tool to a much more integrative system. It provides greater decision support for strategic, tactical, and operational transportation planning, as well as delivery execution, in-transit visibility, and performance evaluation.

4.

What are some of the most valuable TMS functionalities? Why would a company want to link their TMS to other supply chain software systems?

Solution: TMS can generate a variety of cost and operational benefits. Table 3-1 summarizes the value proposition of a TMS. A widely cited and highly desirable advantage offered by a TMS is cost savings that increase return on investment (ROI). Various studies indicate that the use of a TMS helps an organization reduce freight costs by 6 to 10 percent. Users have attributed the savings to more effective mode selection, better routing, and better procurement negotiations.

By providing transportation professionals with desktop and mobile access to carrier rates and service information, a TMS also provides the ability to make better, faster carrier selection decisions that optimize costs, flows, and delivery. With this access, the freight buyer can quickly choose the best available option.

Another important reason to use TMS is the dramatic increase in end-to-end transportation network visibility. The TMS organizes relevant information into precise and easy-to-read lists, which equips the transportation professional to make impactful business decisions during critical moments that improve customers’ experiences.

Increased paperwork accuracy results from automated documentation processes. Key documents are produced using the TMS database of international, regulatory, and multilingual documentation. Both electronic and nonelectronic customs documents can be filed. This capability helps the transportation professional avoid delays caused by missing or incorrect documentation.

Other notable TMS benefits include improved customer delivery performance, greater compliance with regulatory requirements, and stronger data security.

To be most effective, TMS suites should be linked to or integrated with supply chain planning and execution systems. This will allow the systems to share information seamlessly and support end-to-end fulfillment processes.

For example, a link between a TMS and an order management system will make it possible to select carriers dynamically and develop routes as the order is being processed, rather than waiting until after the order is picked.

5.

How can a company facilitate a smooth and timely implementation of a TMS? Solution:

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 3: Transportation Technology and Systems

The mere purchase of point solutions or software suites does not guarantee quick success. Systems integration complexities and training requirements translate into implementation times that can exceed six months at costs that may be twice the software price. Thus, gaining a rapid ROI on technology is challenging.

The key to harnessing the capabilities of transportation software within a reasonable time frame is informed decision making. Transportation professionals take the time to develop a clear vision regarding how technology spending will facilitate freight movement strategy and satisfy specific goals. It is possible to achieve a 12- to 18-month ROI if the transportation experts properly assess their needs, understand the options for software application delivery, and address the technical issues before making a purchase decision. Areas such as needs assessment, software selection, development alternatives, and solutions packages must be investigated.

6.

What options are available for procuring transportation software? Why would a company pursue each option?

Solution: If an organization chooses to purchase transportation software, it should determine what types of applications are needed and how they should be purchased. One option is to purchase individual applications from leading providers in each software category, commonly called ―best-of-breed‖ solutions.

Another option is to buy an integrated TMS suite from a single vendor. The middle ground option is to purchase the main applications from a single software vendor and selectively add other solutions as needed.

Historically, transportation software buyers had one option—license software from vendors and install it on the buyer’s system. This is a logical method for transportation processes with intense computational activity requirements. The downside of licensing is the capital investment and complex deployment. The buyer must pay for the software upfront; address implementation issues; and manage software upgrades, fixes, and maintenance costs.

Another purchase option is hosted software. In this model, the customer purchases and owns the software, but it is installed at a data center or ―hosting center‖ where either physical or virtual servers that the company owns, leases, or finances are set up. The transportation software is implemented much like it would be done on-premise at the buyer’s own facilities. This model offers the services of a highly secure data center with multisite backup. On the downside, hosted solutions can be expensive, and access is lost when Internet service is unavailable.

Cloud computing has changed the purchase landscape. Buyers can now use applications that are not permanently installed on the company’s network. In the software as a service (SaaS) distribution model, software access is provided via the Internet. It is a pay-as-you-go method that allows the customer to use the software as needed without having to install it or purchase a license. SaaS applications can be accessed securely by multiple customers, each of whom typically pays a monthly usage fee.

The SaaS model has grown in popularity as more TMS options have become available. The cloud platform supports a network that is multi-tenant, allowing many business partners to integrate using the same technology. This promotes accessibility to more data, partner collaboration, operational scalability, and visibility. The variable cost structure of a SaaS-based TMS generally produces faster ROI.

7.

How are transportation companies pursuing sustainability?

Solution: Ongoing development, testing, and investment in new equipment features are being made to make transportation more sustainable. This is critical as the transportation industry is a major consumer of fuel and produces significant greenhouse gas emissions. Across all sectors, carriers are using technology to develop more efficient routes and better utilize capacity to minimize wasteful fuel use.

To reduce its use of fossil fuels (the second highest cost in trucking), companies are working on using tractors and trailers with more aerodynamic designs, installing low rolling resistance tires, and purchasing

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 3: Transportation Technology and Systems

tractors with technologically advanced engines. Emerging options include tractors that run on alternate fuels such as electricity and natural gas.

Airlines are actively upgrading their fleets to use jets that are much more energy efficient. Technological improvements include fuel-efficient engines, lighter composite materials, and improved aerodynamics.

Like the trucking industry, railroads and ocean carriers are pursuing advanced energy solutions. Hydrogen fuel cell locomotives have the potential to eliminate greenhouse gas emissions. Ocean carriers are deploying vessels that rely on liquified natural gas.

8.

How can technology promote transportation safety?

Solution: Safety is an ongoing concern in freight transportation. The size of commercial equipment, the distances traveled, and the shared access with passenger equipment on public thoroughfares make it difficult to achieve total safety. In 2015, there were over 415,000 crashes involving large trucks, with 116,000 injuries and 667 fatalities. In addition, the cost of large truck and bus crashes exceeded $118 billion.

Comparatively, fewer than 300 fatalities involved rail freight carriers, airlines, and water cargo transporters.

Given these costs, it is no surprise that significant efforts are being made to improve both operator and equipment safety. Technology plays an important role in both. Among the variety of efforts being made to improve safety are enhanced safety features, electronic logging devices (ELDs), and fatigue reduction research.

9.

Discuss how transportation professionals are deploying technology in their quest to minimize freight theft.

Solution: Cargo theft is a multi-billion-dollar criminal industry and a growing threat to the economy and national security of the United States, according to the Federal Bureau of Investigation (FBI). Often cargo theft offenses are part of larger criminal schemes and have been found to be elements of organized crime rings, drug trafficking, and funding for terrorism. Cargo is stolen from tractor-trailers, railcars, ships, planes, and even directly from warehouses, and the goods are sometimes sold on the Internet. To combat the problem, the FBI has established seven cargo task forces across the country.

Transportation providers and freight shippers must also take a proactive role in cargo security. To secure cargo, transportation professionals employ a multilayered approach that incorporates the latest technology and fine-tuned basic practices, such as pre-employment background checks, extensive staff training, and validation of driver credentials when tendering loads. Global positioning satellite (GPS) tracking systems, onboard sensors and analytics, and intelligence information sharing are three technology-based cargo security initiatives that can be used to combat criminals.

10. Why are technology and transportation equipment companies investing so much time, money, and effort into autonomous transportation research?

Solution: Transportation is a labor-intensive business, and operator roles like driving a truck, piloting a ship, or operating a train can be a difficult job with odd hours, time away from home, and stressful deadlines. That combination can lead to fatigue, poor decision making, and accidents. Also, turnover can be high, particularly among the ranks of truck drivers.

Efforts are underway to take many of the routine operator tasks in trucks, ships, and trains, and turn them over to computers, similar to what is done in the commercial airline industry with autopilot capabilities.

Larger, more sophisticated aircraft have multiple autopilot systems that can control almost all aspects of the airplane’s movement and an auto-throttle system that is able to control the speed of the airplane. On a Boeing 737, the autopilot can be turned on at 1,000 feet above the ground on takeoff. The second autopilot is engaged with the first one to add a layer of redundancy.

11. Why should transportation professionals pay attention to the emerging area of artificial intelligence?

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 3: Transportation Technology and Systems

Solution: Artificial intelligence (AI) tools are available to help transportation professionals analyze large amounts of unstructured data to extract valuable information and take appropriate action.

AI makes it possible for machines to learn from experience, adjust to new inputs and perform human-like tasks. Most of today’s AI-based products – from digital voice assistants to self-driving trucks – rely heavily on deep learning and natural language processing. Using these technologies, computers can be trained to accomplish specific tasks by processing large amounts of data and recognizing patterns in the data.

A valuable AI opportunity exists around equipment maintenance. Rather than performing scheduled maintenance based on use hours or mileage, predictive maintenance enables owners to make repair decisions based on the vehicle’s actual state. The maintenance team uses sensors to monitor a variety of factors, such as vibration and temperature. AI-enabled algorithms aid in determining the vehicle’s ―health‖ status and any maintenance needs.

AI can also be used to deal with a safety issue discussed earlier – operator fatigue and distraction.

12. What capabilities and benefits will result from the development of final mile delivery innovations?

Solution: Transportation companies are challenged to find labor and efficiently deliver small packages to residential locations. Innovations include small robotic delivery vans and carts that deliver goods straight to your door.

Drone delivery is another emerging tool for labor-free delivery. It is especially useful for delivering essential goods to remote locations, as demonstrated by the company Zipline (https://www.flyzipline.com/).

END OF SECTION EXERCISE SOLUTIONS [CASE QUESTIONS] Case 3-1 myIoT Inc. 1.

What types of transportation and supply chain software does myIoT need to support its business growth?

What features and capabilities are needed?

Solution: Spreadsheets and paper documents will no longer support the needs of a growing business like myIoT. Most importantly, myIoT needs a transportation management system (TMS) to address its problems with carrier selection, route development, and documentation to ensure that deliveries are made on time, with the right information, and at the optimal cost/service combination.

The core features provided by a TMS for a company like IoT include routing and rating, executing the shipment across modes and carriers, tracking and tracing loads, and freight settlement. Beyond these primary execution tools, a TMS suite would help myIoT with hybrid planning–execution–evaluation capabilities and a wide array of functionality to generate numerous benefits across the entire shipping process. myIoT will gain the ability to make better, faster carrier selection decisions that optimize costs, flows, and delivery. With this access, they can quickly choose the best available option and avoid problems that are driving Updike crazy.

The company should also look to integrate the TMS with a warehouse management system and order management system to share information seamlessly and support end-to-end fulfillment processes. The TMS should also be able to communicate effectively with carrier and retailer systems to create cross-chain visibility and controls.

2.

What types of technology implementation challenges might myIoT face? How can these risks be minimized?

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 3: Transportation Technology and Systems

Solution: Areas such as needs assessment, software selection, development alternatives, and solutions packages must be investigated.

The mere purchase of point solutions or software suites does not guarantee quick success. Systems integration complexities and training requirements translate into implementation times that can exceed six months at costs that may be twice the software price. Thus, gaining a rapid ROI on technology is challenging.

The key to harnessing the capabilities of transportation software within a reasonable time frame is informed decision making. Transportation professionals take the time to develop a clear vision regarding how technology spending will facilitate freight movement strategy and satisfy specific goals. It is possible to achieve a 12- to 18-month ROI if the transportation experts properly assess their needs, understand the options for software application delivery, and address the technical issues before making a purchase decision.

3.

How can myIoT benefit from TMS that deploys artificial intelligence capabilities and carriers that provide advanced freight monitoring capabilities?

Solution: As the myIoT business grows, they will have an increasing volume of transportation data to analyze.

Artificial intelligence (AI) tools can help them quickly study unstructured data in contracts and freight documents, recognize patterns in the data, recommend solutions, and take appropriate action. The myIoT system can be trained to recommend carriers, prepare freight documents, recommend delivery routing, and evaluate performance through processing large amounts of data and recognizing patterns in the data. myIoT sells high value goods that are relatively small in size and susceptible to poor ride quality. That should make damage, theft, and other problems a concern for the company leaders. myIoT needs to work with carriers that ensure cross-chain visibility and freight control. This can be accomplished through tools like electronic logging devices to monitor driver activity and IoT sensors to help organizations track the location and status of their freight.

4.

As the myIoT online business grows, how can the company use emerging technologies to support final mile deliveries?

Solution: As the myIoT business grows, Updike and other company leaders may decide to pursue a direct-toconsumer sales model. That would lead myIoT to needing home and business delivery capabilities.

Innovations such as drones and small robotic delivery vans and carts can make the final mile deliveries of myIoT packages without needing delivery labor or large vans.

CASE 3-2 Vital-E Nutrition 1.

What types of visibility tools could help VEN detect temperature problems and respond before the product is ruined?

Solution: VEN needs a Transportation Management System (TMS). TMS can handle the planning and flow of materials across the supply chain. Tracking and tracing of loads is the cornerstone of TMS to provide visibility. When linked to satellite tracking or a cellular network, the TMS monitors in-transit shipment location and status. If the shipment is behind schedule, stopped, or off-route, notifications are made so that corrective action can be taken.

VEN should also work with carriers that ensure cross-chain visibility and freight control. This can be accomplished through tools like electronic logging devices to monitor driver activity, and IoT sensors to help organizations track the location and status of their freight. Various service providers, like project44 and Flexport, can help VEN with visibility software tools that provide a single view of shipments as they

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 4: Costing and Pricing for Transportation

move across delivery networks. VEN would have a more seamless network with real-time notification of delivery milestones and exceptions.

2.

Are autonomous trucks a potential answer to driver shortage problems that plague VEN’s transportation providers? Why or why not?

Solution: While over the road (OTR) truck driving is necessary in many industries, it is also labor-intensive. That combination can lead to fatigue, poor decision making, and accidents. Also, turnover can be high, particularly among the ranks of truck drivers.

Efforts are underway to take many of the routine operator tasks in OTR trucking and turn them over to computers, similar to what is done in the commercial airline industry with autopilot capabilities.

Big name companies are racing to revolutionize the trucking industry with self-driving trucks. These autonomous vehicles are being developed and operated on test tracks and remote highways, usually with a driver onboard to handle complex tasks like parking or driving on city streets and to provide a backup safety system should the system not work properly. Currently, VEN cannot depend on autonomous OTR but may be able to in the future.

3.

What value could VEN derive from the analytics capabilities being embedded in a state-of-the-art TMS? Solution: Global positioning satellite (GPS) tracking systems with onboard sensors that use analytics to monitor shipments and share information with the truck’s home base are available.

Transportation providers and freight shippers must also take a proactive role in cargo monitoring and security. To monitor and secure cargo properly, transportation professionals employ a multilayered approach that incorporates the latest technology and data analytics into the process.

Likewise, transportation providers must support customers’ information requirements. Visibility and analytics provide timely insights that assist customers with decision making. Analytics is the end output, illustrating that technology can provide insights that differentiate a transportation provider from its competition.

Solution and Answer Guide NOVACK, TRANSPORTATION : A GLOBAL SUPPLY CHAIN PERSPECTIVE, 10 E, 2024, 9780357908549; CHAPTER 4: COSTING AND PRICING FOR TRANSPORTATION

TABLE OF CONTENTS Content Type ............................................................................................................................................. 17 [Study Questions].................................................................................................................................... 17 End of Section Exercise Solutions............................................................................................................ 20 [Case Questions] ..................................................................................................................................... 20

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 4: Costing and Pricing for Transportation

CONTENT TYPE [STUDY QUESTIONS] 1.

Compare and contrast pure competition with monopoly from a pricing perspective. If you were a shipper, which would you prefer? Why? Which would a carrier prefer?

Solution: In pure competition, many sellers have no influence over prices or supply, and producers can sell all output at one market price but nothing above that price. Monopolies can price to their own advantage. A shipper would prefer pure competition, making carrier and mode decisions easier. Carriers prefer a monopoly because it allows them to price to their advantage.

2.

Describe an oligopolistic market structure. What alternatives to price competition exist in such markets?

Why would these alternatives be important to shippers?

Solution: In an oligopoly, a few large sellers of a relatively homogeneous product with enough cross elasticity of demand must consider their competitors' reactions. In this market, sellers have to consider, in addition to changing prices, competitors’ output, promotional activities, and quality of product as competitive alternatives. These alternatives are important because shippers might require different price/service packages. This market is similar to the railroad industry, but all modes encounter this type of competition occasionally.

3.

What is value-of-service pricing? Is this approach to pricing valid today?

Solution: Value-of-service pricing can be conceptualized in a number of ways. One perspective proposes that it is pricing according to the value of the product. Another identifies it as pricing according to what the traffic will bear. One approach sets value-of-service pricing as third-degree price discrimination, where the seller sets two or more market prices for two or more separate groups of buyers of essentially the same commodity or service. Similar to the third-degree price discrimination approach is differential pricing, where the carrier charges different prices to different segments of traffic for essentially the same service, and the rate differences cannot be explained by differences in the cost of the service. Value-of-service pricing is most valid today where the movement of higher value products requires a higher level of transportation service. The increased presence of competition in the transportation marketplace and differences in elasticities of demand for products creates situations calling for dissimilar pricing.

4.

What is cost-of-service pricing? What is the relationship between value-of-service pricing and cost-ofservice pricing?

Solution: Cost-of-service pricing takes a marginal-cost approach to pricing. Cost-of-service pricing can also be analyzed as a total cost or fully allocated cost approach to price setting, where the price charged by a carrier for movement of a commodity represents the recovery of costs related to the movement. Here: Price = FC + VC + Profit Price is determined by allocating fixed and variable costs to the commodity movement and by adding a margin for profit. Relating pricing to total costs or fully allocated costs does not take into account such considerations as competition and elasticity of demand affecting the price charged.

The presence of common costs raises some problems for cost-of-service pricing, particularly the average cost approach. If rates are based on the average of fully allocated costs, it becomes necessary to apportion these costs by some arbitrary means.

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 4: Costing and Pricing for Transportation

5.

What is a released value rate and how does it affect a shipper’s transportation costs?

Solution: Released rates reflect the fact the shipper has agreed to accept a lower than actual value for their products in the event of loss or damage. Since the carrier is not liable for the full value of the products, they can offer a lower rate to the shipper, reducing the shipper’s cost.

6.

What are the major forces that affect carrier pricing strategies?

Solution: The major forces affecting carrier pricing are customers (market), government, other channel members, and competition. Value-of-service pricing focuses on the role of the customer (market) to determine prices. A profit maximizing carrier will not set a price in the long run that will stop the movement of passengers or freight. This depends upon what the market perceives is a reasonable price and/or what the market is forced to pay. The federal government has economically regulated transportation for more than 100 years. Some of these regulations deals with the prices carriers can charge in terms of how they are constructed and how they are quoted. Channel members include other carriers in the same mode and other modes. Interline movements can affect how carriers price their services. Competitors also impact pricing strategies.

Discounts, special fares, and allowances offered by one carrier can affect the pricing strategies of competing carriers.

7.

How might pricing strategies differ among carriers in perfectly competitive markets, oligopolistic markets, and monopolistic markets?

Solution: In a perfectly competitive market, carriers cannot influence the price. Services are priced at the market level. In oligopolistic markets, the market leader sets the price and competitors respond to that price. In a monopolistic market, there is only one seller who maximizes profits.

8.

What are the various factors used in classifying commodities for tariff purposes?

Solution: The factors that are used to determine the rating of a specific commodity are the product characteristics that impact the carrier’s costs. In particular, the ICC has ruled and the STB has maintained that four factors are to be considered: product density, stowability, handling, and liability.

Although no specific formulas are used to assign a commodity to a particular class, the four factors are considered in conjunction by a carrier classification committee. An individual carrier can establish a commodity classification that differs from the national classification; this individual carrier classification is termed an exception and takes precedence over the national classification.

Product density directly impacts the use of the carrier’s vehicle and the cost per hundredweight. The higher the product density, the greater the amount of weight that can be hauled and the lower the cost per hundredweight. Conversely, the lower the product density, the lower the amount of weight that can be hauled and the higher the cost per hundredweight hauled.

As shown in Table 4.4, only 6,000 pounds of a product that has a density of two pounds per cubic foot can be loaded into the trailer, which means the cost per hundredweight shipped is $6.67. However, 48,000 pounds of a product with a density of 16 pounds per cubic foot can be hauled at a cost of $0.83 per hundred weight. Therefore, the higher the product density, the lower the carrier’s cost per weight unit and the lower the classification rating assigned to the product.

Stowability and handling reflect the cost the carrier will incur in securing and handling the product in the vehicle. Such product characteristics as excessive weight, length, and height result in higher stowage costs for the carrier and a corresponding higher classification rating. Likewise, products that require manual handling or special handling equipment increase the carrier’s costs and are given a higher rating.

The final classification factor, liability, considers the value of the product. When a product is damaged in transit, the common carrier is liable for the value of the product. Because higher-value products pose a

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 4: Costing and Pricing for Transportation

greater liability risk (potential cost), they are classified as higher than lower-valued products. In addition, products that are more susceptible to damage or are likely to damage other freight increase the potential liability cost and are placed into a higher classification rating.

9.

What are the differences among class, exception, and commodity rates?

Solution: These are the class, exception, and commodity rate structures in the United States. The class rate system provides a rate for any commodity between any two points. It is constructed from a uniform distance and product systems. Exception rates are designed so carriers in particular regions can depart from the product scale system, for a variety of reasons. On the other hand, commodity rates are employed for specific origin–destination shipping patterns of specific commodities. Each one of these three systems has a particular purpose.

An exception rate is a modification (change in rating, minimum weight, density groups, etc.) to the national classification instituted by an individual carrier. Exception ratings are published when the transportation characteristics of an item in a particular area differ from those of the same article in other areas.

A commodity rate can be constructed on a variety of bases, but the most common is a specific rate published on a specific commodity or group of related commodities between specific points and generally via specific routes in specific directions. Commodity rates are complete in themselves and are not part of the classification system. If the commodity being shipped is not specifically stated, or if the origin– destination is not specifically spelled out in the commodity rate, then the commodity rate for the particular movement is not applicable.

When the commodity rate is published, it takes precedence over the class rate or exception rate on the same article between the specific points.

10. Why were tariffs created? Are they still useful in today’s transportation environment?

Solution: Tariffs originated under a government-regulated pricing system and were enforceable under ICC law.

Tariffs are the actual publications in which most rates are printed. Some firms print their own tariffs, often referred to as individual tariffs, or they use a rate bureau common to many carriers to establish and publish rates. These tariffs are referred to as bureau tariffs.

They are still useful as they can convey pricing and the carrier's rules and term of sale in a manner that is familiar and understood. Although deregulation has somewhat diminished the use and application of the class, exception, and commodity tariff systems, various features of these tariff systems are widely used today for pricing small LTL freight.

11. What are economies of scale, density, and scope in transportation? How do they affect the cost of carriers?

Solution: Economies of Scale—It is said that an economy of scale exists if the average cost (cost per unit of output) is a decreasing function of the firm output; that is, the more the firm output, the lower the average cost.

Economies of Density—This concept is similar to economies of scale, but it is lane specific. It is said that an economy of density exists in a given lane (origin–destination pair) if the cost (average cost) of a carrier decreases with the increase of the carrier’s shipment volume in that lane.

Economies of Scope—It is said that an economy of scope exists if the cost (average cost) of a carrier decreases with the increase in the number of products or services that the carrier provides. Economies of scope can be found in all modes of transportation, but many good applications of this concept can be found in the trucking industry.

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 4: Costing and Pricing for Transportation

END OF SECTION EXERCISE SOLUTIONS [CASE QUESTIONS] Case 4.1 Mid-West Trucking 1. Calculate the profit which Mid-West Trucking makes under two scenarios – namely, with and without discount for west-bound shipments. Use the following table to compute the profit.

Scenarios No Discount With Discount Shipping cost (one way) 1000 1000 East bound charge 2000 2000 West bound charge 2000 700 Probability of finding BH customer 0.2 0.8 Expected profit per shipment Solution:

Shipping cost (one way) East bound charge West bound charge Probability of finding BH customer Expected Profit per Shipment 2.

No Discount 1000 2000 2000 0.2 400

Scenarios With Discount 1000 2000 700 0.8 560

New Charge 1000 2160 2000 0.2 560

You should have found that if Mid-West Trucking cannot use discounts, the company’s profit will decrease. Now, if Mid-West Trucking follows the request by David White and stops providing discounts on westbound freights (westbound shipments must be charged $2,000), how much does the company have to charge for each headhaul (eastbound) shipment to make the same profit as before (scenario with discount)?

Solution: The company needs to charge $2,160 for each headhaul (eastbound) shipment to make the same profit as before.

Shipping cost (one way) East bound charge West bound charge Probability of finding BH customer Expected Profit per Load 3.

4.

No Discount 1000 2000 2000 0.2 400

Scenarios With Discount 1000 2000 700 0.8 560

New Charge 1000 2160 2000 0.2 560

Do you agree with David White? Why or why not?

Solution: No, do not agree with David White. Profit will decline.

Should Mid-West Trucking stop providing discounts to westbound shipments immediately, as requested by David White?

Solution: Do not stop discounts on westbound. David will have to pay more for headhaul, so he will be unhappy.

Case 4.2 Apple Airlines

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 4: Costing and Pricing for Transportation

1.

Should Apple Airlines practice overbooking for Flight 123 on Monday of the coming week? If so, how many reservations should be accepted beyond the seat capacity? Use the following hints to perform your calculations.

Hint 1: If you are accepting one overbooked passenger beyond the seat capacity, the probability of having one bumped passenger (probability that all 21 ticket holders show up) is given by 0.8521 = 0.0329 (3.29%), while the probability of having no bumped passenger (probability that at least one ticket holder does not show up) is given by 1 − 0.0329 = 0.9671 (96.71%).

Hint 2: If you are accepting two overbooked passengers beyond the seat capacity, the probability of having two bumped passengers (probability that all 22 ticket holders show up) is given by 0.8522 = 0.0280 (2.80%). On the other hand, the probability of having one bumped passenger (probability that exactly one ticket holder does not show up) is given by 0.85 21 × 0.15 × 22 = 0.1087 (10.87%) (note: there are 22 different ways that one passenger does not show up; e.g., passenger 1 does not show up, passenger 2 does not show up, etc.). Finally, the probability of having no bumped passengers (probability that at least two ticket holders do now show up) is given by 1 − 0.0280 − 0.1087 = 0.8633 (86.33%).

Solution:

Prob

overbook cap Ticket $ Bump cost 0.85 1 20 50 400

at least one no show 0.9670544 No bump prob 0.9670544 one bump prob 0.0329456 MC 13.1782406 Prob

2.

Overbook cap 0.85 2 20

All show up all but one show up

0.02800376 0.00494184

2 bump prob 1 bump prob no bump prob MC True MC

0.02800376 0.10872048 0.86327575 65.8912028 52.7129623

benefit 1 overbook benefit 2 overbook

36.8217594 34.1087972

Repeat Question 1 for the rest of days. On which day(s) should Apple Airlines practice overbooking for Flight 123, and to what extend should they overbook the flight beyond the seat capacity?

Solution:

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 4: Costing and Pricing for Transportation

Day Probability of passengers showing up Sunday 0.88 Monday 0.85 Tuesday 0.92 Wednesday 0.91 Thursday 0.89 Friday 0.99 Saturday 0.98 Case 4.3 Hardee Transportation 1. What are the pickup, sort, line-haul, and delivery costs to Hardee for this move?

Solution: Pickup = $186.55 Sort = $400.00 Linehaul = $1,966.07 Delivery = $38.55 2.

What is the total cost of this move? Cost per cwt.? Cost per revenue mile?

Solution: Total cost = $2,850.29 Cost per cwt. = $6.33 Cost per revenue mile = $2.25

3.

If Hardee would put two drivers in the tractor for the line-haul move, there would be no rest required for drivers during the line-haul move. What would happen to total costs?

Solution: In this case, the linehaul portion of the costs needs to be recalculated and added to the original pick-up, sort, and delivery costs, remembering to recalculate the administrative/overhead costs on the new total. In the new linehaul calculation, the total hours will be reduced from 43.8 hours to 27.8 hours. The new hour total removes 16 rest hours from the total move. The miles remain the same, as do all of the item costs. The only total costs that change are the depreciation and interest for the tractor and trailer. The new amounts are: Depreciation: Tractor Trailer Interest: Tractor Trailer

27.8 hr.@ $2.74/hr.

27.8 hr.@ $0.57/hr.

27.8 hr.@ $3.50/hr.

27.8 hr.@ $0.75/hr.

$76.17 $15.85 $97.30 $20.85

Adding these to the fuel, labor, maintenance, and insurance costs results in a new total linehaul cost of $1,845.11.

New Total truckload cost: Pick-up ($186.55), Sort ($400.00), Linehaul ($1,845.11), Delivery ($38.55) = $2,470.21 Administrative/Overhead (10%) $247.02 TOTAL

$2,717.23

Revenue Needs 1. Cost per cwt. ($2,717.23/450) = $6.04 2. Cost per revenue mile ($2,717.23/1269) = $2.14

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 5: Motor Carriers

Obviously, adding a second driver reduces total transit time, thus reducing total operating costs.

4.

Assume that Hardee has no loaded backhaul to return the vehicle and driver to Pittsburgh. How would you account for the empty backhaul costs associated with this move? Would you include those in the headhaul move? How would this impact your pricing strategy?

Solution: There is no one answer to this question. Assuming a value-of-service pricing strategy, Hardee would need to consider market conditions and the importance of the headhaul customer. Hardee might not want to add the empty backhaul costs to the headhaul customer’s price for competitive reasons.

Assuming a cost-of-service pricing strategy, Hardee would need to recover, at a minimum, the marginal (variable) costs of returning empty. Using the original costing answer to the first question and assuming a single driver, the variable costs of returning empty would be fuel and labor. As such, the empty backhaul would incur another $799.36 in fuel costs and another $562.05 expense for driver wages. Adding this to the original total truckload cost of $2,850.29 would result in a round trip cost of $4,211.70. The resulting new cost per cwt. would be $9.36, and the new cost per revenue mile would be $3.32.

This would obviously increase the price to the headhaul customer. However, as mentioned at the beginning of this answer, Hardee needs to make the decision on which cost to use based on the market conditions and the importance of the headhaul customer.

Solution and Answer Guide NOVACK, T RANSPORTATION : A GLOBAL SUPPLY CHAIN PERSPECTIVE , 10E, 2024, 9780357908549; CHAPTER 5: MOTOR C ARRIERS

TABLE OF CONTENTS Content Type ............................................................................................................................................. 23 [Study Questions].................................................................................................................................... 23 End of Section Exercise Solutions............................................................................................................ 28 [Case Questions] ..................................................................................................................................... 28

CONTENT TYPE [STUDY QUESTIONS] 1.

The motor carrier industry is probably the most visible segment of the transportation system in the United States. The motor carrier is also the most significant element of the U.S. freight transport industry. What factors account for the motor carrier’s visibility and significance?

Solution: The motor carrier industry played an important role in the development of the U.S. economy during the 20th century, and it continues this role in the 21st century.

As the interstate system of highways was developed from the 1950s to the 1980s, motor carriers steadily replaced railroads as the mode of choice for transporting finished and unfinished manufactured products. In 1950, the railroad industry moved 1.4 billion tons of freight on an intercity basis, whereas motor carriers

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 5: Motor Carriers

moved 800 million tons. In 1980, railroads moved 1.6 billion tons, compared to more than 200 billion tons by motor carriers. By 2014, motor carriers were handling 9.4 billion tons (see Figures 3.1 and 3.2).

In 2012, the United States paid over $642.1 billion for highway transportation, approximately 80.7 percent of the total 2012 Nation’s Freight Bill. Motor carriers transported 9.4 billion tons in 2012, or 68.5 percent of the tons transported by all modes. In 2011, approximately 6.9 million people were employed in the motor carrier industry. These figures clearly demonstrate the significant role that motor carriers play in our society and the dependence of U.S. companies on motor carrier service. Finally, motor carriers logged 397.8 billion miles used for business purposes in 2010 (excluding the government and farm sectors).

2.

The railroad industry played a significant role in the development and growth of many cities and geographic regions during the 19th century. What role, if any, have motor carriers played during the 21st century in terms of economic development?

Solution: The growth of this industry is noteworthy, considering it did not get started until World War I when converted automobiles were utilized for pickup and delivery in local areas. The railroad industry, which traditionally had difficulty with small shipments that had to be moved short distances, encouraged the early motor carrier entrepreneurs. It was not until after World War II that the railroad industry seriously attempted to compete with the motor carrier industry, but by that time, it was too late.

The motor carriers have shaped our economic development, particularly after World War II. As industry moved to the suburbs, they were no longer tied to railroad tracks. Our suburban shopping complexes are dependent on motor carriers. The door-to-door speed of motor carriers has allowed the industry to develop new methods of distribution which allow greater choice for consumers. Frequency of deliveries, which underlie much of the Just in Time programs, would not be possible without motor carriers.

3.

Private carriage is more important in the motor carrier segment of our transportation industry than any of the other four major modal segments. What factors have contributed to private carriage becoming so prevalent in the motor carrier area?

Solution: The private carrier provides a service to the industry or company that owns or leases the vehicles, but does not charge a fee. Obviously, however, the service provider incurs cost. Private carriers might transport commodities for-hire, but when operating in such a capacity, the private carrier is really an exempt for-hire carrier.

Many firms started operating their own tractor-trailers to provide better service and faster delivery. Grocery store chains needed the flexibility that only their own vehicles would provide. Some firms such as chemical and petroleum companies needed specialized equipment that could not be obtained from commercial carriers. Until recently, private trucking often offered cost savings over commercial carriers, since the cost of transportation did not include a markup for profit.

4

The so-called local carrier is also almost unique to the motor carrier industry. Why? Solution: The growth of this industry is noteworthy, considering it did not get started until World War I, when converted automobiles were utilized for pickup and delivery in local areas. The railroad industry, which traditionally had difficulty with small shipments that had to be moved short distances, encouraged the early motor carrier entrepreneurs.

The local carriers pick up and deliver freight within the commercial zone of a city. Local carriers frequently work in conjunction with intercity carriers to pick up or deliver freight in the commercial zone.

Trucking started in the local or short haul market. The railroads could not fill the crosstown delivery role as well as motor carrier vehicles. Even in the time between World War I and World War II, motor carriers were used to move freight to and from the railroad freight houses. After World War II, motor carriers

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 5: Motor Carriers

dominated the local market because of their speed and flexibility. This allowed them to expand into the medium range and, eventually, the long haul market.

5.

Compare and contrast the TL segment of the motor carrier industry with the LTL segment in terms of infrastructure, cost structure, market structure, and operating characteristics.

Solution: The LTL carriers have far more infrastructure than do the truckload (TL) carriers, since they are required to operate a network of terminals and equip them with material handling equipment for small shipments. TL carriers do not have terminals and normally deliver the shipment on the same trailer on which it is picked up.

Costs are similar for both TL and LTL for drivers, equipment, and fuel. LTL carriers have additional labor costs that TL carriers do not have due to the requirements of the LTL carriers to staff the terminals with dock workers. LTL carriers have more drivers than do TL carriers, since they must have pickup, delivery, and line haul drivers. Both types of motor carriers have a high level of variable cost and a low level of fixed cost. Fixed costs for the LTL segments are higher than those for the TL segment because of terminal investments.

The market structure for both TL and LTL carriers is similar, since they compete against others within their own arena (LTL versus LTL) as well as with other carriers (LTL versus TL). This mode is customer driven for both LTL and TL carriers. TL carriers, in general, face a market that can be characterized as monopolistic competition; LTL carriers operate in an oligopolistic market.

Operations are similar for both, except that the LTL carriers have more in-transit handling of their shipments. Hours of service and other safety rules apply equally to TL and LTL carriers. Both carriers compete with other modes on their flexibility, accessibility, and speed/frequency of delivery.

6.

What is the nature of intramodal and intermodal competition in the motor carrier industry? How have the motor carriers fared in terms of intermodal competition since 1980?

Solution: Intramodal competition has intensified in the past ten years with the gradual removal of regulations. LTL carriers now compete against TL carriers and package carriers such as United Parcel Service and FedEx. The total number of carriers has increased, and, particularly in the TL sector, competition is intense. In the LTL sector, non-union carriers compete with unionized trucking firms, putting severe pressure on prices and margins.

Motor carriers compete vigorously with one another for freight. With a large number of for-hire motor carriers, the rivalry between firms can be intense. However, the most severe competition for for-hire carriers often comes from the private carrier.

As indicated earlier, the motor carrier industry offers few capital constraints to entry. With a relatively small investment, an individual can start a motor carrier business and compete with an existing carrier.

Thus, freedom of entry, discounting, and lack of regulatory constraints appear to dominate the industry and suggest that competition between firms can control the industry. Such a conclusion has been the basis for greater reliance on the marketplace and less reliance on regulation. Even though the LTL segment is more concentrated, there is still intense competition between the top carriers. Other competitors include United Parcel Service, FedEx, and FedEx Ground.

Intermodal competition exists between the railroads with their piggyback and container service and the TL carriers. The competition is limited to the major corridors such as Los Angeles – Chicago and other highvolume lanes. This intermodal competition keeps the prices of both modes constrained.

7.

Describe the general service characteristics of motor carriers and explain how they have contributed to the growth of the motor industry.

Solution:

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 5: Motor Carriers

The motor carriers have the distinct advantage of nearly universal accessibility. Speed allows motor carriers to compete with air up to 500 miles and rail up to 1,500 miles. Door-to-door service combined with a wide range of equipment allows carriers to serve nearly all shippers. The smaller size of vehicles means a shipper does not have to accumulate a large volume of freight before making a shipment.

The smoother ride and easier handling might reduce packaging costs and the potential for damage. The ability of motor carriers to combine with other modes gives them access to all shippers and makes motor carriers an indispensable part of most shipments.

8.

The cost structure of the motor carrier industry is affected by its infrastructure, (such as highways and terminals). Discuss the cost structure of motor carriers and how it is affected by the infrastructure. Should there be changes made in public policy with respect to the motor carriers' use of public highways?

Solution: The cost structure of the motor carrier industry consists of high levels of variable costs and relatively low fixed costs. Approximately 70 to 90 percent of the cost is variable, and 10 to 30 percent is fixed. The public investment in the highway system is a major factor contributing to this low fixed-cost structure, because the highway is the motor carrier’s ―right of way.‖ Much debate exists as to whether motor carrier vehicles pay a fair share of the total cost of highways. In 2011, motor carriers paid $36.5 billion in federal and state highway user taxes. The central issue is whether motor carriers should pay for the added construction and maintenance costs caused by their heavier weight.

9.

Describe how fuel and labor have impacted motor carrier cost structures and how they have altered motor carrier operations.

Solution: Fuel and labor are the largest variable costs incurred by a motor carrier. Because the majority of costs for a motor carrier are variable, these two costs become increasingly important to manage. The incredible rise in diesel prices over the last few years has put a strain on motor carriers’ financial stability. Motor carriers have undertaken several initiatives to help offset the costs of rising fuel prices. First, motor carrier vehicle design has incorporated technology to allow fuel consumption rates to reach 6.5 to 7.0 miles to the gallon.

Aerodynamic design, fiberglass bodies, and improved engine/drive-train efficiencies have reduced fuel consumption for motor carriers. Second, many carriers are scrutinizing their terminal locations and number of terminals to help avoid empty miles and unnecessary backhauls. Third, motor carriers are increasing their vehicles' load capacity to maximize the cube and weight of their trailers, thus minimizing the number of trips they must make.

Whether a motor carrier is unionized or not, driver wages are a large percentage of variable costs. Many motor carriers have re-examined the work rules they have in place with their drivers to gain more efficiencies in driver scheduling. Because there is a shortage of qualified drivers in the motor carrier industry, reducing driver wages has not been a strategy to reduce labor costs.

10. What are the major issues facing motor carriers as we approach the twenty-first century? How should these issues be addressed?

Solution: Safety Deficiencies in safety can translate into decreased profitability because of expensive claims for lost or damaged goods, increased insurance premiums, accidents, fines, and so on. These consequences are not unique to the motor carrier industry; in fact, they apply to the entire transportation industry.

The FMCSA has developed rules under which its inspectors determine whether a carrier is fit from a safety rule compliance perspective. Many shippers seek safety fitness information as part of their selection process, so there is considerable pressure on carriers to operate safely. Many transportation contracts contain clauses that permit the shipper to cancel the contract if the carrier’s safety rating is Unsatisfactory.

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 5: Motor Carriers

A major related concern is that of alcohol and drug abuse. It has been estimated that the American industry pays $50 to $100 billion for the results of substance abuse in the workplace every year, either for the cost of accidents or losses in productivity.

In response to this problem, the motor carrier industry has begun to move toward drug screening for its employees. Drug and alcohol testing are required in the following circumstances: • • • •

As a requirement for employment As a part of a regular physical exam required of current employees For ―cause,‖ required after any accident On a random selection basis

Other areas of safety concerns are drivers’ hours-of-service and fatigue issues. Under a complex formula for allowed driving and required rest periods, a driver can be on duty for not more than 60 hours in 7 days or 70 hours in 8 days. As previously discussed, these rules have been altered to address today’s changing environment.

Another safety issue receiving attention deals with vehicle size and weight. Recent studies have analyzed increasing total gross vehicle weight to 94,000 pounds with the addition of a third axle to the trailer. The studies have also addressed the increased use of triples. All these issues include safety concerns and will require federal legislation before any changes can be made.

Technology The use of satellite technology has a major impact on the motor carrier industry. Satellites with global positioning technology (GPS) are being used to track vehicles’ movement from origin to destination. The use of satellites allows the carriers to pinpoint the location of the vehicle and relay this information to the customer. The interaction between the driver, using an on-board computer, and a home-based computer allows route or arrival adjustment for poor weather or road conditions, and these adjustments can be communicated to the customers.

Satellite communication will continue to play a role in improved safety and customer service for motor carriers into the future.

LTL Rates Since the early 1980s, the LTL segment of the motor carrier industry has used discounts from published tariffs as a means of pricing segments to attract traffic of large shippers. Although certain portions of rate oversight were transferred to the then newly created Surface Transportation Board, LTL rates are subject to the free-market environment for all practical purposes. As it currently stands, the shipper has more choices for LTL today than existed during the height of regulation.

A limited amount of anti-trust immunity was also preserved, but only for classifications, mileage guide rules, and general rate adjustments. Individual carrier rates are subject to anti-trust action, but cannot be challenged on the basis of unreasonably high rates.

There is no longer any requirement to file tariffs, and contracts can be used instead.

Financial Stability Another major concern in the motor carrier industry is financial stability. The operating ratios of many motor carriers have been in excess of 95 percent, and some companies have operating ratios of over 100.

The high operating ratios are a clear indicator of the financial plight of many motor carriers and an indication of the low competitive rates.

In 2015, a total of 310 motor carrier firms failed, which represents the lowest number in the last two decades, but the number is expected to rise in 2016 and onward.

Overcapacity has periodically been a severe problem for the motor carrier industry, most recently during the recession of 2008 and 2009. Given that there is a finite amount of freight to be transported at any one time and there is little, if anything, that carriers can do to influence this, market share changes generally occur at the expense of one carrier over another. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 5: Motor Carriers

These periods of overcapacity also lead to severe pricing pressure, which can cause weaker carriers to exit the market. Shippers often exploit these factors, and the ―spot‖ market can drive prices below costs as carriers seek to move empty equipment.

Shippers have become increasingly cognizant of the failure rate among motor carriers, and many have introduced a financial evaluation of carriers into their overall decision framework for selecting carriers.

END OF SECTION EXERCISE SOLUTIONS [CASE QUESTIONS] Case 5.1 Express Parcel 1.

What is the total distance of the route Jim initially came up with?

Solution: 141 (See Excel file Chapter 5 Case 1 Solution)

2.

What is the distance of the solution found by using the nearest-neighbor method?

Hint: The nearest-neighbor method works as follows. First, find the node (customer) closest to the depot and move to that node. Second, from the node where the truck is currently located, search the closest node that is not yet visited by the truck, and move to that node. Third, repeat the second step above until there are no more unvisited nodes (any ties, at any point, can be broken arbitrarily). Fourth, after all nodes have been visited, the truck returns to the depot. Assume that the costs (distances) of the arcs missing in the diagram are extremely high (arbitrary large costs can be assigned to such arcs).

Solution: 112 (See Excel file Chapter 5 Case 1 Solution)

3.

What is the distance of the solution found by using the complete-enumeration method?

Hint: The complete-enumeration method works as follows. First, identify all the possible ways (sequences) of visiting the six customers. There should be 720 such sequences (the possible number of routes can be obtained by n!, where n is the number of customers). This task can be accomplished by creating a routing tree like the one shown below (it is easier to do this using a spreadsheet than by hand). Second, for each possible sequence, calculate the cost (travel distance). Third, select the sequence that gives the lowest cost.

Solution: 92 (See Excel file Chapter 5 Case 1 Solution)

4.

Which method (initial sequence, nearest-neighbor, or complete-enumeration) provides the best cost?

Solution: Complete-Enumeration

Case 5.2 Cyclone Transportation 1.

Given the proposed contracts, what is your company’s average cost of fuel per gallon with each of the fuel vendors?

Solution: The average cost of fuel per gallon for different suppliers, A, B, and C can be calculated as follows: For Supplier A, use the cost-plus method as follows: Average truck stop cost = (2.514 + 2.421 + 2.460 + 2.738 + 2.570)/5 = 2.5406

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 6: Railroads

Add the pump fee and transaction fee to the average truck stop cost to obtain the average cost of fuel per gallon.

Average cost of fuel per gallon = 2.5406 + 0.02 + 0.25 = 2.8106 For Supplier B, use the retail minus method as follows: Average retail price (no state tax) = (2.705 + 2.681 + 2.659 + 2.576 + 2.590)/5 = 2.6422 Subtract the retail discount from the average retail price to obtain the average cost of fuel per gallon.

Average cost of fuel per gallon = 2.6422 – 0.03 = 2.6122 For Supplier C, use the best of the cost plus or retail minus method.

Using the retail minus method: Average retail price (no state tax) = (2.690 + 2.588 + 2.543 + 2.714 + 2.550)/5 = 2.617 Subtract the retail discount from the average retail price and add the transaction fee to it to obtain the average cost of fuel per gallon.

Average cost of fuel per gallon = 2.617 – 0.02 + 0.50 = 3.097 Using cost plus method: Average truck stop cost = (2.618 + 2.362 + 2.466 + 2.516 + 2.353) = 12.315/5 = 2.463 Add the pump fee and transaction fee to the average truck stop cost to obtain the average cost of fuel per gallon.

The average cost of fuel per gallon = 2.463 + 0.03 + 0.50 = 2.993 The goal is to minimize fuel costs for the fuel vendors, so for Supplier C, the lowest cost is obtained using the cost plus method. So, the average cost using the best method is 2.993.

2.

Which truck stop chain should you choose if your goal is to minimize fuel costs?

Solution: From part 1, the following results are the obtained: The average cost of fuel per gallon for supplier A = 2.8106 The average cost of fuel per gallon for supplier B = 2.6122 The average cost of fuel per gallon for supplier C = 2.993 It can be observed that the average fuel cost of supplier B is the lowest. Since the goal of the company is to minimize fuel costs, supplier B should be chosen.

3.

Chain B really wants your business and says they will do anything to obtain it. What should their retail discount be in order to obtain your business?

Solution: From the above calculation, it can be observed that Supplier B has a lower average cost of fuel per gallon than suppliers A and C, and no transaction fees are included with chain B. So, the contract will definitely go to supplier B; they need make no alternations in retail discount.

Solution and Answer Guide NOVACK, TRANSPORTATION : A GLOBAL SUPPLY CHAIN PERSPECTIVE, 10 E, 2024, 9780357908549; CHAPTER 6: RAILROADS

TABLE OF CONTENTS Content Type ............................................................................................................................................. 30 [Study Questions].................................................................................................................................... 30

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 6: Railroads

End of Section Exercise Solutions............................................................................................................ 34 [Case Questions] ..................................................................................................................................... 34

CONTENT TYPE [STUDY QUESTIONS] 1.

Railroads no longer dominate the freight transportation market but they still lead the market in terms of freight ton-miles. What factors contribute to their leadership in this area? Why is their share of total expenditure for freight movement so small if they lead in freight ton-miles?

Solution: The railroad industry declined in relative importance during the last half of the 20th century. This decline has been well documented and can be attributed in part to the following events: the alternate transport modes with superior services or cost characteristics (primarily motor carriers and pipelines); a resurgence in water transportation; and changing needs of the U.S. economy. In 2006, railroads transported only 43 percent of the total intercity ton-miles transported by all modes. It is important to note that, on an actual basis, rail ton-miles have continued to increase, and railroads are still the largest carrier in terms of intercity ton-miles, but not in terms of tonnage or revenues.

The railroad system has evolved into one that primarily transports large quantities of heavyweight, lowvalue commodities (or bulk products) on which freight rates are relatively low. Motor carriers concentrate on handling small-volume, high-value finished goods on which much higher rates are charged. This is because of the relationship between the value of the commodities to the price charged for transporting them. Freight rates that are too high would cause some low value products to stop moving, as the freight cost would exceed the value of the product.

2.

Since the passage of the Staggers Rail Act of 1980, there has been an increase in the number of small railroads (Class III). Why has this number increased, while the number of Class I railroads has decreased?

Solution: Significant growth occurred in short-line railroads (known as locals) and larger lines (known as regionals), offsetting the decline in the number of Class 1 lines. These new operators took over unwanted trackage of the Class 1 lines and sought to recover lost business. As of 2007, 33 regional railroads existed. There are also 523 local lines, broken up by line-haul and switching. Some rail lines are as short as two or three miles but still contribute to the overall freight network.

The number of railroads and the number of miles of track have declined. One of the major reasons for this decline in both the number of companies and the miles of track is the significant number of mergers or unifications that have occurred in the railroad industry during the past 30 years. A total of 28 mergers have taken place during the past 30 years, and 50 unifications overall. The latter include not only mergers, but also consolidations and outright purchases for control. The 1970s was very active, but the tempo of rail consolidations in the 1980s was hyperactive.

3.

Explain the difference between intramodal and intermodal competition in the railroad industry. Which form of competition is most beneficial to shippers? Why? Solution: Intramodal competition is competition between members of one mode, such as two railroads or two truck lines. Intermodal competition is competition between members of two different modes, such as a railroad and a motor carrier.

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 6: Railroads

Intermodal is perceived as healthy as it may hold down rates between competitors. For example, rail TOFC must compete with motor carriers, and the prices of one cannot be too much higher than the other without freight shifting modes in response to prices.

4.

One of the significant factors in rail development has been the number of mergers that have occurred, but there have been different types of mergers that have occurred over time. Discuss the major types of mergers and explain why they occurred. Will mergers continue to occur in the rail industry? Why or why not?

Solution: Historically, many mergers have taken place in the railroad industry, and the size of the remaining carriers has correspondingly increased. Early rail mergers grew from efforts to expand capacity to benefit from large-volume traffic efficiencies and economies. Later, side-by-side combinations were made to strengthen the financial positions of many railroads and eliminate duplication. More recently, end-to-end mergers were created to provide more effective intermodal and intramodal competition. These mergers can improve customer service and reliability because many operating costs, such as car switching, clerical costs, and record keeping, can be reduced. Such improvements, however, have been slow to develop.

Previously we noted that the number of railroads (refer to Table 6-1) and the number of miles of track (refer to Table 6-2) have declined. One of the major reasons for these declines is the significant number of mergers or unifications that have occurred during the past 30 years. A total of 28 mergers have taken place, and 50 unifications overall. The latter include not only mergers, but also consolidations and outright purchases for control. The decade of the 1970s was very active, but the tempo of rail consolidations in the 1980s was hyperactive.

In 1920, there were 186 Class 1 railroads; by 2008, the number had declined to seven. One reason for this drop was that railroads are classified by revenue – as it was adjusted for inflation, fewer roads qualified.

The primary reason, however, was the accelerating trend of mergers. After the Staggers Act was passed in 1980, there was a significant increase in mergers and acquisitions, so as of 1999, there were only four major rail lines: Norfolk Southern, CSX Transportation, Union Pacific, and Burlington Northern Santa Fe. There is speculation that there may be two more mergers that would create two transcontinental railroads, but given the recent problems which past mergers have created, this seems unlikely in the near future.

5.

What factors have contributed to the decline in the volume of higher-value freight by the railroads? What changes, if any, could the railroads make to take back more higher-value freight from motor carriers?

Solution: The railroad system has evolved primarily to transport large quantities of heavyweight, low-value commodities (or bulk products). Motor carriers concentrate on the handling of small-volume, high-value finished goods, whereas water and pipelines carry the larger volumes of the lowest value types of bulk commodities. The railroads, therefore, find themselves engaged in intense competition with these other modes to ship many product categories.

Although railroads still handle a wide variety of commodities, more than 83 percent of total rail carloadings in 2007 involved the movement of bulk materials. Table 6-3 lists the products with almost 31.5 million carloadings from railroads in 2007. Of the six commodities shown in the table, only two – motor vehicles and equipment, and miscellaneous and mixed shipments (intermodal) – are not bulk commodities.

The railroads have been focusing on equipment and technology to regain traffic lost to other modes and gain new traffic share. To decrease damage statistics, railroads focus on new technologies. They must ensure that their service is price and time competitive with motor carriers, their primary competitors.

The railroad cost structure makes it necessary to attract large and regular traffic volumes to take advantage of economies of scale and operate efficiently. In recent years, rail management has developed or reemphasized some service innovations to increase traffic volume.

6.

Railroads have abandoned a significant number of miles of track (over 260,000 miles) since 1916. Why has this trend developed? Will it continue into the future? Why or why not?

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 6: Railroads

Solution: In 1916, at its peak, the railroad industry owned 254,037 miles of track. Today, more than half of that is gone. The early overexpansion left extensive amounts of excess trackage in many areas, and the railroads had to abandon significant portions of rail trackage to remain competitive. Parallel and overlapping routes, therefore, have been eliminated wherever possible.

Many factors led to the abandonment of tracks around the country. In the late 1950s, the government opened the Interstate Highway System. This allowed motor carrier service to decrease transit time, which caused shippers to use motor carriers. To effectively compete with motor carriers for time-sensitive traffic, railroads had to focus on efficient routes.

Deregulation gave companies the freedom to buy, sell, or abandon unprofitable tracks without federal interference.

Rights-of-way could also be used, unless the original deed required their return when the property was no longer used for railroad purposes. In some cases, all or part of the rights-of-way was turned into hiking trails, with some bridges left in place.

Even though the railroad industry reduced its track mileage by more than half, the lines remaining still carried a major share of the freight. The abandonments were either rural branches or duplicate lines left over from mergers. The ICC (and later the STB) still regulates abandonments, but changes in the law made it much easier for the railroad industry to close unprofitable lines. Not all the lines were scrapped, as discussed above, and regional and short-line operators took over some of this property.

Each time a railroad interchanged a car to another line, there was the chance for a delay. As mergers reduced the number of railroads, fewer interchanges were needed. For example, until 1993, at least three railroads were needed to go from Chicago to San Francisco, but now one company owns all the tracks, allowing more efficient service.

7.

The railroad industry has developed a number of new types of equipment to replace the standard box car.

What is the rationale supporting the diversification of equipment?

Solution: The railroads own and maintain their own rolling stock. The characteristics of these cars have changed considerably to suit customer requirements; for example, the conventional boxcar was for a time deemphasized but has seen a resurgence in the past few years. Today’s car fleet is highly specialized and designed to meet the needs of the individual shipper. Following is a list of eight generalized car types:        

Boxcar (plain): Standardized roofed freight car with sliding doors on the side used for general commodities Boxcar (equipped): Specially modified boxcar used for specialized merchandise, such as automobile parts Hopper car: A freight car with a floor sloping to one or more hinged doors used for discharging bulk materials Covered hopper: A hopper car with a roof designed to transport bulk commodities that need protection from the elements Flatcar: A freight car with no top or sides used primarily for TOFC service machinery and building materials Refrigerator car: A freight car to which refrigeration equipment has been added for controlled temperature Gondola: A freight car with no top, a flat bottom, and fixed sides used primarily for hauling bulk commodities Tank car: Specialized car used for the transport of liquids and gases

These various types of equipment allow the railroads to serve a wide range of customers and transport multiple commodities.

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 6: Railroads

8.

The railroad industry’s cost structure is different than that of the motor carrier industry. What factors contribute to this difference? What impact do these differences have for the railroads in terms of pricing, competiveness, and investment?

Solution: Because the railroads have many fixed assets, the railroads as a group are not as responsive as other modes to the volume of traffic carried. Motor and water carriers and the airline industry can shift resources faster in response to changes in customer demand because of their use of ―free‖ rights-of-way. Motor carriers, for instance, pay for their costs through user charges, tolls, and various taxes (such as fuel taxes). These charges are related and vary directly with the volume handled, creating a variable rather than a fixed cost for the user. Circumstances place the railroads at a disadvantage.

Motor carriers and water carriers are characterized by having a big percentage of variable costs, while railroads have a high percentage of fixed costs. Because of this, the railroads do not have the same freedom in pricing adjustments as other modes. In addition, the railroads have a much higher level of investment than the other modes, as they must buy their own rights-of-way and much larger terminal facilities.

9.

Discuss the major current issues facing the railroad industry. Select one of these major issues and present appropriate recommendations for resolving the issue.

Solution: Many industries, including the rail industry, are closely examining the problem and possible methods for dealing with it.

The very nature of railroad work can bring on the problem of substance abuse. Long hours, inadequate supervision, and nights away from home can lead to loneliness and boredom, resulting in substance abuse.

Because of this situation, the railroads have been dealing with the problem of substance abuse for a century.

Rule G, established in 1897, prohibits using narcotics and alcohol on company property. Rail employees violating this rule could be dismissed; however, the severity of this punishment led to the silence of many rail workers who did not want to jeopardize their coworkers’ jobs.

The railroad industry has attempted to identify employees with substance abuse problems and help them.

The industry has established employee assistance programs (EAPs) that enable these troubled employees to be rehabilitated.

Employees can voluntarily refer themselves to EAPs before a supervisor detects the problem and disciplinary actions become necessary. However, a Rule G violation— substance abuse while on the job— usually necessitates the removal of the employee from the workplace to ensure his or her safety and the safety of coworkers. Employees who are removed can still use EAPs for rehabilitation and can apply for reinstatement after they have overcome their problems.

Railroad EAPs have proven to be very effective. A recent Federal Railroad Administration report found that successful rehabilitation rates have risen by 70 percent. The success of these programs depends largely on support from rail workers and all levels of management.

10. What factors have contributed to the success of intermodal rail service? What barriers exist to future expansion?

Solution: One area that has received much attention has been the intermodal; namely, trailer-on-flatcar (TOFC) and container-on-flatcar (COFC) service. The railroads realized the necessity of improving the TOFC and COFC service to compete effectively with motor carriers. The developments include terminal facilities for loading and unloading, as well as changes in the railcars and trailers and containers. However, the changes have not stopped here. The railroads have invested a significant amount of money recently in improving rights-of-way and structures to help prevent delays.

The concept of piggyback service was designed by railroad management to increase service levels to intermodal customers. Piggyback traffic, which includes both TOFC and COFC services, accounted for

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 6: Railroads

15.2 percent of total loadings in 1986, occupying a little less than three million cars and ranking second behind coal in total rail car-loadings. In 2007, more than 12 million trailers and containers were loaded. As can be seen in Table 6-5, intermodal carloadings increased until 2000, when there was a modest decline of 2.7 percent. When discussing piggyback service, consideration must be given to the individual concepts of TOFC and COFC movements.

TOFC service transports highway trailers on railroad flatcars. It combines the line-haul efficiencies of the railroads with the flexibility of local motor pickup and delivery service. On-time deliveries, regularly scheduled departures, and fuel efficiency are the major reasons for the present growth and future potential of the TOFC service. For example, a 100-car train (which places two trailers on each flatcar) is more economical to run than 200 trucks over the road. Fuel is saved, and railroad economies of scale are realized. Traffic congestion, road damage, and maintenance and repair costs are all reduced because of the reduction of the number of trucks out on the highways.

The intermodal movement of trailers and containers grew rapidly during the 1980s. This growth was stimulated by the advent of double-stack containers used in international trade. Also, the railroads have placed new emphasis on their intermodal business after many years of doubting their profitability.

The ability to provide long-term consistent service is one of the major challenges that could limit growth in this area. Terminals are becoming increasingly congested, causing delays in allocation of available equipment.

END OF SECTION EXERCISE SOLUTIONS [CASE QUESTIONS] Case 6.1 Railroad Market Structure 1.

Discuss the positive and negative impacts of market concentration in the railroad industry.

Solution: A positive impact would be increased economies of scale with fewer railroads because reducing the number of carriers could eliminate redundant tracks while maintaining volume. Another positive impact could be the facilitation of switching crews/locomotives among carriers. The obvious negative impact would be the reduction of competition in an already oligopolistic/monopolistic market.

2.

If you were a member of the STB, what criteria would you use to decide whether the CP/KCS acquisition should take place? Explain your answer.

Solution: As in any acquisition/merger in an industry, government agencies always look at the negative and positive impacts on the customer – in this case, shippers. If reducing the number of carriers would reduce competition, increase rates, or lower service levels, the STB would likely prevent the merger. If the opposite were true and shippers would benefit, the STB would approve.

3.

Would there be any benefits (to shippers or the railroads) of further end-to-end consolidations among the other Class I railroads? Explain your answer.

Solution: There is currently no single east-to-west transcontinental railroad in the U.S. The carriers in the industry dominate certain regions in the country. Another end-to-end merger (e.g., the Norfolk Southern and the BNSF) could improve traffic across the country because of increased switching efficiencies. However, more mergers would further reduce the number of carriers in the U.S., and the STB would need to consider the impacts on shippers.

CASE 6-2 Rail Versus Pipeline Investment

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 7: Airlines

1.

If you were president of one of these railroads, what decision would you make? Maintain current capacity and forgo additional revenue? Make the investment in additional capacity with the assumption that volume will continue to increase? Explain your answer.

Solution: It would be advantageous to maintain the current capacity and forgo the potential future revenue. The future revenue is most likely fleeting and very uncertain. Price changes may shut down the oil fields or make the demand for rail extremely variable. In addition, a pipeline will be built sooner than later, mostly cutting out demand for rail.

2.

Could there be a short-term solution for the railroads other than acquiring more equipment and building more track, allowing them to generate revenue without making significant investments?

Solution: Yes. Charge the oil companies more for the rail capacity. Also, bind the oil companies to longer term contracts whether the oil companies are shipping oil or not. Ask the oil companies to upgrade the track, add track, and improve equipment in collaboration with the rail company.

Solution and Answer Guide NOVACK, T RANSPORTATION : A GLOBAL SUPPLY CHAIN PERSPECTIVE , 10E, 2024, 9780357908549; CHAPTER 7: AIRLINES

TABLE OF CONTENTS Content Type ............................................................................................................................................. 35 [Study Questions].................................................................................................................................... 35 End of Section Exercise Solutions............................................................................................................ 39 [Case Questions] ..................................................................................................................................... 39

CONTENT TYPE [STUDY QUESTIONS] 1.

Discuss the ways in which air carriers compete with each other. How have regulatory changes affected this competition?

Solution: Intermodal Air carriers face limited competition from other modes for either passengers or freight. Air carriers have an advantage in providing time-sensitive, long-distance movement of people or freight. Airlines compete to some extent with motor carriers for the movement of higher-value manufactured goods; they face competition from automobiles for the movement of passengers and, to a limited extent, from trains and buses.

Intramodal

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 7: Airlines

Competition in rates and service among air carriers is very intense, even though the number of carriers is small. As noted, passenger air carrier regulation was significantly reduced in 1978, and new carriers entered selected routes (markets), thereby increasing the amount of competition).

Also, existing carriers expanded their market coverage, which significantly increased intramodal competition in certain markets. The top ten air carriers accounted for about 86 percent of the total operating revenue. Carriers may also have excess capacity (too many flights and seat miles on a route) and attempt to attract passengers by selectively lowering fares to fill empty seats.

Inflation-adjusted airfares increased by 0.3 percent from 2020 to 2021, but declined by 18.0 percent between 2019 and 2020.

The air industry was deregulated by The Airline Deregulation Act (ADA), signed into law on October 28, 1978. The main purpose of the act was to remove government control and open the passenger air transport industry to market forces. Prior to the act, the federal Civil Aeronautics Board (CAB) regulated all domestic air transport, controlling fares and setting routes and schedules, but this law abolished that agency.

2.

What is the major advantage of air carriers? How does this advantage impact the inventory levels of those firms using air transportation? Explain how this advantage relates to the choice of modes when choosing between air carriage and other modes for freight and passengers transport.

Solution: Undoubtedly, the major service advantage of air transportation is speed. The terminal-to-terminal time for a given trip is lower via air transportation than via any of the other modes. Commercial jets are capable of routinely flying at speeds of 500 to 600 miles per hour, thus making the 3,000-mile trip from New York to California a mere six-hour journey.

This advantage of high terminal-to-terminal speed has been dampened somewhat by the reduced frequency of flights and congestion at airports. Commuter airlines have been substituted on some routes, and the use of commuters requires transfer and re-handling of freight or passengers, because the commuter service does not cover long distances.

Air carriers have been concentrating their service on high-density traffic, and have implemented the huband-spoke terminal approach, in which most flights go through a hub terminal. These two factors have aggravated air traffic congestion and ground congestion at major airports and have increased total transit time, while decreasing reliability.

The shippers who use air carriers to transport freight are primarily interested in the speed and reliability of the service and the resultant benefits, such as reduced inventory levels and carrying costs. Acceptable or improved service levels can be achieved by using air carriers to deliver orders in short time periods.

Stockouts can be controlled, reduced, or eliminated by responding to shortages via air carriers. Air freight shipments tend to be small, weigh less than 500 pounds, and require less packaging than shipments moving via surface carriers.

3.

Discuss the length of haul and carrying capacity of air carriers. Explain how this both favors and hinders air carriers from a competitive standpoint.

Solution: For passenger travel, air carriers dominate the long-distance moves. In 2012, the average length of haul for passenger travel was 886 miles for air carriers. The capacity of airplanes is dependent on their type. A wide-body, four-engine jet has a seating capacity of about 370 people and an all-cargo carrying capacity of 16.6 tons.

4.

What is the role of government in air transportation? Include both economics and safety in your answer.

Solution: The air carriers’ terminals (airports) are financed by a government entity. The carriers pay for the use of the airport through landing fees, rent and lease payments for space, taxes on fuel, and aircraft registration taxes.

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 7: Airlines

In addition, users pay a tax on airline tickets and air freight charges. Terminal charges are becoming increasingly more commonplace for passenger traffic. Table 7.3 summarizes the various types of taxes paid by carriers, shippers, and passengers in the airline industry.

The growth and development of air transportation are dependent upon adequate airport facilities. Therefore, to ensure the viability of air transportation, the federal government has the responsibility of assisting the states financially in the construction of airport facilities. The various state and local governments assume the responsibility for operating and maintaining the airports.

The Federal Aviation Agency operates and controls the airways and employs air traffic controllers, who manage the aircraft while airborne. Strict safety regulations are administered by the FAA. Acceptable flight operations, as well as hours of service, are specified for pilots. Both mechanics and pilots are subject to examinations of safety regulations and prescribed operations. FAA regulations also dictate appropriate procedures for flight attendants to follow during take-off and landing.

The Department of Homeland Security and the Transportation Security Administration (TSA) were established by the federal government to monitor and regulate security for passengers and cargo in air transportation.

5.

How does fuel cost and efficiency affect both air carrier costs and pricing?

Solution: A major item is fuel, which increased in cost to $2.86 in 2014 from $0.57 in 1979. Rising fuel costs have been a major problem for the mode. The high fuel costs have led to the development of fuel-efficient aircraft and the use of smaller planes on low-density routes. Fuel costs have also led to fare increases and fuel surcharges.

6.

What is the current situation of labor within the air industry? Are unions a major factor? How does skill level vary within the industry? Do you think this situation is similar to other modes? If so, which one(s)?

Explain why.

Solution: Air transportation employs many people with a variety of skills, such as aircrew and ground crew personnel and management. The FAA controls the nature of flight operations and hours of service for pilots.

Mechanics and pilots must pass examinations regarding safety and operations and be licensed. Pilot wages depend upon the plane rating of the pilot. Wages also differ between unionized and non-unionized airlines, where unionized employees will often earn more than non-union.

The skill levels of pilots are higher than operators in other modes, but other employees’ skill levels are similar to those in motor and rail carriers. Clerical and ramp employees of the airlines are similar in skills required to those working in rail and motor carriers.

7.

Do air carriers face economics of scale at any level? Discuss and support your answer with examples.

Solution: Some economies of scale can be realized from the use of larger airplanes. However, sufficient demand must exist in a market to justify the efficient utilization of larger aircraft; otherwise, this can become more costly. The airline industry most closely resembles the motor carrier industry.

In some cases, carriers will substitute smaller equipment on some routes during certain time periods. This might help improve the load factor. However, this is not always possible, as many aircraft fly on multilegged routes, and that size airplane needs to be positioned at a specific city for a trip requiring that level of capacity.

8.

How do air carriers price their services? Is the weight or density of the shipment a factor? Explain this factor as part of your answer. How does air carrier pricing relate to the value of the goods being transported?

Solution:

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 7: Airlines

The discounts from full fare characterize airline pricing for passenger service. Seats on the same plane can have substantially different prices, depending on restrictions attached to the purchase, such as staying over a weekend or purchasing the ticket in advance. Business people generally pay more for their airline travel due to the more rigid schedules they are on and the fact that they usually depart and return during highdemand times. JetBlue, Southwest, and AirTran have aggressively discounted prices in major passenger markets.

The price of seats on different flights and the price of the same seat on a particular flight can vary due to competition with other airlines, the time and day of departure and return, the level of service (first class versus coach or no-frills service), and advance ticket purchase.

Cargo pricing is dependent mainly on weight and/or cubic dimensions. Some shipments that have a very low density can be assessed as an over-dimensional charge, usually based on 8 pounds per cubic foot. This over-dimensional charge is used to gain more appropriate revenue from shipments that take up a lot of space but do not weigh much. An exaggerated example of a shipment to which this rule would apply is a shipment of inflated beach balls. Other factors affecting the price paid to ship freight via air transportation include completeness of service and special services.

9.

What are the current issues facing the air industry? Discuss how each impacts the industry, its customers and employees.

Solution: The issue of safety is of great importance to the airline industry. Any incident involving airplanes receives a great deal of publicity from the media because of the large number of people affected at one time.

Several factors affect airline safety. First, airport security has come under close scrutiny over the past several years. On September 11, 2001, four aircraft were hijacked, and two were flown into the Twin Towers in New York City, killing and injuring thousands of people. As a result, airport security has reached an all-time high, causing more delays at airport terminals. The U.S. Government created the Office of Homeland Security to be the agency that monitors and manages the security of U.S. borders.

Air travel is more popular than ever, as indicated previously, but there is still great concern about safety.

The 1990s had some major air disasters among major carriers, such as TWA, American, US Airways, SwissAir, and the ValuJet crash in the Florida Everglades. In addition, the frequent reporting of near collisions, minor accidents, and airplane recalls has heightened public awareness of the air safety problem.

However, air travel is still the safest way to travel. Table 7.8 shows the trend of aircraft accidents from 2011 through 2020.

Finally, as with other transportation modes, the issue of substance abuse concerning pilots and ground crews has become important. Strict drug-testing policies and alcohol consumption guidelines are in effect for pilots and other aircraft personnel. Despite these concerns, airline travel is still a very safe form of transportation; however, the airlines are currently addressing these issues to ensure that airline transportation remains safe.

Because the airline industry must offer quick and efficient service to attract business, it constantly needs more sophisticated equipment. With other modes, such as railroads and water carriers, travel times are measured in days; however, air carriers measure travel time in hours.

For this reason, the airline industry has developed automated information processing, and these improvements will allow customers to receive their inbound shipments faster than ever before.

10. What is the cost structure of the air industry? How does it compare with others modes? How does this affect pricing, particularly passengers? Be sure your answer includes examples from either advertising or the Internet.

Solution: Like motor carriers, air carriers’ cost structure consists of high variable and low fixed costs. Approximately 80 percent of total operating costs are variable, and 20 percent are fixed. The relatively low fixed-cost

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 7: Airlines

structure is attributable to government (state and local) investment and operations of airports and airways.

The carriers pay for the use of these facilities through landing fees, which are variable in nature.

By the end of the third quarter of 2014, 34 percent of airline operating costs were incurred for fuel and amounted to $36.7 billion; maintenance costs equaled 5 percent of total operating costs. Both of these expenses are variable costs. The next major category of expense is wages and benefits, which totaled $27 billion, 25 percent of total operating costs. Depreciation accounted for about 6.8 percent of total operating expenses.

Table 7.4 provides a comparison of operating indices for 2005, 2009, and 2022. The overall composite index increased from 2005 to 2022, as did transportation related expenses.

The increased price competition in the airline industry has caused airlines to try to operate more efficiently by cutting costs where possible. There has been much effort put forth to decrease labor costs because the airline industry tends to be labor-intensive compared to railroads and pipelines. The airlines have negotiated significant labor cost reductions with many industry unions in an attempt to lower costs and compete against the low cost start-up carriers.

A Google search for the cost structure of the air industry yielded multiple hits and, while many might not apply, the student should have little trouble with this part of the question.

END OF SECTION EXERCISE SOLUTIONS [CASE QUESTIONS] Case 7.1 The Pandemic versus the Passenger Airline Industry 1.

If you were the CEO of United, what, if anything, could you do in the short run to mitigate this decline in business?

Solution: This is a difficult situation, since travel was reduced significantly during the pandemic. One short-term strategy could be to convert passenger planes to freighters as some international carriers did. Although this would not generate enough revenue to offset the losses, it would keep planes in the air and crews flying.

Another short-term strategy would be to park planes. This would avoid generating fuel and salary expenses, thus reducing total costs. Although laying off crew seems necessary, careful consideration must be given to maintaining employees on staff if possible.

2.

You now have fewer employees, aircraft, and routes. You know that eventually the virus will subside and business will return to some level of normalcy. How do you guarantee that you will have enough employees (since many retired or found other employment) to operate at a higher level of capacity?

Solution: Many airlines did lay off employees and found a shortage after travel began to increase. Offering sign-on bonuses to crew members could be a possible strategy to get them to return. If the airline had kept crew ―on the bench‖ (paid leave) during the pandemic, it could now call them back to service.

3.

What plans do you put in place to offset the tremendous negative impacts of another ―Black Swan‖ event when it happens again?

Solution: Be flexible and act fast. If another pandemic-type event negatively impacts travel, be prepared to repurpose planes and keep as many crew members on staff as financially possible. As a service industry, the airline industry relies on aircraft and people. Being able to act to minimize these costs quickly is important.

Equally important is the ability to ramp up once the pandemic subsides.

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 8: Water Carriers and Pipelines

CASE 7-2 Airline Consolidations 1.

Based on publicly available data, compare the four mega-carriers across the following characteristics: a. Number of aircraft by type b. Number of employees c. Departures d. Revenue passengers e. Revenue passenger miles f. Available seat miles g. Operating revenue (total) h. Operating revenue per seat mile i. Operating profit Solution: The student should be able to find these figures from sources such as the Bureau of Transportation Statistics, Airlines for America, and carrier websites.

2.

Knowing the intent of the Airline Deregulation Act of 1978, explain why the number of passenger airlines in the industry has actually decreased. Be sure to include a discussion of barriers to entry in your discussion.

Solution: The answer to this question can be found in the discussion of the Theory of Contestable Markets, found in Chapter 4. Although the Act was meant to introduce potential competition into the industry by removing all economic regulations, barriers to entry do exist in the airline industry. These barriers are found mainly in landing rights and terminal facilities at major airports. Also, incumbent carriers can withstand a price war longer than new entrants because of the cost structure.

3.

With the total U.S. market being oligopolistic in nature (and at some hubs monopolistic), should the federal government take steps to impose economic regulation on the passenger airlines again? Explain your answer.

Solution: This decision is up to the opinion of the student. However, the answer should point out that economic regulation of the airline industry was neither warranted nor successful. The government has enacted the Consumer Bill of Rights to protect passengers from long delays and hidden fees.

4.

In your opinion, why did the Justice Department allow such consolidations to take place?

Solution: Again, the answer depends on the student’s opinion. However, the airline industry comprised many failing carriers with duplicate routes, old equipment, and high union wages and pensions. As with any industry, consolidations normally eliminate duplications of routes and facilities, and allow the firms within that industry to reduce costs and become more efficient.

Solution and Answer Guide NOVACK, T RANSPORTATION : A GLOBAL SUPPLY CHAIN PERSPECTIVE , 10E, 2024, 9780357908549; CHAPTER 8: WATER C ARRIERS AND PIPELINES

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 8: Water Carriers and Pipelines

TABLE OF CONTENTS Content Type ............................................................................................................................................. 41 [Study Questions].................................................................................................................................... 41 End of Section Exercise Solutions............................................................................................................ 44 [Case Questions] ..................................................................................................................................... 44

CONTENT TYPE [STUDY QUESTIONS] 1.

The integrated ownership of pipelines was initially used by some oil companies to gain control of oilproducing areas. How did they use their market power to gain market control? What other reasons can be offered for integrated ownership? Are these reasons valid in today’s business environment?

Solution: The oligopolistic nature of the industry is demonstrated by the fact that 20 major integrated oil companies control about two-thirds of the crude oil pipeline mileage. There are many reasons for the limited number of pipeline companies. First, start-up costs (capital costs) are high. Second, like railroads and public utilities, the economies of scale are such that duplication or parallel competing lines would be uneconomic.

Large-size operations are more economical because capacity rises more than proportionately with increases in the diameter of the pipeline, and investment per mile decreases, as does operating cost per barrel. For example, a 12-inch pipeline operating at capacity can transport three times as much oil as an 8-inch pipeline.

The procedural requirements for entry and the associated legal costs also contribute to the limited number of companies. An additional factor is the industry itself, dominated by the large oil companies that joined in the post-World War II era to develop pipelines from major fields and entry ports.

2.

The pipeline industry has approximately 100 companies, as compared to the motor carrier industry with more than 50,000. How do you account for this difference, given the fact that they both carry approximately the same volume of intercity ton-miles?

Solution: The tonnage amount transported is in sharp contrast to the revenue earned. Here the low rates of the pipeline, which are discussed later in this chapter, are reflected in the very low percentage of the total intercity revenue paid to all pipeline carriers. The pipelines account for approximately 4 percent of the total transportation revenues, compared to motor carriers, for example, which account for more than 75 percent of the total revenue.

3.

The typical pipeline company has high fixed costs. What economic factors account for this situation? What special problems does this present?

Solution: The pipeline industry has a high proportion of fixed costs with low capital turnover. The pipeline owners have to provide their own right-of-way by purchasing or leasing land, constructing the pipeline, and building pumping stations along the right-of-way. The property taxes, amortizations of depreciation, return to investors, and preventative maintenance all contribute to the high ratio of fixed to variable expenses.

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 8: Water Carriers and Pipelines

In addition to the right-of-way costs, the terminal facilities of pipelines contribute to the high level of fixed costs. The same types of expenses associated with the right-of-way, such as depreciation and property taxes, are incurred by the pipeline terminals.

4.

Pipelines account for more than 20 percent of the intercity ton-miles, but less than 5 percent of the revenue paid by shippers to transportation companies. What factors account for this contrast? Is this situation likely to change? Why or why not?

Solution: Pricing in the pipeline industry is unique compared to its major modal competitors. First of all, pipelines do not use the freight classification system that underlies the class rates of railroads and motor carriers. The limited number and specialization of commodities make such a practice unnecessary. A crude oil pipeline or natural gas pipeline has little need for an elaborate classification system.

Even though pipelines have high fixed costs, the differential pricing practices so common in the railroad industry are virtually nonexistent among pipelines. The nature of the operation (one-way movement, limited geographic coverage of points, limited products, etc.) provides little opportunity for differential pricing practices. Pipelines quote rates on a per-barrel basis (one barrel equals 42 gallons). Quotes for rates are typically point-to-point or zone-to-zone. Also, minimum shipment sizes, usually called tenders, are required; these range from 500 barrels to 10,000 barrels. The high volume helps mitigate the impact of the high fixed costs per unit basis. Also, labor costs are relatively low.

This situation is unlikely to change, as the factors discussed above are unlikely to change.

5.

The economic and market position of the pipelines has been described as mature and stable with little likelihood of significant growth in the near future. Do you agree? Why or why not?

Solution: The most likely answer is that there will be little growth without some new requirements, such as led to the construction of the Trans-Alaska pipeline. While not discussed in the chapter, it is unlikely a new pipeline could be built without serious environmental concerns, which would raise costs and stretch construction out for years.

In addition, start-up costs (capital costs) are high, and the economies of scale are such that duplication or parallel competing lines would be uneconomic. However, the development of the Upper Great Lakes oil fields with new drilling technology has been changing the landscape dramatically, and the U.S. has become the largest producer of gas and oil in the world.

6.

Water carriers played a dominant role in the transportation system of the United States in the 18th and 19th centuries. Why has their relative position declined during the 20th century? Are they still an important component of the total transportation system? Why or why not?

Solution: Water carriers faced strong competition from the railroads, which offered competitive rates. Rail rates also declined during this period, reflecting the competitiveness of the intermodal marketplace. Also, the service disadvantages of the water carriers noted in the text play a role here.

It is obvious that the water carriers’ importance in the U.S. transportation system has declined over the past decade. The decline in water transportation is partly attributable to the transforming of the U.S. economy from basic manufacturing to service industries and technology. The focus on logistics and supply chain management has also impacted water transportation because companies have switched to carriers offering better service (e.g., motor carriers to offset other costs such as carrying costs for inventory, warehousing costs, packaging costs, etc.).

The major water carrier competition is with two other modes – rail and pipelines. Water carriers compete with railroads to move dry bulk commodities such as grain, coal, and ores. For example, the movement of grains from the Midwest to New Orleans (export traffic) is possible by rail and water carrier. The water

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 8: Water Carriers and Pipelines

carriers can use the Mississippi and Missouri River systems to connect the plains states with New Orleans.

Both modes move sizable amounts of grain along this traffic corridor.

Rail and water carriers compete heavily to move coal out of the coal-producing states of Pennsylvania, West Virginia, and Kentucky. The water carriers can transport coal via the Ohio and Mississippi Rivers to southern domestic consuming points (utilities) and export markets.

Water carriers compete with railroads on the Great Lakes to move coal, ores, and grain. Iron ore and grain originating in Minnesota, Michigan, and Wisconsin are moved across the Great Lakes to other Great Lakes ports or out of the Great Lakes region via the Saint Lawrence Seaway to Atlantic and Gulf ports or export markets.

7.

What would be the impact of higher fuel charges on the water carrier industry? Provide a rationale for raising their user charges.

Solution: While not discussed in the book, higher fuel costs would not have the same impact on water carriers as they do on other modes. The productivity of water-borne vessels is such that the ratio of a gallon of fuel per ton mile is the smallest of any mode. However, since fuel is one of the major variable expense components, surcharges will be added as needed.

While other modes have instituted fuel surcharges, they are not at the level of motor carriers.

Service area/type Central Alaska steamship Central Alaska barge Southeast Alaska barge

Current fuel surcharge 7.50% 7.50% 8.0%

New fuel surcharge 8.50% 9.00% 15.00%

Effective date 10/31/2004 11/07/2004 10/25/2004

Please also note that fuel surcharges for shipments to Seattle range from about nine to twelve percent for less-than-truckload shipments to as high as eighteen percent for truckload shipments.

8.

Technology can improve the efficiency and effectiveness of transportation companies, but water carriers do not appear to have applied much new technology to improve their service. Which impediments slow technological progress in the water carrier industry?

Solution: Some impediments slowing technological progress in the water carrier industry include: 

  9.

Maritime policy and transportation policy at large must align to ensure that U.S. ports are prepared to handle the increase in volume in an efficient and environmentally responsible manner and can compete with the ports of neighboring countries.

The existence or lack of rail and road infrastructure has often either facilitated or stymied port development.

No federal entity determines the optimal national direction in overall port development. No federal entity studies efficient freight routing through the broader multi-modal transportation system.

Intermodal competition is more intense than intramodal competition for water carriers. Why? Solution: Intramodal competition among water carriers is not as important as intermodal competition with railroads and pipelines. All three of these modes compete for longer distance movements of bulk commodities.

10. Why are pipelines unknown to many individuals? Do you think the pipelines should advertise to change this?

Solution:

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 8: Water Carriers and Pipelines

The industry is relatively unknown to the general public, which has little appreciation of the role and importance of pipelines. Pipelines are limited in the markets they serve and very limited in the commodities they can haul.

Since they are very limited as to the customers they can serve, advertising would not gain any new business and, as such, would seem inappropriate. ―Awareness‖ ads could even work against the industry as the public might become overly concerned about pipeline safety, leading to more government oversight.

END OF SECTION EXERCISE SOLUTIONS [CASE QUESTIONS] Case 8-1 Great Lakes Carriers: A Sequel 1.

What is the overall impact of the new sources of energy in the Great Lakes area? What is the likely impact on commodity flows in that area? What will be the likely impact on GLC? Solution: These new energy fields will bring economic growth to the Upper Great Lakes as well as states like West Virginia, Pennsylvania, and New York, which will increase the overall flow of goods into and out of the area. New transport infrastructure will need to be developed. Including rail lines, pipelines, and highways, the flow of traffic should also increase on the Great Lakes, which would benefit GLC. There should be increased flows of bulk commodities like Ag products and even some container traffic with manufactured products.

2.

What are some of the logistics supply chain issues that GLC should consider?

Solution: GLC should consider the actual commodities and products that could be moving and the type of transportation equipment needed for efficiency. This includes the port facilities and storage areas.

Collaborative relations with other transportation companies would facilitate freight movements. Better information systems and technology are needed to monitor shipments.

3.

What recommendation would you make to the GLC board of directors regarding a containership operation and the possibility of new bulk shipments of oil or chemicals?

Solution: In regard to the latter, I would recommend aggressive investment in equipment to accommodate the increased traffic and compete with other carriers like rail service, motor carriers, and pipelines. In regard to the latter, I would urge them to be cautious to determine the needs of the area as growth develops. The need for such service is very likely to occur.

CASE 8-2 The Keystone Pipeline 1.

Given the importance of domestically produced oil to the U.S. economy, should the U.S. government promote and subsidize the construction of pipeline and/or rail infrastructure? Explain your answer.

Solution: Considering all points, yes, the U.S. Government should invest in pipeline and rail infrastructure.

Historically projects like this have benefitted the citizens of America greatly. Economically speaking, the oil produced in North America (Canada and the United States) allows those countries involved to reduce the amount of oil imported from other areas of the world. This has been a goal of the United States for decades.

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 9: Third Party Logistics

In the area of safety, the pipeline itself would minimize accidents that occur when moving oil by rail. There are environmental issues with a project such as this, but the benefits far outweigh the risks. In addition, with U.S. Government involvement, environmental oversight would be stricter and more easily monitored by federal authorities.

2.

Discuss the advantages and disadvantages of increasing capacity to move this oil by pipeline and by rail.

Be sure to include in your discussion the environmental, safety, and economic impacts of using each mode.

Solution: Oil is not going away and will be extracted and moved by some form of transport. So it is advantageous to partner to find an effective and efficient solution. Stricter environmental regulations could impact pipeline construction in some ways that are perceived as being negative to the growth of the pipeline industry, but in this case, the positives of building the pipeline outweigh those negatives. Overall, the pipeline industry has a good environmental record compared to alternative modes of transportation (e.g., some accidents with oil rail cars). The pipeline industry needs to tell its story in terms of its environmental position relative to other modes of transportation.

3.

If you had the authority as a U.S. government official, which mode would you choose and why?

Solution: It is simple; I would choose to build pipelines. They are essential to the growth of the United States and provide a very safe manner of moving commodities such as oil. The oil will be extracted and transported by some means. For this commodity, a pipeline makes the most sense. By assuming some responsibility for the project, the U.S. Government will have better oversight of safety and environmental areas as well.

Solution and Answer Guide NOVACK, TRANSPORTATION: A GLOBAL SUPPLY CHAIN PERSPECTIVE, 10E, 2024, 9780357908549; CHAPTER 9: THIRD PARTY LOGISTICS

TABLE OF CONTENTS Content Type ............................................................................................................................................. 45 [Study Questions].................................................................................................................................... 45 End of Section Exercise Solutions............................................................................................................ 49 [Case Questions] ..................................................................................................................................... 49

CONTENT TYPE [STUDY QUESTIONS] 1.

Define the concepts of outsourcing and third party logistics. What role does transportation play in 3PL? Solution: Outsourcing is an arrangement in which one company provides services for another company that could also be or usually have been provided in-house. A 3PL firm may be defined as ―an external supplier that

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 9: Third Party Logistics

performs all or part of a company’s logistics functions.‖ These functions may include inventory management, warehousing, distribution, financial services, and transportation.

Transportation is one of the most widely outsourced logistics activities. The 2013 Penn State-Capgemini annual study of 3PL customers found that half of the most frequently outsourced activities are related to the movement and management of freight. Hence, 3PL firms offer a wide array of transportation-related movement, management, intermediary, and special service capabilities as Figure 12-2 in the chapter reveals.

2.

What are the basic types of 3PL firms? How do they facilitate the planning and execution of freight transportation?

Solution:  Transportation Based - These 3PLs trace their origins to freight movement via truck, rail, air, or other modes of transportation. As customer requirements expanded, these transportation companies developed 3PL subsidiaries or major divisions to provide a broader set of capabilities to serve the marketplace.  Distribution Based - These 3PLs suppliers originated from the public or contract warehousing business and have expanded into a broader range of logistics services. Based on their traditional orientation, these types of organizations are heavily involved in logistics activities such as inventory management, warehousing, and order fulfillment.  Forwarder Based - This group of 3PLs includes freight forwarders, brokers, and agents that primary facilitate the flow of goods on behalf of customers.  Financial Based - This category of 3PL providers helps customers with monetary issues and financial flows in the supply chain. Their traditional roles include freight rating, freight payment, freight bill auditing, and accounting services.  Information Based - The Internet has provided an excellent platform for the growth of informationbased 3PLs. These companies have digitized many activities that were previously performed manually or required the use of licensed software. Today, these information-based 3PLs provide logistics information systems, online freight brokerage services, and cargo planning, routing, and scheduling.

3.

Why would a company use an asset-based 3PL service provider versus a nonasset-based provider?

Solution: Reasons for using asset-based service providers: Many customers choose to work with asset-based providers because they have readily available capacity, permanent employees, and direct control of the customers’ freight. They prefer to work with a single 3PL who will take total responsibility for the outsourced activity and assume accountability if problems occur. Customers can also maintain greater visibility of outsourced activities and inventory if they are handled by a technology-savvy asset-based provider who performs all activities internally rather than handing them off to other companies.

Reasons for using nonasset-based service providers: Customers view nonasset-based providers as being more flexible than their asset-based counterparts. Such 3PLs can be unbiased in their decision making, as they are not limited to an internal infrastructure of assets. Because they are not restricted to using any particular transportation company or set of facilities to serve customers, they are free to choose the best set of service providers and create innovative solutions for customers.

This can lead to tailored services and lower overall costs for the customer.

4.

Discuss the four primary types of transportation services offered by 3PL service providers.

Solution:

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 9: Third Party Logistics

Within the transportation function, 3PLs provide four primary types of services: freight movement, freight management, intermediary services, and specialty services.

Figure 12-2 highlights different services in each category and explanations are provided for 3PL services that are not discussed in other chapters of the textbook.

5.

Why is service integration an important issue to the 3PL industry? What companies are developing these capabilities?

Solution: As customers embrace global sourcing and distribution, their supply chains become more complex and challenging. In turn, they need the assistance of highly capable 3PLs to develop integrated, cross-functional global supply chains. Transportation expertise is not enough to capture the attention of these increasingly sophisticated customers. 3PLs must also develop expertise in supply chain network design, process implementation and coordination, and day-to-day execution. Doing all three requires strong IT tools, multimodal capabilities, and the ability to manage and streamline the flow of goods through the supply chain.

In response to the demand for integrated services, larger 3PLs have embarked on an aggressive plan to expand and integrate their capabilities. Others are bolstering their integration capabilities and their international resources through the creation of internal divisions, acquisition of smaller 3PLs, or the development of partner relationships with other 3PLs.

6.

What are some of the more frequently outsourced logistics activities? Less frequently outsourced?

Solution: While the use of 3PLs has grown dramatically, customer engagement patterns have not changed significantly from year to year. 3PL services are widely ―tactical‖ in nature, meaning 3PLs are used for specific tasks such as transportation or warehousing. These tactical services often focus on transportation, as highlighted by Table 12-5 in the Chapter. The 2013 Penn State-Capgemini study found that the most frequently outsourced activities are related to the movement and management of freight.

Far fewer companies engage in outsourcing at a strategic level where a 3PL essentially takes over a customer's entire logistics and supply chain operation.

7.

To what extent are clients/customers satisfied with 3PL services? What can 3PLs do to improve customer satisfaction?

Solution: The 2014 Penn State – Capgemini study participants are satisfied with their outsourcing results. The study participants, from across industries and around the globe, place a high value on their relationships with 3PL service providers. A distinct majority of the users (90 percent) and 3PL service providers (97 percent) state that their relationships are successful. In addition, 55 percent of the users indicate that their use of 3PL services has led to year-over-year incremental benefits in order fill rates and accuracy. Also, study participants report logistics cost reductions of 11 percent, inventory cost reduction of 6 percent, and fixed logistics asset reductions of 23 percent.

Still, there is room for improvement. 3PLs can develop stronger technologies, retain top talent, and collaborate with customers to enhance their value proposition and customer satisfaction.

8.

Describe the six steps involved in establishing and managing 3PL relationships. Which step(s) do you feel is (are) most critical?

Solution: Step 1: Perform Strategic Assessment - The first stage involves the process by which the manufacturer becomes fully aware of its transportation and logistics needs and the overall strategies that will guide its operations.

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 9: Third Party Logistics

Step 2: Decision to Form Relationship - The second stage focuses assessing internal competencies and weaknesses, in an effort to identify potential partners with strong capabilities that are needed by the customer.

Step 3: Evaluate Alternatives - Another key activity that requires significant attention is conducting thorough assessments of the capabilities of each 3PL under consideration. This should involve capability and capacity reviews, performance evaluations, and interviews.

Step 4: Select Partners - While this stage is of critical concern to the customer, the selection of a transportation or logistics partner should be made only following very close consideration of the credentials of the top candidate 3PLs. Step 5: Structure Operating Model - The fifth stage focuses on the ―rules of engagement‖ and coordination of the 3PL relationship. This focuses on the activities, processes, and priorities that will be used to build and sustain the relationship.

Step 6: Implementation and Continuous Improvement - The ongoing step of the process is to monitor and evaluate performance continuously, seek out improvement opportunities, and sustain a mutually beneficial, long-term relationship.

The second part of the question is an opinion response. While every step contributes to the success of a 3PL relationship, selecting the right partners (#4) and managing 3PL performance (#6) are particularly important for achieving outstanding customer service and cost-efficient operations.

9.

If you were given the task of outsourcing your company’s transportation operations, what types of capabilities and core competencies would you seek in a 3PL service provider?

Solution: The specific list of required capabilities would depend upon the company’s goals, objectives, internal transportation capabilities, and capacity. That being said, key capabilities of 3PLs would include:       

Expertise and significant experience in the desired transportation service functionality Strong information technology capabilities Commitment to customer service and continuous performance improvement Access to capacity and service coverage of required geographic regions Financial stability and strong cash flow Efficient operations and competitive pricing Compatible management style and philosophy/cultural fit

10. After implementing a 3PL relationship, how should transportation managers promote continuous improvement of performance and achieve supply chain value?

Solution: The future success of a 3PL relationship will be a direct function of the ability of the involved organizations to achieve both continuous and breakthrough improvement. As indicated in Figure 12-6, there are a number of steps that should be considered in the continuous improvement process. In addition, efforts should be made to create breakthrough improvements that drive the relationship to new levels of competitive advantage.

11. Discuss the strategic needs and challenges that transportation managers face. How can 3PL service providers help them improve performance and reduce costs?

Solution: The continuous change taking place in supply chains and the ongoing need for improved service and relationships means that 3PLs cannot be complacent. Among the most important needs of 3PL users are strategic innovation, technological strength, capacity access, talent availability, omni-channel agility, and sustainability expertise.

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 9: Third Party Logistics

Figure 12-7 highlights additional capabilities needed by 3PL users to keep pace with the competition.

Although 3PLs bear primary responsibility for providing these capabilities, customers must take a collaborative role in achieving maximum success.

12. Why is information technology an important issue to customers when outsourcing transportation and logistics activities?

Solution: IT is a high-priority issue for 3PL customers, so they should scrutinize the current IT capabilities and future IT investment plans of potential service providers during the 3PL selection process. According to the Penn State-Capgemini study, technology is viewed as a critical capability of 3PL service providers to improve communication, enhance shipment visibility and event management, and manage day-to-day transportation operations. More than 92 percent of the study participants view IT capabilities as necessary for a 3PL service offering. However, only 35 percent report that they are satisfied with their 3PL service providers' IT capabilities, showing that a gap between expectations and performance has lingered for more than seven years.

3PLs will need to improve their abilities to provide shipment visibility and their integration among internal systems to support this customer requirement. Without them, it is difficult for customers to achieve seamless information flows across their transportation and logistics networks. On the 3PL side, the lack of IT integration hampers their ability to coordinate internal activities, offer true integrated service capabilities, or effectively serve as a lead logistics provider.

13. What are the six issues customers must deal with if they choose to use private carriage instead of 3PLs? Answer - Operating cost - Equipment - Leasing - Organization - Control - Regulations

END OF SECTION EXERCISE SOLUTIONS [CASE QUESTIONS] Case 9.1 Pool Distribution by Younger Water, Inc. 1. If exactly the same amount (unit) of each product must be loaded onto a truck, what is the maximum number of units of each product that can be loaded per truck? Make sure that the solution you provide does not violate either the weight or volume capacity constraint.

Solution: 266 units for each product Parameters shipper Y

shipper Z

Weight per unit (lbs.)

100

50

Volume per unit (cu ft.)

5

10

Units shipped per week

4,000

4,000

Product Characteristics

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 9: Third Party Logistics

Truck Characteristics TL weight capacity (lbs.)

40,000

40,000

TL volume capacity (cu ft.)

4,000

4,000

Cost calculation After Collaboration

Before collaboration shipper Y

shipper Z

Units loaded (product Y)

400

-

266

Units loaded (product Z)

-

400

266

Total weight per TL (lbs.)

40,000

20,000

39,900

Total volume per TL (cu ft.)

2,000

4,000

3,990

% of weight capacity

100.0%

50.0%

99.8%

% of volume capacity

50.0%

100.0%

99.8%

Dedicated (product Y only)

10

0

0

Dedicated (product Z only)

0

10

0

Non-dedicated (mixed loads)

0

0

16

Total TL shipments

10

10

16

Transportation Cost

10,000

10,000

16,000

Cost per shipper

10,000

10,000

8,000

Maximum Loading per TL1

Capacity utilization

Total TL shipments needed

1

The maximum loading is given by the amount (units) beyond which the weight capacity or volume capacity would be violated.

2.

Using the solution obtained in the first question, calculate the number of total TL shipments needed (shippers Y and Z combined) when collaboration takes place between the two shippers.

Solution: 16

3.

Based on the answer to question 2, calculate the cost of transportation under the pool distribution scenario.

Calculate both the combined cost and the cost per shipper (assuming that the cost is shared evenly between the two shippers). How much cost saving is attained by each shipper?

Solution: $16,000 combined or $8,000 per shipper, which represents a 20% cost saving for each shipper.

4.

If you do not have to load exactly the same amount (unit) of each product onto a truck, can you come up with a better (lower cost) solution?

Solution: No, you cannot. Try different combinations in the spreadsheet.

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 10: Transportation Risk Management

Case 9.2 C.H. Robinson Worldwide, Inc. 1. What are advantages and disadvantages of using Navisphere®? Make sure that you discuss this from the viewpoint of both customers and contract carriers.

Solution: This case is meant to provoke discussion. Answers will vary.

2.

What are advantages and disadvantages of using Freightview®? Make sure that you discuss this from the viewpoint of both customers and contract carriers.

Solution: This case is meant to provoke discussion. Answers will vary.

3.

What types of companies are good targets (potential users) for Navisphere ®? Make sure that you discuss specific characteristics of target customers such as size, industries to which they belong, technological capabilities, and geographic locations.

Solution: This case is meant to provoke discussion. Answers will vary.

4.

What types of companies are good targets (potential users) for Freightview®? Make sure that you discuss specific characteristics of target customers such as size, industries to which they belong, technological capabilities, and geographic locations.

Solution: This case is meant to provoke discussion. Answers will vary.

5.

As you learned in Chapter 5, the trucking industry is highly fragmented (that is, there are many small carriers and few large carriers). Does this fact affect your answers to the above questions; that is, does this fact affect your strategy of customer segmentation?

Solution: This case is meant to provoke discussion. Answers will vary.

6.

Do you think it is a good idea for C.H. Robinson to approach companies (shippers) that have their own fleet (private carrier)? Why or why not? How can the TMS of C.H. Robinson help these firms?

Solution: This case is meant to provoke discussion. Answers will vary.

Solution and Answer Guide NOVACK, T RANSPORTATION : A GLOBAL SUPPLY CHAIN PERSPECTIVE , 10E, 2024, 9780357908549; CHAPTER 10: T RANSPORTATION RISK M ANAGEMENT

TABLE OF CONTENTS Content Type ............................................................................................................................................. 52 [Study Questions].................................................................................................................................... 52 End of Section Exercise Solutions............................................................................................................ 55 [Case Questions] ..................................................................................................................................... 55

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 10: Transportation Risk Management

CONTENT TYPE [STUDY QUESTIONS] 1.

Describe the concepts of disruptions and risks as they apply to transportation. Why are they important from financial and service standpoints?

Solution: Transportation Disruption—an unplanned or unanticipated event that interrupts the normal flow of goods and materials through the supply chain. These disruptions expose companies within the supply chain to operational and financial risks.

Transportation Risk—a future freight movement event with a probability of occurrence and the potential for impacting supply chain performance.

Problems arise when the threat of transportation disruptions and hazards become a reality, and the supply chain is negatively affected. At a minimum, disruptions are nuisances, creating extra work and delays.

Recovery efforts hurt productivity, involve expensive expediting efforts, and require premium freight services. At worst, disruptions inflict long-term damage to a company’s image, profitability, and stock price.

2.

Risk management consists of a series of steps that should be followed to reduce the consequences of disruptions. Briefly discuss these steps.

Solution: Risk Identification: Step 1 involves identifying the potential threats and disruptions to which the organization is susceptible. Structural and procedural changes may be required to execute the strategy.

Risk Assessment: Step 2 focuses on evaluating and prioritizing the risks. The more vulnerable the organization’s transportation process is to a potential risk, the more attention it should receive. Risk assessment aims to evaluate the risks identified during Step 1 to determine how serious each risk is to the organization.

Risk Management Strategy Creation: Step 3 requires the organization to develop proactive risk management and mitigation strategies. The goal is to lower the probability of risk occurrence and/or minimize the negative impact if the risk occurs. These risks can be addressed through one of four means: avoidance, reduction, transfer, or retention.

Risk Review and Monitoring: Step 4 promotes continuity, vigilance, and process improvement. Ongoing testing of strategies, evaluation of their success, and scanning for new risks are needed to achieve maximum protection.

3.

Is risk a natural phenomenon or a manmade problem in transportation? Briefly defend your perspective.

Solution: Students could argue either side of this debate. More logically, they should answer that both nature and man create risks.

Weather is the most obvious natural risk in transportation – hurricanes, floods, tornadoes, ice, and snowstorms are primary risks to the timely movement of freight. Rough seas and turbulence are also natural risks that make transport difficult.

Transportation risks caused by humans include a variety of strategic and operational issues. Poor capitalization of transportation companies and ineffective pricing policies create financial risks.

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 10: Transportation Risk Management

Performance commitments of rapid delivery can lead to delivery delay risks and risky behaviors to meet deadlines. Failure to inspect and maintain equipment can create accident and breakdown risks. Unsafe equipment operation, be it speeding, operating in poor weather conditions, or operating when drivers are fatigued, all create accident and freight damage risks. Freight theft is an ongoing risk. Other risks may also be correctly cited by students.

4.

Six different categories of transportation risk were discussed in the chapter. Identify these categories, describe them, and give transportation examples for each risk category.

Solution: The primary categories of risk discussed in Chapter 10 include:      

Product loss - any type of action or negligence that leads to the product not reaching the intended buyer.

Product damage - a potential peril that arises every time a shipment is handled. A damaged product loses much, if not all, of its value.

Product contamination - any type of spoilage, tampering, or exposure problem that leads to corruption of the product and loss of value.

Delivery delay - any type of failure to meet transit time and delivery deadline commitments constitutes a delay.

Supply chain interruption - a major problem that brings the transportation operation to a complete and prolonged stoppage.

Security breach - a failure to protect in-transit freight from potential security problems that threaten citizens and nations.

Transportation risk examples for each category are discussed throughout the chapter and are summarized in the following table.

5.

How can transportation professionals identify the specific risks facing their companies? Briefly describe these methods.

Solution: The first steps in developing an effective transportation risk management program are to discover, define, describe, document, and communicate risks before they become problems that adversely affect freight flows. Techniques used by transportation companies and shippers include brainstorming, interviews and surveys, data mining and analysis of transportation records, and categorization of risks into high, medium, and low probabilities.

6.

Risk analysis is a critical component of risk management. When conducting this activity, what are the two components of risk that must be analyzed? Why are they important?

Solution: The objective of risk assessment is to evaluate the risks identified during Step 1 in order to determine how serious each risk is to the organization. In making this determination, two parameters are typically evaluated:  

7.

Probability—the likelihood of the risk occurring is important to know as it influences the chosen strategy or response to mitigate the risk.

Impact—the consequences if the risk does occur in terms of service time, cost, or quality problems.

What are the key outputs of a risk assessment process? What should be done with these outputs?

Solution: Risk assessment is an invaluable activity for identifying critical transportation challenges and primary disruption concerns. The process can include the following outputs:

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 10: Transportation Risk Management

  

Qualitative analysis provides a baseline evaluation of risks in a rapid and cost-effective manner. This approach classifies each risk in terms of low, medium, or high probability and impact.

Quantitative analysis is warranted for those risks falling into the ―Major‖ risk category. This analysis incorporates numerical estimates of frequency or probability and consequence.

Risk Assessment Report highlights risk management priorities and ―red flag‖ issues. The output of the report provides: o o o o o o

Relative ranking or prioritization of risks List of risks requiring immediate response List of risks for additional analysis and response Watch list of low priority risks List of risks grouped by category Risk trends

The output from the Risk Assessment should be used to create a coherent strategy for managing and mitigating transportation risks in a cost-effective manner.

8.

Describe the three types of strategies that a company can deploy proactively to limit its transportation risks.

Solution: Step 3 – Risk Mitigation Strategy Development of the Transportation Risk Management Process discusses the three risk reduction strategic options available in detail. Table 10-1 provides specific examples of risk reduction strategies.

Some companies will use a hedging strategy to offset or balance out the risks presented by a single option.

This diversification avoids the inflated risk of having ―all your eggs in one basket.‖ A postponement strategy seeks to limit risk by delaying a commitment of resources.

A buffering strategy provides additional resources to reduce risks related to capacity shortages or performance problems.

In addition to risk reduction, companies can also pursue risk avoidance by not performing a risk-laden activity. They can also transfer risk to another party, often through insurance.

9.

Discuss how companies can use transportation risk management software and other technologies to analyze risks and mitigate disruptions?

Solution: From a risk management perspective, leading transportation companies are utilizing technology and integrating systems to make data-driven decisions with advanced risk analytics. These leaders deploy transportation risk management (TRM) software to anticipate what’s ahead, protect their reputation, and improve business performance through stronger controls. With AI-powered analytics built into the systems, transportation managers can integrate data from internal and external sources in a unified TRM solution while connecting risk mitigation activities across the business.

The TRM software can observe issues like risky driving behaviors, predict outcomes, and take preventive action to avoid costly errors. Other modules help transportation companies comply with changing local, state, and federal transportation regulations, understand and predict accident claims, and control the cost of insurance premiums. The net benefit, according to one TRM software provider, is reducing a transportation company’s total cost of risk by four to nine percent.

Transportation companies and their customers can also deploy a wide range of tools to monitor and control in-transit freight. Freight visibility tools help managers avoid potential problems and respond rapidly to disruptions. Visibility tools provide a seamless flow of timely information across the supply chain.

Accurate knowledge of in-transit freight allows managers to be proactive in routing and scheduling to meet delivery windows. Exception management tools detect performance problems and alert the affected

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 10: Transportation Risk Management

organization. Corrective action can be taken to resolve the situation before the supply chain is adversely impacted.

10. What is the role of insurance in transportation risk management?

Solution: If a transportation risk is determined to be too problematic to manage or mitigate on its own, the organization may seek outside assistance in controlling those risks. This risk transfer strategy provides a means to place liability on a third party should the risk occur. Of course, the third party doesn’t freely accept the risk. They are paid by the customer to assume or share the risk.

Insurance is a common method of risk transfer. Transportation companies and their customers can purchase insurance to outright transfer or limit their risks. For example, the financial risks stemming from commercial vehicle accidents and related lawsuits are very high. Rather than setting aside a large pool of money to self-insure against these possible problems, most transportation companies purchase coverage from insurance companies. They are using the strategy of risk transfer as a means to place financial liability on a third party (the insurance company) should the risk (a vehicle accident) occur. Insurance can also be purchased to protect against freight loss, damage, and delay.

11. What impact did COVID-19 have on transportation risk? What can companies do to prepare transportation operations better for future problems like pandemics?

Solution: COVID-19 caught much of the transportation industry and its customers off guard in terms of the magnitude and duration of the disruption. It was a low probability/high impact type of disruption that very few companies considered. They did not have contingency plans for such a situation where businesses shut down for periods of time, and consumer demand surged in specific categories. Carriers struggled to keep up with the peak volume of freight due to labor shortages and periodic port shutdowns. Stability of freight flows was decimated, and the result was significant port congestion, tremendous increases in transit times, and rapid rises in freight prices.

Transportation companies and their customers must develop stronger business continuity plans for similar events. Greater use of freight contracts, securing additional freight capacity through private fleet operations, the willingness to hold more safety stock inventory, and less reliance on a single carrier are ways that freight shippers can improve the continuity of operations in the event of massive disruption. It is important to do so because experts warn that future pandemics may arrive with greater frequency than in the past. This makes it even more important for transportation and supply chain professionals to recognize and manage these infrequent but major impact events. Advanced planning will be the key to minimizing delivery disruptions.

END OF SECTION EXERCISE SOLUTIONS [CASE QUESTIONS] Case 10-1 GoFastBikes 1.

Do some brainstorming and develop a list of six transportation risks that GFB faces with the inbound and outbound flows of GFB-X19.

Solution: Moving production locally from Austin, Texas to global suppliers will bring about numerous transportation risks that students should consider. Potential categories of risks that warrant mention are product loss, product damage, delivery delay, supply chain interruption, and security breaches. Potential responses include:

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     

Much greater distances will introduce multiple risks of delivery delays, lost product, and product damage.

Involvement of multiple companies, carriers, and freight transfers make it more difficult to maintain in-transit visibility and control.

High value of goods and ease of selling individual units make freight theft a major concern.

Potential production problems and labor disruptions at the contract manufacturers can delay delivery.

Port congestion and weather issues delay delivery.

Much higher inbound delivery costs may be difficult to control for a small company like GFB.

Outbound flows with direct consumer delivery create some of the same risks, though the delivery delay, product theft and damage, and returns are among the major factors to consider.

2.

Based on your answer to Question 1, what are the three biggest risks that you believe CJ Coyle must address? Why? Solution: This answer is a function of the student’s Question 1 response. A student should focus on the types of disruption that increase the risk of product loss/damage/theft, delivery delay, and high cost of delivery.

3.

What actions do you think that CJ Coyle should take to mitigate each of the three risks identified in Question 2?

Solution: This answer is a function of the student’s Question 1 and Question 2 responses. Proposed actions should focus on understanding the magnitude of each risk and developing contingency plans for major issues.

Proactive business continuity planning is essential to being ready for a crisis. Creating readiness plans to reestablish the full functionality of delivery processes as swiftly and smoothly as possible when a transportation disruption occurs will be important for Coyle and GFB. If Chapter 11 is covered before Chapter 10, a logical action would be to select Incoterms that put more transportation responsibility on the seller versus GFB. This would be helpful as GFB has little experience with selection of international carriers, development of documents, and Customs entry processes.

4.

Based on what you have read in the chapter, how would a pandemic like COVID-19 potentially disrupt the flow of e-bikes from Taiwan and Hungary to Austin, Texas?

Solution: The two most prominent categories of risks created by a pandemic include supply chain interruption and delivery delay. As companies experienced with COVID-19, suppliers can shut down their operations – temporarily or permanently – without warning, carriers can cancel voyages, ports can experience unprecedented volumes, and government agencies can change rules and operating hours for carriers and ports.

As a side note, pandemic-related freight congestion and delays can result in products sitting idle for longer than normal periods of time. This introduces a higher risk of product theft for high value goods like the GFB-X19.

CASE 10-2 RIoT Athletic 1.

What issues should Litchee take into consideration in her assessment of transportation risks for RIoT Runners?

Solution: The two most prominent factors that will drive carrier selection are the high product value and the unique nature of the product.

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The primary risk based on product value is obvious – product loss in the form of theft. Athletic shoes are small, high value, and can be readily sold by thieves online, at street markets, and other secondary channels. That puts shipments of RIoT Runners at high risk of theft.

The unique nature of the product requires a rapid market introduction. That means RIoT Athletic cannot afford to have any type of delivery delay by their carriers or theft by competitors. Speed, protection, and accuracy are a must.

2.

Analyze each carrier option that Rasgen presented. What specific risks does each carrier present?

Solution: Arrow Speed offers an integrated domestic network that should improve in-transit visibility and control and reduce theft potential. The risks involve thin capacity, which can lead to delivery delays and the need for delivery partners in Canada and Mexico, creating visibility, control, and product loss risks.

Bravo Freight offers rapid service (but at a higher cost), reducing transit time and the risk of competitor reaction to the new product introduction. With freight moving quickly, the opportunity for theft declines.

However, Bravo’s reliance on asset-based carriers to move the product physically increases the number of product touches and handoffs. That creates visibility and control issues and greater product damage, loss, and theft risks.

Clipper Transport is the low-cost option in this case. That advantage is offset by the longer transit time and the related risk of losing a critical advantage over competitors. Poor integration of the three different operations can reduce visibility and lead to shipment transfer delay. Using multiple partners creates control risks and heightens theft risks.

3.

Which carrier would you recommend that Litchee choose to balance company goals with transportation and supply chain risks?

Solution: A student should target either Arrow Speed or Bravo Freight based on perceived primary risks. Each carrier has advantages and risks, as outlined above for Question 2.

Clipper should not be considered a strong candidate given the longer transit time, integration issues, and use of multiple freight forwarders. These issues cannot overcome the cost savings.

4.

How can Litchee minimize the potential for in-transit product theft?

Solution: Litchee should go through a transportation risk management process to identify primary theft risks, assess their probability and impact, and develop strategies to mitigate the high probability risks.

Key actions should include:       

Use quality carriers that have a strong track record for freight protection and few freight claims.

Use carriers with rapid service to minimize the idle time of products sitting on freight docks and trailers.

Use carriers that have secured facilities – cameras, fenced areas, etc.

Use integrated carriers to avoid introducing other carriers that have not been properly vetted.

Leverage freight visibility technology to monitor in-transit freight and respond rapidly to disruptions.

Minimize information on external packaging to avoid attracting the attention of would-be thieves.

Limit the number of people who have access to shipment information (trailer number, delivery schedule, route, etc.) to minimize the risk of organized theft.

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 11: Global Transportation Management

Solution and Answer Guide NOVACK, T RANSPORTATION : A GLOBAL SUPPLY CHAIN PERSPECTIVE , 10E, 2024, 9780357908549; CHAPTER 11: GLOBAL T RANSPORTATION M ANAGEMENT

TABLE OF CONTENTS Content Type ............................................................................................................................................. 58 [Study Questions].................................................................................................................................... 58 End of Section Exercise Solutions............................................................................................................ 65 [Case Questions] ..................................................................................................................................... 65

CONTENT TYPE [STUDY QUESTIONS] 1.

Why is global transportation such an important issue in supply chain success?

Solution: Global transportation is a huge business, with more than $900 billion spent on transportation services to facilitate merchandise flows. With forecasts of world merchandise exports of $20.7 trillion in 2015, there is an ongoing need for quality global transportation services.

Simply stated, it’s possible to source high-quality, low-cost goods from distant countries… but if they can’t be delivered when needed at a reasonable landed cost, the global opportunity is lost. There is a need to support the efficient and effective global fulfillment of demand. An efficient transportation system increases the competitiveness of products in more markets, while an effective system improves access to the markets and timely delivery to customers.

2.

What is the role of trade terms in global transportation? Briefly describe the four groups of Incoterms.

Solution: The terms of trade facilitate international trade by streamlining the process of determining responsibilities and risks related to the international transport of goods. Trade terms specified in the contract determine which responsibilities are handled by the exporter and which are managed by the importer. Key areas of responsibility include:  Clearing the goods for export  Organizing the transport of goods from origin to destination, often involving multiple moves and modes  Clearing customs in the country of import  Arranging payment for transportation, insurance, and duties International Commercial Terms (Incoterms) make international trade easier and facilitate the flow of goods between different countries. These international rules are accepted by governments, legal authorities, and practitioners worldwide for the interpretation of the most commonly used terms in international trade.

They either reduce or remove altogether uncertainties arising from differing interpretations of such terms in different countries. The four groups of Incoterms are:

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E Term - This departure term gives the importer total responsibility for the shipment. The exporter’s responsibility is to make the shipment available at its facility. The importer agrees to take possession of the shipment at the point of origin and to bear all the cost and risk of transporting the goods to the destination.

F Terms - The three F terms obligate the exporter to incur the cost of delivering the shipment cleared for export to the carrier designated by the importer. The importer selects and incurs the cost of main transportation, insurance, and customs clearance.

C Terms - The four C terms are shipment contracts that obligate the exporter to obtain and pay for the main carriage and/or cargo insurance.

D Terms - The three D terms obligate the exporter to incur all costs related to delivery of the shipment to the foreign destination. The exporter incurs all risks of damage up to the destination port and may be responsible for clearing the goods for import and paying customs duties.

3.

What risks and perils are present in global transportation? Discuss how exporters and importers can manage these risks, especially during pandemics and periods of global unrest.

Solution: There are numerous risks and perils that arise when goods are moved long distances and across borders.

Financial risk occurs as the result of freight theft, damage, or loss.

International cargo is subject to a wide array of freight loss and damage risks due to extended origin-todestination distance, the number of transfers between carriers, and varying climatic conditions. The primary perils include:  Cargo movement  Water damage  Overboard losses  Jettison  Fire and explosion  Sinking  Stranding  General average  Theft  Hijacking  Freight contamination  Vessel collision  Government delays  Labor strikes and slowdowns The burden of proof is on the freight owner to prove that the carrier was at fault for the loss. Given the liability limitations provided in transportation regulations, substantiating carrier responsibility can be very difficult. If they cannot prove fault, importers and exporters have little legal recourse against international carriers.

One way for freight owners to manage risk is to transfer it. Risk transfer means that a company shifts its potential problems to the other party in the transaction via Incoterms selection. This makes the most sense when a company has limited experience with global transportation.

Another option is to transfer the risk to an insurance company through the purchase of a cargo insurance policy. Insurance makes sense when a company’s operations would be severely impacted by a loss; the goods are valuable, susceptible to damage, or a theft target; or the perceived risk is too high.

Exclusive reliance on a single country, carrier, or route proved to be problematic for many companies during COVID and the Ukrainian-Russian conflict. To manage more effectively the macro risks of

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 11: Global Transportation Management

pandemics and global unrest, companies must analyze the probability of problems and develop business continuity plans. That may include setting up operations in multiple countries, contracting with more than a single carrier, and developing multiple routes to move products.

4.

What payment options are available for international transactions? How does each option protect the interests of the exporter and the importer?

Solution: An entire spectrum of payment options ranges from placing the buyer 100% at risk (payment in advance) to putting the seller completely at risk (open account). The five options are identified, and the protection capabilities of each are described in Table 10-3.

5.

What factors impact mode selection for global transportation?

Solution: Mode selection is impacted by both the characteristics of the freight and the capabilities of the mode. The nature of a product – size, durability, and value – may eliminate some modes from consideration as they cannot physically, legally, or safely handle the goods. Also, shipment characteristics – size, route, and required speed – are important considerations.

Modal capacities must be matched to the total weight and dimensions of shipments, while modal capabilities must be matched to customer service requirements. Combined, these considerations tend to limit the modal selection to two or three realistic options, one of which is intermodal transportation. Key modal capabilities considered in the selection process include accessibility, capacity, transit time,

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reliability, and product safety. Of course, the cost is another critical consideration that must be balanced against service capabilities.

6.

Why would companies use ocean transportation versus air freight service to move international freight?

Solution: One major shift is the introduction of larger, more efficient containerships. As stated previously, carriers like China Shipping Container Line are introducing ultra-large containerships (ULCS) that dwarf what were considered the 10,000 TEU megaships of a decade ago. Today, no less than 20 ships with capacities of 18,000 or more TEUs are in service.

ULCS offer unparalleled carrying capacity, but they come with some challenges. First, only a few ports can handle ships of this length and draught, limiting the potential routes. Second, the added amount of time required to load/offload containers can create port congestion. Finally, success is dependent on high load factors. If China’s export activity wanes, it will be difficult to operate these ULCS profitably.

Other issues include the shift from ocean conferences to carrier vessel sharing alliances that seek to pool and control freight capacity in specific trade routes. Carriers are also adopting process automation tools to speed up booking and billing processes. Other issues facing the industry include: port congestion, rising fees for port services and Panama Canal transits, increasing environmental legislation, and growing freight protection headaches such as piracy that threaten to drive operating and insurance costs higher.

As a result of the Ocean Shipping Reform Act and other global reforms that rendered ocean conference pricing mechanisms obsolete, large ocean carriers have formed alliances. An alliance seeks to pool and control freight capacity for a group of carriers serving common trade routes and ports. Originally conceived as a competitive tool to provide more frequent service and better reliability to customers, alliances are now a defensive response to prolonged overcapacity and faltering freight rates. These vessel sharing alliances seek to reduce excess capacity and prop up rates to secure future industry profitability. Customers may have a tougher time negotiating contracts in trade lanes with strong ship alliances and controlled capacity.

While air cargo transportation remains a small and specialized mode in terms of tonnage, it is a critical part of the airline business and the supply chain for time-sensitive freight. Air carriers ship small quantities of high-value, low-weight, semi-finished and finished goods. Primary commodities moved globally as air cargo include: computers, precision instruments, electronics, pharmaceuticals, perishable foods, periodicals, and apparel. The more urgent the need for the product, the more viable air cargo transport becomes.

7.

How are air cargo rates calculated? Calculate the cost of international air transportation for the following shipment: 200 cartons of fine jewelry weighing a total of 2,500 pounds. The carton dimensions are 18 inches by 12 inches by 12 inches (L × W × H).

The freight rate is $10.25 per pound and the dimensional factor of 166 is used by the carrier.

Solution: Air cargo rates are based on the value of service or the cost of service. Value of service rates are demand based and consider the sensitivity of the cargo being shipped to freight rates. Cost of service also factors in to air carrier pricing of cargo. Given the limited cargo-carrying capacity of a plane, space is at a premium.

The utilization of this space is related to the density of the cargo, with low-density cargo requiring more space per weight unit than high-density cargo.

Air cargo is evaluated in two ways for ratemaking purposes: weight and dimensional weight. Air carriers use the greater of the actual weight or dimensional weight to calculate shipping charges. Carriers calculate international air shipments as (Length x Width × Height) / (Dimensional Factor). The common dimensional factor for international freight is 166 for shipments measured in inches and 6,000 for shipments measured in centimeters.

For the example shipment: Dimensional Weight (18 x 12 x 12)/166 = 15.6

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 11: Global Transportation Management

Total Dimensional Weight 15.6 x 200 = 3,120 Total Cost Based on Dimensional Weight 3,120 x $10.25 = $31,980 Total Cost Based on Actual Weight 2,500 x $10.25 = $25,625 8.

What are the benefits and drawbacks of intermodal transportation for international freight?

Solution: The primary benefits of intermodalism include: 





Intermodal transportation facilitates global trade. The capacity and efficiency of ocean transportation allow large-volume shipments to be transported between continents at relatively low per-unit costs.

The speed of air transportation allows perishable goods to flow quickly between countries. The domestic legs of the delivery can take place via truck.

Greater accessibility is created by linking the individual modes. The road infrastructure allows trucks to reach locations inaccessible to other modes, especially air transportation, water transportation, and pipelines.

Overall cost efficiency can be achieved without sacrificing service quality or accessibility. In other words, intermodal transportation allows supply chains to utilize the inherent capabilities of multiple modes to control the cost and fulfill customer requirements.

The primary drawbacks of intermodalism are generated by the multiple carriers and intermediaries involved in moving the freight:     9.

Number of freight transfers can reduce shipment visibility.

Increased handling can lead to product damage.

Transit times can be longer due to the dwell time between modal hand-offs.

Paperwork may be more complex.

What combination of intermodal services would be most beneficial for the following products?

Solution: a. A combination of truck transportation for the short trip from the mill to the Port of Mobile and ocean transportation from Mobile to a Brazilian seaport makes the most sense. For the port to the final destination, truck or rail transport is appropriate. b. The most logical and efficient combination is truck transportation for the trip from the vineyards to the port, temperature controlled containership service for sea transport to Vancouver, and final delivery to Calgary via truck or rail. Air transport is not warranted because of the low value and perishability of grapes. c. A combination of truck transportation for pickup and delivery of the grapes with ocean service for linehaul transportation would be most efficient. Air transport is not warranted because of the low value and perishability of grapes.

10. When developing transportation routes for global freight, what considerations should influence the decision maker?

Solution: Effective routing impacts customer satisfaction, supply chain performance, and organizational success.

Freight owners must spend time choosing efficient routes, coordinating delivery schedules, and sequencing stops to improve transit time and on-time delivery performance. Intelligent freight planners avoid routes that cross or come near unfriendly countries and unstable regions (e.g., the Gulf of Aden), poorly equipped ports, and congested border crossing points. All three issues create potential freight risks and disruptions that may drastically delay cargo flows and impact value. Also, costs can be reduced by using high volume

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routes where carrier competition exists, as well as routes that minimize tolls, port costs, and other service surcharges.

11. If you need to move two TEUs of Adidas footwear from the factory in Vung Tau, Vietnam to the European distribution center in Antwerp, Belgium, what route options should be considered? Which would you choose?

Solution: The logical option would be to consider an intermodal shipment consisting of truck and water service. An Asia-North Europe water route using the Suez Canal will provide a useful shortcut and would take approximately 34 days. The product would move through the Red Sea, the Suez Canal, the Mediterranean Sea, and the Atlantic Ocean.

Other (less efficient) route options include:  

An Asia-America-Europe land bridge uses a North American rail link to connect the origin and destination.

A long Pacific to Atlantic route around the southern tip of Africa

12. What value do ancillary service providers bring to global transportation execution? Discuss the roles of: a. International freight forwarders b. NVOCCs c. Export packers Solution: a. The primary role of an international freight forwarder (IFF) is to help importers and exporters transport their goods. Many IFFs specialize in particular service areas, modes of transport, or markets. IFFs are often seen as the travel agents of international freight transportation. These service providers identify and book the best routes, modes of transport, and specific carriers for customers, based on their specific requirements. b.

NVOCCs are common carriers that provide service via containers rather than the entire ship. NVOCCs book container berths on ships on a regular basis, allowing them to gain advantageous rates from the ocean carriers. They are able to resell the space to customers in smaller increments at favorable rates.

The NVOCC combines the goods from multiple customers into a single load to fill a container. The container is then given to an ocean carrier for movement to the destination port. Upon arrival, the NVOCC receives the container and delivers the contents to each final destination.

c.

Given the challenges of properly packing, marking, and loading shipments, many companies seek the assistance of export packing companies. These service providers work to ensure that products arrive safely. Export packers also help save money by using economical packing materials, improving space utilization inside cartons and containers, and taking steps to prevent theft. Finally, export packers also ensure that all packing regulations and marking requirements are met across the channel.

13. Why is documentation important to global transportation? Briefly describe the primary documents used to facilitate global cargo flows.

Solution: Freight documents control the cargo on its journey from the origin point in the country of export to its final destination in the country of import. Under current U.S. regulations, a failure to provide complete cargo information 24 hours prior to loading at an international seaport can lead to denial of loading, fines, and penalties. Paperwork errors can also lead to Customs clearance delays, additional inspection, and improper application of duty rates. Hence, proper and accurate documentation is critical to the timely and costefficient flow of international cargo.

There are four types of documents: invoices, export documents, import documents, and transportation documents. Primary documents include:

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 11: Global Transportation Management

Commercial Invoice - This document is used by Customs to determine the true value of the imported goods for assessment of duties and taxes. It must clearly indicate the (1) date and terms of sale, (2) quantity, weight and/or volume of the shipment, (3) type of packaging, (4) complete description of goods, (5) unit value and total value, and (6) insurance, shipping, and other charges (as applicable).

Pro-forma Invoice - This document is a sales quote in an invoice format that may be required by the buyer to apply for an import license, contract for pre-shipment inspection, open a letter of credit or arrange for a transfer of hard currency. This document is used by the importer to understand better the total landed costs for a potential order and provides information for price quote comparisons.

Shippers Export Declaration - This document is required by the U.S. Department of Commerce for exports of certain controlled items, and/or shipments to certain countries, and/or shipments anywhere that exceed certain dollar amounts. This document is used to monitor shipments of controlled goods.

Certificate of Origin - This document is a statement that the goods were shipped from the country in which the exporter is located.

Bill of Lading - This document acts as a contract of carriage between the transportation company and the cargo owner, either the exporter or importer, depending on the Incoterm used.

Packing List - This document provides a detailed inventory of the contents of a shipment. It itemizes the material in each individual package and indicates the type of package, such as a box, crate, drum, or carton.

It also shows the individual net, legal, tare, and gross weights and measurements for each package.

14. Identify and briefly describe the six steps involved in the CBP customs clearance process. What can individual companies do to streamline this process?

Solution: The textbook provides a good overview of the Customs clearance process elements:

Entry Filing - Entering merchandise is a two-part process consisting of (1) filing the documents necessary to determine whether merchandise may be released from USCBP custody, and (2) filing the documents that contain information for duty assessment and statistical purposes. The entry must be accompanied by evidence that a bond has been posted with USCBP to cover any potential duties, taxes, and charges that may accrue.

Arrival - As the goods arrive at the seaport or airport, USCBP is notified of arrival and unloading.

Examination - Following the presentation of the entry documents and arrival of the shipment, it may be examined by USCBP, or the examination may be waived.

Classification – All goods imported into the United States are subject to duty or duty-free entry in accordance with their classification under the applicable items in the U.S. Harmonized Tariff Schedule

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(HTS). The HTS comprises a hierarchical structure for describing all goods in trade for duty, quota, and statistical purposes.

Taxation - When import goods are dutiable (i.e., taxable) ad valorem, specific or compound rates may be assessed. An ad valorem rate, the type of rate most often applied, is a percentage of the value of the merchandise. Import duties vary from product to product and are dependent on the commodity being imported, its declared value, its country of origin, and other factors like anti-dumping legislation and quota controls.

Release – After the clearance requirements are completed, and USCBP has accepted the rate and amount of duty ascertained, the entry is considered to be liquidated. The goods can be released to the importer for onward domestic delivery of the goods.

The Customs clearance process can be streamlined by: (1) working with reputable, known suppliers and customers, (2) working with knowledgeable carriers and customs brokers, (3) filling out paperwork accurately, clearly, and in a timely fashion, and (4) using carriers that participate in the Advanced Manifest System to pre-clear products before arrival.

END OF SECTION EXERCISE SOLUTIONS [CASE QUESTIONS] Case 11-1 Nothing Virtual About Importing Headsets 1.

What is the price per VR headset in USD for the Retina Electronics offer? What costs, responsibilities, and risks does EZ-Shop assume under DPU, Port of Oakland?

Solution: EZ-Shop would pay the supplier $158.72 per VR headset under the stated exchange rates. Under DPU (delivered at place unloaded), Retina Electronics clears the goods for export and bears all risks and costs associated with export packing, loading charges, delivery, export duties and taxes, origin terminal charges, loading on carriage, carriage charges, and destination terminal charges. EZ-Shop is responsible for the delivery to the destination and import duties and taxes.

2.

What is the price per VR headset in USD for the V.Image Innovations offer? What costs, responsibilities, and risks does EZ-Shop assume under FAS, Port of Tanjung Pelepas?

Solution: EZ-Shop would pay the supplier $153.75 per VR headset under the stated exchange rates. The FAS term (free alongside ship) is used for water transportation shipments only. The risk of damage is transferred from V.Image Innovations to the importer (EZ-Ship) when the shipment is placed on the wharf next to the ship. The importer pays for loading.

Risks would be higher than the first option, as EZ-Ship would have to deal with any in-transit freight damage and loss, port delays, and any additional costs that are incurred after the goods leave the origin port.

3.

What is the price per VR headset in USD for the Iris Enterprises offer? What costs, responsibilities, and risks does EZ-Shop assume under EXW, Bucharest?

Solution: EZ-Shop would pay the supplier $151.96 per VR headset under the stated exchange rates. Under EXW terms (ex works), Iris Enterprises fulfills its obligations by having the goods available for the buyer to pick up at the Iris assembly campus. EZ-Shop bears all risk and costs after picking up the products at the seller’s location until the products are delivered to his location. Iris Enterprises has no obligation to load the goods

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or clear them for export. Risks would be maximized, as EZ-Shop would have to deal with all in-transit loss, damage, or problems. This includes resolving issues such as insurance claims, port delays, and any additional costs incurred after the goods leave the origin point.

4.

What other global transportation issues and costs must Joe consider when trying to make an effective purchase selection?

Solution: Average transit time, transit time consistency, freight loss, and damage rates, potential delays, and service quality must all be considered when selecting a supplier. If the supplier is responsible for carrier selection, EZ-Shop must promote using cost-efficient, quality carriers. Another logistics issue that EZ-Shop should consider (though outside the general scope of this book) is inventory carrying cost. The Japanese supplier wants to ship in quantities of 2,500, forcing EZ-Shop to purchase and store the goods well in advance of demand. This will drive costs up, versus the Malaysian offer of smaller deliveries that could be better matched to the overall demand forecast.

5.

Which of the three options would you recommend? Why? Solution: There is no single correct answer here. Choosing between the suppliers may depend on several issues in the case. One consideration must be the expertise of EZ-Shop in planning and managing global transportation.

The more experience they have, the more it is feasible for them to consider the V.Image offer with FAS terms or the Iris offer with EXW. For example, if EZ-Shop has the experience and can handle the additional responsibilities of EWX for less than $6.76 per unit (everything else being equal), then it is reasonable to consider the Iris offer instead of Retina. But sticking with the known supplier and lower risk of Retina may be the most prudent course of action.

CASE 11-2 Roll Out the Hydrogen Buses 1.

What are the major problems and pitfalls that MLM faces as it tries to go global with its alternative fuel buses?

Solution: Foremost on MLM’s list of challenges is the highly unusual nature of the freight. The length and weight of the buses will pose a major transportation problem and reduce the number of modes available. Specialized carriers such as roll-on/roll-off ships will be needed. Another issue will be the cost of transportation. The company will have to investigate the financial feasibility of profitably exporting the product to India and Poland.

Another consideration will be routing the shipments. Medicine Hat is a landlocked city nearly 4,500 kilometers from Halifax, Nova Scotia, on the Atlantic Ocean and over 1,200 kilometers from Vancouver, British Columbia, on the Pacific Ocean port.

Finally, the two proposed markets are in opposite directions. That will not make it easy to select carriers and simultaneously manage flows to these locations.

2.

What mode(s) of transportation would you recommend to Richford as most appropriate for moving the buses domestically and internationally?

Solution: The options for origin-port moves include truck, rail, and water transport.

Domestically, rail transport seems the most logical based on the size and weight of the buses. Trucking is possible with heavy haulers but will be more expensive.

Internationally, ocean transport using roll-on/roll-off ships is the most financially viable option, but it will require an intermodal connection to get the buses from factory-to-port and port-to-destination.

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 12: Governmental Roles in Transportation

3.

How would you route shipments of buses from Medicine Hat to Bangalore, India, and to Warsaw, Poland?

Why? Solution: Many different routes could be suggested by students. Logical options include: Bangalore, India – move from Medicine Hat to Vancouver, BC, then onward from the Port of Vancouver to the Chennai Port, about 350 kilometers from Bangalore. From the port to the customer location, heavy trucks could be used, or buses could be driven.

Warsaw, Poland – move from Medicine Hat to an east coast location, either in Canada or the U.S., with roll-on/roll-off ship service. Move across the Atlantic to a major European port and onward to the customer location via rail or truck.

4.

What role will ports play in the movement of buses from Canada to India and Poland?

Solution: It will be critical to work with ports that can handle large equipment like buses. They will need to offer staging areas for the buses, the ability to load/unload roll-on/roll-off ships, and protection of the buses from vandalism and theft.

Solution and Answer Guide NOVACK, T RANSPORTATION : A GLOBAL SUPPLY CHAIN PERSPECTIVE , 10E, 2024, 9780357908549; CHAPTER 12: GOVERNMENTAL ROLES IN T RANSPORTATION

TABLE OF CONTENTS Content Type ............................................................................................................................................. 67 [Study Questions].................................................................................................................................... 67 End of Section Exercise Solutions............................................................................................................ 70 [Case Questions] ..................................................................................................................................... 70

CONTENT TYPE [STUDY QUESTIONS] 1.

Why are transportation policy, regulation, and planning important? How do they feed off each other?

Solution: Policy drives decision making in many ways that drive job creation and the economy. Regulation plays a role in that much of commerce is across state lines, and states must communicate with each other and look to the federal government for assistance. Planning is vital to efficiency, safety, maintenance, and long term sustainability. As stated, policy drives jobs and the economy, which requires planning and communication between states and the Feds.

2.

Why does the United States need a national transportation policy?

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 12: Governmental Roles in Transportation

Solution: Transportation is vital to the economic development and defense of the United States and the welfare of its citizens. With the numerous federal agencies and congressional committees overseeing transportation in our nation, an overall policy is necessary to define the overarching goals of our transportation network. The policy is intended to provide a safe, secure, and non-discriminatory transportation network that fulfills the need for commerce, defense, and individual freedom. It is a mechanism that can be used when various agencies make transportation decisions.

3.

Does President Kennedy’s 1962 national transportation policy speech remain relevant more than 60 years later? Defend your answer.

Solution: Students should respond ―yes‖ to the question of relevancy, though it could be argued that much work must be done to achieve President Kennedy's goals. His speech reflects what companies, the traveling public, and the government desire to achieve – fast, safe, and economical transportation services needed in a growing and changing economy to move people and goods, without waste or discrimination, in response to private and public demands.

This should be done at the lowest cost, and be consistent with health, convenience, national security, and other broad public objectives. The nation's transportation system continues to be largely reliant on for-profit entities in the transportation sector with support from government investment and incentives.

4.

How has common law provided a basis for the government’s regulation of transportation in the United States?

Solution: Common law allows the court system to interpret the intent of the law and make decisions that then change the law. This is necessary as conditions in the industry and society change. This was especially important in the early days of economic transportation regulation, since no precedent existed in the United States for regulating an industry. Common law especially fits well with the concept of common carriage, which requires transportation providers to serve all individuals equally and without prejudice or discrimination.

5.

Why is the judicial system involved in transportation policy and regulation?

Solution: Although the regulatory commissions and DOT operating administrations play key roles in regulating transportation, they are still subject to judicial review. The courts are the sole determinants of the intent of the law, and only court decisions can serve as legal precedents under common law. The courts make the final ruling on the constitutionality of regulatory statutes and the interpretation of the regulation. The review of the courts acts as a check on arbitrary or capricious actions, actions that do not conform to statutory standards or authority, or actions that do not follow a fair procedure or substantial evidence.

Therefore, the parties involved in a commission decision have the right to appeal the decision to the courts.

6.

What roles do individual states play in transportation regulation?

Solution: The states establish various transportation safety regulations to protect the health and welfare of their citizens. In addition, the states exercise limited economic regulations over the transportation of commodities and passengers wholly within the state. The Commerce Clause of the U.S. Constitution gave these powers to the states. The states' powers were greatly limited under various federal laws. States generally cannot impose stricter regulations than on a given mode at the federal level. States can still regulate safety, provided these regulations do not impose an undue burden on interstate commerce. This type of transportation is known as intrastate commerce, and most states had a regulatory commission that was charged with enforcing these intrastate controls. These agencies might still exist to regulate utilities, such as telephone or electric companies.

7.

Identify the four primary types of transportation regulation. Describe the purpose or rationale for each type.

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 12: Governmental Roles in Transportation

Solution: Economic regulation is needed to promote healthy competition.

Antitrust regulation is needed to prevent illegal trade and pricing inequities.

Safety regulation is necessary to protect the health and welfare of citizens.

Security regulation is needed to combat terrorism.

8.

Discuss the advantages and disadvantages of increasing regulations relating to transportation safety and security. Be sure to include both transportation providers and transportation users in your discussion.

Solution: While economic regulation of transportation has been almost eliminated, regulations about safety and security in transportation have increased. The reason for this is obvious. A transportation accident, whether a train derailment (random) or terrorist threat (planned), can cause damage to property and death to individuals. As such, taking action to prevent these instances is warranted. For example, over the last year, the number of rail shipments of crude oil from North Dakota and Canada has grown significantly because of oil drilling and the lack of pipeline infrastructure to get the oil to refinery sites. During this time, several derailments have occurred, causing significant damage and death to the communities affected. To help prevent these derailments, the federal government has mandated initiatives such as positive train control (PTC), new brake requirements, and new designs for oil tank cars. These actions will certainly help prevent some derailments. However, with these initiatives come costs. The railroads will invest billions of dollars over the next several years to implement these changes, increasing their costs in both infrastructure and operations. Ultimately, however, these increased costs will get passed on to shippers in the form of higher rates, who will then pass those costs on to the consumer.

Another example was the creation of TSA. This government-funded agency (using tax dollars) intends to make air travel safer through more intense screening procedures for boarding passengers and other activities. This has undoubtedly made air travel safer. However, the additional screening procedures cause longer delays in passenger boarding, which translates into higher costs for the traveler.

So, safety and security have benefits and costs to both transportation providers and users. The trade-off is balancing the costs with the increase in safety and security.

9.

Discuss the advantages and disadvantages of increasing transportation safety, security, and environmental protection regulations. Be sure to include both transportation providers and transportation users in your discussion.

Solution: While economic regulation of transportation has been almost eliminated, transportation safety, security, and environmental protection regulations have increased. The reason for this is obvious. A transportation accident like a train derailment, a security breach like an airplane hijacking, or an environmental disaster like an oil spill from an ocean tanker can cause major damage to property and the environment, endanger individuals, or create major remediation costs. As such, taking action to prevent incidents is warranted.

The reality is that regulation is sometimes required to gain compliance with these safety, security, and protection needs. Regulation can be time consuming to develop and may not always be clear. Carriers can find it difficult to comply, and regulation is typically costly to implement. These costs are passed along to freight customers as higher freight rates and to consumers as higher product prices.

10. Identify and describe the four major eras of transportation regulation.

Solution: Transportation regulation has progressed through four phases: Initiation Era, Positive Era, Intermodal Era, and the New Economic Era. See Table 12-1.

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 12: Governmental Roles in Transportation

11. What is the rationale for the public promotion of transportation? Discuss how the 2021 Infrastructure Investment and Jobs Act supports and promotes freight transportation.

Solution: Since transportation is vital to the economy and defense of the U.S., public promotion of this industry is a valid decision. Investments in highways benefit both individual citizens and companies. Maintaining our airports, air traffic control systems, and domestic waterways encourages economic development and provides safety to passengers and communities.

According to the U.S. Department of Transportation, the 2021 Infrastructure Investment and Jobs Act is the largest long-term investment in our infrastructure and economy in U.S. history. It provides $550 billion over fiscal years 2022 through 2026 in new Federal investment in infrastructure, including roads, bridges, mass transit, water infrastructure, resilience, and broadband. The 2021 Infrastructure Investment and Jobs Act focuses on improving public safety and climate resistance, increasing public transit access, reducing traffic congestion, and promoting clean energy for transportation.

12. Which mode of transportation has received the greatest level of government promotional support? Defend your answer.

Solution: In terms of dollar figures, it can be argued that roads and other infrastructure received the greatest level of government promotional support.

In an effort to address the aging infrastructure, the bipartisan Infrastructure Investment and Jobs Act (IIJA) was signed into law on November 15, 2021. The legislation includes approximately $550 billion in new federal investment in America’s infrastructure.

In addition to the $550 billion in new investments, the package also includes roughly $650 billion in previously authorized funding for roads and other infrastructure, including nearly $300 billion for the Highway Trust Fund and $90 billion for public transit over the next five years.

13. What are transportation user charges? Are these charges reasonable? Defend your answers.

Solution: Transportation user charges are fees assessed by a government agency for using government-provided infrastructure or for the privilege of vehicle ownership.

The purpose is to recoup promotional subsidies/investments from those using those subsidies/investments.

For example, fuel taxes and landing fees are assessed on those consuming fuel or landing at an airport.

Registration fees are assessed on those given the privilege of owning a vehicle (e.g., an automobile). These fees are also reinvested in the current infrastructure for its improvement. A good example is the Highway Trust Fund, which receives its funding from a per-gallon fuel tax at both the state and federal levels. The rationale is the more fuel consumed and miles travelled, the faster the need to repair and maintain the state and federal highway system.

The issue of reasonableness can be argued either way. Students may believe that the charges are reasonable because, theoretically, those who use the transportation system more will pay more than those who use the system less. Other students may believe that the charges are not reasonable because certain groups are perceived not to pay their fair share (e.g., heavy trucks that put more wear and tear on the infrastructure and electric vehicle users who are not paying fuel taxes).

END OF SECTION EXERCISE SOLUTIONS [CASE QUESTIONS] Case 12.1 Who Pays the Price?

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 12: Governmental Roles in Transportation

1.

In each of the environmental regulation examples presented in the case, there are pros and cons of government intervention. One view is on the public benefit, while the other is on the challenges and costs to private industry. How can you decide which view to accept?

Solution: There is no one correct answer to this question. The student should note that the EPA, international organizations like the IMO, and state agencies have established requirements for environmental protection.

Their answers should also examine the trade-offs between government regulation's costs versus the benefit to society. Since these costs are passed on to private industry and ultimately to the consumer, society decides whether or not the benefit exceeds the costs.

2.

In each of the examples, identify the benefits versus the costs for both viewpoints. What other considerations should be addressed?

Solution: The truck emissions example involves CARB, trucking companies, customers, and the public. CARB desires to reduce fuel consumption and emissions; the cost burden falls to motor carriers that must invest in new equipment. The public benefits from cleaner air and less resource waste, but product costs may rise to offset the carrier increases in rates to cover their new investments in vehicles and charging infrastructure.

The major considerations are whether or not enough electric trucks can be produced by the deadlines, the cost of producing additional electricity to charge thousands of trucks, and the environmental impact of mining materials for the batteries.

The ocean shipping pollution example involves the International Maritime Organization, ocean carriers, customers, and the public. Getting ocean carriers to stop using low-grade bunker fuels to power their vessels is the goal of the IMO, intending to reduce pollution significantly. Carriers will bear the cost burden of upgrading or replacing ships, using more expensive cleaner fuels, and monitoring their compliance. Customers will likely pay more for transportation to offset these carrier costs, but they and the public will benefit from cleaner air. A key consideration is what will happen to carriers not complying with the IMO initiative. The IMO has no authority to punish carriers and needs government backing to make the initiative impactful.

3.

Should governments and global organizations like the IMO be the primary drivers of transportation environmental regulations? Or should private industry take a more active role in environmental protection?

Discuss.

Solution: The student should present the pros and cons of government regulation versus private initiatives. However, since these initiatives add costs to the industry, businesses might hesitate to implement such measures.

Thus, it makes sense for the government to mandate safety, security, and environmental measures to prevent major problems. Government and global organizations should also promote the development of safer, cleaner, and more reliable transportation through research and development activities, tax incentives for carrier innovation in these areas, and other means to promote new methods.

CASE 12-2 Federal Highway Infrastructure Funding 1.

Which of the three funding methods make the best economic sense? Which one makes the best political sense?

Solution: There is no correct answer to this question, so it is up to the student to argue which is best. Regardless of their choice, driving costs will increase for those who buy fuel and use the highway system. From an economic perspective, costs will rise in all three options. Since it will be a user tax, only those using the highway system will be affected. From a political consequences perspective, option 1 has the largest negative impact as voters will experience that change directly. They will see a less direct and immediate impact from option 2 or option 3, making them less problematic for politicians who adhere to a ―no new taxes‖ stand.

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 13: Issues and Challenges for Global Supply Chains

2.

What are the pros and cons of each funding method? Be sure to include in your discussion the views of personal vehicle owners versus commercial vehicle owners.

Solution: Increase fuel taxes: pros – a direct fee that is based on the use of the system, may get back to a dedicated funding mechanism, and will help to keep up with the cost of construction; cons – might not be able to fund the Trust Fund as fully and quickly as it needs to, and will not be popular with drivers at the outset when prices go up.

New VMT tax: pros – direct fee based on usage of the roads by motor carriers, not a direct tax on individual commuters, and may do better to capture revenue from electric vehicles than fuel consumption taxes; cons – the amount of annual revenue generated is not enough to fund infrastructure needs fully, and the taxes paid by carriers will eventually be passed along to freight buyers and consumers.

Higher state/local spending: pros – less reliance on federal taxes to address all infrastructure needs, and state and local governments may become more focused on high need projects; cons – state and local governments will need to raise fuel taxes and license fees, increase tolls, or add toll roads.

Consumers are likely to favor the VMT tax on commercial vehicles or the higher state spending in the short run, as they are not direct tax increases like the first option, which would be highly visible to them.

3.

What other funding alternatives should be considered? How would they be implemented?

Solution: This is up to the imagination of the student. One alternative would be to implement a tax on electric vehicle charging stations or a VMT tax on electric vehicles to capture some user fees from them. Another alternative would be making the fuel tax a percentage of the fuel price. This could be implemented immediately and, unlike the indexing option, is directly related to the use of or demand for fuel.

Solution and Answer Guide NOVACK, T RANSPORTATION : A GLOBAL SUPPLY CHAIN PERSPECTIVE , 10E, 2024, 9780357908549; CHAPTER 13: ISSUES AND CHALLENGES FOR GLOBAL SUPPLY CHAINS

TABLE OF CONTENTS Content Type ............................................................................................................................................. 73 [Study Questions].................................................................................................................................... 73 End of Section Exercise Solutions............................................................................................................ 75 [Case Questions] ..................................................................................................................................... 75

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 13: Issues and Challenges for Global Supply Chains

CONTENT TYPE [STUDY QUESTIONS] 1.

There has been an increasing number of editorials in newspapers and magazines about concern over transport capacity and infrastructure. What is the nature of this issue? Why is it such a problem? How can it be resolved?

Solution: Basically, there has been an exponential increase in the demand for freight movement. Some of this is the result of growth in the U.S. economy. However, there is no question that the globalization of our economy during the last several decades has been a major factor in demand growth because of the increase in imports and exports. Unfortunately, the maintenance and improvement of the transportation infrastructure have not kept pace with the increased demand. Also, the capacity of the transportation carriers has not matched the demand growth during the peak years. The solution is primarily finding sufficient public and private funds to invest in improving and maintaining the total system. Increasing user charges (fuel tax, license fees, tolls, etc.) is not popular. The solution will require both public and private funding and some behavioral changes among users of the transportation system.

2.

While we have concerns about transportation service currently, there did not appear to be any special challenges or big problems during the 1980s and 1990s. Why were these two decades so different as far as transportation is concerned?

Solution: The 1980s and the 1990s were special in that transportation services became relatively less expensive. This phenomenon was primarily attributable to two factors: relatively inexpensive fuel and competition among transport carriers (because they had excess capacity, particularly in the motor carrier industry). These two conditions helped to foster and sustain a relatively long period of economic growth. This led to increased demand for transportation services, which was challenged by constraints in the infrastructure in the twentyfirst century.

3.

We have all experienced highway congestion and ―bumper-to-bumper‖ traffic, but congestion is a huge issue for supply chains and transport service providers. Why? Solution: Congestion is a problem for the general public because it increases economic and social costs, but our increase in economic cost is usually relatively low (extra fuel). For businesses, however, congestion delays can substantially increase their economic or real cost of operation. The text indicates that highway delays cost Nike an additional $4 million per week in extra inventory costs, and that is without considering increased labor or fuel costs. The text offers other examples, with their respective costs to businesses.

4.

The supply chain industry is facing a severe talent gap. What are the causes of this gap? What can companies do to acquire and retain supply chain talent?

Solution: People are the most important asset of any organization. They provide the leadership, management, and innovation required to make any organization successful. As such, managing talent through acquisition and retention must be a key strength of any company. This is especially true for supply chain talent in today’s environment. According to the Bureau of Labor Statistics, jobs for logistics professionals are predicted to grow 26 percent between 2010 and 2020. However, a severe supply chain talent gap exists today.

According to a DHL Supply Chain research project, there are six supply chain job openings for every supply chain graduate.

The shortage of over-the-road truck drivers is another example. According to the American Trucking Association (ATA), the driver turnover rate in the third quarter of 2016 for carriers with revenue exceeding

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 13: Issues and Challenges for Global Supply Chains

$30 million was 81 percent. Along with this, the ATA estimates that the driver shortage in 2015 stood at 48,000 and could rise to 175,000 by 2024.

There are several strategies firms can use to acquire and retain supply chain talent. First, establish recruiting relationships with universities that have a well-developed supply chain curriculum. Second, change the perception of the supply chain management profession; it should be marketed as having a promotion path. Third, develop supply chain management internally through training and professional development. Fourth, some long-haul truckload carriers are regionalizing their operations to be able to give their drivers more ―home‖ time.

5.

Sustainability and the environment have captured the attention of not only ordinary citizens, but also shippers and carriers. What is the nature of the concern? How can shippers and carriers mitigate their impact on the environment?

Solution: The overall concern is the diminishing quality of our environment and its resources. For example, the ecological system is being negatively impacted by the carbon footprint of many businesses and individual households. There is a direct correlation between the economic development of countries and the quality of the environment. The logistics systems and supply chains of companies have a major impact on the environment through their transportation, packaging, warehousing, and related decisions. Network optimization can reduce transport miles and warehouse locations, and ultimately the carbon footprint.

Analyzing and rationalizing packaging can also lead to improved sustainability and collaboration to increase land consolidation and decrease emergency shipments. The supply chain can be a major factor in improved sustainability.

6.

―Don’t ship air‖ and ―don’t ship water‖ are the bases of some important supply chain strategies. What do these statements really mean? What are the related strategies? How do these strategies help?

Solution: ―Don’t ship air‖ essentially means don’t waste space in a transport container. The most obvious strategy here is reducing empty or partially filled shipment miles. The empty shipments frequently occur with backhauls. Achieving balanced flows is always a challenge, but it can be accomplished with shipper-carrier collaboration and visibility. ―Don’t ship water‖ refers to products that have water included. Water adds significantly to the weight of the product. The classic examples are beer and soda (which are about 90% water), but there are many other consumer products that contain water. The underlying premise is that water is available in most market areas, and adding the water later (or even eliminating it) can result in significant transportation savings. The Walmart example in this text provides an example of the benefits.

7.

The EPA has implemented the Smart Way Transport Partnership. Discuss the nature and role of the program. Do you think it will be effective? Why or why not?

Solution: This EPA program is an effort to get carriers and shippers to collaborate and work toward a cleaner environment and more efficient and less costly transport options. The program has doubled in size since 2004, with 1,100 members, including some of the top companies in the U.S. The EPA has pointed out the possibility of significant savings with the adoption of their recommended practices. It is already effective, as pointed out in this text, and should continue to be so.

8.

Fuel prices have been very volatile during the last five years. What factors have contributed to this volatility? What impact will lower fuel prices have on transportation?

Solution: Essentially, the volatility is a manifestation of world supply and demand. Demand is growing at a steady rate, especially with the economic emergence of underdeveloped countries in Asia, the Pacific Rim, and South America. The supply picture has changed in recent years; new technology makes it feasible to drill

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 13: Issues and Challenges for Global Supply Chains

for oil and natural gas in what were considered marginal areas because of the recovery costs. This has led to a significant reduction in the price of a barrel of oil and the emergence of the U.S. as a major producer of energy.

9.

What is collaboration? How can transportation companies and shippers use collaboration to reduce fuel consumption and cost?

Solution: Collaboration is essentially cooperation between buyers, sellers, and logistics providers.

It aims to eliminate costs and improve services. It involves sharing information and examining opportunities to help each other. Collaboration can happen at the tactical, operational, and strategic levels. As discussed in the text, Vendor Managed Inventory is a good example of proactive collaboration that benefits many supply chains.

10. What is your view of the use of technology to enhance sustainability in transportation systems in the future?

Solution: Most students will profess to be optimistic, and rightly so. There is much potential for using technology to improve the efficiency and effectiveness of transportation equipment and services.

11. Are you optimistic or pessimistic about transportation services for shippers in the 21st century? Why? Solution: This question can be answered either way. The student should provide logical analysis to defend either position.

END OF SECTION EXERCISE SOLUTIONS [CASE QUESTIONS] Case 13-1 Sustainability and Night Delivery 1.

Create a list of benefits for adopting night deliveries, including (but not limited to) those mentioned in the text.

Solution: Benefits include: lower carbon emissions due to reduced road congestion; enhanced nighttime air stability; fewer shop owner disturbances during busy times; reduced fleet size; and fewer parking fines. Students may provide other benefits.

2.

Create a list of disadvantages associated with night deliveries, including (but not limited to) those mentioned above.

Solution: Disadvantages include: the need for trained staff at stores at night; higher utility bills due to additional operating hours; increased noise during nighttime; possible driver fatigue, which can result in more accidents; and higher risk of theft. Students may provide other disadvantages.

3.

After considering both advantages and disadvantages, do you recommend that Cyclone adopt nighttime delivery? Why or why not? Should your recommendation be based only on costs?

Solution: Students should choose based on one or more reason(s) mentioned in Questions 1 and 2. They need to consider the trade-off between the advantages and disadvantages of night deliveries. If sustainability is a major concern, night deliveries can be a good resolution, but if minimizing the company’s operating cost is the main focus, night deliveries may not help, and can actually make the cost higher.

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 13: Issues and Challenges for Global Supply Chains

Case 13-2 The Future of Maverick Transport 1a. What methods should Maverick use to recruit drivers and transportation professionals?

Solution: There is no one correct answer to this question. The student should note that Maverick has an opportunity to tout its stellar reputation in the industry for service and innovation when trying to recruit existing talent.

In terms of methods, students could focus on personal recruiting techniques for drivers where current drivers get bonuses for referrals, focused advertising that highlights competitive pay and positive culture, and a bonus system that pays money upon hire and each quarter for retention, safety, and fuel conservation.

For current transportation professionals, recruiting should focus on referrals from current staff, personal engagement at industry events, and business-oriented social media like LinkedIn, as well as online recruiting sites.

1b. How can Maverick improve retention of drivers and current associates?

Solution: Students would do well to use Figures 13-7 and 13-8 as valuable resources for driver retention. From a driver standpoint, Maverick Transport’s leadership must analyze the market to ensure that their associates are receiving competitive pay, have modern, well-maintained, clean, and safe equipment to operate, are treated with respect and appreciation by company leadership, and are given schedules that provide reasonable work-life balance (e.g., home on weekends or consecutive days, local/regional route opportunities, etc.). For non-driving associates, similar factors must be considered. Maverick must provide competitive salaries and benefits, opportunities for challenging work that provides professional satisfaction and growth, work-life balance and schedule flexibility, and a team-based atmosphere. A positive culture and a continued focus on customer satisfaction are critical for retaining both groups.

2a. How can Maverick best appeal to this group of candidates?

Solution: Students would do well to use Figures 13-7 and 13-8 as valuable resources for responses to this question.

While providing a competitive salary is important, Maverick must also demonstrate that it can provide emerging talent with opportunities to learn and grow professionally, to be surrounded by talented, positive people, to be part of a great work culture that fosters innovation and prioritizes customer service, and to achieve work-life balance. Note that students may go in a different direction with their responses, which is fine because there is no single correct answer here.

2b. What competitive challenges will Maverick face when trying to recruit emerging talent?

Solution: Given the strong competition for emerging supply chain talent, students can be expected to focus on the strong starting pay and benefits, signing bonuses, flexible schedules, and development programs being offered by other companies. Students may also focus on the reputation of the trucking industry as a challenge, as well as a preference for "cleaner" and more schedule consistent roles of analysts, buyers, planners, and other roles that are not operations-based.

2c. How should Maverick try to minimize turnover of new hires?

Solution: Students can be expected to focus on their own ideal employer for this question. They may suggest that Maverick Transport assign mentors to new hires or provide extended onboarding with access to company leadership to facilitate learning about the company mission. They might also suggest that the company offer special project assignments that provide unique challenges and opportunities to demonstrate skills.

Frequent feedback from supervisors would help the new hires with continuous improvement. Allowing for some schedule flexibility, such as occasional remote work or a four-day work week and paid time off during the first year, can be helpful for retention.

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Solution and Answer Guide: Novack, Transportation: A Global Supply Chain Perspective, 10e, 2024, 9780357908549; Chapter 13: Issues and Challenges for Global Supply Chains

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