Global Supply Chain Transportation

What is Transportation in Supply Chain?

In a supply chain, transportation is the movement of a product from one location to another as it makes its way to the end-use customer. Although supply chain experts agree that transportation sometimes falls through the supply chain management cracks, receiving less attention than it should, it can be a significant supply chain cost. For some manufacturing companies, transportation costs can be as much as 20% of total production costs and run as high as 6% of revenue.

Over $1.4 trillion is spent annually on supply chain logistics and transportation costs in the United States each year. For some retail companies primarily involved in the distribution of goods, such as L.L. Bean and Amazon, transportation is not only a major cost of doing business, it is also a major determinant of quick delivery service. Amazon ships over 600 million packages in a year—over 1.6 million per day—mostly by UPS.

The principal modes of transportation within the United States are railroads, air, trucks, intermodal, water, package carriers, and pipelines. In the United States, the greatest amount of freight is shipped by trucking, followed by railroad, pipeline, and inland waterways. Railroads, with more than 160,000 miles of track in the United States, are cost-effective for transporting products such as raw materials, coal, minerals, ores, and especially containers over long distances.

However, railroads operate on less flexible and slower schedules than trucks, and they usually cannot go directly from one business location to another as trucks can. Railroad freight service also has the worst record of quality performance of all modes of freight transport, with a higher incidence of product damage and almost 10 times more late deliveries than trucking.

Trucking is the main mode of freight transportation in the United States, annually carrying over 70% of U.S. freight tonnage, and generating over 80% of the nation’s total freight cost each year. Trucks provide flexible point-to-point service, delivering small loads over short and long distances over widely dispersed geographic areas.

Air freight is the most expensive and fastest mode of freight transportation. For companies that use air freight, service is more important than price. For some companies, production stoppages because of missing parts or components can be much more expensive than the increased cost of air freight. For high-value goods such as pharmaceuticals, high technology, and consumer electronics, speed to market is important.

In addition, shorter shipping times reduce the chances of theft and other losses. The general rule for international air freight is that anything that is physically or economically perishable has to move by air instead of by ship. The major product groups that are shipped by international air freight, from largest to smallest, are perishables, construction and engineering equipment, textiles and wearing apparel, documents, and small package shipments, and computers, peripherals, and spare parts.

Air freight is growing particularly fast in Asia specifically China. The lack of adequate ground infrastructure makes rail and trucking transport difficult between countries in Asia and regions in China. Companies with manufacturing plants in one place in Asia and suppliers in another often use air freight to connect the two.

Package carriers, such as UPS, FedEx, and the U.S. Postal Service, transport small packages, up to about 150 pounds. The growth of e-business has significantly increased the use of package carriers. Package carriers combine various modes of transportation, mostly air, and truck, to ship small packages rapidly. They are not economical for large-volume shipments; however, they are fast and reliable, and they provide unique services that some companies must have.

Package carriers have been innovative in the use of bar codes, RFID, and the Internet to arrange and track shipments. The FedEx website attracts more than 150 million package tracking requests daily, and it receives 70% of its customer orders electronically. FedEx, with over 670 aircraft and 185,000 motorized vehicles delivers around 14 million packages daily in over 220 countries.

Waterways in the United States include 26,000 navigable miles over inland waterways, canals, the Great Lakes, and along coastlines. Water transport is a slow but very low-cost form of shipping. It is limited to heavy, bulk items such as raw materials, minerals, ores, grains, chemicals, and petroleum products.

If delivery speed is not a factor, water transport is cost-competitive with railroads for shipping these kinds of bulk products. Water transport is the primary means of international shipping between countries separated by oceans for most products. Over 80% of freight imports into the United States arrive via ocean shipping.

There are over 2 million miles of pipelines in the United States, 75% of which are used primarily for transporting oil and petroleum products. Pipelines called slurry lines carry other products such as coal and kaolin that have been pulverized and transformed into liquid form. Once the product arrives at its destination, the water is removed, leaving the solid material. Although pipelines require a high initial capital investment to construct, they are economical because they can carry materials over terrain that would be difficult for trucks or trains to travel across, for example, the Trans-Alaska pipeline. Once in place, pipelines have a long life and are low-cost in terms of operation, maintenance, and labor.

Intermodal transportation combines several modes of transportation to move shipments. The most common intermodal combination in the United States is truck-rail-–rail–truck, and the truck–water–rail/truck combination is the primary means of global transport. Intermodal transportation carries over 40% of all freight shipments over 500 miles in the United States. Intermodal truck–rail shipping accounts for over half of all U.S. rail freight shipments and is the fastest-growing segment of freight transport.

It can be as much as 40% cheaper than long-haul trucking. The key component in intermodal transportation is the container. Within the United States, containers are hauled as trailers attached to trucks to rail terminals, where they are double- or triple-stacked on railroad flatcars or specially designed “well cars” in which double or triple-stacked trailers or containers ride in a well-like lower section. Annually 70% of U.S. intermodal shipping—over a million containers—is double-stacked.

The containers are then transported to another rail terminal, where they are reattached to trucks for direct delivery to the customer. For overseas shipments, container ships transport containers to ports where they are off-loaded to trucks or rail for transport. Container traffic worldwide is around 700 million TEUs (i.e., 20-foot equivalent units, a standard-size container) annually; over half of the shipment of goods around the world is with containers.

Internet Transportation Exchanges

Internet transportation exchanges bring together shippers who post loads and carriers who post their available capacity to arrange shipments. In some exchanges, once the parties have matched up at a website, all the negotiation is done offline. In others, the online service manages the load matches automatically; the services match up shipments and carriers based on shipment characteristics, trailer availability, and the like.

For example, shippers tender load characteristics, and the online service returns with recommendations on carrier price and service levels. Some services also provide an online international exchange structured as a reverse auction. The shippers will tender their loads, and carriers will bid on the shipment. Shipments remain up for bid until a shipper-specified auction closing time (like auctions on eBay). However, the lowest price, or lowest bid, is not always conducive to quality service.

At some sites, the low bid does not necessarily win; the service takes into account quality issues such as transit time, the carrier, and availability in addition to price. One of the more well-known Internet exchange services is www.freightquote.com. At this site (and others like it) shippers and carriers identify their available shipment or capacity needs and their business requirements. The exchanges automatically match compatible shippers with carriers based on price and service. Automated processes make the trade within a few hours with no phone calls, invoices, and so on.