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Talking Freight

Supply Chains

May 21, 2008 Talking Freight Transcript

Presentation

Jennifer Symoun:
Good afternoon or good morning to those of you to the West. Welcome to the Talking Freight Seminar Series. My name is Jennifer Symoun and I will moderate today's seminar. Today's topic is Supply Chains. Please be advised that today's seminar is being recorded.

Today we'll have one presenter, Paula Dowell of Wilbur Smith Associates. Paula E. Dowell, Ph.D. is Vice President of Economic, Freight and Finance with Wilbur Smith Associates. She has over twelve years experience in transportation economics, fiscal and economic impact analysis and forecasting. Her areas of expertise include economic analysis of multimodal transportation investments, multi-jurisdictional trade studies, urban goods movement and benefit-cost analysis. Since joining Wilbur Smith Associates she has served as a senior analyst and project manager on several multi-jurisdictional trade, urban goods movement and transportation corridor studies has led the firm's freight planning practice. Dr. Dowell specializes in freight economics and forecast methodologies. Prior to joining WSA, Dr. Dowell was a research assistant professor at the University of Tennessee, Center for Business and Economic Research. She is an active participant in TRB where she serves on the Transportation and Economic Development, Transportation Economics and Freight Transportation Economics Committees.

I'd now like to go over a few logistical details prior to starting the seminar. Today's seminar will last 90 minutes, with 60 minutes allocated for the speakers, and the final 30 minutes for audience Question and Answer. If during the presentations you think of a question, you can type it into the smaller text box underneath the chat area on the lower right side of your screen. Please make sure you are typing in the thin text box and not the large white area. Please also make sure you send your question to "Everyone" and indicate which presenter your question is for. Presenters will be unable to answer your questions during their presentations, but I will start off the question and answer session with the questions typed into the chat box. Once we get through all of the questions that have been typed in, the Operator will give you instructions on how to ask a question over the phone. If you think of a question after the seminar, you can send it to the presenters directly, or I encourage you to use the Freight Planning LISTSERV. The LISTSERV is an email list and is a great forum for the distribution of information and a place where you can post questions to find out what other subscribers have learned in the area of Freight Planning. If you have not already joined the LISTSERV, the web address at which you can register is provided on the slide on your screen.

Finally, I would like to remind you that this session is being recorded. A file containing the audio and the visual portion of this seminar will be posted to the Talking Freight Web site within the next week. We encourage you to direct others in your office that may have not been able to attend this seminar to access the recorded seminar.

The PowerPoint presentations used during the seminar are available for download from the file download box in the lower right corner of your screen. The presentations will also be available online within the next week. I will notify all attendees of the availability of the PowerPoints, the recording, and a transcript of this seminar.

We're now going to go ahead and get started. Today's topic, for those of you who just joined us, is Supply Chains. Our first presentation will be given by Paula Dowell of Wilbur Smith Associates. As a reminder, if you have questions during the presentation please type them into the chat box and they will be answered in the last 30 minutes of the seminar. Paula you can go ahead.

Paula Dowell:
Okay. Thank you very much and welcome, everyone, and thanks for tuning. Of the first of all, I would like to say that the material that I am presenting today is pulled from the new NHI course 139003, advanced freight planning, so that course is now currently available to us on the NHI website. Again, the presentation material is just a sampling of some of the in-depth supply chain and freight planning material covered in is in that advanced freight planning course. For the agenda today we'll start off with talking about the market trends in freight logistics we'll continue our discussion and by giving an overview of supply chain basics, and then talk about the implications for planning, how do planners for the public sector really use this information, and to integrate the freight needs and concerns into the transportation planning process. To start off again talking about the trends and logistics we'll break it down mode by mode and talk about the trends in trucking. The modes handling most of the nation's service freight are under significant pressure. Trucking productivity is being challenged by many factors including labor factors, increased congestion, and at the same time that they're being challenged with productivity and congestion, the costs are also rising. For safety for a lot of safety reasons, the U.S. DOT changed the hours of service and regulations for truck drivers in 2004. This had some significant implications for the trucking industry. The key change in that regulation is that drivers can now run eleven hours instead of ten but the rest period can't be used to break up the work shift. Once this ultimately means is if a driver is waiting around for a customer, our waiting in between pick up and deliveries, that driver is effectively still on the clock. So this can have a significant impact on productivity for the trucking industry. Mean while traffic congestion continues to grow in all the major cities, and this congestion is also beginning to spread into the inner city lane. What this equates to is more time for truckers sitting in traffic. Every minute lost in traffic equate to say lost productivity. There are lots of estimates out there. One of them is commonly used estimates is the cost of delay for a truck driver is $75 per hour which is over a dollar a minute, and of course this is going to vary based upon geographic regions and the type of pickup and deliveries long haul versus some of the drainage drivers, but regardless, congestion and delay impact everyone within the trucking industry.

The importance of this is highlighted by the realization that the driver weight typically is the biggest expense for motor carriers. More over, weight levels have been slowly climbing, but never enough to really offset the driver turnover due to long working hours and too much time spent away from home, so what ultimately this is resulting in is that the demand for drivers is well above the supply and driver shortage is one of the biggest issues facing the trucking industry. As public planners, you should care about this for two reasons. First of all, trucks handle about 80% of the nation's freight tonnage that's higher in some geographic areas, a little lower in others and on average nationwide it is 80%. It will take on more than 80% of the new tonnage over the next few decades. This means the health of the industry is important to the economic well-being of our nation. And secondly, the public policy and public action can and do affect the productivity in overall driver satisfaction in the trends again productivity, congestion and input cost factors that are all impacting the trucking industry.

So fuel costs, a lot of discussion about fuel costs, and definitely we're feeling it as passengers, but it is also really hitting hard the trucking industry, and it has become a material burden for all freight modes that are especially significant for trucking, and the costs continue to climb, there will be consequences for how goods are handled and you will ultimately what we're seeing is consequences in the consumer prices. The graph here on the screen just shows the diesel fuel prices which in recent years have climbed significantly, and again it goes through the second quarter of '06, and so we know that already '07 and '08 that we continue to see those prices climbing and often times on a daily basis hitting new records, so higher fuel costs are really helping shippers to begin to look for alternatives including modal shift and redesigned supply chains both of which change freight demand patterns which are going to change the way in which freight transportation impacts our public transportation system.

With this, a lot of times again the trends in one mode are the trends impacting one mode are going to spill over and impact other modes, and that's definitely true in terms of the impacts of trucking and the spill over into the trends in rail freight. Rail might be an outlet for some motor carriers if it had room to grow and could meet service standards. While the truck modal business is thriving there are big question marks on the capacity and the ability of the nation's rail system to actually be able to handle all of the trucking freight that might ultimately wanted to divert over to the rail system. In response to productivity pressures on the trucking industry, some motor carriers are looking to free up driver time and reduce costs by putting loads on the intermodal rail. The real is that rail is ten times for fuel efficient and some truckers found the rail service is more profitable than over the road services they're currently providing. If the nation moves for widely to toll roads, this differential could widen even. Mean while, the rail intermodal business has been growing at an average rate of 6% per year which means that rail is keeping a great deal of new volume off the roads. A big part of the issue for the rail is that the network reduction that the industry under took over the several decades in terms of the abandoning lines and selling off lines left them with a capacity crunch, especially for the fact intermodal train that is need more track space. Railroads have been responding with investments but using prices to also affect capacity as well, sometimes this is referred to marketing. They will demarket less profitable lines by increasing the prices and therefore making trucking more competitive relative to the rail simply because they know that they're going to have lower profit margins on those particular lines. This is important to public planners because new traffic may be coming onto the highways because railroads no longer have room for it, and it really opens the door and the need for public private partnerships, may actually be the answer to get some of the necessary investments in rail, and we've seen that on a national level. We've seen it in a lot of local areas and also seen it on a national level. One of the of course the Al a media corridor is talked a lot about and also there is the heartland corridor going from Norfolk, Virginia, up to Columbus, Ohio, and it is public/private in terms of local, state, port railroad money and also federal dollars as well. In terms of water borne freight, some of the major trends here you will see listed, but marine transportation due to increasing size of vessel places high demands on the infrastructure because again they get to the ports that still depends on the intermodal movement either by rail and/or truck to actually get it to the final market. The number of strategies has been developed through addressed marine capacity issues, but capacity is not the only issue facing water born freight. There are also a lot of environmental issues as well as labor issues. To appreciate the effect of increasing sizes of shifts consider that a 6,000 TEU which is a 20-foot equivalent unit container ship represents 3,000 trucks loading in one place in less than a week. Shielding of empty containers and truck tests results in an even greater number of truck movements in the port area, so again these port facilities and especially those that are going to be handling the mega shifts will be huge traffic generators on our surface transportation system. Peer pass is a good example of a public policy response to the need for increased port capacity, and this is implemented at the ports of L.A. and Long Beach where the dock crews were not working in evening shifts. Peer pass is a way to charge money for daytime operations or to charge a premium for day time operations which acted as an incentive for port terminals to add a night shift, so 30 to 35% of the container cargo moved to evening and weekend hours in the first year of operation which was 2005 to 2006 thereby it increases the throughput plus it helps to spread out the demand for truck traffic on the roadway system. So uses of water route has also contributed to a shifting of some of the capacity burden from West Coast to East Coast ports that started to occur due to port congestion and the 2002 West Coast port strike as well as the supply chain strategies of big box retailers. The all water routes tend to replace Transcontinental rail land bridge shipments from west to east coast ports, and so again this whole concept of the all water routes and as we have the expansion of the Panama Canal which is under way, as that continues as well as expanded use of the so ease canal, and some of the shifting of potential growth in freight from the West Coast ports ore to the East Coast ports.

Trans loading is the third trend and involves the transfer of goods from international container to say bigger domestic trailers or containers, and there are really two issues here or two catalysts for this Trans loading. First are the retail supply chain strategies that seek to respond better to the point-of-sale data and to consolidate international with domestic freight. Second is the move by container shift line to say keep the boss close to the port by reducing free time and charging more for use. The fourth trend noted on the slide is short sea shipping, the domestic water borne shipment of container right goods as a substitute for highway transport. According to the private study the best short sea prospects are in dense lanes of 800 miles or more, most of which lie along the coast of or within the Great Lakes regions. Object sack he wills include the high cost of U.S. built vessels, going whack back to the Jones act, and again while there is lots of interest in short sea shipping, I think that we do have to recognize that there are limitations in terms of how effective -- how extensively it can be used as congestion mitigates for land side transport. Just to talk very briefly about the trends and pipelines, pipeline transportation is use primarily for using natural gas and petroleum products for areas of production to consumption and in some areas water transportation complements or competes with pipeline transport for these commodities. Some of the primary trends are the key trends impacting pipelines are weather risks. Again, a series or future concern is changing weather patterns and kind of declining change impact on transportation has been a big issue of national research and discussion the past year and pipelines are not immune to this. For example, hurricane Katrina shut down some petroleum pipelines for several days in 2005. Of course with the weather trends and everything, the concern is that this is going to become the recurring trend, especially on the Gulf Coast. A second issue that's really impacting pipelines is the growing command for ethanol and other biofuels. In existing pipelines can be converted to handle this product which would otherwise move by water or rail but it takes time and money, so the rise in fuel prices we talk about will affect the market for ethanol and practical ways to transport it.

Trends in air cargo again, represents in terms of total tonnage the smallest of transported but the fastest growing and in terms of value tends to carry the highest value goods. It does really depend on the high performance standards because it typically these things are credit call items of high value, so time and reliability are some of the key needs in terms of air cargo, and given some of the deficiencies within our air cargo within just our overall air infrastructure, there are concerns with the ability in the continued growth in it and air cargo for its need to be able to meet the supply chain needs. The great reliability and transit times of air freight make it the leading edge for high performance logistics although its physical volumes are light, it is big in value terms and many of the airborne goods are critical to keeping supply chains running, and of all the big air freight carriers are typically global operators. However, as trucks have become better able to provide time definite service and as fuel costs have risen domestic shipments that in the past may ( indiscernible ) are now using ground transportation. For example, one of our express carriers, Fed ex and UPS are now shipping some package that is traditionally may have gone on air cargo via over night shipments on our highway system. So public planners should care about this because local businesses may, for example, want longer runway to support international flights for all cargo flights. They're going to need good air and ground connections to the airports again, talking about the really the multi-modal connections, it comes in via air cargo, to ultimately has to move to the final destination via truck. The trends in logistics really help the economic geography and the operating requirements for freight. So with this slide we're going to start to look at those things that really start to impact the functioning of supply chain. Visibility is a logistics objective signifying the ability ideally to see and effect any items real time anywhere in the supply chain. The factory, the warehouse, the store, or aboard the freight carrier. Shipment tracking is a critical part of seeing where items are in the supply chain. That's a very important component in terms of supply chain management.

Shipment tracking involves a combination of technology which can be trance responders, cellular devices, bar codes, radio. It also combines data processing and communication systems including web-based platform for shippers to attack carrier data and operational controls like slight tracking of tractors and trailers, so not only does this help in terms of overall management of supply chain, but it also adds safety and security measures which are very important to carriers that shippers as well.

Another trend is really globalization and international trade has become a primary component of the U.S. economy, and this is driven in large part by import growth, foreign trade, now exceeds one quarter of the GDP. This graph shows that imports and exports now exceed one quarter of our total me and projections are it will continue to rise. Both exports and imports are growing, but imports began to outstrip exports in the 1980s, and the gap has widened since the new century has began. Basically what we're saying here is the projects are that by 2020 that the trade based employment is going to comprise a major component or the most significant component of the U.S. employment picture replacing manufacturing, so in the end I think this comes to no surprise to everyone, but the U.S. is moving and becoming a trade based economy as opposed to a production based economy, and this has significant implications for our transportation system. It is always been important in terms of supporting the economic activity and the economic base, but with regards to trade and the emphasis on supply chain management it has become even more important for economic competitiveness. With that, we're now going to move into the section where we start talking more specifically about supply chain basis and how all of these trends are impacting really operations firm by firm at a specific level. We'll start by talking about logistics and comparing traditional logistics to what we're starting to see more and more of today. There are two key changes to recognize in logistics. One, how the structure of the business enterprise has changed and secondly, how the method of control have changed with it. In the traditional structure material ownership of the principle method of control. This is going to be the first of two slides. This one shows the traditional structure for goods movement. The traditional structure really relied on integrated business model pushing goods out for manufacturers to store. It is a pop down supply chain process where materials flow from an integrated manufacturer to customers at the end of a supply chain. This is a push system in which goods production is scheduled and shipped to stores based on predictions of customer sales.

So now consider the method of control for this type of system. In the traditional system control relied on having inventory on hand throughout the supply chain stages of distribution which are shown at the right-hand side of the slide. The method of control did not rely very much on information systems which in any case were not digital and were far from real time. Transportation had an important but not a primary role and typically it was not performing with just in time precision because you had a stock of goods sitting on the warehouse shelf. These either at the back of the retail establishment or from where within a nearby warehouse or distribution center, so again goods were produced and pushed out to the retail level in your traditional logistics system. What we're seeing today and what we've seen the evolution of over the past decade or so has been fast cycle logistics, and again here we are moving to the contemporary system of fast-cycle logistics. Look first at the key at the lower left-hand which now has a component for information flow and that's shown in red as well as for material flow which is shown in white. Now, consider the new look of the business structure at the right which has become more complex and has two directions, starting at the top the supply chains have become far flung around the world. And so notice that we have global locations right there at the top. Now look at the integrator there and position of the integrator. The integrator is a company that really ties everything together. Often times this is in the form of a third party logistics company, a 3 PL, but the key players today really are the modern retailers who increasingly dictate the design of the products which are sold within their store.

A prime objective in the system is to rely on point-of-sale information to really drive the ordering and production in as close to real time as possible, and this is called pool logistics which means that the actual sales pull the products through the chain instead of doing longer term forecasts at producing that makes the forecast and having it ready made and stocked on the shelves, they're really waiting until as close to the point of where it is being sold and needs to be restocked as possible. The goal is to have exactly the right kind of product ready for purchase at the exactly the right place and moment with no lost sales and no excess inventory. This really helps the Company in terms of tightening up cash flow. They're not taking ownership of products and spending the money until they know they need it and will be able to sell it and get the revenue. Again, the efficiency of the supply chain really is a cash flow management tool for businesses today. All of this is enabled by information technology and it is really the fusion of information technology and transportation which has enabled this movement towards fast cycle logistics. The whole complex system excel example is the need and the absolutely essential need for the visibility principle we just discussed previously.

If you look here now, looking at the method of control, we'll also notice changes within the method of control. The term fast cycle logistics refers to the replacement of inventory with information and high performance transportation as can be seen in the pie chart here. It is also known as just in time as well as other names. To sum it up, when you look at the supply chain flow charts, you're looking at the way businesses are organized. All of the transportation and information linkages are joining together parts of the enterprise and when the transportation system doesn't work right, when it is slow or unreliable only I am immaterial precise, the business itself is under performance N a global market under performance makes our business uncompetitive.

So what exactly is supply chain management? We've thrown that word out some. When we look at supply chain management, it really freight transportation performance drives supply chain function which in turn ( indiscernible ) economic development. The transportation activity had no real value then except to get buckets to the consumer N today's supply chain the transportation vehicle is serving as the moving warehouse which allows shippers and receivers to reduce inventory carrying costs and places more emphasis on the performance of the transportation system. This has led to an increase in logistics industry employment and a creation of third party logistics firms to manage the supply chain process. Fine performance is behind everything. If you don't have the goods on hand you need to know where they are and get them when needed. Just in time business model says have replaced inventory levels with transportation. Trucks and rail cars new warehouses. Hurts shippers and carriers and in particular hurt the shippers through the carriers.

Time delays and more importantly their ability in travel time harm carrier productivity because they drag down the utilization of freight carrier assets which are the equipment and people. Poor turn around is costly in terms of return on access to capital and retention of drivers. All of this has an impact ultimately on consumer prices and overall level of economic activity within a region.

With this I am going to talk briefly about what are some of the key transportation requirements of different major industrial sectors. For advanced manufacturing again these are the industries that rely on just in time and have really been kind of main streaming the whole supply chain management and the integration of the information with transportation, and the transportation requirements for advancing manufacturing which would include electronic manufacturing or automotive manufacturing, aircraft, biomedical type manufacturing, is that it has to be reliable and timely. They won't time definite deliveries because they are holding very low inventory. For example, interviewed some folks at Nissan plants throughout the country, and on some of their parts they hold as little as two hours worth of inventory on hand, and so reliability is really crucial because if they miss those parts it could be me shutting down a production line. It is also characterized by higher value of shipments, and again this is to the reliability and timeliness to support the just in time manufacturing and you typically see that these are really multi-modal. They'll depend on air cargo to a certain extent but also rail, it really all of the modes, but they also tend to be truck dominant because again trucking can provide some of the most reliable forms of surface transportation.

For natural resource manufacturing again this is characterized typically by bulky goods. They tend to be low damage but low cost goods, so there is not as much focus on damage. There is less emphasis on feed because they are bulky and can be costly to transport them so they're willing to give up some of the emphasis on speed to get a lower cost per ton mile. Typically you'll see a -- rail and barge dependent, again a lot of times the last mile may be handled by trucks. For nondurable manufacturing again this is a lot of our consumer goods that we see and they tend to be heavy or high cube, and what we mean when we say high Q is they tend to when terms of trucking and we all have truck size and weight limits and typically what we see a lot of times with nondurable manufacturing is that they will cube out or fill the physical space of a truck before they really reach the weight limit there. We typically have moderate to high value, and the shippers are typically concerned with moderate to high speed. Again, getting things to the market and not having inventory stock yard. These are also characterized by local ends of long supply chains, and so you're going to have a different patterns in terms of the overall manufacturing and production, and then you'll have local ends in terms of the distribution of these goods to local retail outlets, and again nondurable manufacturing, the transmit of these types of goods typically truck dominant.

For service industries, and service industries vary. Importantly, when we're talking service industries, it is not just your eating establishments and hotel and lodging but also the high value professional services in terms of financial services but healthcare services and educational services as well, and this is a growing part of our economy, one of the fastest growing parts of our economy, but they also have freight transportation needs. Normally it is accessibility. These will be in the center of pop -- population centers, downtown urban core centers and accessibility and being able to get the delivery trucks into the facility sincerely a big issue here. Re light. A lot of times they're sensitive time critical shipments, whether it is documents or whether it is organ transplants, very time sensitive. They tend to be smaller and more frequent trips, and, again, the most dominant modes here are truck and express package dependent which means a lot of air cargo involved in support of the service industry. With that overview of the needs what we'll do now next is submit some generalized supply chains and they really take a generalized view of some of the major industry sector that is you're going to find in practically every region throughout the country and the thought behind this is that the supply chains, the generalized supply chains can be customized for your specific region by interview and by interviewing and talking with some of some of your major shippers within the industrial sectors. The first we'll look at is really a global supply chain. This is the high tech. The high tech industries really have some of the most global supply chains out there in terms of being ( indiscernible ) line and bringing in in-puts from all over the world for manufacturing and distribution here in the U.S. One of the key points in this initial slide is that the complexity of supply chain operations, especially in advanced manufacturing and the reliance on the high service mode. This chain depicts a global supply chain for advanced manufacturing, specifically for the hated to order production of high technology goods. The order for these goods, let's say, for example, laptop computers starts production in Asia which is where the fabrication components takes place. The components then reach the U.S. mainly by ships, but some of the critical components parts come by air. From the port of entry they're moving primarily to factories where they are assembled into laptops. These factories also act as distribution centers, so you'll notice we have a modal key where we have truck loads and intermodal and then less than truck loads. So the intermodal there is really referring to rail intermodal. We also have air depicted here, and then we have packaged, so you will see with these global supply chains and high tech they really are using a multi-modal system and require upon that multi-modal system. There are two other things happening in addition to these sea ports and manufacturing and distribution centers, and there is a factory dedicated to the special high-end goods. It gets a lot of product by air and acts as a safety point for critical want cans. Those components would be where the actual factories keep less than two hours worth of inventory on hand so that they can't have those kind of in emergency stock. Second, there are general parts of Poe which supplies -- to the extent our transportation system is becoming more and more unreliable and unable to meet the needs of just in time. What we're starting to see happen already is that a lot of our higher tech manufacturers are keeping our increasing their emergency stock and expanding that two-hour worth of supply maybe out to four hour, and what this means basically is that they're becoming a little less competitive, but it can also translate to increases in consumer prices. Look at what happens at the assembled products move on to the end markets. The rail option drops out. You'll notice the rail or the intermodal from the sea port to the assembly. As you move to the assembly and DC into the consumer market the rail drops out and they're you're seeing the less than truckload and packaged modes take over with from your parts DC you will also see some air shipments taking over there.

The last thing to really notice here is the difference between the ownership and control. This is a very low inventory supply chain that assembles everything to order and keeps costs down further by not taking ownership of the goods until they actually reach the assembly plants or the distribution centers. However, the Company also makes the commitment computers will be delivered to the customer's door within a handful of date of order to meet the service commitment the Company takes control of flow of goods and information starting back in Asia and manages the whole process of transportation and material flow itself. The next supply chain we want to talk about, this is another global supply chain but retail office, so this is one of the supply chains that will be far flung, but it is going to have a very local end in terms of getting things out to the retail outlets, so the key point to this particular supply chain and slide is the blending of foreign made with domestic products both for supply for a full range of products to customers and for consolidation. In retail goods, the wholesale regional DC is the center of action. Supplies from domestic and international sources are being blended in the distribution center, so you'll see regional vendors there using truck and less than truckload packaging to get to the wholesale or regional DC. You're also going to have things coming in internationally through ports, and they will use truck drainage as well as intermodal rail to get to the staging and to the distribution centers, and then you're also likely to have extra regional vendors as well. Again, doing truckload and less than truckload packaging to kind of your emergency or your extra regional distribution center.

Imports are typically container right goods, and then from the port to the regional DC, it is mostly truck transportation. Rail is typically limited in this type of supply chain to the long distance hauling, and then rail is also limited since goods for multiple locations may end up consolidated within the same container and it is easier to do that from a trucking perspective. There are three notable characteristics of the retail supply chain, the multiple staging of goods, have you the initial warehouse and regional distribution, and then it goes to other warehouses via your truckload and less than truckload packages, and then it goes to retail outlets. It is also the overlapping relationship and supplies between distribution centers as well as the way of serving end-users with different sizes of trucking which can involve full truckload deliveries or smaller deliveries and multi-stop loop, and that's what you see there in your lower right-hand corner is one of the multi-stop loops. Reverse logistics which is where the industry, that's the industry term for return goods, so as we're dropping off new goods we may also be picking up returned or did he effected active goods. It is also a factor for retail supply chain. It creates two-way traffic and if not scheduled properly can result in even higher levels of trucks on the roadway. Today's logistics system favor small orders, and can also mean small shipments, but if goods can be staged properly, located quickly and moved fast, there are opportunities to consolidate loads and reduce the costs as well as the truck trips which is important from a public planning perspective. The blending of domestic with international products is one-way volumes are combined. Distribution points can involve final stage manufacturing. For example, bulk paper might be put in smaller packages and have logos attached. This means value add and had employment benefits for the region's economy, so some of these distribution centers, it is important to noted that there is also the potential for the value-added type activities, stuffing and destuffing of boxes that have been also repackaged and tagging of the goods coming in from the containers, and so it is not just distribution employment that can be support through these types of supply chains, but also value-added employment as well. Next we're going to move onto the consumer beverage supply chain.

The first point in this regional chain is the interrelated roles of production facilities in order to create efficiency and manufacturing as well as in service to the markets here, and again you'll see the red arrows or production flows and the dot is a purple pinkish arrows are the production in warehouse flows, and then we have local receivers here. The facets at the top have two roles, and the plants are also distribution centers, so you'll see a local planted and distribution center. In this case bottled products we're looking here at consumer beverages, are made of one plant and canned products at another, so each planted shifts through the other and acts as a DC for both products in its region. Notice that the modal key and note that in the supply chain ( indiscernible ) production flows from combined production and wholesale flows.

All the freight in this chain is done by truck. The Company uses common carrier trucks to ship to external markets and a private truck fleeted to distribute locally. The local delivery pattern is typical for urban freight. The private fleet are two primary sizes, typically 53-foot to deliver to high volume locations by Wal-Mart or Sam's Club or Costco and varieties of box trucks to deliver to smaller orders to like your convenience stores, your bars, and your restaurants and other retail outlets.

Here really talking about the use of stem routes, where you have production and wholesale flow, the stem route is a cross-town travel to a delivery pocket where the driver spends the day making many stops in a small radius. Most notable about the chain is all of this activity is time sensitive. Customers try to keep no more on hand than they expect to sell, and truck drivers are based on delivered products. A lot of the outlets don't have a lot of warehouse space and use all of the square footage for actual retail displays, so they're not storing a lot of extra product. Again, the drivers here in many cases, especially on those local markets are also sales people.

So that puts limitations on some of the typical operational solutions that folks think about for urban goods movement such as off peak deliveries. If the drivers are also the sales people, the managers who are placing the orders and who they're trying to sell typically workday time hours, so that makes off peak delivery a nonviable although alternative there. Okay. So next we're going to talk about a high service chain since service industries are one of the fastest-growing components of the nation's economy, we want to talk about high service chain, and the example here is healthcare. The initial point on this is to recognize how extreme time sensitivity of the products shipped in the hospital really creates a logistical challenge. Combine the fact with the fact that a lot of our medical centers are located in within the urban core of our metropolitan areas, the fact that -- they're getting many sometimes hundreds of deliveries a day, but also the fact that they're doing that within congestion -- congested areas and typically in older areas which may not have planned properly for the types of time sensitive deliveries in which these industries depend upon. The supply chain is designed for high service performance, and the customers is a hospital, so having the right material on hand is critical. However, inventory costs money and space, so to keep healthcare costs down, it can't be wasted. The time could be true for other high service industries such as financial institutions, educational facilities, and other professional services. The first part of this slide establishes a situation. The hospital originally received goods directly from the vendors, but this was expensive and consumed storage space. What it was is they litter ally had runs and sometimes thousands of vendors each making their own sales call and delivery, and it took a lot of time, staff time keeping inventory and placing orders with all of these different vendors and also took up a lot of space, and any space storing goods and equipment was space that couldn't be used to actually sell medical services which is the revenue generation.

So now what happened, and this is an actual example from Vanderbilt hospital, so now what happens is the vendors shift to a central distribution center so we have a third party that came up and said we'll be the distribution center and the vendors will ship to us, and the hospital will make their direct order. They will order from the distribution center as opposed to all of the individual vendors. So what's happened here is a multi-phase system. The central distribution center gets the product in volume for many customers and then it stages -- and then stages it in consolidated loads to a regional distribution center close to the hospital, again, time sensitivity is the key. The vendors never have to go directly into the urban core or the urban center because the central distribution center would be located out on the fringe of the region and then so all the vendors and the heavy traffic would be going into that one distribution center and then they can take loads into the regional center that has been within a day's drive of the hospital to make those deliveries, so standard deliveries are made to work twelve hours every day, but emergency deliveries can still be made within one to two hours because you'll notice there is also routes from those distribution centers that would allow one to two-hour service and four to six-hour service. Obviously those facilities and locations would be holding much lower levels of inventory since they're just for emergency supply. There are some benefits to the system, but one in terms of private sector benefits, the hospitals were able to convert store room to say clinical use thereby generating revenue, so wards are guaranteed supply because they're not waiting on individual vendors but all of that is already within a central distribution center, and inventory costs are greatly reduced and so are transportation costs. This is all due to the efficiency of consolidation. All of this help to say keep the healthcare costs down. There is also benefits to our transportation system in terms of reducing the truck traffic going in and out of busy urban quarters trying to make like literally what could be dozens of deliveries a day. The entire system is exceptionally time sensitive but has and accommodates a range of performance requirements. All of the transport is by truck while air can be used for emergencies, this system itself in this particular situation is engineered to avoid it, again, because it is very costly to do so.

So a lot of information in a short period of period of time. I recognize that. Kind of pulling back and really thinking about what are the implications of all of this private sector supply chain management and logistics trends, what are the implications for public sector planning? Well, I think we can start by understanding that first when it comes to making marketing and distributing goods, today's business enterprise equate to say the supply chain. The sly chain is the economic unit of competition. This means the business unit isn't just a company. It is an interlinked chain. Skid, business purchase answer depends on transportation performance, and by extension economic competitiveness depends on transportation performance.

So again thinking about the sensitivity of supply chains to time delay and other disruptions, all have implications for things like incidence, congestion management, so the way in which we from the public planning sector can really manage incidence and help to mitigate congestion, we're going to have direct impact upon the overall supply chain and the ability for private industry to effectively and efficiently manage those supply chains. The variability in the needs by chain again remember we talked about the different industrial sectors where some focused on cost, others more on speed of delivery, this is variation in the chain has implications for where we on the public sector side where we manage and where we invest, and what are the freight demands and the needs put upon the system by the different industrial sectors. I think another thing, too, is understanding that it was very obvious in all of the supply chains that supply chains and therefore freight movement crossed jurisdictions, so the cross jurisdictional nature or cashing of the chain has implications for how we on the public sector side should organize our planning efforts but also finance our investment.

I think the purpose of this slide is to provide a linkage between the impacts of characteristics of the freight transportation system and private sector costs, and public sector freight planning has a direct linkage to economic competitiveness. The linkage between transportation and economic growth has been well documented and freight is sometimes referred to as the economy in motion. HWA document from a few years ago, the national freight study by the detailed discussion of these linkages, and in both passenger and freight travel are important to economic growth but freight mobility is especially important to the reason economy in terms of meeting the demands of industry and businesses and being able to really make sure that business is your local and regional businesses can compete in this global environment, so when we talk about one of the costs impacting supply chains and competitiveness was travel, travel costs and vehicle operating costs, well, this can all be impacted by the level of service of your highway system. Inventory carrying costs is a huge factor in terms of economic competitiveness, and this is impacted by the reliability of your transportation system. Asset utilization costs in terms of how many pickup and deliveries can you do in one day in ( indiscernible ). A lot of times this is influenced by land use, and the interaction between land use and the transportation system. Of the access to markets, this is both to our input markets and also our final consumer markets really requires 34U89 I jurisdictional planning, so again freight planning has a direct impact on the economic competitiveness of the nation but also of every region throughout the nation. Timely would just like to talk about again businesses compete on logistics costs. Freight mobility directly impact the costs of doing business through logistics costs and change in information technology have led to an evolution in logistics and inventory management. The advances in information technology have led to a shift in control for material ownership to information ownership. This allows producers and distributors to reduce their inventory level by point-of-sale information and to drive ordering and production and in as close to real time as possible. Again, this is called pool logistics which means actual sales pull the product through the chain. The goal is to have exactly the right kind of product ready for purchase at exactly the right moment. It does command demand a high performance transportation system to do so. So the evolution and information has had dramatic impact on how supply chain management depends upon the transportation system and this is going to have a dramatic implication for the demands that these freight stakeholders make on the private sector planning process to make sure that their needs and concerns are being met. So with that, that concludes the formal presentation part of the seminar.

Q&A

J. Symoun:
Thank you, Paula. We'll move onto the question and answer session now. We have a few questions posted, and if anybody thinks of anything additional, please feel free to post them and we can also open the phone lines after we get through these. Let's see here.

The first question we have is is there a break even point in which the escalating cost of diesel fuel will make it cost effective once again to go back to stocking inventory?

P. Dowell:
Well, I think again there are several factors that are -- we're already starting to see trends and again looking at inventory tells us something that all of the businesses report on their taxes, and something that we've actually been trying to get a handle on is, you know, how can we track how inventory levels are changing over time to act as a proxy for the productivity gains or losses within a transportation system, so each company is going to have a different break even point because it is going to depend on the value and the costs of the goods relative to the costs of the transportation system, and the costs associated with stop outs, so each industry is going to have a break even point, but it is going to be different based upon various different factors. One of the other things we're starting to witness already as well is a shortening of some of the supply chains during the early 1990s we saw a lot of manufacturing move down south or across the border to Mexico and the rise of the industries. Well, towards the end of the decade and the started of the millennium they were starting to see a definitely decrease in the growth in the maquilladora as those were moving to China so those were moving to China because of the wage differential, and the wage differential far out benefited any increase in transportation costs. What we started to see over the last couple of years is that due to the increase in transportation costs including not only fuel costs but also a labor costs, but the increase in the unreliability in the congestion on the transportation system that for some of the higher value goods and the more critical goods a lot of that production has been moving closer to the U.S. and we're starting to see a pretty significant increase in the maquilladora industry in Mexico as a result. There are those break even points to where it is always constantly with a weighing your total production costs, so have you to look at wage differentials and your transportation costs and your whole supply chain management costs.

J. Symoun:
Thank you. Can you elaborate on rising logistics costs, the main drivers of the rising costs (fuel, congestion, etc.), and any new supply chain trends to mitigate these costs?

P. Dowell:
I think again we touched on some of that in the beginning. Obviously driver costs and just the increasing wages and the pressure because a lot of times the trucking industry is pulling from the same labor pool that the construction industry pulls from, and so up until the housing boom we had a real construction boom and so the need for construction workers was actually having an influence on the costs of drivers for the trucking industry, and often times the construction does offer a better quality of life allowing them to stay at home more and everything. That was one of the factors that was really leading to a driver shortage, but now in addition to the pressures just on drivers wages, you also add to that escalating fuel costs as well as the increased costs in terms of environmental regulations and some of the other regulations such as hours of officers, and truck size and weight regulations. All of these types of things are putting pressure on the trucking industry. What we're starting to see now is trucking companies are one of the largest customers of the rail companies. They are trying harder than the public sector is in terms of trying to divert more trucks to the rail system, especially for those long hauls because that's where they're having the largest difficulty in terms of being competitive and finding the drivers for those loads.

J. Symoun:
Okay. Thank you. Next question is do you see fuel costs, driver shortages, road congestion costs and environmental costs eventually affecting the intermodal competitive distance to 500 miles or less?

P. Dowell:
If I understand the question correctly, typically we think of now that rails can really only compete with truck if we're looking at a longer haul. You've heard some depending upon the type of service, you might hear 300 miles, but typically about a 500-mile kind of minimum in order for rail to really be competitive with truck, and I think the question is given all of these other factors, could there be a shortening of that minimum competitive length, and I think that definitely from the trucking industry there could be. However, the biggest obstacle to that really remains the reliability of the system, and again it is ultimately the shippers that dictate how things are delivered by dictating the schedule and the timing of those deliveries and the delivery windows. Rail continues to struggle in terms of being able to provide the service reliability that trucking companies can, and another pressure that's really facing the railroad companies is the increased pressure to add commuter passenger trains to freight rail lines, and when you look at a system and some of the same corridors where it makes sense potentially for passenger trains, also happen to be some of the more dense corridors for intermodal traffic, that, you know, there is already capacity constraints there to go and try to add passenger trains on those rails, just an increasing pressure on that. So I think again while there could be situations, especially if you start to get into different types of services and technologies, I think that that's going to be the requirement to really see that threshold for rail being competitive with truck on the shorter distances. I think that's going to be a key. Costs will be a factor, but service will be the real key.

J. Symoun:
Okay. Thank you. Let's see. We don't have any questions typed in right now. I think if the operator can give instructions on how to ask a question over the phone, I know that Jocelyn Jones from the Federal Highway Administration was going to add something in, so once the operator gives instructions, Jocelyn, I guess if you could just key in that code.

Jocelyn Jones:
Hi, Paula and Jennifer. My comment, I had more of a comment, not a question, but I just wanted to offer up that for people who are interested in finding out more information about supply chains in their own area, there are several private sector industry groups that focus on these issues. Three that come to mind are the council of supply chain management professionals. That was www.cscmp.org, a group I am involved in. Often times in larger cities there is another group called traffic club, and then a third one would be a group called delta new. I am not as familiar with that group, but I know that they have some transportation chapters around the country, and attending their meetings is a good way to understand some of the transportation and logistical issue says in your regions. Thanks.

J. Symoun:
Thank you. We do have another one that's been typed in. The question do you see any potential for increased use of inland ports to mitigate congested major seaports?

P. Dowell:
I think we're starting to see that. There are already great examples of that happening. The Virginia inland port up in Front Royal has really had a tremendous impact in terms of increasing throughput at the ported of Virginia, and at the same time it is really served as a great economic development engine for that rural area. We also see areas along other east coast ports, especially where they're experiencing some tremendous growth down in the Savannah and also around the Charleston and the North Carolina port areas looking at the developing those inland port concepts because basically what it does is helps to increase the throughput because a lot of that activity is shifted inward most often times one of the things that really helped the Virginia inland port be successful was the fact they worked very closely with the railroads and were able to come up with a short haul rail rate that was very truck competitive, so the beauty of that is an inland port that's being served primarily by rail, and so you're getting that very short haul rail intermodal movement, but that was a very collaborative and cooperative effort between the port of Virginia, Virginia port authority, and the railroads and in the state and local communities as well to really come together to make that happen, but it did take some negotiation in terms of getting rail rates that were competitive with truck rates and service that was dependable, and so I think that we'll start to see more and more and especially imports such as L.A., Long Beach, New York, New Jersey, some of those that are really starting to feel the pressures of the land side access and the land side congestion, but I was in meetings yesterday in San Diego, and I one remarked they never cease to be amazed by the ability of these ports to be innovative and just when you think that they're going to be peaking at capacity and everything, they come up with solutions that allow them to do more with what they've got, and I think that's one of the things in talking to the private sector that probably one of the big section lessons to be learned by public sector that the private sector really looks at the infrastructure and says how can we get more out of what we already have through operational improvement and inland ports is one of those such operational improvements if you can get all the players to the board to really make it work and make it a win-win for both public and private sector entities.

J. Symoun:
I guess a follow-up to that, could the inland ports be extended to Great Lakes ports?

P. Dowell:
Yeah. I think definitely. We're already seeing some, there is different types of inland ports. In Columbus, Ohio, Rickenbacker that's an inland part primarily placed on air cargo service, but also strategically located to be able to serve some of the traffic from the Great Lakes. I know that up in Niagara, Ann tear row, they're looking at trying to develop an inland support concept that would link into the Great Lakes traffic as well as some of the traffic coming in through Montreal and air cargo traffic, so there are communities out there looking at the synergies of really all of the modes and then all of your major traffic lanes, Great Lakes are, very important traffic lane there with a lot of activity and a lot of growth projected to happen within that area.

J. Symoun:
Thank you. I don't see any other questions typed in at this point.

Operator:
We do have one on the phone from Al Altoona.

Al Altoona:
Hello, Paula. This is Al Altoona. We here in Tucson are looking to develop an inland port operation, and I guess my question is are we better off trying to approach the like the port authorities at Long Beach as opposed to the customers or what is your best suggestion as far as how do we approach trying to attract some of this business to perform value-added services in our region?

P. Dowell:
Ultimately it is the shippers and the requirements of the shippers that are going to drive even if you have a third party logistics provider, and the shippers just say, okay, I need to get this from here to here, you know, and you're responsible for doing it, it is ultimately understanding the needs and the desires of the shippers that will shape the form in which freight transportation goes. So I think that anyone investigating inland ports, you need to understand who is most likely to use your type of facility and what are their requirements, and then if you can meet that, and if you can convince them, they're going to convince the carriers themselves.

A. Altoona:
Are you saying basically like it was the Virginia inland port situation that was driven by customers, then?

P. Dowell:
By the customers and by the shippers, and it was really anchored by getting your first one or two major distribution centers, and once you get that to happen, other things can fall in place. Same thing with Rickenbacker. It started because you had limited international which is a clothing store brand that brings in all of their clothing and everything from China. They served as the anchor tenant for that air cargo facility which was enough to get them started with the regularly scheduled daily flights from China, and once you got that you added the other modes and other things took off, and whenever you look at inland parts, what you typically see is the first step is to get that first anchor tenant.

Operator:
At this time there are no other questions from the phone.

Carol Keenan:
Hi, Al, this is Carol Keenan with the Federal Highway Administration. One of the products that we have available to our stakeholders and customers is the freight peer to peer program, and what you described might be a perfect candidate for one of our peer exchanges, and I would encourage to you go to our Federal Highway website and look at that program and feel free to call someone in our freight office if you have any questions about that.

J. Symoun:
I just put up a slide about the peer to peer program right now which has website address, e-mail address and phone number to call for more information. I think we've gotten through all the questions now it seems like. Paula, was there anything else that you wanted to add before we close out?

P. Dowell:
I just wanted to restate what I started off saying is the material that was present in today's seminar is a subset of a couple of the lessons that available in the new advanced freight planning course. You can go to the NHI website and request that course. And again it does build upon a lot of the basic information provided in integrating the freight, integrating freight into the transportation planning course, and so I encourage you that if this is something you're interested in and you feel like that you would like to learn more to go in and investigate that course.

J. Symoun:
Okay. Thank you and thank you very much, Paula, for presenting today, and thank you for everyone in attendance. If you do think of additional questions after we close out, I encourage to you post them to the freight planning listserv or send them to Paula or to the Federal Highway Administration and we'll get those questions addressed. As I mentioned earlier, the recording of this event will be available within the next week on the talking freight website, and I will send e-mail out to everybody in attendance when the recording, and presentation and transcript are posted. The next seminar will be held on June 18 and will be on Freight Planning: Impacts on Air Quality and Greenhouse Gas Emissions. This seminar is not currently open for registration on the talking freight website but should be up by tomorrow, and I will send e-mail out to the listserv as soon as it is posted and also when I send follow-up information from today's seminar, I will let you know the registration is open, but like I said it should be if not by this afternoon then tomorrow we'll have registration open for the June 18th talking freight. I also encourage to you join the freight planning listserv if you haven't already done so. With that, we'll close out. Thank you, Paula, and thank you, everybody in attendance and enjoy the rest of your day.

Updated: 03/28/2011
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