Final Exam
Hepburn Act of 1906
-Spearheaded by Theodore Roosevelt (R) and Henry Lodge (R) -Expanded Interstate Commerce Act of 1887 -Defined pipeline as a common carrier
How would you rank the following modes in terms of fixed facilities costs as a percentage of total costs?
1. Pipeline- don't move anything, everything is fixed facility 2. Rail- limited to tracks 3. Maritime 4. Air transportation- 80% of operating cost variable and 20% fixed 5. Trucking- 70 to 90% variable costs Rail and Pipeline- own and maintain own network in terminals
Pipelines
20% of total ton miles shipped in US in 2007 (comparable to share of water carriers)
Boeing
787 Freighter, 747-8 Freighter Smaller, faster airplanes
Airbus
A380F Superjumbo Larger airplanes
All Cargo Carriers
Airplane is configured to carry only freight.- can be feeder planes for UPS or DHL
Integrated or Express Carriers
Carry time-sensitive "smaller" freight packages providing door-to-door service FedEx
General Commodity Rates
Depends on characteristics of the cargo
Air Carrier Competition Intramodal (between airlines)
Intense competition -Cycles of new entrants (overcapacity to exist in routes), excess capacity (too many flights and seats), reduced fares (fill empty seats), market exits (financially weaker carriers exit due to reduced prices)- Especially true for carriers with high operating costs
Flight frequency and timing
Smaller communities have experienced reduced frequencies- not as many flights (take away convenience and speed) as air carriers concentrate on high density route (NY and Chicago)
In-direct routing due to hub and spoke networks
Legacy majors moved to hub and spoke networks following deregulation to improve load-factors- delta hub in atlanta to go to other major locations
Explain the role of the warehouse in the transportation/logistics system: Transportation and Consolidation: LTL vs TL
Long distance shipping- higher rate to ship with LTL Small shipments sent to warehouses using shorter distances with LTLs
basic warehousing operations
Receiving- delivered at specific time, moved to receiving dock, examined for damage Put-away- physically move items from receiving dock to storage area Order Picking- go get item order from storage area (people and kiva robots) Shipping Prep- items placed on pallet and shipping label is attached, staged to go onto shipping vehicle Shipping- output, outbound carrier arrives and loaded, carrier will indicate that it has received merchandise, shipper will sign bill of lading
Trailer on Flat Car (TOFC)
Schneider Trailers- wheels set car onto railroad track (locked down), can take It off, truck can haul it off and continue journey
Internal or inland carriers
US rivers (Arkansas river) -Mississippi, Ohio, Tennessee, Columbia, and Hudson -Other smaller arteries
Fixed Facilities Costs
Trucks use roads and terminals. Ocean vessels use ports. Railroads use tracks, stations, and yards. Airlines use the air traffic control system and airports- runway, terminal, gate, hangars where planes are stored
Distribution Management/ Warehousing
Used to store inventory, now provide shorter cycle times (deliver more quickly), lower inventories, lower cost, better customer service Trucks come up and unload, store in facility, take out and load onto another truck Storage of goods in production facility- iron ore in open fields, grain elevators, tobacco warehouses, refrigeration facilities Every product manufactured, grown, cut- warehoused at least once in lifecycle (creation to consumption)
Air Carrier Competition Intermodal (between types of modes)
Very limited competition over long distances (500+ miles) and small time- air provide time sensitive long distance movement of people or freight (other carrier can't compete) -Freight: increasing competition from time-definite motor carrier service -Passengers: some competition from personal automobile travel, rail, and bus
Carloading
declining due to increasing average car size, improving carload productivity
Service
goods available when the customer needs them- enhances customer satisfaction and sales
Traffic shifts
growth of intermodal freight traffic
Smoothing
helps with seasonal demand- produce production run long enough to ensure reasonable cost and quality, excess help in warehouse until shipped out (Easter candy)
Gravity Discharge Hopper Car
hopper car but helps happen naturally
Great Lakes carriers
laker ships normally remain on lakes but access to Atlanta and Gilf Ports is possible via Saint Lawrence Seaway, along northeastern portion of US, provide service between ports on 5 great lakes that border states of NY, Pennsylvania, Ohio, Michigan, Indiana, IL, Wisconsin, Minnesota Large, interconnected, important as based on operating revenues for hauling this domestic freight, inland waterways with access to coast
Fuel affects RR
locomotives increasingly productive and fuel efficient, thus reduced fuel expenditures
If warehouses increase, what does that mean for inventory cost?
more warehouses, more total inventory so inventory cost would increase
Gondola
no top, flat bottom, fixed size, used primarily for hauling bulk commodities
Intercoastal Carriers
operate ocean going ships and barges, transport freight from East Coast to West Coast or vice versa via Panama Canal, currently large quantities of petroleum, crude
Semi-variable costs %
over 40% of total costs- not completely variable where more produce is going to change, but more they can produce they can add things to smaller level -Includes maintenance of rights-of-way, structures and equipment -Deferred during financial difficulties - not making enough money this year so do next year
Refrigerated Car
refrigeration equipment
For-hire carriers
regulated and exempt carriers that charge a fee for their services
Tank car
specialize, transport liquid and gases
Specialized Box Car
specialized merchandise like auto parts
Economies of scale
the cost advantages that a firm obtains due to expansion (i.e. when the average cost is reduced when output increases)- characterize production process in which increase in scale of firm causes decrease in long run average cost of each unit
Lardner's Law ON EXAM
transportation costs cut in half the market area where goods can be offered is now 4x greater
Transportation is Exempt When
transporting bulk commodities both dry and liquid (majority of freight transported by domestic water carriers consist of bulk commodities, exempt carriers dominate for-hire segment of industry)
For-hire carriers
types of services they offer (all cargo, air taxi, commuter, charter, international flights), compare according to annual revenue (majors, nationals, regionals), no longer regulated on economic basis by federal government, can't be easily categorized into specific types because carriers provide many different types of services
Rate simplification
used to make it easier for carriers to offer services, and shippers to shop for services
What about decreasing the number of warehouses?
warehouse building and operating cost are large, eliminate any unproductive facilities that might be incurring wasteful cost
Airport Expenses
-Over 19,000 airports in the U.S. (over 3,300 open to the public) -Airlines are tenants at over 500 airports - Airlines, passengers, and shippers comprise 98% of airports revenues -Owned and operated by states, municipalities or agencies set up by local governments -Carriers pay for the use of facilities through landing fees and rent for any terminal space they occupy US- largest most extensive aviation system in world
Private air transport
-Over 500 corporations own/operate aircraft -About 60,000 corporate planes exist -Thousands of private aircraft used for personal, recreational and instructional purposes
The Air Traffic Control System
- Maintained by the Federal Aviation Administration - FAA -Over 150,000 miles of high altitude jet routes sets up equivalent of a network of fixed facilities for airline industry, combined with airports to load, unload, and transfer passengers and freight make airline industry more fixed facilities intensive than initial appearance would indicate (fixed facilities provided by government so individual companies appear to have low fixed facilities cost)
Approx. 0.5% of intercity freight ton-miles- small amount of freight
-14.7% of revenues from freight transport - larger revenues -High-value, perishable, emergency traffic -Emphasis on quick-response lead times favors use of air over long distances
Terminals (airports)
-Airports financed by government •Federal construction assistance programs •State and local gov'ts operate and maintain -Air carriers (American or Delta, landing fees, rent space within terminal) and users pay for use (taxes on tickets)
Air Carrier Length of haul and capacity
-Ave. air trip length for passengers: 1100 miles -Aircraft capacity dependent on aircraft type- Wide-body, 4 engine jet (370 passengers and all-cargo capacity of 16.6 tons)
For-hire carriers can be classified by
-Classified by annual operating revenues -Classified by type of service
Air freight rates depend on both weight and volume
-Denser cargo may be assessed on the basis of weight -Lighter cargo may be assessed on the basis of dimension
Coastal carriers
-East (Atlantic) -West (Pacific) -Gulf of Mexico operate ocean going ships and barges, navigating along ports
Constraints of the Railroad Industry ON EXAM
-Fixed rights-of-way- if shipper or receiver doesn't own sightings, another mode of transportation is required to complete that shipment (if don't have a way to stop and offload merchandise, somebody else has to get it) -Service limitations- shipment across country may require several different railroads to handle merchandise, different railroads own different parts of country, expensive to change railroads several different times
Air Carrier Accessibility and dependability
-Generally reliable, except when weather and congestion disrupt schedules- snow, fog, extreme cold (small variation is travel time) -Limited airport accessibility adds travel time and cost- passengers and freight must be transported to airport for air service to be rendered
Strengths of the Railroad Industry
-Large carrying capacity, few size or weight constraints -Handle almost any type of cargo -Assumption of liability for damage- rough train ride (steel) -Intermodal services and other new technologies -A public benefit from rail: reduced road congestion and road damage- railroad maintains own tracks so we don't have to repair
Relative advantages of pipelines
-Low rates -Low loss and damage rates- rare accidents -Warehousing function (oil only moves 3-5 mph)- also like storing it -High delivery dependability- on time and right amount
For-hire carrier operating revenues
-More than $173 billion in 2011 -Nearly 62% of revenues from passengers (it was 69% in 2007!)- decreased a little from a few years ago as hauling more freight
Relatively small number of for-hire carriers
-Most of revenues earned by small no. of majors -Several cycles of increasing, then decreasing number of airlines after 1978 deregulation
Air traffic and ground congestion getting to and from airports
-Most relevant at major airports- confusing, lot of people -Adds uncertainty to travel time
Railroads costs
-Railroad tracks are privately owned in the U.S.- different from most countries -In most cases, the tracks are owned by the same company operating the rail service Private Fixed expenses occur independently of volume of business experienced by organization (have expenses no matter how often used)
Hepburn-empowered ICC regulated:
-Rates and charges -Terms of service -Form and content of tariffs -Accounting and reporting -Disclosure of shipper information (to prevent rebates)
Relative disadvantages of pipelines
-Slow speed- walk faster -Limited responsiveness -Limited geographic flexibility- only built in certain parts of US -Limited variety of products carried
Factors Shippers Consider in Carrier Choice
-Weight/size of shipment? -Time sensitivity (Is same-day service required?) -Control required over shipment?- can it be with a person all the time or by itself -How important is cost? -What carriers serve the route?- not every carrier goes to certain cities -Is there non-stop service? How fragile/perishable is the shipment? -Are specialized freight forwarder services required? -Is the shipment hazmat?- hazardous in any way (hairspray in aerosol can can't ship by air)
In which scenarios is demand for air cargo stronger?
-When shipment requirements are...- emergency -When products shipped are...- typical commodities (mail, clothes, communication products, flowers, jewelry, race horses) -When demand for product is...- high and need it immediately
Warehousing
.81% of GDP or $75 billion per year, time and place utility (goods available when and where customers need them) placing goods in closer location or holding things that customers need that they don't want to have in store
Variable costs: Labor %
33% of each revenue dollar- process of reducing personnel and cost •Unionized work force, 14 craft unions •Work rule challenges and issues
Effect of Deregulation
Area, Location, and Route rates - Local rates - Per-mile rates - Terminal-to-terminal rates - Blanket or group rates- might charge smaller amount - Zip code rates
Functional classification of carriers
Class I (operating revenue of at least $346.8 million in 2006) •BNSF Railway •Canadian National Railway •Canadian Pacific Railway •CSX Transportation- B&O Railroad •Kansas City Southern Railway •Norfolk Southern •Union Pacific Railroad -Regional (linehaul of at least 350 miles of revenue of between $40 million and the Class I threshold) -Local linehaul (less than 350 miles and revenue less than $40 million per year) -Switching and terminal (S&T)
Container on a Flatcar (COFT)
Doesn't have wheels, actually come on ships (tracks to set them on to haul them to final destination)
Railroad Piggyback service
Double-stack container services and international trade
Decrease in train accidents
Down 60% from 1980-2001
Air Carrier Equipment, Economies of Scale and Density
Equipment economies of scale, density -Cost per flight-hour higher for large planes- carry more passengers, cost spread out over large number of output units -Cost per seat-mile lower for large planes (EOS) -For any given plane size, low marginal cost to fill empty seats (EOD)- large planes small cost is ten empty seats out of 300+, small plane will be more concerned Operating economies of scale, density at firm level -Minor economies of scale •Role of integrated communication networks- expensive, used for operating control and passenger reservations, hard for small carriers to enter market as would have to rent passenger reservation system -Significant economies of density at route level- carrier has significant volume between origin destination pair to fully utilize capacity and to have back hauls , want to fully utilize capacity and if ship something in 1 direction they are able to ship it back
Yield Trends
Falling overall- productivity gains, technical improvements, intense competition Ongoing Profit Challenges passenger airlines focusing on lower hold revenue cargo market opportunities On average cargo revenue represents 15 or 50% of total traffic revenue with some airlines planning to earn over half their revenue from source and feature
Air Carrier Fuel and Labor Costs
Fuel costs: -Increases have major impact on operating costs •Airlines turn to more fuel efficient aircraft and smaller planes on low-density routes- try to combat costs, don't want money flying away Labor costs: 2/3 of total operating expenses in 2011 -Variety of job skills •Pilots, flight engineers, attendants, communications personnel, mechanics, ground crew, administrative •Pilot wages impacted by equipment ratings and union affiliation -Impact of FAA safety regulations- hours of service for pilots (cant fly 24 hours straight), pilots and maintenance workers subject to exams on safety regulations, dictates appropriate flight attendant procedures during takeoff and landing (spiel is same at each airline)
Express Cargo
Growth in international express traffic has averaged 16.4% per year over the past decade, twice the rate for total worldwide cargo growth
Railroads High % of indirect fixed costs in short run (capacity remains fixed)
High % of long-lived (durable) assets RRs own and maintain networks (rights-of-way) and terminals (freight yards) Geographically fixed, reduces responsiveness to demand- can't pick up and move freight yard somewhere else, difficult to build tracks in different places Equipment: locomotives and rolling stock $ billions in annual capital expenditures
Water Carriers
Important for basic raw materials, compete with railroads for bulk commodities like grains, coal, chemicals, compete with pipelines and railroads for petroleum products Importance in US have declined over past decade- still important to many industries Medium to long haul carriers, low cost, slow, service can be disrupted by weather, attractive alternative for low value traffic where transportation rates are a significant part of total delivered cost and price of good, poor service characteristics can add cost to users
Air Carrier Rates
Pricing: Many fare variations for passenger service -Same seat on flight may vary depending on restrictions at purchase •Adv. purchase, time of day, competition -Yield management used to increase revenues and improve capacity utilization •Business travelers pay higher fares- nicer location with leg room, only willing to travel in business day •Load factors average about 79.9% in 2011 Operating efficiency -Operating ratio- ratio over 100 means loss incurred •Industry average -1994-2000: Ranged from 94.7-96.9 -2008: 108.8 -Load Factor •(#Passengers/#Seats) x 100 •Industry average climbs above 70 to 80% Relationship between load factor, plane size, cost and profitability
Explain the role of the warehouse in the transportation/logistics system: Cross - docking: moves out quickly
Products from different suppliers arrive in truckload lots- all different products on whole truckload and then move across warehouse on conveyor system to trucks that are waiting in area where going to be loading up additional trucks, trying to separate goods and put them in a way that makes more sense to where they're shipping them to particular customers Items often not placed into storage at all- process completed in hours (few items might be stored temporarily)
Explain the role of the warehouse in the transportation/logistics system:
Service, Contingencies, Smoothing
Air Carrier Speed of service considerations
Speed, travel time advantage can be off-set by •Flight frequency and timing •In-direct routing due to hub and spoke networks •Air traffic and ground congestion getting to and from airports
Explain the role of the warehouse in the transportation/logistics system: Product Mixing: For multiple product lines
Want product mix, don't have to order each product from different company Efficient order filling Urban areas- small delivery vehicles and save gas
Intermodal
between modes from railroad to truck or vice versa, or ship involved intensity depends on where going in US =, little more intense, take truck and get container off ship and take it to railroad of choice offering good service, cheaper per mile, haul long distance and save money overall •Intense - see alternative measures of market share •Railroads adapt service and pricing
Intramodal
between railroads switching, didn't go to everyone on map not super intense if not same location not easy to enter industry, have to have a lot of different cars and terminals so expensive •Differentiated oligopoly, few places served by multiple railroads- hard to enter, not many doing it •Large financial barriers to entry on a large scale - even small railroad would be expensive
Tramps
bulk or tank ship, hired on voyage or time basis, time charters are longer term charters in which shipper will make or arrange for more than 1-way move - Ply irregular routes - Sail on a need basis - Usually chartered on a voyage or time basis
Passenger-Cargo "Combi" Carriers
carry passengers and freight. Freight is generally carried in the belly of the aircraft United
RORO- Roll On Roll Off
carry trucks, trailers, construction equipment like multi-level ferryboat, maintain an even kill while equipment is being loaded and unloaded without use of dockside cranes Cars can drive straight onto ship
Liners
charge according to tariffs either unique to ship line or made by several lines in particular trade route, container (everything in container and ship that particular container) or break bolt types (saves port and ship time, different operating and management concerns for ship company, service requires large investment in containers and ability to control containers with inland movement over this land becomes a necessity, put into containers and can have different companies that have different parts of that container and put on truck to land in US or river for truck to deliver to location or people take out what they need) - Ply fixed routes - Have published schedules
Regulated Carriers
common or contract carriers
Private carriers
company personnel or freight in planes to support primary business (Tyson Foods- large fleet of private planes, can transport people within company to different plants to examine different issues, use planes for freight even though less likely)
In which ways do airlines compete for passengers? How do they adjust their operations in order to attract more customers?
compete based on service (frequency and time of flights on route), advertise amenities (on time arrival, live TV, WiFi, no frills, (1 class of service, fewer employees involved, lower cost)
Warehouse Management System (WMS)
computer software assess management of receiving, put away, picking, packing, shipping, storage location, work, planning layout in analysis activities
Surface Transportation Board
concerned with domestic carriers, control inland river traffic, port to port traffic, when both ports are in US, transportation between US and its territories
RRs own and maintain most rolling stock
different from some large trucking companies Non-railroad companies own 37%, growing 30% of costs do not vary with volume- operate own rolling stock so fixed costs
Economies of distance
distance of shipment increases then the cost per unit distance goes down (per mile cost of transporting something goes down as trip distance increases- part of fixed cost, if increase miles then can lower cost per mile) Holding all else constant, flying, driving, sailing longer distances will have lower cost per unit distance than shorter distances.
Aircraft costs
don't use fixed guide ways like railroads and highway vehicles, capable of flying any direction and taking any route between 2 points (commercial aviation limited to government determined air traffic corridors in practice)
Economies of density
economies achievable by increasing traffic within the limits of a fixed network- significant volume between origin destination and where going to fully utilize capacity on forward and back haul movements How? -By increasing traffic (i.e. number of trips or varying speed) -By better utilizing vehicle capacity- make sure trucks full -By consolidating traffic- networks arise when (savings on per unit facilities cost)
Contingencies
examples - transportation delays, vendor stockouts, or strikes- buyers would stock larger inventories than usual
Private carriers
excluded from federal regulation, cant be hired, only transport freight for company that owns and leases vessel, can haul exempt commodities
Hopper Car
freight car with floor sloping, use hinge doors to discharge bulk materials freight car with floor sloping to 1 or more hinged doors used to discharge bulk materials- coal without lid or top
Flatcar
freight car with no top or sides, hauls equipment or intermodal freight
LASH- Lighter aboard ship
liner that carries barges that were loaded at inland river point and move to an ocean port via water TO, especially designed ocean ship carrier payload in barge intact to foreign port to be dropped off in harbor, avoids port handling and enables fast ship turnaround and high utilization Vessel capable of carrying both barges and containers Load entire ship and then drop entire ship
What are the advantages of intermodal service?
lower cost than truck, more reliable than average train, lower transit times, more accessible to people (combining cost efficiency of railroad long-haul with flexibility of truck and pickup delivery service)
Priority Reserved (Time Definite) Rates
higher than general rates for reserved space on flights- has to be shipped in certain amount of time -When would goods be shipped on a time definite basis?- organ for transplant
Fixed Facilities
immobile part of transportation facilities (can't move around) 2 Consequences- dedicated to particular geographic markets, investing in doesn't increase capacity uniformly in transportation system as a whole (only in part), investments considered sunk (cost won't change over time, can't invest money in something else), differences among transportation modes in importance of fixed facility cost as a proportion of their total cost (importance varies among modes), in some cases owners also provide transportation services, in most cases owners are different from provide transportation New Airport- only help those in area that it's actually serving (doesn't help transportation as a whole)
Warehouse Management System Benefits
improve productivity and accuracy, reduces wasted effort of looking for item as automatically know where it is, what if planning and performance management (how efficient)
Pipeline Diameters
increasing which is increased capacity pretty significantly
Bayou Steel Corporation
inland waterways can be used Operates a steel mill located on the Mississippi River in LaPlace, Louisiana, 35 miles northwest of New Orleans, Louisiana and a rolling mill in Harriman, Tennessee, 37 miles west of Knoxville.- water transportation is important to them The Company's principal raw material, scrap steel, is melted in electric arc furnaces and continuously cast into billets, then rolled on its two rolling mills into a variety of bars and structural shapes 551 customers in 44 states, Canada, and Mexico- occasionally ships billets and shapes overseas Four warehouses located at strategic points along the inland waterway system and an additional warehouse in Tennessee- wide geographic market for product distribution
In which ways do cargo compete for passengers?
intense competition so trying to eliminate excess capacity
Little competition among waterway carriers
main competition are railroads and pipelines (all move grains, coal, iron) Rail and Water Carriers- work together to transport coal (rail moves from coal field to waterway to be shipped overseas) Pipelines and Water Carriers- compete for bulk liquids like petroleum (railroads becoming significant player in field too) Can Compete With Trucks- trucks usually used to overcome accessibility problems for water carriers (trucks take to final destination) relatively small number of water carriers- any decrease in rate will most likely be matches by another carrier
Importance of water transportation for the U.S.
maritime transportation system is critical to U.S. success in importing and exporting Maritime Transportation- carrying things from overseas, carry over 3 quarters of weight of all US international freight Water share of all commercial freight activity in US during last few years- value was 8.3%, weight was 14.8%, ton miles were 16.3%
Passenger yields
measure of average yield paid per mile per passenger, divide passenger revenue by revenue passenger miles
Sunk Cost
payment for resource that has no opportunity cost after it has been packed into service (invested in truck then can't invest in something else)
Boxcar
plain is standardized roof freight car with sliding doors on side
Why Different Types of Water Transportation are Decreasing (Water Carriers Not Being as Important)
reduction in rail rates (cheaper to ship on railroads), transformation of US economy from basic manufacturing to service industry (water carriers transport raw materials but that's not as important in our economy)
Federal Maritime Administration
regulates international carriers
Covered Hopper Car
roof designed to transport bulk commodities that need protection from elements
Unit trains
specialized, one commodity trains •Direct origin to destination movement •Priority service schedules
how order processing, fulfillment, and e-fulfillment works within the warehousing system
starts at receiving dock where items barcode is scanned into system- verifies items against purchase order, adds item to inventory, determines stock location in warehouse, tracks item movement, determines location of item and picking on pic slip (helps keep track of where is to get out and be picked), determines and keeps track staging location of completed orders Process aided by RFID- helps track some of different locations where item is at
Economic Significance of Water Carriers
•13% of intercity freight ton-miles in 2009 •11% of intercity freight tons in 2001 •A primary transporter of: -dry bulk commodities -bulk petroleum, petroleum products and chemicals •Market shares decline since 1980
Transportation cost classifications
•A common classification is of productive resources into fixed inputs (therefore, costs) and variable inputs (costs). •What is the difference between them? -Fixed Input- resource whose level of use can't be altered within specific time period (stay same) -Variable Input- same per unit, over time or more units we look at together they will show an increase overall
In transportation, the scale of operations change by:
•Adding more vehicles to the fleet •Adding more cars to a train •Increasing the size of the vehicles (larger planes, larger trucks) •Operating in a larger network (length of haul, terminals) Fixed Costs- great quantity being produced (larger network or vehicle then fixed costs being spread over larger vehicle), business operate under conditions of increasing returns until capacity is reached (increase in output will not be accompanied by proportional increase in total cost as only variable costs will increase, fixed costs stay same but hauling more merchandise with bigger truck so can make more money, decline in per unit cost as fixed cost spread out over increased number of units with subsequent unit cost declining so total cost will decrease since we can reduce fixed cost) More seats and longer distance- operating cost will decrease Air carriers with long distance that seats many people- lower operating costs per mile than smaller aircraft for short distance use Hold more people- lower cost
RR Current Issues
•Alcohol and drug abuse (Effect of work environment) •Rail more energy-efficient than truck (Lower environmental impact- no roads or rubber) •Technology (Train, yard control systems, "smart" equipment) •Future role of smaller railroads- due to deregulation, smaller railroads took over part of infrastructure that was abandoned by large railroads that had low traffic levels, operate at cost disadvantage compared to larger railroads, advantages are more flexible and adaptable to customers or shippers/ not unionized/ state and local governments provide financial assistance to them •Customer service- Class 1 sometimes not very customer focused due to inherent challenges of combining large organizations, Class 1 differences in customer service •Drayage for intermodal service- pickup and delivery of trailers and containers in conjunction with line haul rail movement (called local drayage), railroads carrying trailers for motor carriers then local drayage is not an issue, when railroad is land carrier it has to arrange for local drayage, motor carriers willing to provide service are becoming scarce and charging very high rates, pickup and delivery time ass significantly to total transit time
-Classified by type of service
•All-cargo carriers- Cargo- deregulated in 1977, freely set rates, enter and exit markets, use any size of aircraft dictated by market (FedEx, UPS Airlines) •Commuter air carriers- regional, connect less populated routes with major cities, publish timetable on specific routes •Charter carriers ("air taxis")- small to medium size aircraft to transport people or freight, no timetable or designated route, hire contractor to transport you to desired location •International- between continents (United and American Airlines, British Airways and Air France)
Port costs
•Almost 200 coastal ports in the U.S. •Port infrastructure expenditures cover docking equipment, loading and unloading equipment, and warehousing space. •Most expenditure on port facilities is made for deep-draft ships- large •Carriers pay user charges - lock fees, dock fees, fuel taxes - for the use of government facilities
Compare and contrast the cost trade-offs in determining the number of warehouses needed
•As the number of warehouses increases, transportation cost and the cost of lost sales decrease, whereas inventory cost and warehousing costs increase. •What can happen to inbound logistics?- coming into warehouse, can consolidate into carload or TL rates (lower) if more warehouses to decrease transportation cost •What can happen to outbound logistics?- out to customer, more warehouses closer to customer and market area would reduce transportation distancing cost to customers More warehouses- transportation cost and cost of lost sales will go down as warehouses are closer together (easier to deliver, out to stores to prevent lost sales), warehousing cost increases, inventory cost increases as storing more
Cost-based
•Average cost -Priced above the fully allocated average cost of producing each unit of output •Marginal cost -Priced above the marginal cost of producing each unit of output
Value-based Approach
•Based on differential pricing -Third degree price discrimination •"What's it worth to you?"- higher product cost then charged more -"And how much do I need your business?" •Marginal cost->Price floor •Average cost-> "Break even" point •Value of service-> Profit maximization -May not necessarily be higher than average cost occasionally
Principal commodities hauled on railroads
•Coal- primary haulers •Farm products- grains •Chemicals- safer than highways •Transportation equipment (not a bulk commodity)
Carriers are mostly classified by the waterway used
•Coastal carriers •Intercoastal carriers •Internal or inland carriers •Great Lakes carriers
Vehicle costs
•Costs of owning and operating trucks, ships, boats, barges, planes, ... •Vehicle ownership costs have three components: Modes vary considerably with each of these 3 factors -Vehicle depreciation -Costs of tying up investment funds in vehicles -Vehicle maintenance ... these sometimes can be considered fixed or variable- depending on mode Pipelines- don't use vehicles Other Transportation- requires vehicles and fixed facilities Annual Cost- measured by interest rate that's applied to value of vehicle in used market, predictable in years or mileage opportunity cost can be approximated by subtracting depreciation allowances from original cost of vehicle, vehicle ownership costs vary greatly with modes •Value of investment funds tied up in the vehicle stock- sunk cost - These costs are determined by values in the used vehicle market. •Some annual maintenance is required on transport vehicles regardless of the amount that they are used: fixed costs •Maintenance costs that depend on the level of use of a vehicle are, by definition, variable costs (significant miles)
Simplifying Commodities
•Density- batteries more dense •Stowability- harder to ship house •Handling- easier to ship in box •Liability- more expensive to lose medicine, harder to replace concrete if broken •Individual carriers may establish commodity exceptions
Vehicle depreciation
•Depreciation is the reduction in value of transport vehicle which results from age and use. -If vehicles wear out due to age more rapidly than due to use, depreciation costs are a fixed cost of ownership. Why is that the case?- Obsolete before physically worn out -If vehicle lives can be measured in miles, or take offs and landings, depreciation is a variable cost of ownership.
Break-bulk vessels
•Designed to transport packaged break-bulk cargo, such as grains, coal, ore, and cement in its cargo holds. •Break-Bulk must be loaded individually •The goods may be in bags, cases, crates, barrels or pallets •Often called general cargo
Bulk vessels
•Designed to transport unpackaged bulk cargo, such as grains, coal, ore, and cement in its cargo holds. • Bulk cargos are usually dropped or poured, with a shovel or bucket. •Bulk cargos can be liquid or dry
WC Current Issues
•Emergence of mega-ships- larger ships the deeper they go (small ports have to start dredging to stay competitive- Oakland Port or Port of Long Beach) •Port development -Economic vs. environmental tradeoffs- interfering with environment when dredge channels -Appropriation of port revenues- states can take for other purposes since own ports -Inter-port competition- Oakland Port and Port of Long Beach aren't that far apart -Impact of "mega-ship" emergence- bring in a lot of material at once, not as many ships but much larger when get
Other rate concerns of note
•Empty haul rates -Empty backhaul is basically wasted fuel and labor- cheaper rate to haul something back •Spot-market rates -One-time transactions/loads- never ship with them again •Menu pricing -Like ordering food from a restaurant- add things you want together for total rate
In transportation it is useful though to make a further distinction
•Fixed facilities •Vehicle ownership costs •Vehicle operation costs •You will note that different modes of transportation will present different levels of each of these costs •Which ones are fixed costs? Which ones are variable costs?- not defined equally among modes (some costs may be fixed for some modes but variable for others)
Barges
•Flat-bottomed boat •Most need to be towed by tugboats or pushed by towboats
P Cost Structure
•High fixed costs (Primarily capital costs of actually building pipeline itself) -Rights-of-way -Pumping station -Terminal facilities •Very low labor costs -Entire pipeline industry employs 8,000 workers -To move comparable ton-miles, motor carriers would need to employ 10,000,000 workers. •Significant Economies of Scale
Air Carrier Fixed vs. variable cost components
•High variable costs (about 80% of total) -About 30% attributable to flight operations -About 12% for maintenance -About 17% for aircraft and traffic servicing •Low fixed costs- about 20% -Due to government investment in terminals and operating infrastructure •Increasing non-labor costs increase pressure to reduce labor costs, increase productivity
Highways costs
•Highway expenditure is made by government in various levels •Traffic level and mix affect highway construction costs •Traffic level and mix affect highway repair costs •Do motor carriers contribute in anyway to highway construction and maintenance costs?- yes through taxes on fuel, taxes on vehicles, taxes with registration of vehicles Public (fixed facilities provided by government)
How to Price: Pricing a New Transportation Service
•In many ways, it is similar to all pricing decisions -Same major factors Price is too low: route may not be profitable, demand may outstrip available capacity Price is too high: not enough demand, attract competitors (low barrier to entry)
Pipeline Competitive Conditions
•Intramodal competition- between pipelines -Low number of operators -High economic and procedural barriers to entry- expensive to build and complicated procedures -Joint venture ownership -Very low •Intermodal competition- water carriers or railroads -Water carriers are principal competitors -Difficult for other modes to match rates due to scale economies
-Classified by annual operating revenues
•Majors (revenues of >$1 billion)- service between major population areas (American, united, delta, southwest) •Nationals ($100 million - $1 billion)- between less popular areas and major population centers, feed people to major airlines (Midwest, SUN Country) •Regionals (revenues of <$100 million)- within particular region of country (big sky and Piedmont airlines)
What is being carried in pipelines?
•Oil pipeline decreasing in capacity -Domestic wells are beginning to tap out •Natural Gas Pipeline- fracking to get out and into lines -Hydraulic fracturing expanded production •Coal and coal products -Crushed and mixed with water (slurry) - very rare •Chemicals -Anhydrous ammonia (for fertilizer) -Propylene (for detergents, rubbing alcohol, motor fluids) -Ethylene (for antifreeze)
WC Equipment and Terminals
•Operating equipment - vessel types •Terminals -Require significant capital investment- lot of land to locate on and equipment itself is expensive -Most publicly provided, operated by local governments, authorities -Few provided by large volume shippers -Functions •facilitate intermodal transfers- off ship goes on either truck or railroad •Provide temporary storage at port- look to notes
Pipelines Costs
•Pipeline transportation is the one mode that does not use vehicles •They are narrowly limited in both cargo and in geographical reach •Commodities: natural gas, crude oil, and petroleum products (primarily gasoline and fuel oil).
Decline in rail freight rates
•Rail freight revenue/ton declines 27% (inflation adjusted) from 1992-2001 •Coal and grain rates decline- major commodities shipped on railroads
WC Carrier Cost Structure
•Relatively high variable, low fixed costs -Fixed costs: about 15% of total •Nature provides ways •Governments provide for improvements to rivers, canals, channels, locks, dams, terminals and ports -Variable costs: about 85% of total- running operating equipment and facilities like line operating cost and maintenance costs •Not labor intensive- primary labor required at terminal to load and unload ships •Carriers pay user charges for portion of publicly provided improvements
Market Structure of Air Carriers
•Relatively small number of for-hire carriers •Private air transport
WC Number of Carriers, Competitive ConditionsDomestic Market
•Relatively small number of small firms -Approximately 500 domestic for-hire carriers -Inland carriers earn highest share of revenues •Moderate intramodal competition- between different carriers on waterway, price will be matched •Intense intermodal competition -With rail for dry bulk commodities- grain price wars -With pipelines for oil and petroleum products
Tankers
•Ship designed to transport liquids in bulk form •Major types include the oil tanker, the chemical tanker, and the liquefied natural gas (LNG) carrier
Today's Pipelines
•Small number of large carriers -Oligopoly- difficult to join industry -90% operate as common carriers- anyone can ship oil on them -Mostly owned and operated by oil companies (individual + joint venture) •20 integrated oil companies - 66% of crude oil mileage •Why aren't there more competitors? -Obtaining rights-of-way to build pipelines -Capital intensity- high to create one
WC Selected Service Characteristics
•Speed of service -Slowest mode for dry cargoes -Trade-off with cost favors low-value goods •Service disruption -Vulnerability to ice and drought conditions -Vulnerability to port strikes and congestion- everything will have to be loaded and unloaded at a port •Accessibility gap: need pickup and delivery by another mode- only transport wherever there is water
Alternative Pricing Strategies
•Survival-based pricing: If you were near bankruptcy... -Take a loss, but increase cash flow (and hope other carriers go out of business first so you can get their market share) -Downside: What if you go out of business first? •Profit maximization- charge highest prices you can get -Great for ROI -Downside: But requires a tremendous pricing power and low price sensitivity- people have to have high demand and not be price sensitive •Unit volume pricing -If you have it already, why not put your slack capacity to use?- sitting trucks sold for lower price -Downside: Typically lower margins, and shippers might come to expect it- harder to charge regular rates •Skimming -High prices based on service quality, uniqueness, and price insensitivity -Downside: How do you sell quality? •Penetration pricing -Put your name out there, then get shippers to "try before they buy"- low price and good customer service to keep them and then increase prices -Downside: What if customers balks when you decide to go back to regular prices?- stop using service •Sales-based and Market share pricing -Mature or declining industries -Lower price to gain market share and higher sales -Down side: Industry is declining- why having to offer lower price •Social responsibility pricing -Explicitly price environmental premiums to rates -Emphasize worker treatment -Down side: No one knows how this works!- not currently offered but likely to be offered in future
Water Carriers will operate many vessel types
•Tankers •Bulk •Break bulk •Containerships •Barges- powerless vessel towed by tug boat, used by internal waterway carriers •LASH- lighter aboard ship •RORO- roll-on roll-off ship
Cost of operation
•The most obvious are: variable (vary with use of vehicle) -Time of the driver or crew -Cost of fuel But other indirect costs of operation should be considered as well, such as vehicle maintenance Also, maintenance needs non-operating staff, such as dispatchers, reservation clerks, and lawyers. This level of support will vary with level of vehicle operation
Rate-Making under Deregulation
•Under regulation, rate system hardly changed. •Rate system is largely just a guideline •Rates are mostly negotiated between shippers and carriers- standard •Portion of general rate system still used by LTL carriers -Commodity classification still simplifies -Class rates serve as benchmark
What Can Be Negotiated
•Volume Discount- negotiate if shipping more •Flexible Delivery Time Discount -If carrier desires flexibility, then discount- next week or 2 -If shipper desires flexibility, then premium- absolute guaranteed time •Equipment Charges -Specialized equipment is not used as often •Transit-Time Premiums •Other Logistics Services- install refrigerator
Simplifying Rate Structure
•What do you currently do when you ship a package via USPS, UPS, Fedex? -Do you have to know the exact weight anymore? •Same principle applies to freight! -Minimum weight -May be different between modes Flat Rate- fit in envelope, doesn't matter what weighs
Public warehouse
•What is the capital investment?- limited as don't own warehouse, just renting it •Can it provide flexibility?- yes rent for small time or in different locations of country •What does bonded warehouse mean?- user can delay or slow down payment of taxes until goods are ready for sale •What type of liability does a public warehouse have?- liable for exercising reasonable care (standard), user (puts in warehouse) has burden of proof if warehouse did something to goods •How are rates set?- fragile with special packaging will cost extra, decrease if regularly use, space (big cost more) and weight (heavier cost more) •What types of services are provided?- storage, break bulk (large amounts of merchandise and sending out smaller pieces), consolidation (want TL rate), order assortment (sending variety), spot stocking (few things), in transit mixing, inventory control (place to maintain inventory), arrange transportation- work with logistics information systems Seasonal warehouse needs and no large inventory buildup Warehousing Costs- expense on income statement, paying cash out to rent space
Distribution Center (Private Warehouse)
•What type of cost?- fixed due to property taxes and depreciation, need high volume to help spread out cost •What type of demand?- stocking multiple products and change them out to keep stable as have to cover costs and things sell better at certain times of year •What type of market area?- LTL vs TL, gather small shipments via LTL to ship on TL to get lower rate, want dense market area to reach all customers •Can it help "control"?- yes, physical like security and refrigeration, service for customers and plants (manufacturers), want control over goods in warehouse•What are multiple uses for a private warehouse?- combine warehouses with office staff, customer service, and salespeople Warehouse owned by company that is either producing item or getting items in and holding it in private warehouse to delivery to their stores (Walmart) Facility investment- impact balance sheet, assets and liabilities (if owe money) appear larger
Air Carriers Brief History
•Wright Brothers flight: 1903- less than a minute, kitty hawk, NC, can visit site •Air transport of mail: 1920s -U.S. Post Office air mail subsidy program helps launch commercial passenger airline industry •Speed (travel time savings): greatest advantage of air mode •Competitive pricing after deregulation- lead to growth of airline industry especially in movement of passengers
Containerships
•cargo ships that carry all of their load in truck-size containers •Capacity is measured in Twenty-foot equivalent unit (TEU) •Today, approximately 90% of non-bulk cargo worldwide is transported by container
Increase in intermodal traffic (picture- taking trailer off truck or ship, putting on railroad, hauling certain distance, back on truck): Piggyback service (truck and rail together) ON EXAM
•directed to non-bulk, manufactured products •Up 300% from 1980-2001 •RRs create dedicated intermodal trains with regularly scheduled departures and priority operating schedules to improve on-time delivery •Trailer-on-flatcar (TOFC) and container-on-flatcar (COFC) service