Transcript Chapter1 - Transportation, the Supply Chain and the

Transportation 2A
CBTM201
Calculations of Semester marks
Total Semester mark
100%
Exam
60%
Continuous
Assessment
40%
Test1 20%
Remember: The
more you put in
during the
semester the
better your final
mark!
Test2 30%
Test3 30%
Assignment 20%
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 Transportation
Chapter1: 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 profit
E.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 transport
1. 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 linehaul, 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)
•
•
1.
2.
3.
4.
Transportation adds utility to goods.
Efficient highway systems and modern
modes of transportation allows:
Geographic specialization
Large-scale production
Increased competition
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-anddemand 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.
2.
3.
4.
5.
6.
7.
8.
Destination
Schedules and Speed
Cost
Equipment
Entertainment and Attention
Terminals
Complaints and Experiences
Role of travel agent