Transportation 2ACBTM201

Calculations of Semester marks

Total Semester mark100%

Exam60%

Continuous Assessment

40%

Test1 20%

Test2 30%

Test3 30%

Assignment 20%

Remember: The more you put in

during the semester the

better your final mark!

Overview

• Week 1: Transportation, the Supply Chain and the economy

• Week 2-3: Transport Regulation and Public Policy in SA

• Week4-5: Motor Carriers• Week6-7: Railroads• Week8-9: Air Carriers• Week10 Pipelines• Week11: Inter-modal and Special Carriers

Management of TransportationChapter1: Transportation, the supply chain and

economy Introduction

• Transportation is a vital activity in moving both freight and passengers around the world.

• It is the lifeline of most town’s and cities and without it businesses and trade will go to a halt. e.g. London Underground.

• Within the subject of Transport management we want to provide you with the skills and knowledge to manage a transport business effectively and efficiently, i.e. making a profit.

The challenge of Transport (p4)

• Competitive advantage is in a big part created by transportation through customer service, quality and value added service.

New challenges have been created by 4 constant variables:• Internet and E-business – home shopping services / real time

inventory tracking• Continual Globalization – international sourcing and sales• Business alliances – 3PL (3rd party logistics providers)

expanding services / eliminate duplication of assets and processes to benefit both parties

• Rapidly Changing technology – hardware, software, GPD, RFID (radio frequency identification), bar-coding, robotics.

The Logistics Concept (p6)

• Def1: Logistics is the process of planning, implementing, and controlling the efficient, effective flow and storage of raw materials, in-process inventory, finished goods, services, and related information from point of origin to point of consumption (including inbound, outbound, internal and external movements) for the purpose of conforming to customer requirements.

• Def2: the logistics process provides a systems framework for the decision making that integrates transportation, inventory levels, warehousing space, materials-handling systems, packaging, and other related activities that encompasses appropriate trade-offs involving cost and service.

• Def3: Logistics involves the efficient and effective management of inventory, whether in motion or at rest, to satisfy customer requirements and organizational objectives.

• Integrated logistics concept – one part effects the other, seeing every part not as stand alone unit but as inter-connected and effecting other parts

The Supply Chain Concept (p10)

• Def: Supply chain management integrates product, information and cash flows among organizations from point of origin to the point of consumption, with the goal of maximizing consumption satisfaction and minimizing organization costs

• Supply chain management consists of logistics, strategic planning, information technology, marketing/sales and finance.

The supply chain concept cont’• Logistics – has been responsible for the physical flow of

products among organizations, like activities such as transportation and warehousing.

• Marketing and sales – has been responsible for providing information to the customers before and after the transaction.

• Information technology – have allowed logistics to provide information on product flow before they occur, during movement and after delivery.

• Finance and Accounting – has been responsible for cash flows among organizations in a channel by controlling invoicing and collections.

Total-Cost Analysis (p11)

• Why? No one area in logistics operates independently. E.g. low cost transportation is usually associated with slow service i.e. higher warehousing and inventory costs and lower customer service.

3 levels of optimality when making decisions:1. Interrelationship between transportation, warehousing,

inventory and customer service.2. The impact of logistics decision has on other areas

within the firm such as marketing and manufacturing.3. The impact of logistics on supply chain partners. E.g

pallet size different to customer’s

Total-cost analysis cont’

• Total-cost analysis also requires the decision maker to consider cost trade-offs

• Higher costs vs potential saving and more profitE.g. You have a low cost transport system. You

switch to high cost air transport because the higher transportation costs are traded for lower warehousing and inventory costs. (not good from transport manager point of view but good from a supply chain manager’s point of view)

• NB to make integrated business decisions

• 2 functions most directly affected by logistics are marketing and production.

• Marketing – movement of finished goods to customer completes the sales transaction and is part of the marketing function e.g. speedy, punctual and reliable deliver of goods can enhance sales

• Production – physical supply of raw-material is a logistics function e.g. late goods or no goods can cause the production line to stop.

• When changes are considered, the total cost of the proposed change must reflect the benefit of increased profit as well as the added cost of lost sales (profit) due to service level changes

• The total-cost concept of logistics provides an analytical framework for considering the impact of logistics decisions.

• Decisions in one area, like transportation, have a cost trade-off effect with other areas of logistics and of the firm

• The minimization of total logistics costs is the objective of logistics.

Business Logistics Activities (p13)• The business logistics functions recognizes the

movement-storage interaction in the provision of time, place and quantity utilities in goods i.e. that there is a positive and direct relationship between the movement and storage elements of the logistics system.

• Transportation decisions have and impact on the functional costs of finance, production and marketing.

• The decision regarding the mode of transportation used affects the level of inventories to be held, the size of raw materials orders and the quality of service to the customer.

• Company functions are based on utility creation as in Fig 1.5

• Form Utility is created by production.• Time, place and quantity utility is created by

logistics.• Possession utility is created by marketing.• Give attention to the multifunctional area of

purchasing, pricing and packaging(Fig1.5) E.g packaging decisions must consider the efficiency of the production process, consumer acceptance (marketing) and the need to protect the product in transit while making efficient use of the carrier vehicle.

• Note that material management function is concerned with the inbound movement and storage of raw materials.

• Physical distribution is directed toward the outbound movement and storage of finished products.

• However, transportation activities are performed in both.

• Conclusion: logistics function does not operate in a vacuum; a decision made in the logistics area impact other areas of the company

Transportation and the Economy (p15)

• Transportation has historical, economic, environmental, social and political significance.

• It is the most important industry in the world because without it you can’t operate a grocery store or win a war.

• It provides a thoroughfare for the nation’s products, it provides a means for traveling to and from work and it supports our communications network.

• Transportation is the creation of place and time utility.

Transportation and the Economy cont’

• Place utility – when are goods are moved to places where they have higher value than at the places from which they originated.

• Time utility – this service occurs when it is needed.

• E.g. passengers

• Transportation is a service but it has basic characteristic that make purchasing this service similar to buying goods

Transportation and the Economy cont’3 factors of transport1. It is a movement service that includes speed,

reliability and the frequency of the service.2. Equipment used which affects comfort and

safety for passengers and for freight effects shipment preparation, the size of the shipment and loading and unloading costs

3. Cost of the transportation service which includes the rate charged plus any additional costs like: pickup, delivery costs, packaging requirements, damage or detention charge and special service charge such as refrigeration and heat

Transportation and the Economy cont’

• It is important to note that transportation should not be viewed as simple movement of persons or things through space.

• The user is actually purchasing a bundle of services e.g. a carrier that offers line-haul, sorting and segregating with local delivery.

• The basic function of transportation is to provide the market with access to the resultant products.

Economic Significance (p17)Value of Goods (place, time and quantity utilities)

• Transportation help determine the economic value of products. To illustrate:

• Let us consider a product, e.g. a fridge, that is desired in one location, provided is offered below a certain price.

• The fridge is produced at point A and costs OC at the point of production.

• The community desiring the fridge, located at B, is the distance AB from A.

• The maximum price the people will pay is OE, at community B.

• If the original, inefficient transport system is used, moving the fridge from A to B will cost CH.

• The CD is fixed cost whilst DH is the cost per km or slope.

Value of Goods cont’

• The total cost at B is OH, a price greater than the maximum cost limit, OE, in the community B.

• Now lets assume the transport system is improved through the cost per km being reduced to DJ.

• The cost to the community becomes OJ, well below the maximum cost of OE.

• The market for the fridge would be expanded to community B, while production continues at A.

Place Utility (p19)

• From the fridge example we could see that the reduction in transportation costs between points A and B gives the commodity place utility.

• In a less efficient system, the goods will have no value because they would not be sold at the market.

• Place Utility is the value added to goods by transporting them from a place where they occur in a useless form or where they are plentiful to place where they are processed into a useful form or where they relatively scarce.

• END END END

Place Utility cont’

• Important to note that the reduction in transportation cost is actually much greater for long distances than for short ones because of the fixed charges – Fig1.6

• Reductions in transport costs will encourage market areas to purchase products from distant suppliers that might otherwise be produced locally.

Time Utility (p19)

• The demand for a particular commodity can only exist during certain periods of time.

• If a product is at the market in a time where there is no demand for it, then in possesses no value e.g. Halloween costumes, Christmas Trees.

• Time Utility is the value added by making goods available at the time they are required for processing, consumption or use.

Time Utility cont’

• E.g. speed might be the governing factor for the transportation of certain perishable products (fruit or vegetables) that have a limited shelf life.

• If the speed were increased the potential service area would increase dramatically.

Quantity Utility (p20)• Transportation gives goods quantity utility

through the assurance that the goods will arrive without damage.

• Quantity Utility is the value added by making sure the quantity demanded is the same as the quantity delivered.

• E.g. this utility as increased in importance due to emphasis placed on minimizing safety stock levels.

• Use of special bracing, blocking, strapping, temperature controls all help with damage-free delivery.

Utility of Goods (p20)

• Transportation adds utility to goods.

• Efficient highway systems and modern modes of transportation allows:

1. Geographic specialization

2. Large-scale production

3. Increased competition

4. Increased land value

Utility of Goods cont’

1. Geographic specialization• Each nation , state or city produces

products and services for which its capital, labour, and raw materials are best suited.

• Not one area can produce all needed goods and thus transportation makes in possible to send goods that can more efficiently produced at point A to point B in return for different goods efficiently produced at point B.

Utility of Goods cont’

2. Large-scale production• Without efficient and effective transportation

networks, the advantages of scale of economies, production efficiencies and cheaper manufacturing facilities would be destroyed.

• Geographic specialization assumes that the large-scale production of produced goods is demanded at distances far from the production site and transport enables this

Utility of Goods cont’

3. Increased Competition

• Efficient transport provides the consumer with the benefit of increased competition.

• Transportation increases the market area for product; thus, goods must be produced in the most efficient fashion or distant competitors will enter the market.

Utility of Goods cont’

4. Land Values

• Transportation improvements also increases the value of land that is adjacent to or served by the improvements.

• Thus the land becomes more accessible and more useful.

• It could however also have the adverse effect such as an airport where noise levels and air pollution place a role

Transportation Patterns (p21)

• Transportation patterns reflect the flow of people and commerce.

• Transportation stimulates commerce and movement and vice versa.

• Rail, highway and water transportation must traverse/follow specific geographic routes.

• The airline however, only require end points.• Creation of airline hubs and spoke systems acts

as central connecting points and feeder routes.

Gross Domestic Product (p23)• The term GDP refers to the total value of

income (production) from economic activity within SA and is a measure of the economic wealth that a country creates or earns over period of time (1year)

• In 2003 freight transport amounted to R134 billion, or 11% of the country’s GDP

• Passenger transportation has been growing in relation to GDP until recently due to the greater use of cars and the affordability of air travel.

Gross Domestic Product cont’

• Freight Transportation has seen a decrease in relation to GDP due to the more efficient use of transportation resulting from less regulation.

• Modal Split is a useful analytical tool in the study of transportation which divides the entire transportation passenger or freight market according to the major modes of travel e.g. railroads, buses, air, for hire, cars.

In conclusion• Good transportation spurs economic

development by giving mobility to production factors, which permits scale economies and increased efficiency.

• Good transportation enlarges the area that consumers and industries can draw on resources and products.

• Good transportation expands the area to which a plant might distribute its products economically.

• End End End

Environmental Significance (p25)• Transportation provides the economy with

numerous benefits but not without a cost.

• Transportation sometimes pollutes the environment and exploits natural resources however, there is a general feeling that the benefits far outweigh the costs.

The Environment

• There has been a growing concern over the impact of transportation on environment and it is only going increase.

• Increasing pressure from the environmentalists has resulted in legal restrictions that help govern the balance between a sound and efficient transportation system and a safe and clean environment.

• Always think about the generations after us.• We are going to look at air quality, acid rain,

global climate changes, maritime and water quality and noise.

Air Quality

• Transportation is a major contributor to air pollution created by the internal combustion engine giving off: carbon monoxide, nitrogen oxides, suspended particles.

• Be aware that there are motor vehicle emission standards due to governmental requirements and environmental awareness.

Acid Rain

• Is rain that is much more acidic than normal.

• The addition of sulfur dioxide, nitrogen oxides and volatile organic compounds in the atmosphere causes it.

• Has an adverse impact on aquatic systems, crops, forests, human health and visibility.

Global Climate Change

• The ‘greenhouse effect’ – some of the gases in the Earth’s atmosphere act naturally like the glass in a greenhouse. They trap heat from the sun to help keep the surface of the earth warm. However, human activities (like transportation) have increased the amount of these greenhouse gases in the atmosphere and they are now trapping to much heat causing the world to become warmer?

• Ozone reduction in the stratosphere is a big concern because ozone reduces the amount of ultraviolet radiation reaching the earth’s surface from the sun – increased risk of skin cancer

Maritime and Water quality• The marine environment is at risk from the

adverse effects of oil spills, garbage dumping from ships, hazardous material losses. E.g. BP oil spill

• Plastic and other ship generating garbage can cause birds, marine mammals, and sea turtle that are very susceptible to this to die.

• Water quality, both surface and drinking water sources are also an area of risk and concern.

Noise

• Transportation also emits a lot of noise that has an annoyance factor and also a health risk.

• Be aware that there are operational standards for noise emissions that have to be adhered to.

Safety• Most disturbing by-product in

transportation is injury and loss of life.• In SA we have an unacceptable high rate

of road accidents and fatalities that would need to be looked at.

Substance Abuse• Abuse of alcohol and drugs is a major

issue in transportation.• Railroad, motor carrier, and aircrews are

involved in public safety when they help move passenger.

• The biggest contributor to road accidents are drivers over the legal limit.

Social Significance (p29)

• Transportation provides employment and enhances travel.

• A good transportation system can also enhance the health and welfare of a population. E.g. famine relief efforts.

• Food for thought: people traveling or living within the bounds of a particular transportation network share ideas and experiences, eventually a society develops with unified political opinions, cultural ideals and educational methods.

• END END

Political Significance (p29)• The origin and maintenance of

transportation systems are dependent on the government.

• Government intervention is needed to design feasible routes, cover the expense of building highways and harbours.

• Government has also created regulations the offer consumers the opportunity to transact in a competitive free-market environment

Political Significance con’t

• One outgrowth of regulation is the common carrier which has the duty to render service without discrimination based upon set rates for specific commodities.

• Transportation’s political role also is as a provider for national defense e.g. ability to transport troops

Overview of modern Transportation (p31)

• Overall, transportation interacts with three groups of our society: users, providers and the government.

• Thus, decision makers are expected to consider all aspects of society in one form or another

Overview if Transportation Trends (p32)

• Transportation system challenges and problems: global competition, governmental budget constraints, increasing population.

• Transportations touches the lives of all South Africans and affects their economic wellbeing, their safety, their access to people and places an the quality of their environment.

• When the transportation system fails it is a source of great frustration and economic loss.

• When it works well it provides opportunity and economic rewards for everyone.

Demand for Transport (p33)• The specialization of labour and production

results in an oversupply of goods in one location and an undersupply, or demand, for these goods at another place.

• Transportation bridges this the supply-and-demand gap inherent in mass production and for people, such as the movement of people from their homes to their place of work.

• Transportation plays a key role in the international dependency or trade by permitting the equalization of supply and demand on a global basis.

Demand for transport con’t

• An individual’s decision about where to work, live and play is influenced by transportation

• The growth of suburbs can be attributed to the motorcar because you can drive long distances to work and back

Demand measurement units (p34)

• Transportation demand is essentially a request to move a given amount of cargo or people a specific distance.

• The demand for transportation is measured in weight/passenger-distance units.

• For freight, the demand unit is ton-km

• For people, passenger-km

Level of Aggregation (p35)• The demand for transportation can be examined

at different levels of aggregation.• Aggregate demand for transportation is the

sum of the individual demands for freight and passenger transportation.

• It can also be the sum of the demand for transportation via different modes.

• The aggregate demand for a particular mode is the sum of the demand for specific carriers in that mode e.g. private cars + for hire cars + busses = road demand

Demand Elasticity (p35)

• Demand Elasticity refers to the sensitivity of customers to changes in the price.

• If customers are sensitive to price, a price reduction will increase the demand for the item and total revenue received i.e. demand is elastic,

• If customers are insensitive to price, a price reduction will result in a small relative change in quantity demanded and total revenue will fall slightly i.e. demand is inelastics

Demand elasticity cont’Elasticity = % change in quantity / % change in price

If > 1 then demand is elastic because the quantity demanded changes more than the change in price

If < 1 then price is inelastic because the quantity demanded changes less than the change in price

Demand elasticity cont’• In general, the demand for freight transportation

is inelastic• Why? Freight rate reductions will not

dramatically increase the demand freight transportation because transportation costs represent less than 4% of a product’s landed cost.

• On a modal and specific carrier basis, demand is elastic (price sensitive).

• Why? Reductions in rates charged by a particular mode will result in increases in volume of freight handled by that mode.

Demand elasticity cont’

• Modal and specific carrier demand is also service elastic i.e. a better service level (reliable, on-time, speedy delivery) will result in increasing volume of freight handled by the mode.

Freight Transportation (p36)• Specific areas have a oversupply of

product while other areas face a deficit because of the specialization of labour and mass production.

• This imbalance of the supply of the product gives rise to the demand for freight transportation.

• END END

Derived Demand

• Freight is generally not transported to a location unless a need for the product exists at the location.

• Thus the demand for freight transportation is derived from the customer demand for the product.

• When there is demand for a product, only then do we have demand for transportation. FIG1.11 to illustrate

Derived Demand cont’

• Derived demand imply that the freight transportation demand cannot be affected by freight carrier action.

• This assumption is true for the aggregate demand for transportation.

• E.g. if a freight carrier lowers it rate to zero for moving washing machines, this ‘free’ transportation will not materially change the demand for washing machines. (demand is not only dependent on price)

Derived Demand cont’

• At the disaggregate level (i.e. modal, carrier or specific traffic lane), the rate charge or service level provided can influence demand for the product and the demand to transport the product

Value of Service (p37)

• Value of service considers the impact of the transportation cost and service on the demand for the product.

• Lower transportation cost will cause a shift in demand for transportation among the modes and specific carriers.

• Landed Cost is the cost of the product at the source plus the cost to transport the product to its destination.

Value of Service cont’

• If the landed cost of a product lower than other sources, there will be a demand for that product and for transportation of that product.

• E.g Fig1.12. Manufacturer of bicycle tyres located in Chicago competing with local producers in the Boston Market.

• For Chicago to be competitive, the landed cost of the tyre must be lower than cost of the local manufacturer’s tyres.

Value of Service cont’

• As long as the transportation cost from Chicago is less than $1, the Chicago will have a landed cost advantage and demand for the Chicago tyre will exist in Boston.

• The greater the distance the product is shipped the greater the landed cost.

• The market area for a seller will be the area where the seller has a landed cost advantage over its competitor because buyer will select service with lowest price. E.G to illustrate.

Service components of Freight Demand (p38)

• Transportation service characteristics of freight shippers include: transit time, reliability, accessibility, capability and security

Transit time• Affects the level of inventory held by both

shipper and receiver and the cost of holding inventory.

• Longer transit time also increases the potential cost of stockouts.

Service components of Freight Demand cont’

Reliability• refers to the consistency of transit time.• Meeting pickup and delivery schedules enables

shippers and receivers to optimize inventory levels and minimize stockout costs.

Accessibility• Is the ability of the transportation provider to

move the freight between a specific origin and destination.

• The inability of carrier to provide direct service between an origin and destination results in added costs and transit time for the shipper e.g. air carrier

Service components of Freight Demand cont’

Capability

• The ability of the carrier to provide to special service requirement.

• E.g. products requiring controlled temperature necessitates the use of refrigerated vehicles

• Time-sensitive shipments demand electronic communication systems to monitor exact location and arrival time.

Service components of Freight Demand cont’

Security

• Is concerned with safety of the goods in transit.

• Damaged or stolen goods effects inventory and stockout costs

Location of Economic Activity p(39)

• The cost of transporting raw materials into a facility and the cost of transporting finished goods to markets directly affect the profitability of the plant or warehouse (E.g. Eskom)

• Today many companies are faced with the question where to locate plants and warehouse.

Passenger Transportation (p40)• Is the movement of people• There are many related industries like: hotels,

restaurants and travel agencies.• Demand is affected by people’s motives for

travel and movement.• Business travel is highly sensitive to schedules

rather than price• Vacation travel is typically price sensitive.• Personal travel like home visits, travel to school

and emergency, are more sensitive to time or speed and also price.

Passenger Transportation cont’

Urban Transit• Falls in to 3 broad categories:

1. Work or school trips. (very repetitive in nature)

2. Trips to the shop for food or other necessities.

3. Miscellaneous trips, includes recreational and medical trips. (least repetitive)

• The automobile has had the most influence in urban transport.

• Peak demand (rush hour) one of the greatest challenges to urban transit

Passenger Demand Characteristics (p43)

1. Destination2. Schedules and Speed3. Cost4. Equipment5. Entertainment and Attention6. Terminals7. Complaints and Experiences8. Role of travel agent