Chapter three

Transportation Management
Transportation. For most firms, transportation is the most important logistics activity simply
because it absorbs, on the average, approximately one-third to two-thirds of logistics costs. It is
essential, because no modern firm can operate without providing for the movement of its raw
materials and/or finished products in some way. This essential nature is always underscored by
the financial strains placed on many firms when there is a national railroad strike or when
independent truckers refuse to move goods because of escalating fuel prices. It is not uncommon
to call these events national disasters. Markets cannot be served, and products back up in the
distribution pipeline to deteriorate or become obsolete.
"Transportation" refers to the various methods for moving a product. Truck, rail, and air are just
a few of the popular choices. Management of the transportation activity usually involves the
making of choices regarding the method of shipment, the routings, and the utilization of vehicle
capacity.
The Transportation System
Importance of an Inexpensive Transportation System
One need only contrast the economies of a developed nation with those of a developing nation to
see the part that transportation plays in creating a high-level economic activity. With the advent
of inexpensive and readily available transportation services, the entire structure of the economy
changes toward that of developed nations: large cities result from the migration of the population
to urban centers, geographic areas limit production to a narrow range of products, and the
standard of living usually rises for the average citizen. More specifically, an improved
transportation system contributes to (1) greater competition in the marketplace, (2) greater
economies of scale in production, and (3) reduced prices for goods.
Greater Competition
When an improved transportation system is not available, the extent of the market is limited to
the areas immediately surrounding the point of production. Unless production costs are
extremely low compared with those at a second production point, that is, unless the production-
cost difference is near to offsetting the transportation costs of serving the second market, not
much competition is likely to take place. However, with improved transportation, the landed
costs for products in distant markets can be competitive with those of other producers selling in
the same markets.
In addition to encouraging direct competition, inexpensive transportation also encourages an

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indirect form of competition by making available to market goods that normally could not
withstand the cost of transportation.
Economies of Scale
The second important effect that inexpensive transportation has on the business firm is that wider
markets permit economies of scale in production. With the greater volume provided by these
markets, more intense utilization can be made of production facilities and specialization of labor
usually follows. In addition, inexpensive transportation also permits uncoupling of markets and
production sites. This provides a degree of freedom in selecting production sites such that
production can be located where there is a geographical advantage.
Reduced Prices
Inexpensive transportation also contributes to reduced product prices. This occurs not only
because of the increased competition in the marketplace but also because transportation is a
component cost along with production, selling, and other distribution costs that make up the
aggregate product cost. As transportation becomes more efficient, as well as offering improved
performance, society benefits through a higher standard of living.
Scope of the Transportation System
Overall Statistics
The domestic transportation system refers to the entire collection of labor, facilities, and
resources that make up the movement capability in the economy. This capability refers to the
movement of freight and people, although it may include the system for delivering intangible
such as telephone messages, electrical power, and medical services.
Products Hauled
The relative importance of each transportation mode and the changes that are occurring in
relative importance are partially explained by the composition of the freight hauled and the
inherent advantage of the mode.
Airfreight is not as limited in scope by technical feasibility as by the relatively higher rates that
must be charged as compared with other modes. This has tended to limit airfreight to products
that can effectively trade-off the premium costs for improved service. Common products carried
are electric and electronic equipment and parts, optical instruments, wearing apparel, machinery
and parts, and cut flowers. These products generally have high value compared to their weight or
bulk, or they may benefit from speed of delivery if it is important in their distribution.
Water transportation is a major hauler of products in bulk. In contrast with products carried by
air, these products are low in value and not perishable, so storage costs are not excessive, and

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these products can withstand the slow seasonal transportation service in exchange for low rates.
The differences between rail and truck in terms of products hauled are not as great as those of the
other modes. Rail and truck compete over essentially the same routes for much of the same
freight.
Physical Plant and Equipment
The transportation system is composed of the networks over which freight is moved and of the
equipment used to transport freight. The system includes vehicles, terminals, pipes, highways,
waterways, ships, canals, airways, and railroad tracking easily converted to use as a cargo carrier
at night. From a practical standpoint, aircraft do vary in capacity and performance characteristics.
However, airplanes for commercial use are not designed to handle products with special require-
ments, as would be refrigerated railroad boxcars or dry-bulk-handling tank trucks.
Service Choices and Performance Characteristics
The user of transportation has a wide range of services at his or her disposal, all-revolving
around the five basic modes. The variety is almost limitless: (1) the five modes may be used in
combination. (2) Agencies, associations, and brokers may, be used for their indirect services. (3)
A single transportation mode may be used exclusively. From among this plethora of service
choices, the user must select a service or service combination that provides the best balance.
Between the quality of service provided and the cost of the service. The task of service choice is
not as forbidding as it first sounds because the circumstances surrounding a particular shipping
situation often reduce the choice to only a few reasonable service possibilities. To aid in solving
the problem of transportation-service choice, transportation service may be viewed in terms of
characteristics that are basic to all services. These criteria are (1) cost of service, (2) average
delivery time, (3) transit-time variability, and (4) loss and damage: It is presumed that the service
is available and can be supplied with a frequency that makes it attractive as possible service
choice.
Cost of service: The cost of service to a shipper is simply the line-haul cost for transporting
goods plus any accessorial or terminal charges for additional service provided. In the case of for-
hire service, the rate charged for movement of goods between two points plus any additional
charges, such as for pickup at origin, delivery at destination, insurance, or the cost of preparing
the goods for shipment, makes up the total cost of service. When the service is owned by the
shipper, the cost of service is an allocation of the relevant costs to the shipment in question.
Relevant costs include fuel, labor, maintenance, depreciation of equipment, and administrative
costs.

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Cost of services varies greatly from one type of service to another. They show that air is the most
expensive and water is the least expensive. Trucking is more than four times as expensive as rail,
and rail is three times more expensive than water or pipeline movement. These figures are
averages that result from the ratio of all freight revenue generated to the total ton-miles shipped
for the particular mode, and can only serve as general indicators of cost differences. Cost
comparisons for the purpose of transportation service selection must be made on the basis of
actual charges that reflect the specific commodity being shipped, the distance and direction of
the movement, and any special handling required.
Delivery Time and variability: There are many factors to be considered when selecting a
transportation service. Repeated surveys have shown that average delivery time and delivery-
time variability rank at the top in importance. Delivery time is usually referred to as the average
time it takes for a shipment to move from its point of origin to its destination. The different
modes of transportation vary as to whether they provide direct connection between the origin and
destination points; for example, shipments move on air carriers between airports and on water
carriers between harbors. But for purposes of comparing carriers' performance, it is best to
measure delivery time "door-to-door" even if more than one mode is involved. Although the
major movement of a shipment may be by rail, local pickup and delivery is often by truck if no
rail sidings are available at the shipment origin and destination points.
Variability refers to the normal differences that occur between shipments by the various modes.
All shipments having the same origin and destination points and moved on the same mode are
necessarily in transit for the same length of time due to the effects of weather, traffic, congestion,
number of stop-offs and differences in time to consolidate shipments. Transit-time variability is a
measure of the uncertainty in carrier performance.
Statistics on carrier performance are not extensive. No one-business firm utilizes the total
transportation system enough to provide worthwhile comparisons on large scale. However, the
military uses the domestic transportation system extensively for all kinds of commodities, and
maintains good records on delivery times. Selective crosschecking against industrial shipments
where the data are available shows no significant differences due to data sources.
In terms of variability, the transport services can roughly be ranked as they were for average
delivery time; that is, rail has the highest delivery time variability and air has the least, with truck
falling between these extremes. If variability is viewed relative to the average transit time for the
transport service, air can be the least dependable and truck the most dependable.
Loss and damage: Carriers differ in their ability to move freight loss-and-damage free. Because
of this, loss and damage become factors in selecting a carrier.
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Regulated carriers are liable under law to move freight with reasonable dispatch and to do so
using reasonable care in order to avoid damage. They are often released from the liability if loss
and damage are a result of an act of God, the act or default of the shipper, or other causes not
within control of the carrier. Although the carrier, upon proper presentation of the facts by the
shipper, incurs the direct loss sustained by the shipper, there are certain indirect costs that the
shipper should recognize before making a carrier selection. The potentially most serious loss that
the shipper may sustain has to do with customer service. The goods being shipped may be for the
purpose of replenishing a customer's inventory or for direct customer consumption. Delayed
shipments or goods arriving in unusable condition mean inconvenience for the customer, or
possibly higher inventory costs arising from a greater number of stock outs or backorders that
may result when anticipated replenishment stocks are not received as planned. However, the
carrier may not always be at fault. Retailers sometimes use damage as a sales gimmick.
The claims procedure takes time to gather pertinent facts about the claim, takes effort on the part
of the shipper to prepare the proper claim form, ties up capital while claims are being processed,
and sometimes involves a considerable expense if the claim can only be resolved through court
action. Obviously, the fewer the claims against a carrier, the more favorable the service appears
to the user. A reaction to a high likelihood of damage is to provide improved protective
packaging. This expense must be borne by the user as well.
SINGLE-SERVICE CHOICES
Each of the five basic transportation modes sells its services directly to users. This is in contrast
to the use of a "transportation middleman" like a freight forwarder, who sells transportation
services but does not own any movement capability.
Single-mode service is also in contrast to those services involving two or more individual
transportation modes.
Rail. The railroad is basically a long hauler and slow mover of raw materials and of low-valued
manufactured products. The average length of haul is 535 miles with an average train speed of
20 miles per hour. Rail service exists in two legal forms, common carrier and private. A common
carrier sells its transportation services to all shippers and is guided by the economic and safety
regulations of the government. In contrast, private carriers are owned by the shipper and serve
only the owner. Because of the limited scope of the private carrier's operations, no economic
regulation is needed. Virtually all rail movement is of the common-carrier type.
Common-carrier line-haul rail service is basically either carload (CL) or less-than-carload (LCL).
A carload quantity refers to predetermined shipment size, usually equaling or exceeding the
average capacity of a rail car to which a particular rate is applied. The carload-quantity rate is
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less than the LCL rate, which reflects the reduced handling required for volume shipments. Most
rail freight today moves in carload quantities. This is a reflection of the trend toward volume
movement.
Railroads offer a diversity of special services to the shipper. These range from the movement of
bulk commodities such as coal and grain to refrigerated products and new automobiles, which
require special equipment. Other services include expedited service to guarantee arrival within a
certain number of hours; various stop off privileges, which permit partial loading and unloading
between origin and destination points, pickup and delivery; and diversion and reconsignment,
which allow circuitous routing and changes in the ultimate destination of a shipment while en
route.
Truck. In contrast with rail, trucking is a short-range transportation service of semi-finished and
finished products. The average length of haul is about 300 miles for common-carrier trucks and
170 miles for privately owned trucks. Also, trucking moves freight with smaller average
shipment sizes than rail. The inherent advantages of trucking are (1) its door-to-door service so
that no loading or unloading is required between origin and destination, as is often true of rail
and air modes; (2) its frequency and availability of service; and (3) its door-to-door speed and
convenience.
Truck and rail services show some distinct differences, even though they compete for many of
the same product shipments. First, in addition to the common and private legal classification of
carriers, trucking offers services as contract and exempt carriers as well. Contract carriers do not
hold themselves out to service all shippers; rather, they work with a limited number of shippers
on a long-term-contract basis. Shippers enter into a contractual arrangement to obtain a service
that better meets their particular needs without incurring the capital expense and administrative
problems associated with private ownership of a trucking fleet. Contract carriers are regulated,
but less closely than common carriers. Exempt motor carriers are free from economic regulation.
Examples of such exempt carriers are vehicles operated and controlled by farmers and farm
cooperatives and used to transport agricultural commodities, vehicles used to transport freight
associated with transport by air, vehicles used for occasional transfer of property, and vehicles
transporting freight primarily within municipalities.
A second difference between truck and rail service is that trucks can be judged less capable of
handling all types of freight than rail, mainly due to highway-safety restrictions that limit the
dimensions and weight of shipments. Specially designed equipment can accept loads in different
dimensions than these.
Third, trucking offers reasonably fast and dependable delivery for LTL shipments. The trucker
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needs to fill only one van before moving the shipment, whereas the railroad must be concerned
with a trainload. On balance, trucking has a service advantage in the small-shipment market.
Air. Air transportation is being considered by increasing numbers of shippers for regular service,
even though air-freight rates exceed those of trucking by more than 3 times and those of rail by
more than 14 times. The appeal of air transportation is its unmatched origin-destination speed,
especially over long distances. Air-service dependability and availability can be rated as good
under normal operating conditions. Delivery-time variability is low in absolute magnitude, even
though air traffic is quite sensitive to mechanical breakdown, weather conditions, and traffic
congestion. Variability, when compared with average delivery times, can rank air as one of the
least dependable modes.
The capability of air has been greatly constrained by the physical dimensions of the cargo space
in the aircraft and the aircraft's lifting capacity. This is becoming less of a constraint, however, as
larger aircraft are put into service. Door-to-door ton-mile costs are expected to drop to about one-
half of the current cost levels through the benefits of new technology, deregulation, and
productivity-improvement programs. This would make air a serious competitor with the more
premium forms of surface-transport services.
Air transportation has a distinct advantage in terms of loss and damage. According to a classic
study by Lewis, Culliton, and Steele, the ratio of air claim costs to freight revenue was only
about 60 percent of those for truck or rail. In general, less protective packaging is required for
airfreight, provided that ground handling does not offer a higher exposure to damage than the
enroute phase of the movement and that airport theft is not excessive.
Air-transportation service exists in common, contract, and private legal forms. Direct air service
is offered in seven types: (1) regular domestic truck-line carriers, (2) all-cargo carriers, (3) local-
service airlines, (4) supplemental carriers, (5) air taxis, (6) commuter airlines, and (7)
international carriers. About a dozen airlines operate currently over the most-heavily-traveled
routes. These airlines offer cargo-carrying services in addition to their regularly scheduled
passenger operations. All cargo carriers are common carriers of freight only. Service is
concentrated at night, and rates average 30 percent less than those for domestic trunk-line
carriers. Local-service airlines provide a "connecting" service with domestic trunk-line carriers
for less-populated centers. They provide both cargo and passenger service. Supplemental
(charter) carriers operate much as do trunk line carriers except that they do not have regular
schedules. Commuter airlines are like local-service carriers that "fill in" routes abandoned by
trunk-line carriers. Air taxis are small aircraft, namely helicopters and small fixed-wing aircraft,
offering a shuttle service for passengers and cargo between downtown areas and airports. They
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often have only irregular service.
Water. Water-transportation service is limited in scope for several reasons. Domestic water
service is confined to the inland-waterway system, which requires shippers to be located on the
waterways or to use another transportation mode in combination with water. Also, water service
on the average is slower than rail. Availability and dependability are greatly influenced by the
weather.
Water services are provided in all four legal forms, but most commodities shipped by water
move free of economic regulation. In addition to unregulated private carriage, liquid cargoes in
bulk moving in tank vessels and commodities in bulk such as coal, sand, and grain, which make
up over 75 percent of the total annual ton-miles by water, are exempt. Outside of the handling of
bulk commodities, water carriers, especially those in Foreign Service, do move some higher -
valued commodities. This freight moves in containerized ships to reduce handling time and to
better effect intermodal transfer.
Loss and damage costs due to transporting by water are considered low relative to other modes
because damage is not much of a concern with low-valued bulk products, and losses due to
delays are not serious (large inventories are often maintained by buyers). Claims involving
transport of high-valued goods, as in ocean service, are much higher (approximately 4 percent of
ocean-ship revenues). Substantial packaging is needed to protect goods, mainly against rough
handling during the loading-unloading operation.
Pipeline. To date, pipeline transportation offers a very limited range of services and capability.
The most economically feasible products to move by pipeline are crude oil and refined petroleum
products. However, there is some experimentation with moving solid products suspended in
liquid, called “slurry", or containing the solid products in cylinders that in turn move in a liquid.
If these innovations prove to be economical, pipeline service could be greatly expanded.
Product movement by pipeline is very slow, only about 3 to 4 miles per hour. This slowness is
tempered by the fact that products move 24 hours a day and 7 days a week. This makes the
effective speed much greater when compared with other modes.
Relative to transit time, pipeline service is the most dependable of all modes, because there are
few interruptions to cause delivery-time variability. Weather is not a significant factor, &
pumping equipment is highly reliable. Also, the availability of pipeline capacity is limited only
by the use that other shippers may be making of the facilities at the time capacity is desired.
Product loss and damage for pipelines is low because (1) liquids and gases are not subject to
damage to the same degree as manufactured products, and (2) the number of dangers that can
befall a pipeline operation is limited. There is liability for such loss and damage when it does
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occur because pipelines have the status of common carriers, even though many are private
carriers in form.
COORDINATED SERVICES
In recent years, there has been renewed interest in the idea of coordinating the services of more
than one transportation mode. The major feature of coordination is the free exchange of
equipment between modes. For example, a truck trailer is carried aboard an airplane, or a rail car
is hauled by a water carrier. Such equipment interchange creates transportation services that are
not available to a shipper using a single transportation mode. Coordinated services are usually a
compromise between the services offered by the cooperating carriers individually. That is, cost
and performance characteristics rank between those of the participating carriers.
There are ten possible coordinated-service combinations: (1) rail-truck, (2) rail-water, (3) rail-air,
(4) rail-pipeline, (5) truck-air, (6) truck-water, (7) truck pipeline, (8) water pipeline. (9) Water-
air, and (10) air-pipeline. Not all of these combinations are practical. Some that are feasible have
gained little acceptance. Only rail-truck, called "piggyback," has seen widespread use. Truck-
water combinations, referred to as "fishy-back," are gaining acceptance, especially in the
international movement of high-valued goods. To a much lesser extent, truck-air and rail-water
combinations are feasible, but they have seen limited use.
TOFC. Trailer-on-flat-car (TOFC), or piggyback, refers to transporting truck trailers on railroad
flatcars, usually over longer distances than trucks normally haul. TOFC is a blending of the
convenience and flexibility of trucking with the long-haul economy of rail. The cost is less than
for trucking alone and has permitted trucking to extend its range. Likewise, rail has been able to
share in some traffic that normally would move by truck alone. The shipper benefits from the
convenience of door-to-door service over long distances at reasonable rates. These features have
made piggyback the most popular coordinated service.
TOFC service is offered under five different plans, depending on who owns the highway
equipment and rail equipment and on the rate structure established. These plans are:
Plan I. Railroads transport the trailers of highway common carriers. Billing is through the
highway carriers, and the railroads charge a portion of the highway carriers' rate or a flat fee for
moving the trailer.
Plan II. Railroads use their own trailers and containers and transport these on their own flatcars
to provide a door-to-door service. Railroads contract with local truckers to handle assembly at
originating terminals and delivery from destination terminals. Shippers deal only with railroads
and receive rates comparable to those of highway common carriers. Plan II 1/4. Similar to Plan
II, except railroads provide either pickup or delivery, or both. Plan II 1/2. Railroads provide the
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trailers or containers and the shippers provide the service of moving these to and from the rail
terminals.
Plan III. Shippers or freight forwarders can place their own trailers or containers, empty or
loaded, on railroad flatcars for a flat rate. The rate is for ramp-to-ramp; that is, pickup and
delivery are the responsibility of the shippers.
Plan IV. Shippers furnish not only the trailers or containers, but also the railroad equipment on
which the trailers or containers move. The railroad charges a flat rate for moving the cars empty
or loaded. The payment to the railroad is for the rails and for pulling power.
Containerized freight. Under a TOFC arrangement, the entire trailer is transported on a railroad
flatcar. However, it is also possible to visualize the trailer in two ways, that is, (1) as a container
or box in which the freight is packaged, and (2) as the trailer's chassis. In a truck-rail
combination service, it is possible to haul only the container, thus saving the dead weight of the
understructure and wheels. Such a service is called COFC, or container-on-flatcar.
COMPANY-CONTROLLED TRANSPORTATION
An alternative that is available is to provide transportation service through company ownership
of equipment or contracting for transportation services. Ideally, the user hopes to gain better
operating performance, greater availability and capacity of transportation service, and a lower
cost. At the same time, a certain amount of financial flexibility is sacrificed because the company
must invest in a transportation capability or must commit itself to a long-term contractual
arrangement. If the shipping volume is high, it may be more economical to own the
transportation service than to rent it. However, some companies are forced to own or contract for
transportation even at higher costs because their special requirements for service cannot be
adequately met through purchase of common carrier services. Such requirements might include
(1) fast delivery with very high dependability, (2) special equipment not generally available, (3)
special handling of the freight, and (4) a service that is available when needed. Common carriers
serve many customers and cannot always meet the specific transportation requirements of
individual users.
INTERNATIONAL TRANSPORTATION
The success of the transportation industry in developing a fast, reliable, and efficient
transportation system has substantially contributed to the dramatically, expanding level of
international trade occurring in the last 25 years (about a 12-fold increase in dollars).
Inexpensive transportation has allowed domestic companies to take advantage of the differences
in labor rates worldwide, secure raw materials that are geographically dispersed, and place goods
competitively in.
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