Modes of Transportation and Their Performance Characteristics in a Supply Chain

Supply chains use a combination of the following modes of transportation:

• Air
• Package carriers
• Truck
• Rail
• Water
• Pipeline
• Intermodal

Commercial freight activity in the United States by mode in 2002, along with the value added by each mode to GDP in 2009, are summarized in Table 14-1.

Before discussing the various modes, it is important to highlight some important trends in the U.S. economy. Between 1970 and 2002, U.S. real GDP, measured in year 2000 dollars, grew by 176 percent. Over the same period, U.S. freight transportation, measured in ton-miles, grew by only 73 percent. In 1970, it took 2.1 ton-miles of freight transportation to produce $1 of goods GDP. In 2002, it took only 1.1 ton-miles to produce $1 of goods GDP. This trend reflects the downsizing of products with new technology and the improved efficiency of the freight transpor­tation system. This trend has continued since 2002.

The effectiveness of any mode of transport is influenced by equipment investments and operating decisions by the carrier and the available infrastructure and transportation policies. The carrier’s primary objective is to ensure good utilization of its assets while providing customers with an acceptable level of service. Carrier decisions are affected by equipment cost, fixed oper­ating costs, variable operating costs, the responsiveness the carrier seeks to provide its target segment, and the prices that the market will bear. For example, FedEx designed a hub-and-spoke airline network for transporting packages to provide reliable next-day delivery times. UPS, in contrast, uses a combination of aircraft, rail, and trucks to provide less expensive transportation with somewhat longer delivery times. The difference between the two transportation networks is reflected in the pricing schedule. FedEx’s next-day delivery charges are based primarily on pack­age size. UPS, in contrast, charges based on both size and destination. From a supply chain per­spective, a hub-and-spoke air network is more appropriate when prices are independent of destination and rapid delivery is important, whereas a trucking network is more appropriate when prices vary with destination and a somewhat slower delivery is acceptable.

1. Air

Major airlines in the United States that carry both passengers and cargo include American, Southwest, United, and Delta. Airlines have three cost components: (1) a fixed cost of infrastruc­ture and equipment, (2) cost of labor and fuel that is independent of the passengers or cargo on a flight but is fixed for a flight, and (3) a variable cost that depends on the passengers or cargo car­ried. Given that most of the cost of a flight is incurred when it takes off, an important objective of an airline is to maximize the revenue generated per flight. As a result, revenue management (see Chapter 16) is a significant factor in the success of passenger airlines.

Air carriers offer a fast and fairly expensive mode of transportation for cargo. Small, high- value items or time-sensitive emergency shipments that must travel a long distance are best suited for air transport. Air carriers normally move shipments under 500 pounds, including high- value but lightweight high-tech products. Given the growth in high technology, the weight of freight carried by air has diminished over the past two decades even as the value of the freight has increased somewhat. In 2002, the goods U.S. businesses moved by air were valued at $75,000 per ton, by far the highest among all modes.

The airline industry in Asia has seen significant growth in the twenty-first century, espe­cially in China and India. In the United States, the industry has had a difficult time, with several carriers declaring bankruptcy in the first decade of the twenty-first century. This was followed by consolidation in the industry in the United States and Western Europe. Following steep losses in 2008 and 2009, the industry has been profitable since 2010.

Key issues that air carriers face include identifying the location and number of hubs, assigning planes to routes, setting up maintenance schedules for planes, scheduling crews, and managing prices and availability at different prices.

2. Package Carriers

Package carriers are transportation companies such as FedEx, UPS, and the U.S. Postal Ser­vice, which carry small packages ranging from letters to shipments weighing about 150 pounds. Package carriers use air, truck, and rail to transport time-critical smaller packages. Package carriers are expensive and cannot compete with LTL carriers on price for large ship­ments. The major service they offer shippers is rapid and reliable delivery. Thus, shippers use package carriers for small and time-sensitive shipments. Package carriers also provide other value-added services such as package tracking and, in some cases, processing and assembly of products.

Package carriers are the preferred mode of transport for online businesses such as Amazon and Gilt Groupe, as well as for companies such as W.W. Grainger and McMaster-Carr that send small packages to customers. With the growth in online sales, the use of package carriers has increased significantly over the past few years. Package carriers seek out smaller and more time- sensitive shipments than air cargo carriers, especially when tracking and other value-added ser­vices are important to the shipper.

Given the small size of packages and several delivery points, consolidation of shipments is a key factor in increasing utilization and decreasing costs for package carriers. Package carriers have trucks that make local deliveries and pick up packages. Packages are then taken to large sorting centers, from which they are sent by full truckload, rail, or air to the sorting center closest to the delivery point. From the delivery-point sorting center, the package is sent to customers on small trucks making milk runs (discussed later in the chapter). Key issues in this industry include the location and capacity of transfer points and information capability to facilitate and track package flow. For the final delivery to a customer, an important consideration is the scheduling and routing of the delivery trucks.

3. Truck

In most of the world, trucks carry a significant fraction of the goods moved. In 2002, trucks moved 69.5 percent of U.S commercial freight by value and 60.1 percent by weight.² The trucking indus­try consists of two major segments—truckload (TL) or less than truckload (LTL). Trucking is more expensive than rail but offers the advantage of door-to-door shipment and a shorter delivery time. It also has the advantage of requiring no transfer between pickup and delivery.

TL operations have relatively low fixed costs, and owning a few trucks is often sufficient to enter the business. This industry is characterized by shipments of 10,000 pounds or more; more than 50,000 carriers offer TL services in the United States. The challenge in the TL business is that most markets have an imbalance of inbound and outbound flows. For example, New York has a significantly higher inflow of material than outflow. The goal of a TL carrier is to schedule shipments that provide high revenue while minimizing trucks’ idle and empty travel time (deadheading). This is best done by designing routes that pick up loads from markets where out­bound demand exceeds inbound supply, because these markets tend to offer the highest prices.

LTL operations are priced to encourage shipments in small lots, usually less than half a TL, as TL tends to be cheaper for larger shipments. LTL is suited for shipments that are too large to be mailed as small packages (typically more than 150 lbs.) but that constitute less than half a TL. LTL operators tend to run regional or national hub-and-spoke networks that allow consolidation of partial loads. LTL shipments take longer than TL shipments because of other loads that need to be picked up and dropped off.

Fatigue-related accidents correlate with the number of hours of driving and increase with the total length of the driver’s trip. To reduce accidents on the road caused by driver fatigue, the U.S. Department of Transportation issues hours-of-service regulations that limit work periods for truck drivers. Both TL and LTL carriers must design their routes taking these rules into account.

4. Rail

In 2002, rail carried about 3 percent of U.S. shipments by value, 10 percent by weight, and more than 30 percent of total ton-miles. These figures reflect the use of rail to move commodities over large distances. Rail carriers incur a high fixed cost in terms of tracks, locomotives, cars, and yards. A significant trip-related labor and fuel cost is independent of the number of cars (fuel costs do vary somewhat with the number of cars) but does vary with the distance traveled and the time taken. Any idle time, once a train is powered, is expensive because labor and fuel costs are incurred even though trains are not moving. Idle time occurs when trains exchange cars for dif­ferent destinations. It also occurs because of track congestion. Labor and fuel together account for more than 60 percent of railroad expense. From an operational perspective, it is thus impor­tant for railroads to keep locomotives and crews well utilized.

The price structure and heavy load capability make rail an ideal mode for carrying large, heavy, or high-density products over long distances. Transportation time by rail, however, can be long. Rail is thus ideal for heavy, low-value shipments that are not time sensitive. Coal, for example, is a major part of each railroad’s shipments. Small, time-sensitive, short-distance, or short-lead-time shipments rarely go by rail.

A major goal for railroad firms is to keep locomotives and crews well utilized. Major operational issues at railroads include vehicle and staff scheduling, track and terminal delays, and poor on-time performance. Railroad performance is hurt by the large amount of time taken at each transition. The travel time is usually a small fraction of the total time for a rail shipment. Delays get exaggerated because trains today are typically not scheduled, but “built.” In other words, a train leaves once there are enough cars to constitute the train. Cars wait for the train to build, adding to the uncertainty of the delivery time for a shipper. A railroad can improve on-time performance by scheduling some of the trains instead of building all of them. In such a setting, a more sophisticated pricing strategy that includes revenue management (see Chapter 16) must be instituted for scheduled trains.

5. Water

Major global ocean carriers include Maersk, Evergreen Group, American President Lines, and Hanjin Shipping Co. Water transport, by its nature, is limited to certain areas. Within the United States, water transport takes place via the inland waterway system (the Great Lakes and rivers) or coastal waters. Water transport is ideally suited for carrying large loads at low cost. Within the United States, water transport is used primarily for the movement of large bulk commodity ship­ments and is the cheapest mode for carrying such loads. It is, however, the slowest of all the modes, and significant delays occur at ports and terminals. This makes water transport difficult to operate for short-haul trips, although it is used effectively in Japan and parts of Europe for daily short-haul trips of a few miles.

Within the United States, the passage of the Ocean Shipping Reform Act of 1998 was a significant event for water transport. This act allows carriers and shippers to enter into confiden­tial contracts, effectively deregulating the industry. The act is similar to the deregulation that occurred in the trucking and airline industries more than two decades ago and is likely to have a similar impact on the shipping industry.

In global trade, water transport is the dominant mode for shipping all kinds of products. Cars, grain, apparel, and other products are shipped by sea. In 2001, merchandise trade valued at more than $718 billion moved between the United States and foreign seaports. Maritime trans­portation accounted for 78 percent of the U.S. international merchandise freight by weight in 2002. For the quantities shipped and the distances involved in international trade, water transport is by far the cheapest mode of transport. A significant trend in maritime trade worldwide has been the growth in the use of containers. This has led to a demand for larger, faster, and more specialized vessels to improve the economics of container transport. Delays at ports, customs, and security and the management of containers used are major issues in global shipping. Port congestion in particular has been a big problem in the United States.

6. Pipeline

Pipeline is used primarily for the transport of crude petroleum, refined petroleum products, and natural gas. In the United States, pipeline accounted for about 16 percent of total ton-miles in 2002. A significant initial fixed cost is incurred in setting up the pipeline and related infrastruc­ture that does not vary significantly with the diameter of the pipeline. Pipeline operations are typically optimized at about 80 to 90 percent of pipeline capacity. Given the nature of the costs, pipelines are best suited when relatively stable and large flows are required. Pipeline may be an effective way of getting crude oil to a port or a refinery. Sending gasoline to a gas station does not justify investment in a pipeline and is done better with a truck. Pipeline pricing usually consists of two components: a fixed component related to the shipper’s peak usage and a second charge relating to the actual quantity transported. This pricing structure encourages the shipper to use the pipeline for the predictable component of demand with other modes often being used to cover fluctuations.

7. Intermodal

Intermodal transportation is the use of more than one mode of transport to move a shipment to its destination. A variety of intermodal combinations are possible, with the most common being truck/rail. Intermodal traffic has grown considerably with the increased use of containers for shipping and the rise of global trade. Containers are easy to transfer from one mode to another, and their use facilitates intermodal transportation. Containerized freight often uses truck/water/ rail combinations, particularly for global freight. For global trade, intermodal is often the only option because factories and markets may not be situated next to ports. As the quantity shipped using containers has grown, the truck/water/rail intermodal combination has also grown. By 2001, intermodal activity contributed more than 20 percent of rail revenues.^[1] On land, the rail/ truck intermodal system offers the benefits of lower cost than TL and delivery times that are bet­ter than rail, thereby bringing together different modes of transport to create a price/service offer­ing that cannot be matched by any single mode. It also creates convenience for shippers that now deal with only one entity representing all carriers that together provide the intermodal service.

Key issues in the intermodal industry involve the exchange of information to facilitate shipment transfers between different modes because these transfers often involve considerable delays, hurting delivery time performance.

Source: Chopra Sunil, Meindl Peter (2014), Supply Chain Management: Strategy, Planning, and Operation, Pearson; 6th edition.