Transportation

Seventh Edition
Coyle, Novack, Gibson & Bardi
© 2011 Cengage Learning

Chapter 1
Transportation:
Critical Link in the
Supply Chain

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or 1
duplicated, or posted to a publicly accessible website, in whole or in part.
 Introduction
• Chapter focus: The role transport plays in:
– Fostering improved supply chain integration
• Integration is not achievable without effective transport
– Helping organizations to be more efficient and
effective
• Chapter organization
– Conceptual dimensions of transport
– Fundamentals of supply chain management
– Role of transport in the supply chain
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied 2
or duplicated, or posted to a publicly accessible website, in whole or in part.
 Introduction
Economics of Transportation
• Transportation
– Pervasive element of daily life
– Impacts citizens’
• Economic well being
• Safety
• Social interaction
• Quality of physical environment
• Quality of daily life
– Chapter focuses on the economic impact
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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Introduction
Demand for Transportation

• Regions or areas tend to specialize in certain

economic activities
• This specialization creates physical gap
between markets and areas of production for
a given good
• This gap creates a demand for transport
• Fundamental economic role of transport is to
bridge this supply-demand gap
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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Introduction
Transport Measurement Units
• Typical measurement units
– Ton-miles (freight) and passenger-miles (people)
– Caution: Both units are heterogeneous. Two units
may have
• Very different costs of production
• Very different service requirements
• Levels of measurement unit aggregation
– Total transport output (freight or passenger)
– Transport output by mode (mode share)
– Transport output by carrier (market share)
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied 5
or duplicated, or posted to a publicly accessible website, in whole or in part.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied 6
or duplicated, or posted to a publicly accessible website, in whole or in part.
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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Introduction
Price Elasticity of Demand
• Sensitivity of demand to price change
• Relative measure between price change and
quantity change. Measured as:
% change in quantity  % change in price
• Terminology
– Price elastic: demand is sensitive to price change
– Price inelastic: demand is insensitive to price
change
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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Introduction
Price Elasticity of Demand
• If % change in quantity < % change in
price, then demand is price inelastic
(insensitive to price change)
– Price increase leads to revenue increase
– Price reduction leads to revenue reduction
• If % change in quantity > % change in
price, then demand is price elastic
– Price increase leads to revenue reduction
– Price reduction leads to revenue increase
© 2011Cengage Learning. All Rights Reserved. May not be scanned, copied or 9
duplicated, or posted to a publicly accessible website, in whole or in part.
 Introduction
Price Elasticity of Demand
• Aggregate demand for freight transportation
tends to be price inelastic
– Cost for transport generally small % of
product’s landed cost
• Demand for particular mode or carrier tends
to be price elastic
– Often, substitutes are available
• Service elasticity
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 Freight Transportation
Derived Demand

• Definition of derived demand

– Demand for transport service to move a product
to a given location depends upon the existence
of demand to consume (use) that product at that
location
• Remember, demand is a relationship between price
and quantity demanded
– Aggregate demand for freight transport cannot
be easily affected by individual carrier actions

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied 11
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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Value of (Transport) Service
• Transport cost is a component of landed cost
– Landed cost includes:
• Cost of production
• Transport cost from production point to market
– Transport costs influence a producer’s landed cost
advantage/disadvantage vs. competitors, thus
determining the market value of the transport service
• Similar to place utility concept (see Ch. 2)
– Landed cost also determines extent or range of a
producer’s market area (Lardner’s Law) and thus the
value of transport service
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied 13
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or duplicated, or posted to a publicly accessible website, in whole or in part.
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 Value of (Transport) Service
Service Components of Freight Demand
• Critical service characteristics and related
supply chain cost impacts
– Transit time
• Volume and cost of holding inventory
• Potential stockout and/or safety stock costs
– Reliability or consistency of transit time
• Safety stock and/or stockout costs
– Accessibility: impacts transport cost and time
– Capability: “special” service requirements
– Security: safety stocks and/or stockout costs
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 Value of (Transport) Service
Location of Economic Activity
• Historically, transportation influences location of
cities, particularly ports
• For firms, transport influences the location of
manufacturing plants and distribution facilities
– Influences very pronounced for firms producing or
marketing globally
• Influences are dynamic
– As economic activity locations shift, the pattern of
transport demand also shifts and vice versa
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 Supply Chain Concept
Development of the Concept
• Concept evolves in three phases
– 1960s: physical distribution concept
– 1980s: business logistics or integrated logistics
– 1990s: supply chain management concept
• A systems approach to analysis and
decision-making is common to all three
phases

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 Supply Chain Concept
Development of the Concept
• Physical distribution concept
– Focuses on physical distribution system costs and
tradeoffs
– Objective was to find lowest total physical
distribution system cost
– Example: transportation mode or carrier selection
• Involves tradeoffs between transport, inventory,
materials handling, and packaging costs

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 Supply Chain Concept
Development of the Concept
• Business logistics concept
– Adds analysis of inbound or sourcing side to the
outbound physical distribution side
– Development facilitated by
• Economic deregulation of transport in U.S.
• Rising degree of international or global sourcing
• Both create additional opportunities for cost savings
through integrated management and coordination
– Notion that logistics contributes to customer
service and revenue generation begins to emerge
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 Supply Chain Concept
Development of the Concept
• Supply chain management concept
– Key underlying principles
• Systems analysis and management
• 3 key flows: product, information, and cash
• Integrated management of extended enterprise
• Focus on ultimate consumer of end product
– Transport: most direct influence on product flow
• Product flow is two way
• Growing importance of reverse logistics systems

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied 21
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 Supply Chain Concept
Development of the Concept
– Information flow
• Sales trigger replenishment orders flowing upstream
• Traditionally, replenishment orders used by upstream
supply chain members to forecast downstream demand
– Long intervals between orders create demand uncertainty
– Safety stocks used to buffer against uncertainty
– Magnitude of uncertainty and safety stocks amplify upstream in a
phenomenon known as the bullwhip effect
• SC compression via improved two-way information flow
reduces uncertainty and cost impact of bullwhip effect
– Transport carriers contribute to uncertainty reduction (reliable
and fast deliveries) and improved two-way info flow (advanced
shipment notices, bar codes, radio frequency tags)
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 Supply Chain Concept
Development of the Concept

– Financial or cash flow

• Payments flowing upstream for goods ordered
• If order and replenishment cycles shorten (orders and
product flow faster) then cash flows faster
• Faster cash flow reduces working capital
requirements for financing operations and processes
and contributes to improved profitability
– “free” cash flow cycle
• High transport service levels contribute to improved
customer service and faster cash flow
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied 24
or duplicated, or posted to a publicly accessible website, in whole or in part.