Office of Planning, Environment, & Realty (HEP)
The Role of Transportation in Logistics
Presented December 13, 2000
The definition of logistics adopted by the Council of Logistics Management is "the process of planning, implementing, and controlling the efficient, effective flow and storage of goods, services, and related information from point of origin to point of consumption for the purpose of conforming to customer requirements." Note that this definition includes inbound, outbound, internal, and external movements, and returns of materials for environmental, salvage, repair and recall purposes.
Every business firm, regardless of what it produces or distributes, requires the movement of goods from one point to another and, therefore, is involved in transportation. Transportation essentially concerns the spatial dimension of the business firm. "The spatial dimension refers to geographical relationships and reflects the juxtaposition of firms with respect to their materials sources, markets, and competitors, plus the spatial relations of the latter to their sources and markets". The purpose or function of transportation is to serve as a connecting link between the spatially separated units within a firm's own organization (such as between plants and warehouses) and between units of the firm and units of other firms and individuals (such as suppliers and customers). Good transportation has the effect of holding to a minimum the time and cost involved in the spatial relationships of the firm.
It is imperative that we understand that the modern logistics structure rests on efficient motor carrier transportation. Techniques such as JIT and Efficient Consumer Response (ECR) would not be possible without the highly developed trucking industry.
Robert Delaney, Vice President of Cass Logistics and Consultant to ProLogis indicated in his 11th annual "State of Logistics Report© that the motor carriers have an 82 percent share of the freight market and freight expenses constitute 50 percent of the total cost of logistics. Delaney also points out that the efficient motor carrier network has made possible the lowering of the level of safety stock with its resultant reduction in inventory carrying cost.
Creating Economic Utility
In economic theory terms, transportation's function is to create place utility for the goods produced or distributed by the firm. The word "utility" means usefulness or ability to give satisfaction. Place utility exists when goods are in the place where they can be consumed. Goods that are not in the place where they are needed have less than full value and so transportation creates value by creating place utility. Along with the necessity to have goods in the right place, the goods must be there at the right time (time utility) and in the right form (form utility) and in the possession or ownership of the person(s) who wants to consume them (possession utility). Whether it is delivering goods to a warehouse to serve markets, moving goods into storage for future use, or forming an integral part of a Just-In-Time system and delivering goods at the exact point in time they are needed, transportation adds value to the goods by providing time utility. Form and possession utility are the result of the production process and of marketing, respectively.
Our current consumer driven economy is driven by our ability to offer a wide choice of competing products with wide scale or "intensive" distribution. Consumers take for granted the choices available whether for a "commodity" such as milk or high value products such as electronics. Store direct delivery and delivery of Internet purchases would not be possible without the trucking industry.
Without place, time, form, and possession utility, goods have no value to the customer. In a broad sense, the production process is really not complete until all four utilities have been created because until then goods are not capable of giving satisfaction and would not prompt a customer to exchange something of value for something with no value. Thus, transportation is an essential part of the total production process that cannot be overlooked.
Market and Pricing Decisions
Because transportation creates time and place utility, both of which are necessary for economic exchanges to take place, its availability, adequacy, and cost have an effect on several kinds of decisions made by a business firm in addition to decisions related to managing the transportation function itself. Customer delivery requirements often require the timeliness which can only be achieved by the use of trucks.
For those firms that deal in tangible products, one such decision is the product decision, or the decision as to what product or products to produce or to distribute. The transportability of a product in terms of its physical attributes and the cost, availability, and adequacy of transportation enters into any product decision.
Market Area Decision
Closely related to the product decision for firms dealing in tangible products is the decision relative to where the product(s) should be sold.This decision is affected by the transportation characteristics of the product(s) itself as well as transportation availability, adequacy and cost.
What to purchase and where to purchase are also affected by transportation considerations, regardless of whether the firm is a manufacturer, wholesaler, retailer or service organization. The goods involved may be component parts, raw materials, supplies, or finished goods for resale. The transportation characteristics of the goods, the availability, adequacy and cost of transportation have a bearing on the "what and where" decision.
Although decisions relative to where plants, warehouses, offices, stores, and other business facilities should be located are influenced by many factors, transportation availability, adequacy, and cost are extremely important in such decision making. The core business of the firm will dictate the mode of transportation services required. Proximity to highway services is a key factor in the location decision for new manufacturing facilities. The significance of the transportation factor varies widely from industry to industry, but transportation requirements always need to be considered in location decisions.
Since transportation is a critical cost factor in business operations, it can have a bearing on the pricing decisions made by business firms, especially those firms that have a cost-oriented pricing policy. In fact transportation is one of the nation's "basic" economic activities. This does not mean that in any individual firm there is an automatic cause-and-effect relationship between transportation cost changes and the firm's prices, but transportation cost is one of the factors that usually should be considered in pricing decisions.
Transportation's Place in the Economy
Our freight transportation system enables consumers to enjoy the availability of goods which are not produced in their immediate locale because of climate or soil conditions, the lack of raw materials, utilities, or labor, or the cost of production. Such a system allows consumers a choice of goods which would not otherwise be available. A good transportation network makes possibly the mobility of people for economic, educational, social, or other purposes while reducing or eliminating isolation, while promoting economic, social, and political development and economic and political unity in the country.
There are many ways to categorize and describe the economic importance of transportation. For society or the economy as a whole, transportation makes possible geographic specialization or territorial division of labor. Geographic specialization takes place when a nation or region or state or city produces those products and services for which it is best suited in terms of its capital, labor, raw materials and other resources and talents. California and Florida specialize in the production of citrus fruit because of a climate while the Great Lakes region produces much of the nation's steel because of the proximity of raw material and low-cost transportation. Chemicals are manufactured in Texas and Louisiana for the same reasons. In this way the most efficient utilization of each areas' resources and talents are made. If such geographic specialization does not occur, then a nation, region, state, or city will be forced to devote some of its resources and energies to production of goods and/or services for which it is not well suited thus resulting in economic inefficiency and a lower standard of living for all concerned.
Transportation's role is critical but so accepted that it may be taken for granted. Consider a simple example, where area A specializes in producing widgets, then area A must rely on shipments from other areas for the things other than widgets that its population wants or needs. Area A must also depend on other areas to import the surplus of widgets that A will produce. If, however, there is no adequate transportation between A and the areas it wishes to trade with, or if the transportation charges are so high as to make the price for the various products involved too high, then trade between A and the other areas will not take place and geographic specialization by A will be impossible.
If international or inter-regional or interstate or intercity commerce is to exist and geographic specialization exists, adequate transportation at a reasonable cost must be available. Speed of service is another factor in allowing wide ranging trade as many items have a finite shelf life.
The role of transportation in large-scale production is similar to that discussed in connection with geographic specialization in that the availability of an adequate transportation system is a requirement to sustain large-scale production. The benefits of large-scale production in terms of economies of scale, production efficiencies and lower prices are well-known. The United States has been the leading exponent of the principle of large-scale production. But large-scale production by a firm requires that raw materials, parts, and supplies be collected from a variety of sources and a large geographic market for the product(s) produced be accessible at reasonable cost. Therefore, adequate transportation service at reasonable cost is indispensable to large-scale production.
The transportation system in the United States evolved and matured due to the needs of a manufacturing economy. However, without a viable transportation system, our economy could not survive.
Improvements in the transportation network are usually credited with having a positive effect on the value of the land that is adjacent to or served by the improvements. The principal factor is one of accessibility. If land is suddenly accessible to a new transportation facility, an airport for example, the value of the land will ordinarily increase because the land has been given greater access to economic markets and hence is more useful. The same can be said if land is already served by some form of transportation, and transportation access is improved, for example, when a new interstate highway interchange supplements a conventional two-lane highway, accessibility of the land has been increased and the time, effort, and, perhaps, the cost involved in getting to and from the land have been reduced. This greater accessibility should result in an increase in the value of the land.
Competition Among Sellers
Transportation facilitates geographic specialization, large-scale production and land accessibility by providing time and place utility thereby permitting diversely located sellers of the same product to compete in a given geographic market. Because goods can be transported anywhere in the country, transportation availability tends to prevent captive markets and local monopolies. The net effect is to keep prices lower than they would be if access to markets were restricted due to the unavailability of transportation services.
The adequacy of transportation of military personnel and supplies can make or break a military operation, as Napoleon learned in his invasion of Russia, and the Confederacy learned after much of its railroad system was destroyed during the Civil War. In modern times military logistics is truly the lifeblood of military operations. Sir Winston S. Churchill wrote: "Victory is the beautiful, bright colored flower. Transport is the stem without which it could never have blossomed."
With the great emphasis on military and defense activity in the United States since World War II including the Desert Shield and Desert Storm operations, it is not surprising that the connection between transportation and national defense should exist. It is, in fact, well recognized that an adequate domestic transportation system is vital to national defense. The result has been that some governmental expenditures designed to improve our transportation system have been partly justified on the ground that they will contribute to the nation's ability to defend itself. Thus, federal expenditures to improve our waterways are partly justified this way and the official title of the Interstate highway system is "National System of Interstate and Defense Highways." Without delving into the wisdom of such expenditures at this point, it is enough to say here that national defense and transportation are inextricably interrelated and, consequently, makes transportation "important" to the economy and to society in general.
Trucking's Importance to Commerce
Highway transportation has become an important part of our transportation system since 1920, and it accounts for almost half of our intercity ton-mileage and most of the local transportation of property. The phenomenal growth of the industry since the early days has been in large part due to the technological advances made in equipment as well as infrastructure improvements. The construction of the Interstate Highway System provided an advantage to trucking by allowing faster travel times and consistent size and weight.
Facts About the Trucking Industry
Employs 9.6 million people in jobs relating to trucking- more than the populations of 42 of the 50 United States.
Had 1997 annual revenues equal to nearly 5% of the Gross Domestic Product- a total of $372 billion.
Comprises more than 450,000 companies
Businesses chose trucks for 81 cents out of every dollar they spend on shipping. By weight, trucks carry 60 percent of all freight- 6.7 billion tons in 1997.
Exclusively serves more than 70 percent of all communities in the US for the products and goods they receive.
The nation's trucking fleet consists of more than six million trucks, weighing more than 10,000 pounds, travels more than190 billion miles per year and purchases more than 44 billion gallons of gasoline and diesel fuel annually.
More than 360,000 companies in the U.S. are involved in interstate trucking. 82 percent of U.S. motor carriers operate 6 or fewer trucks; 96 percent operate 28 or fewer.
(Source American Trucking Association)
Although deregulation has prompted many companies to disband private carrier operations, more than 54% of the shipment volume handled by trucks still moves in proprietary private carriage. In 1994, approximately 55 percent of the total for-hire traffic moved by truck with that percentage rising approximately another 2 percent by the year 2004. Rail traffic experienced similar percentage growth from about 15 percent while pipeline and water carriage will lose tonnage to rail and truck. Intermodal traffic will increase slightly from today's 2 percent. This according to a study by the American Trucking Associations and DRI/McGraw Hill.
It is interesting to look at the make up of commercial fleets operating over the highway. There are 83,609 fleets, each operating more than 10 vehicles. The overall composition of these fleets is:
Number of fleets 83,609
Government, Schools Utilities, Busses 17,050
Total Vehicles operated 11,729,468
Government, Schools Utilities, Busses 2,740,275
Straight Trucks operated 3,161,285
Tractors operated 2,229,620
Trailers operated 4,836,324
Buses operated 566,915
A significant reason for the success of trucking has been the ability to provide door-to-door service. Trucking service usually includes pickup of the cargo at the shipper's place of business and delivery to the consignee's (receivers') place of business. In fact, many trucking firms began by providing service to and from railroad freight houses in support of the railroads' less-than-carload traffic. Rails provided service from station-to-station instead of door-to-door, requiring shipments to be brought to and from the railroad terminal by the shipper and consignee or the shipper and receiver had to pay the railroads an extra charge for doing so. By the 1970s, trucking had captured most intercity freight shipments of less than 10,000 pounds due in part to the railroads abandoning this service. With the advent of Just In Time Manufacturing and the corresponding reduction in inventories and shipment sizes, the inherent advantage of door-to-door service became paramount and allowed many of the new logistics techniques to be used.
Cost and Value of Service
Motor service can be cheaper on some shorter hauls than that of some other modes because of its cost structure. Trucking may often be at a price disadvantage on longer hauls because of the high labor content in the cost structure which increases relative to the distance traveled. Some modes such as rail achieve significant economies of scale on longer hauls as they can move many trailers or carloads with less labor. This is partially offset by the higher cost of rail intermodal terminals.
LTL rates may be lower than those of competitive modes on smaller shipments, regardless of distance traveled, because operations are often geared primarily to less-than-truckload traffic rather than to movement of large quantities of freight. Rates are based on
the size and weight of the shipment combined with the length of travel. Truckload carriers typically "sell" the entire trailer capacity regardless of the actual size and weight of the shipment.
In addition, trucking service is often faster and more frequent for both less-than-truckload and truckload shipments than that of its competitors except package carriers such as UPS. This service consideration permits shippers and consignees to maintain smaller inventories which reduce inventory carrying costs which may approach 30 percent of the cost of sales (Council of Logistics Management and Cass Logistics). Trucking service also offers cost advantages because of less damage and reduced packaging costs as compared some other modes.
The ability to provide time utility to its customers has been a major reason for the success of the motor carrier industry. Motor carrier service is often faster than that of other modes, particularly over short hauls where schedule flexibility that doesn't exist in other modes such as air or rail can minimize terminal delays. Rail or air carriers may only depart at the end of the day because of schedules or other constraints while motor carriers can depart when the loading is finished. Truckload carriers may operate without any terminal delay by moving from the shipper's door directly to the receiver's door. This advantage is diminished as distance increases because of enhanced intermodal service by the railroads. The elapsed time of motor carrier service on long hauls can be reduced by using team drivers in a continuous twenty-four-hour operation (one driver is driving while a second driver is asleep) or by relaying drivers at spaced intervals along the route.
Another time advantage inherent to trucking is the ability to provide more frequent service than their competition. This is possible because of the flexibility of operating over the highways as opposed to scheduled departures as may happen with railroads and airlines. One could use personal travel as an analogy. With a choice of driving to Chicago or taking Amtrak, the time advantage usually rests with the personal auto because of Amtrak's terminal time to load and unload passengers at stations along the way for trips less than 500 miles. There may be only one or two scheduled departures while the individual may leave when they choose.
Flexibility of Service
An important advantage of motor carrier service is its flexibility. Trucks can go anywhere there are roads and streets. One can find a segment of the industry that can provide a type of equipment meeting even the most unusual needs of a customer. Today's trucking company will often design unique equipment for a specific customer under a long term transportation contract so that adequate opportunity exists to recoup the cost of capital.
Consistency of Service
One of the challenges of the motor carrier industry is to maintain tightly scheduled transit times to meet customer requirements. Many LTL carriers have made significant advances in their ability to deliver either overnight or second morning at the latest. Motor carriers are more affected by weather conditions than are some other modes which can impact service levels. Trucking companies also suffer from congestion on city streets and on metropolitan area roads. A trip through a major metropolitan area may vary well more than one hour in length depending on the time of day.
Trucking companies are better than some other modes in terms of amount of loss and damage. Unless an exception to liability is present, the carrier assumes liability for the full value of the shipment without making an extra charge for that liability. This trend has changed in recent years as the value of products has escalated significantly. Carriers, particularly LTL carriers are seeking ways to limit their liability, a trend that has been resisted by shippers.
If you don't believe transportation is important, just ask Etoys.com or KidsRUs.com. Better still, ask Santa Claus who operates the most efficient transport we have ever seen.