Management of Transportation
Chapter1: Transportation, the supply chain and economy
Introduction
Transportation is a vital activity in moving both freight and passengers around the world.
It is the lifeline of most town’s and cities and without it businesses and trade will go to a halt. E.g. London Underground.
Within the subject of Transport management we want to provide you with the skills and knowledge to manage a transport business effectively and efficiently, i.e. making a profit.
This semester we will look at Transportation, the Supply Chain, and the Economy; Transportation Regulation and Public Policy within RSA, e.g. AARTO; and then we are going to look at the different modes of transport and their characteristics, e.g. road, rail, air, water, pipeline.
2nd Semester we will look at the one of the most important aspects, which is costing and pricing, carrier and shipper strategies and information management and technology.
The Challenge of Transport p4
Competitive advantage is in a big part created by transportation by customer service, quality and value added service.
New challenges have been created by 4 constant variables:
- Internet and E-business – home shopping services / real time inventory tracking
- Continual Globalization – international sourcing and sales
- Business alliances – 3PL (3rd party logistics providers) expanding services / eliminate duplication of assets and processes to benefit both parties
- Rapidly Changing technology – hardware, software, GPD, RFID (radio frequency identification), bar-coding, robotics.
The Logistics Concept p6
Def1: Logistics is the process of planning, implementing, and controlling the efficient, effective flow and storage of raw materials, in-process inventory, finished goods, services, and related information from point of origin to point of consumption (including inbound, outbound, internal and external movements) for the purpose of conforming to customer requirements.
Def2: the logistics process provides a systems framework for the decision making that integrates transportation, inventory levels, warehousing space, materials-handling systems, packaging, and other related activities that encompasses appropriate trade-offs involving cost and service.
Def3: Logistics involves the efficient and effective management of inventory, whether in motion or at rest, to satisfy customer requirements and organizational objectives.
Integrated logistics concept – one part affects the other, seeing every part not as stand alone unit but as inter-connected and affecting other parts
FIG 1.1Typical Logistics Network – Physical Distribution p7
FIG 1.3 The logistics Evolution p8
Logistics consists of materials management and physical distribution.
Materials management consists of
- Demand forecasting
- Purchasing
- Requirements planning
- Production planning
- Manufacturing inventory
Both materials management and physical distribution consists of:
- Warehousing
- Materials handling
- Industrial packaging
Physical distribution consists of:
- Finished goods inventory
- Distribution planning
- Order processing
- Transportation
- Customer service
The Supply Chain Concept
Def: Supply chain management integrates product, information and cash flows among organizations from point of origin to the point of consumption, with the goal of maximizing consumption satisfaction and minimizing organization costs.
Logistics – has been responsible for the physical flow of products among organizations, like activities such as transportation and warehousing.
Marketing and sales – has been responsible for providing information to the customers before and after the transaction.
Information technology – have allowed logistics to provide information on product flow before they occur, during movement and after delivery.
Finance and Accounting – has been responsible for cash flows among organizations in a channel by controlling invoicing and collections.
FIG 1.4 Logistics Evolution to Supply Chain Management p10
Supply chain management consists of logistics, strategic planning, information technology, marketing/sales and finance.
Total-Cost Analysis
Why? No one area in logistics operates independently. E.g. low cost transportation is usually associated with slow service i.e. higher warehousing and inventory costs and lower customer service.
3 levels of optimality when making decisions:
- Interrelationship between transportation, warehousing, inventory and customer service.
- The impact of logistics decision has on other areas within the firm such as marketing and manufacturing.
- The impact of logistics on supply chain partners. E.g. pallet size different to customers’.
Total-cost analysis also requires the decision maker to consider cost trade-offs i.e. higher costs vs potential saving and more profit. E.g. You have a low cost transport system. You switch to high cost air transport because the higher transportation costs are traded for lower warehousing and inventory costs. (not good from transport manager point of view but good from a supply chain manager’s point of view)
It is important to make integrated business decisions.2 functions most directly affected by logistics are marketing and production.
•Marketing – movement of finished goods to customer completes the sales transaction and is part of the marketing function e.g. speedy, punctual and reliable delivery of goods can enhance sales
•Production – physical supply of raw-material is a logistics function e.g. late goods or no goods can cause the production line to stop.
When changes are considered, the total cost of the proposed change must reflect the benefit of increased profit as well as the added cost of lost sales (profit) due to service level changes. The total-cost concept of logistics provides an analytical framework for considering the impact of logistics decisions.
Decisions in one area, like transportation, have a cost trade-off effect with other areas of logistics and of the firm. The minimization of total logistics costs is the objective of logistics.
Business Logistics Activities (p13)
The business logistics functions recognizes the movement-storage interaction in the provision of time, place and quantity utilities in goods i.e. that there is a positive and direct relationship between the movement and storage elements of the logistics system.
Transportation decisions have and impact on the functional costs of finance, production and marketing. The decision regarding the mode of transportation used affects the level of inventories to be held, the size of raw materials orders and the quality of service to the customer.
Company functions are based on utility creation as in Fig 1.5
•Form utility is created by production.
•Time, place and quantity utility are created by logistics.
•Possession utility is created by marketing.
Give attention to the multifunctional area of purchasing, pricing and packaging (Fig1.5) E.g. packaging decisions must consider the efficiency of the production process, consumer acceptance (marketing) and the need to protect the product in transit while making efficient use of the carrier vehicle.
Note that material management function is concerned with the inbound movement and storage of raw materials. Physical distribution is directed toward the outbound movement and storage of finished products. However, transportation activities are performed in both.
Conclusion: logistics function does not operate in a vacuum; a decision made in the logistics area impact other areas of the company.
Transportation and the Economy (p15)
Transportation has historical, economic, environmental, social and political significance. It is the most important industry in the world because without it you can’t operate a grocery store or win a war.
It provides a thoroughfare for the nation’s products, it provides a means for travelling to and from work and it supports our communications network.
Transportation is the creation of place and time utility.
•Place utility – when are goods are moved to places where they have higher value than at the places from which they originated.
•Time utility – this service occurs when it is needed. E.g. passengers
Transportation is a service but it has basic characteristic that make purchasing this service similar to buying goods.
3 factors of transport:
- It is a movement service that includes speed, reliability and the frequency of the service.
- Equipment used which affects comfort and safety for passengers and for freight effects shipment preparation, the size of the shipment and loading and unloading costs.
- Cost of the transportation service which includes the rate charged plus any additional costs like: pickup, delivery costs, packaging requirements, damage or detention charge and special service charge such as refrigeration and heat.
It is important to note that transportation should not be viewed as simple movement of persons or things through space. The user is actually purchasing a bundle of services e.g. a carrier that offers line-haul, sorting and segregating with local delivery. The basic function of transportation is to provide the market with access to the resultant products.
Economic Significance (p17)
Value of Goods (place, time and quantity utilities)
Transportation help determine the economic value of products. To illustrate: Let us consider a product, e.g. a fridge, that is desired in one location, provided it is offered below a certain price. The fridge is produced at point A and costs OC at the point of production. The community desiring the fridge, located at B, is the distance AB from A. The maximum price the people will pay is OE, at community B.
If the original, inefficient transport system is used, moving the fridge from A to B will cost CH. The CD is fixed cost whilst DH is the cost per km or slope. The total cost at B is OH, a price greater than the maximum cost limit, OE, in the community B. Now lets assume the transport system is improved through the cost per km being reduced to DJ. The cost to the community becomes OJ, well below the maximum cost of OE. The market for the fridge would be expanded to community B, while production continues at A.
Place Utility (p19)
From the fridge example we could see that the reduction in transportation costs between points A and B gives the commodity place utility.In a less efficient system, the goods will have no value because they would not be sold at the market.
Place Utility is the value added to goods by transporting them from a place where they occur in a useless form or where they are plentiful to place where they are processed into a useful form or where they relatively scarce.
Important to note that the reduction in transportation cost is actually much greater for long distances than for short ones because of the fixed charges, Fig1.6. Reductions in transport costs will encourage market areas to purchase products from distant suppliers that might otherwise be produced locally.
Time Utility (p19)
The demand for a particular commodity can only exist during certain periods of time. If a product is at the market in a time where there is no demand for it, then in possesses no value e.g. Halloween costumes, Christmas Trees.
Time Utility is the value added by making goods available at the time they are required for processing, consumption or use. E.g. speed might be the governing factor for the transportation of certain perishable products (fruit or vegetables) that have a limited shelf life. If the speed were increased the potential service area would increase dramatically.
Quantity Utility (p20)
Transportation gives goods quantity utility through the assurance that the goods will arrive without damage. Quantity Utility is the value added by making sure the quantity demanded is the same as the quantity delivered. E.g. this utility as increased in importance due to emphasis placed on minimizing safety stock levels. Use of special bracing, blocking, strapping, temperature controls all help with damage-free delivery.
Utility of Goods (p20)
Transportation adds utility to goods. Efficient highway systems and modern modes of transportation allows:
- Geographic specialization
- Large-scale production
- Increased competition
- Increased land value
1. Geographic specialization
•Each nation, state or city produces products and services for which its capital, labour, and raw materials are best suited.
•Not one area can produce all needed goods and thus transportation makes in possible to send goods that can more efficiently produced at point A to point B in return for different goods efficiently produced at point B.
2. Large-scale production
•Without efficient and effective transportation networks, the advantages of scale of economies, production efficiencies and cheaper manufacturing facilities would be destroyed.
•Geographic specialization assumes that the large-scale production of produced goods is demanded at distances far from the production site and transport enables this.
3. Increased Competition
•Efficient transport provides the consumer with the benefit of increased competition.
•Transportation increases the market area for product; thus, goods must be produced in the most efficient fashion or distant competitors will enter the market.
4. Land Values
•Transportation improvements also increases the value of land that is adjacent to or served by the improvements. Thus the land becomes more accessible and more useful.
•It could however also have the adverse effect such as an airport where noise levels and air pollution place a role
Transportation Patterns (p21)
Transportation patterns reflect the flow of people and commerce. Transportation stimulates commerce and movement and vice versa.
Rail, highway and water transportation must traverse/follow specific geographic routes. The airline however, only requires end points. Creation of airline hubs and spoke systems acts as central connecting points and feeder routes.
Gross Domestic Product (p23)
The term GDP refers to the total value of income (production) from economic activity within SA and is a measure of the economic wealth that a country creates or earns over period of time (1year). In 2003 freight transport amounted to R134 billion, or 11% of the country’s GDP.
Def. GDP is the total value of goods produced and services provided in a country during one year.
Passenger transportation has been growing in relation to GDP until recently due to the greater use of cars and the affordability of air travel. Freight Transportation has seen a decrease in relation to GDP due to the more efficient use of transportation resulting from less regulation.
Modal Split is a useful analytical tool in the study of transportation which divides the entire transportation passenger or freight market according to the major modes of travel e.g. railroads, buses, air, for hire, cars.
Good transportation spurs economic development by giving mobility to production factors, which permits scale economies and increased efficiency. Good transportation enlarges the area that consumers and industries can draw on resources and products. Good transportation expands the area to which a plant might distribute its products economically.
Environmental Significance (p25)
Transportation provides the economy with numerous benefits but not without a cost. Transportation sometimes pollutes the environment and exploits natural resources however, there is a general feeling that the benefits far outweigh the costs.
The Environment
There has been a growing concern over the impact of transportation on environment and it is only going increase. Increasing pressure from the environmentalists has resulted in legal restrictions that help govern the balance between a sound and efficient transportation system and a safe and clean environment. Always think about the generations after us.We are going to look at air quality, acid rain, global climate changes, maritime and water quality and noise.
Air Quality
•Transportation is a major contributor to air pollution created by the internal combustion engine giving off: carbon monoxide, nitrogen oxides, suspended particles.
•Be aware that there are motor vehicle emission standards due to governmental requirements and environmental awareness.
Acid Rain
•Rain that is much more acidic than normal.
•The addition of sulphur dioxide, nitrogen oxides and volatile organic compounds in the atmosphere causes it.
•Has an adverse impact on aquatic systems, crops, forests, human health and visibility.
Global Climate Change
•The ‘greenhouse effect’ – some of the gases in the Earth’s atmosphere act naturally like the glass in a greenhouse. They trap heat from the sun to help keep the surface of the earth warm. However, human activities (like transportation) have increased the amount of these greenhouse gases in the atmosphere and they are now trapping too much heat causing the world to become warmer?
•Ozone reduction in the stratosphere is a big concern because ozone reduces the amount of ultraviolet radiation reaching the earth’s surface from the sun – increased risk of skin cancer
Maritime and Water quality
•The marine environment is at risk from the adverse effects of oil spills, garbage dumping from ships, hazardous material losses. E.g. BP oil spill
•Plastic and other ship generating garbage can cause birds, marine mammals, and sea turtle that are very susceptible to this to die.
•Water quality, both surface and drinking water sources are also an area of risk and concern.
Noise
•Transportation also emits a lot of noise that has an annoyance factor and also a health risk.
•Be aware that there are operational standards for noise emissions that have to be adhered to.
Safety
•Most disturbing by-product in transportation is injury and loss of life.
•In SA we have an unacceptable high rate of road accidents and fatalities that would need to be looked at.
Substance Abuse
•Abuse of alcohol and drugs is a major issue in transportation.
•Railroad, motor carrier, and aircrews are involved in public safety when they help move passenger.
•The biggest contributor to road accidents is drivers over the legal limit.
Social Significance (p29)
Transportation provides employment and enhances travel. A good transportation system can also enhance the health and welfare of a population. E.g. famine relief efforts.