Transportation terminals

Class 8: Transportation terminals:

  • Passenger terminals: Bus, trains and subways: Passenger terminal usually require little specific equipment (there is one exception); services such as information, shelter, food and security are required, but the layouts and activities taking place in passenger terminals tend to be simple and require relatively little equipment
  • They may appear congested at certain times of the day, but the flows of people can be managed successfully with good design of platforms and access points, and with appropriate scheduling of arrivals and departuresà bus, trains and subways are places ppl spend less time therefore its has simple components
  • Airports: They are among the most complex of terminals functionally and have significant opportunity for delays. Moving people through an airport has become a very significant problem. à ppl can spend up to hours are the airport which means implying a complex management of gates and scheduling of flights is required.
  • WIDE RANGE OF SERVICES are required at airports that are not directly related to the transfer function, including restaurants, bars, stores, hotels, in addition to the activities directly related to operations such as check-in halls, passenger loading ramps and baggage handling facilities. At the same time airports have to provide the very specific needs of the aircraft, from runways to maintenance facilities, from fire protection to air traffic control
  • Measurementof activities in passenger terminals is generally straightforward. The most common indicator is the number of passengers handled, sometimes differentiated according to arrivals and departures
  • Transfer passengers are counted in the airport but for airports its impossible to measure them. à number of aircraft movement is good but the capacity of the plane isn’t considered. This is still important because it indicates the usage of the runways
  • Freight Terminals: requires specific loading and unloading equipment in addition to the facilities required to accommodate ships, trucks and trains. Requires specific loading and unloading equipment in addition to the facilities required to accommodate ships, trucks and trains. Distinction is bulk, general cargo, containers
  • Bulkrefers to goods that are handled in large quantities that are unpackaged and are available in uniform
  • Liquid bulk goods include crude oil and refined products that can be handled using pumps to move the product along hoses and pipes. à less complex and faster to transferà Relatively limited handling equipment is neededà Significant storage facilities may be required.
  • Dry bulk includes a wide range of products, such as ores, coal and cereals. More equipment for dry bulk handling is required, because the material may have to utilize specialized grabs, cranes and conveyer-belt systems.
  • General cargorefers to goods that are of many shapes, dimensions and weights such as
  • machinery, processed materials and parts. Because the goods are so uneven and irregular, handling is difficult to mechanize. General cargo handling usually requires a lot of labor and is time-consuming. Very difficult to handle à involves more labor and human and a specific way of transfer that’s why is generally more expensive and time consuming
  • Containersare standard units that have had a substantial impact on terminal operations. Container terminals have minimal labor requirements and perform a wide variety of intermodal function. They require a significant amount of storage space which are simple paved areas where containers can be stacked and retrieved with intermodal equipment (e.g., cranes). Depending on the intermodal function of the container terminal, specialized cranes are required, such as portainers (container cranes).
  • Measurement of freight traffic through terminals is more complicated than for passengers. Because freight is so diverse, standard measures of weight and value are difficult to compare and combine.
  • Because bulk cargoes are inevitably weighty, terminals specialized in such cargoes will record higher throughout measured in tons than others more specialized in general cargoes.
  • The reverse may be true if value of commodities handled is the measure employed.
  • The problem of measurement involving weight or volumes becomes very difficult when many types of freight are handled, because one is adding together goods that are inherently unequal.
  • For container terminals a common measure of productivity concerns the number of lifts per hour.
  • The difficulty of comparing traffic totals of different commodities has led to attempts to ‘weigh’ cargoes.
  • The most famous is the so-called "Bremen rule". It was developed in 1982 by the port of Bremen and based on a survey of the labor cost incurred in the handling of one ton of different cargoes. The results found that handling one ton of general cargo. Bremen rule: time wise: general cargo > dry> liquid à 1 ton general cargo; 3 ton dry; 12 ton liquid
  • Terminal cost: Because they jointly perform transferand consolidation functions, terminals are important economically because of the costs incurred in carrying out these activities. The traffic they handle is a source of employment. They benefit regional economic activities, notably by providing accessibility to suppliers and customers. 
  • Terminal costsrepresent an important component of total transport costs. They are; Fixed costs that are incurred regardless of the length of the eventual trip. Infrastructure costs. Include construction and maintenance costs of structures. Transshipment costs. The costs of loading and unloading passengers or freight. Administration costs. Many terminals are managed by institutions such as port or airport authorities or by private companies (e.g. terminal operators).
  • Because ships have the largest carrying capacities, they incur the largest terminal costs, since it may take many days to load or unload a vessel. Conversely, a truck or a passenger bus can be loaded much more quickly, and hence the terminal costs for road transport are the lowest.
  • Terminal costs play an important role in determining the competitive position between the modes. Because of their high freight terminal costs, ships and rail are generally unsuitable for short-haul trips.
  • Road terminals: Some motor carrier operations, namely Truckload (TL) operations, might not require terminals for the movement of freight. à TL : THE STOP IN BETWEEN ID FOR THE DRIVER NOT THE FREIGHT The carrier uses the shipper’s plant for loading and the consignee’s plant for unloading. Typically, TL terminals normally provide dispatching, fuel, and maintenance TL operations want to maximize loaded movements and minimize empty moves.
  • Deports: These terminals (depots) are designed primarily to accommodate drivers and equipment, but not freight
  • Heavy less than truckload (LTL) carriers use terminals for loading, or consolidation, only. LTL freight operations do require terminals.
  • Three major terminal types: Pickup and Delivery Terminals, Break-Bulk Terminals, Relay Terminals
  • Pickup and delivery terminal: The PUD terminal serves a local area and provides contact with both shippers and receivers. The basic transportation service provided at this terminal is the pickup and/or delivery of freight on milk runs
  • A milk run is a tour that is driven daily out of the PUD terminal for the purpose of collecting freight for outbound moves or delivering freight from inbound moves. EG: You can pick up returns from the stores
  • Break-bulk terminal: Another type of terminal found in an LTL hub-and-spoke system is called a break-bulk. This facility performs both consolidation and dispersion service. Customers will rarely have contact with the operations at the break-bulk facility.
  • The main purpose of this terminal is to provide an intermediate point where freight with common destinations from the PUD terminals is combined in a single trailer for movement to the delivering PUD terminal
  • City drivers located at a PUD terminal will always remain in their local area during their shift and will be able to return home when it is over. Line-haul drivers, however, might or might not be able to return home after a trip, depending on the length of haul they are assigned because of hours of service driving limits!
  • Relay Terminal: are different from the PUD and break-bulk terminals in that freight is never touched.
  • The relay terminal is necessitated by the maximum hours-of-service regulation that is imposed on drivers. At the relay terminal, one driver substitutes for another who has accumulated the maximum hours of service. For example: under the US department of Transportation enforcement, drivers were permitted to drive a maximum of 11 hours after 10 consecutive hours off duty.
  • An alternative to the relay terminal is the use of a sleeper team—two drivers. While one driver accumulates the off-duty time in the sleeper berth of the tractor, the other driver is driving. The sleeper team has been most successful for long trips with many destinations.
  • Fixed vs. Variable cost components: Approximately 70 to 90 percent of the costs are variable, and 10 to 30 percent are fixed. The public investment in the highway system is a major factor contributing to this low fixed-cost structure.
  • In addition, the motor carrier is able to increase or decrease the number of vehicles used in short periods of time and in small increments of capacity.
  • Lastly, the carriers as a group (with the exception of the LTL carrier) do not require expensive terminals. The small investment in terminals also contributes to low fixed costs.
  • Major cost components: 1- Driver Wages    2-Fuel
  • Operating ratio: Is the measure of operating efficiency used by motor carriers. The operating ratio measures the percent of operating expenses to operating revenue.

Operating Ratio= (Operating expenses/Operating revenue) ×100

  • g., an operating ratio of 94 indicates that 94 cents of every operating revenue dollar is consumed by operating expenses, leaving 6 cents of every operating dollar to cover interest costs and a return to the owners.
  • LTL motor carrier operating ratios usually range between 93 and 96, whereas the TL segment could see ratios in the low to mid 80s. TL operations are usually more profitable, but are typically less routine and risks are higher. à can’t guarantee a full truck load for every delivery
  • Rail Terminals: At one time it was believed that more than half of rail costs were fixed. The exact proportion of fixed expenses is subject to some debate. However, it is generally accepted that fixed expenses constitute a significant portion of railroad total costs, ranging from 20 to 50 à highest fixed cost
  • One of the major components of the railroad industry’s high fixed costs is the extensive investment in private terminal facilities and minimal government subsidies for terminals/yards. à attract money from private individuals. These terminal facilities include freight yards, where trains are sorted and assembled, and terminal areas and sidings, where shippers and connecting railroads are serviced.
  • Rail road yards: Hump Yard: A railroad yard that uses an artificial hill or “hump” to assist in switching and classifying railcars. The cars are pushed up the hill by a switch engine, and at the top of the hill the railcar or group of railcars is uncoupled and rolls down the hill to the correct track.
  • Variable costs: are one of the immediate concerns of railroad management, accounting for a large proportion of every revenue dollar spent by the railways. Labor cost is the largest single element of variable costs for railroads. Fuel and power costs are the next largest group of variable costs.
  • Major Issues: 1- Location. An important distinction concerns passengers and freight rail terminals, which commonly involve very different locations. Passenger terminals tend to occupy central locations while freight terminals have seen a growing separation from central locations and closer proximity to industrial activities. While sites may have been on the edge of urban areas at the time they were built, decades of urban development have surrounded older rail terminals, leaving limited opportunities for expansion
  • 2- Setting. Because of the characteristic of the mode they serve, rail terminals are dominantly rectangular shaped facilities. Their capacity is a function of the number of tracks available, which is a characteristic difficult to change once the terminal has been built. Individual rail terminals may not be as extensive as airports or ports, but cumulativelythe area of all the rail sites in a city may exceed those of the other modes.
  • Airport Terminals: Airports are usually financed by a government entity. The operators (carriers) pay for the use of the airport through landing fees, rent and lease payments for space, taxes on fuel, and aircraft registration taxes. In addition, users pay a tax on airline tickets and air freight charges. Terminal charges are becoming increasingly more commonplace for passenger traffic.
  • The growth and development of air transportation is dependent upon adequate airport facilities. Therefore, to ensure the viability of air transportation, the federal government has the responsibility of financially assisting the states in the construction of airport facilities. The various state and local governments assume the responsibility for operating and maintaining the airports.
  • An airport has two major components; an airfield and terminals.
  • Airfield: A typical airfield is composed of a runway for takeoffs and landings as well as two (or one) parallel taxiing lanes (taxiway). Connecting lanes between the runway and the taxiing lanes usually have an angle permitting the quick exit from the runway for planes that have just landed. Taxiways are an important element of capacity, as they keep runways clear for the next takeoff or landing. Modern airfield designs provide different exiting options per landing direction depending on the plane's size. A small aircraft will take less distance to brake than a large aircraft and has thus the opportunity to exit the runway, freeing valuable takeoff or landing slots.
  • Terminal 1 Linear Orientation: The linear orientationof terminals allows several planes to board passengers at the same time (through jet bridges) and represents one of the most common terminal designs.  The drawback of this type of terminal is when they are of large size, movements of passengers and luggage can be long particularly if they are used as hubs (e.g. Frankfurt, Chicago, Brussels, Minneapolis / St. Paul). It is recommended for low-activity airports.  
  • Terminal 2 Islet: The islet, or satellite, is an answer to the lack of terminal space problem by permitting the stowage of several planes on a smaller terminal surface. The satellite is often linked to the rest of the airport by a hall or an underground passage (g. Charles de Gaulle, Terminal 1, Dallas/Fort Worth). Best for very high-traffic airports. à Diverts the high traffic activities
  • Terminal 3 Transporter: Some airports opt for shuttles, which reduces the size of the terminal and maximizes the number of planes that can be serviced but may involve longer boarding times (more inconvenient). This type of design is however less common for a whole terminal, but commonly applied to parts of a larger terminal. This can be the case for smaller domestic planes that are parked on a pad and serviced by buses. In a normal situation, freight planes are loaded and unloaded by shuttles, so the shuttle’s design is prevalent in air cargo operationsà Reducing engine noise around the terminal, Aircraft taxing time to and from the runway is reduced ,Used around smaller airports  
  • Maritime Terminals Ports: These are points of convergence between two geographical domains of freight circulation (sometimes passengers); the landand maritime domains. While the maritime domain can involve substantial geographical coverage related to global trade, the land domain is related to the port's region and locality. As terminals, ports handle the largest amounts of freight, more than any other types of terminals combined.
  • Port Functions: The main function of a port is to supply services to freight (warehousing, transshipment, etc.) and ships (piers, refueling, repairs, etc.). Consequently, it is misleading to consider a port strictly as a maritime terminal since it acts concomitantly as a land terminal where inland traffic originates or ends. Ports are at start cargo-oriented To this significant cargo related function, many ports are also involved in other activities such as fishing, ferries, cruises (a growing activity) and recreational (e.g. marinas).
  • About 4,600 commercial ports are in operation worldwide, but only less than one hundred ports have a global importance.
  • In terms of the freight they handle, ports can be classified in two categories:
  • Monofunctional portstransit a limited array of commodities, most often dry or liquid bulks (raw materials). The mineral ports of Australia, Africa and in some measure of Canada are mono functional ports.  
  • Polyfunctional portsare vast harbors where several transshipment and industrial activities are present. They have a variety of specialized and general cargo piers linked to a wide variety of modes that can include containers, bulk cargo or raw materials.
  • Reasons why there are transshipments between two countries: It is technically and economically impossible to establish direct shipping connections between every country. Sometimes physical distance makes it infeasible to move cargo directly (feasibility). Other times, there is not a high enough amount of trade between two countries (economical). There may not be enough volume to justify a direct service or the ports may be far too distant from one another.

Class 10: International trade and freight distribution:

  • International Trade: Transportation is often referred to as an enabling factor that is not necessarily the cause of international trade, but as a condition without which globalization could not have occurred.  About half of all global trade takes place between locations of more than 3,000 km Because of this geography, most international freight movements involve several modes since it is impossible to have a physical continuity in freight flows.
  • Transport chains must thus be established to service these flows which reinforce the importance of intermodal transportation modes and terminals at strategic
  • Transport modes in In’l trade: Among the different transport modes, two are specifically concerned with international trade.
  • Ports and Maritime Shipping. In terms of tonnage, maritime shipping handles about 90% of global trade. Its importance to global trade is thus unmistakable. Thus, globalization is the realm of maritime shipping, with containerized shipping at the forefront of the process. The global maritime transport system is composed of a series of major gateways granting access to major production and consumption regions. à Between those gateways are major hubs acting as points of interconnection and transshipment between systems of maritime circulation
  • Airports and Air Transport. In terms of tonnage, air transportation carries an insignificant amount of freight compared with maritime transportation. However, its importance in terms of the total value is much more significant. The location of freight airports corresponds to: high technology manufacturing clusters (not heavy industrial clusters) intermediary locations where freight planes are refueled and/or cargo is transshipped.
  • Commodity chains and freight distribution: Components of the Economic System: Production and consumption are the two core components of economic systems and are both interrelated through the conventional supply/demand relationship. Basic economic theory underlines that what is being consumed has to be produced and what is being produced has to be consumed. Any disequilibrium between the quantity being produced and the quantity being consumed can be considered as a market failure. On one side, insufficient production involves shortages and price increases. On the other, overproduction and overcapacity involves waste, storage and price volatility.
  • Commodities: are resources that can be consumed. They can be accumulated for a period of time; some are perishable while others can be virtually stored for centuries. Some commodities are fixed, implying that they cannot be transferred, Bulk commodities are commodities that can be transferred, which includes grains, metals, livestock, oil, cotton, coffee, sugar and cocoa as some examples. Their value is derived from utility, supply and demand, which is established through major commodity markets involving a constant price discovery mechanism.
  • Commodity chain (value chain): A functionally integrated network of production, trade and service activities that covers all the stages: from the transformation of raw materials, through intermediate manufacturing stages, to the delivery of a finished good to a market.
  • The chain is conceptualized as a series of nodes, linked by various types of transactions, such as sales and intra firm transfers. Each successive node within a commodity chain involves the acquisition or organization of inputs for the purpose of added value. Commodity chains are also integrated by a transport chain routing goods, parts and raw materials from extraction and transformation sites to markets.
  • Competition over concepts. In a global production and consumption market, R&D, branding and design (creating a product) can be a significant component of the competitiveness and added value of a commodity chain. This requires specific scientific, technical and design capabilities. This is also known as pre-fabrication services.
  • Competition over processes. The manufacturing function (or fabrication) of many corporations has been hollowed out by the process of globalization, in which manufacturing accounts for one of the least added value activities, particularly if it takes place within an outsourcing and offshoring They enable manufacturers to lower conventional input costs such as labor and raw materials. The massive entry of low cost manufacturers led to a high level of competitiveness in fabrication, reducing profit margins as well as its overall level of contribution to added value.
  • Competition over markets. The growing complexity of products and market imperatives have reinforced the importance of the logistics segment (making a specified product available on markets).
  • It includes distribution, marketing and sales/after sales services (such as customer support), activities that are generating significant added- value. This is also known as post-fabrication
  • Value of transport services: Value of Service considers the impact of transportation costs and service on the demand for the product. The impact of transportation costs on the demand for a product at a given location usually focuses on the landed cost of the product.
  • The landed cost of the product includes the cost of the product at the source, the cost to transport the product to its destination, plus any ancillary expenses such as insurance or loading costs. If the landed cost of the product is lower than that of other sources, there will usually be a demand for that product and also for the transportation of that product from its origin point.
  • Landed cost impact: The landed cost also determines the extent of the market for business. The greater the distance the product is shipped, usually the higher the landed cost.  At some distance from the product’s source, the landed cost usually becomes prohibitive to the buyer and there will be no demand for that product at that point. Also, the landed cost usually determines the extent of the market between two competing companies. To illustrate this concept, consider two producers located 200 miles apart. Find the midpoint for the two producers to make equal landed costs LC (A) =LS(B) à
  • Production Cost (A)+Transportation Cost (A)=Production Cost(B)+Transportation Cost (B)
  • 50+X(0.6)=50+(200-X)(0.5)à6X=100-0.5Xà 1.1X=100à X=(100/1.1)=90.9 miles

Chapter 10: Transport and the Economy:

  • The major impacts of transportation on economic factors: An efficient transport system with modern infrastructures favors many economic changes, most of them positive.
  • 1-Geographic Specialization: Improvements in transportation and communication favor a process of geographical specialization. An economic entity tends to produce goods and services with the most appropriate combination of capital, labor, and raw materials. Through geographic specialization supported by efficient transportation, economic productivity is promoted.
  • Comparative advantage: A region will thus tend to specialize in the production of goods and services for which it has the greatest advantages (or the least disadvantages) compared to other regions as long as appropriate transport is available for trade. Through geographic specialization supported by efficient transportation, economic productivity is promoted. This process is known in economic theory as comparative advantages.
  • 2-Large Scale Production: An efficient transport system offering cost, time, and reliability advantages enables goods to be transported over longer distances. This facilitates mass production through economies of scale because larger markets can be accessed. Thus, the more efficient transportation becomes, the larger the markets that can be serviced and the larger the scale of production. This results in lower unit (production) costs.
  • 3- Increased Competition: When transport is efficient, the potential market for a given product (or service) increases, and so does competition. A wider array of goods and services becomes available to consumers through competition which tends to reduce costs and promote quality and innovation. Globalization has clearly been associated with a competitive environment that spans the world and enables consumers to have access to a wider range of goods and services.
  • 4-Increased Land Value: Land which is adjacent or serviced by good transport services generally has greater value due to the utility it confers to many activities. Consumers can have access to a wider range of services and retail goods while residents can have better accessibility to employment, services, and social networks, all of which transcribes in higher land value. In some cases, transportation activities can lower land value, particularly for residential activities. Land located near airports and highways, near noise and pollution sources, will thus be impacted by corresponding diminishing land value.
  • Geographic specialization: The evolution of transport systems impacts regional economies in terms of their level of specialization. More connected regions tend to be more specialized while less connected regions tend to have a reduced degree of specialization. The reliance on transportation services moves up as you go from self to international trade
  • Self reliance: In a situation of self reliance, there is no efficient transport link between two regions; goods cannot be transferred in a cost effective manner. They must satisfy their own needs. à Depend on: demand of each region, availability of resources, capacity à  min from demand or capacity . This is the only one the depends on its demand and supply in the region (Chart shows two regions having no trade)
  • Regional trade: With a transport link between two regions, specialization can take place. Each region develops its respective potential; Product A for the first region and Product B for the second, assuming that they respectively have a comparative advantage for these two products. à If Product A is cheaper to produce in the first region, it becomes more efficient to lessen the production of other products and concentrate on Product A. Respectively, the second region can do so for Product B. (Chart shows trade and transport of product with the greatest capacity)
  • International trade: Regional specialization is greatly expanded with international trade. By having access to a larger market and a range of products through a gateway, namely a seaport, regions A and B can specialize even more in the production they have respective comparative advantages. Under such circumstances, the reliance on transportation increases. (Chart shows transport and trade and also gateways)
  • Transport costsare a monetary measure of what the transport provider must pay to produce transportation services. They come as fixed (infrastructure) and variable (operating) costs, depending on a variety of conditions related to geography, infrastructure, administrative barriers, energy, and on how passengers and freight are carried. 

Transport costs have significant impacts on the structure of economic activities as well as on international trade. Empirical evidence underlines that raising transport costs by 10% reduces trade volumes by more than 20%.

  • Transportation Ratesare the price of transportation services paid by their users. They are the negotiated monetary cost of moving a passenger or a unit of freight between a specific origin and destination. Rates are visible to the consumers since transport providers must provide this information to secure transactions. They may not necessarily express the real transport costs. The difference between costs and rates either results in a loss or a profit from the service provider. Considering the components of transport costs previously discussed, rate setting is a complex undertaking subject to constant change
  • For public transit, rates are often fixedand the result of a political decision where a share of the total costs is subsidized by the society. The goal is to provide affordable mobility to the largest possible segment of the population even if this implies a recurring deficit (public transit systems rarely make any profit). Vs. the goal of private transportation. It is thus common for public transit systems to have rates that are lower than costs and targeted at subsidizing the mobility of social groups such as students, the elderly or people on welfare.
  • For freight transportation and many forms of passenger transportation (e.g. air transportation) rates are subject to a competitive pressure. This means that the rate will be adjusted according to the demand and the supply. They either reflect costs directly involved with shipping (cost-of-service) or are determined by the value of service. Since many actors involved in freight transportation are private, rates tend to vary, often significantly, but profitability is paramount.
  • Unit Transportation Cost :
  • 1-Composition and decomposition costs are using more expensive modes of transportation (e.g., road)
  • 2- Congestion the locations where cargo is generated and attracted usually takes place in metropolitan areas à First and last mile is higher becuz we are using a expensive transportation ( road) per unit à congestion , transportation and location àTransport sequence is cheaper becuz if economies of scale
  • Distance is commonly the most basic condition affecting transport costs. It can be expressed in terms of length, time, or amount of energy used. There are four major categories:
  • No effects of distance Uncommon are economic activities on which distance has no effects.
  • However, the distance-cost function of telecommunication networks and the virtual space of the Internet have such a cost structure. Telephone calls, Postal fees, Public transit fares. All of these activities generally have a fixed cost which is not related to distance, but often to a service zone (Chart is fixed cost + zone change à backwards Z)
  • Linear effects of distance: Transport costs are increasing proportionally to distance. Fuel consumption can be included in this category since it is a direct function of the distance traveled. For reasons of simplicity, a step-wise approach is often used to establish transport rates by using administrative units as distance units.
  • Non-linear effects of distance: Freight distribution costs are growing in a non-linear fashion with distance from the terminal or the distribution center, particularly because of empty back-hauls (a). Inversely, international air transportation costs are not usually much higher than regional air transportation costs because long haul planes have more capacity and fuel efficiency (b).
  • Intermodal transport chain: A combination of line haul and terminal costs where transshipment costs at terminals (e.g. ports and airports) increase the friction of distance as efforts must be spent at loading or unloading when passing from one mode to another. --> Terminal cost =wages of workers at the terminal
  • Integration in Value Chain: As manufacturers are spreading their production facilities and assembly plants around the globe to take advantage of local factors of production, transportation becomes an ever more important issue. The integrated transport chain is itself being integrated into the production and distribution processes. Transport can no longer be considered as a separate service that is required only as a response to supply and demand conditions. It has to be built into the entire value chain, from multi-source procurement, to processing, assembly and final distribution. à create some level of repetition
  • Level of Embeddedness of Production, Distribution, and Market Demand
  • Push; suppliers to the end of the chain good for standardized products; everyone has to work in order to have the product in store; cream cheese
  • Pull; starts from the customer’s side; aircrafts;
  • ***Higher level of integration in transportation is needed in pure customization
  • You need more control since the prdt isn't the same à more customized, waiting till the last moment for demand realization , time awareness is highly viewed here as they can not waste any time in producing
  • There are different levels of embeddedness of production and distribution systems, ranging from pure standardization to pure customization. The trend in most sectors has been towards a higher level of embeddedness, since this is associated with a higher synchronization level with market demand and lower inventory levels (movement toward a pull system).
  • The energy and raw materials sectors tend to have low levels of embeddedness as they have stable outputs and a fairly well-known demand that can be predicted in advance (e.g. oil consumption). These sectors often produce and process without orders or stockpile goods.
  • The apparel sector is probably the one closest to pure customization as fashion is constantly changing and thus value chains must adapt very quickly to market fluctuations in terms of preferences and seasonality. They are thus either manufacturing to order or designing to order.
  • Computer hardware manufacturers with a strong online selling strategy, such as Dell, fall within the customized standardization paradigm as they offer customers the possibility to have specific specifications built from a set of existing parts. The product (computers) is often not assembled until an order has been placed.
  • Supply chain concepts: (same as the value chain): While references to supply chain management can be traced to the 1980s, it is safe to say that it was not until the 1990s that supply chains captured the attention of senior-level management in numerous organizations. They began to recognize the power and the potential impact of supply chain management to make organizations more globally competitive and to increase their market share.
  • Supply chains are under increasing financial pressure and stages that do not add value to the supply chain are quickly bypassed or eliminated. For this reason, a supply chain is often called a value chain or a value network”. (Sanders, 2011)

Supply Chain Management (SCM): SCM is the art and science of integrating the flows of products, information, and financials through the entire supply pipeline from the supplier’s supplier to the customer’s customer.

Management of shipments: Refers to cargo transported by the owner, the manufacturer or by a third party. The tendency has been for corporations to sub-contract their freight operations to specialized providers who provide more efficient and cost effective services. ( 1-Doing it yourself or subcontract  )

Geographical coverage: Implies a wide variety of scales ranging from intercontinental, within economic blocs, national, regional or local. Each of these scales often involves specific modes of transport services and the use of specific terminals. (2- where are you sending it ( coverage) )

Time constraint: Freight services can have a time element ranging from express, where time is essential, to the lowest cost possible, where time is secondary. There is also a direct relationship between transport time and the level of inventory that has to be maintained in the supply chain. ( 3- timing being relative in the operation : The shorter the time, the lower the inventory level, which can result in significant savings)

Consignment size: Depending on the nature of production, consignments can be carried in full truck loads, less than truck load, as general cargo, as container loads or as parcels.

Cargo type: Break-bulk cargo (containers, boxes or pallets) or bulk cargo requires dedicated vehicles, vessels and transshipment as well as storage infrastructures.

Mode: Cargo can be carried on a single mode (sea, rail, road or air) or in a combination of modes through intermodal transportation.

Cold chain: A temperature-controlled supply chain linked to the material, equipment and procedures used to maintain specific cargo shipments within an appropriate temperature range. Commonly relates to the distribution of food and pharmaceutical products.

Distribution Centers (Dc): Distribution centers are the main facilities that coordinate supply chain activities Perform consolidation, warehousing, packaging, decomposition and other functions linked with handling freight. Their main purpose is to provide value-added services to freight, which is stored for relatively short periods of time (days or weeks). DCs are often in proximity to major transport routes or terminals. They can also perform light manufacturing activities such as assembly and labeling.

A warehouse is a facility designed to store goods for longer periods of time.


Outsourcing: This allows the company to focus on using the technology to operate its core business rather than having to manage all the technical issues and challenges. (Information Technology (IT), Accounting, payroll and tax preparation, Advertising, And numerous other activities)à Many companies like Nike even outsource their production needs to contract manufacturers located around the world

Transportation is another activity that is widely outsourced to external experts. Global companies like COSCO (China Ocean Shipping Company), Deutsche Post (owner of Exel and DHL), FedExMaersk, and UPS provide a wide variety of transportation services. These third party logistics service providers (3PLs) are experts in the management and flow of freight, allowing customers to focus their resources on other activities.

Council of Supply Chain Management Professionals: Third Party Logistics (3PL) Providers: Outsourcing all or much of a company’s logistics operations to a specialized company. The term “3PL” was first used in the early 1970s to identify intermodal marketing companies (IMCs) in transportation contracts. Up to that point, contracts for transportation had featured only two parties: users (shippers) and transport providers (carriers). When IMCs entered the picture (as intermediaries that accepted shipments from the shippers and tendered them to the rail carriers) they became the third party to the contract. 3PL is a company who solely receives, holds, or otherwise transports a consumer product in the ordinary course of business but who does not take title to the product.


  • Opportunity for cost reductions
  • Productivity improvement opportunities
  • Ability to focus on core competencies
  • Opportunity to improve customer service
  • Expansion to unfamiliar markets


  • Logistics is a core competency of the company (logistics is too important to consider outsourcing)
  • Cost reductions would not be experienced
  • Control over outsourced function would diminish
  • Issues related to security of shipments

Asset-Based vs. Non-Asset Based: One common way to distinguish service providers is by the resources that they rely upon to fulfill customer requirements. 3PLs with tangible equipment and facilities are called asset-based providers. In contrast, 3PLs that leverage the resources of other companies are called non-asset based providers.

Asset Based Providers: When a 3PL owns many or all of the assets necessary to run its customers’ transportation and logistics activities, it is known as an asset based provider. This category includes companies that own truck fleets, containers, aircraft, terminals and warehouses, material handling equipment, technology systems, and/or other resources.  An asset based provider typically has its own labor force to perform the customers’ work and management team to oversee the day-to-day operations. Having these internal resources allows the 3PL to leverage internal strengths and infrastructures to provide direct and immediate solutions. --> This type of 3PL includes widely known companies such as DHL, FedEx, and UPS.

Many customers choose to work with asset based providers because of: readily available capacity, permanent employees, direct control of the customers’ freight. They prefer to work with a single 3PL who will take total responsibility for the outsourced activity and assume accountability if problems occur. Customers can also maintain greater visibility of outsourced activities and inventory if they are handled by a technology savvy asset based provider who performs all activities internally rather than handing them off to other companies. The primary concern with asset based providers is  bias toward their internal resources. The argument is that these companies have made significant investments in physical assets and are tethered to those assets when developing solutions for customers. This internal focus may not always generate the most flexible solutions or produce the most cost-efficient transportation and logistics services for customers.

Non-asset based providers: When a 3PL contracts with other firms to provide transportation and logistics services rather than owning the required equipment and facilities, it is called a non-asset based provider.

This type of provider acts as a service integrator and is not restricted to using any particular warehouse or transportation company in providing services to its customers.

Non-asset based providers offer expertise in negotiating contracts with transportation companies and distribution centers in an effort to achieve the best combination of price and service for their customers. (Accenture, Capgemini, DXC Technology, Software firms) Customers view non-asset based providers as being more flexible than their asset based counterparts. Non-asset based 3PLs can be unbiased in their decision making as they are not limited to an internal infrastructure of assets. Because they are not restricted to using any particular transportation company or set of facilities to serve customers: They are free to objectively choose the best set of service providers and create innovative solutions for customers. This can lead to tailored services and lower overall costs for the customer.

There are also concerns with non-asset based providers. First, these companies do not have significant internal capacity to handle customers’ requirements. This can be a problem during times of economic expansion when transportation equipment availability is squeezed. Also, there are more moving parts and relationships to manage when a non-asset based provider uses external service providers on behalf of their customers. It is imperative to have strong IT capabilities to maintain control and visibility of customers' freight that is dispersed among a variety of transportation and warehousing companies.

Chapter 9 Costing and Pricing for Transportation:

Pricing Difficulty : EG: total cost  function = “$160 + x” xà number of units over 100 miles lanes

Q1. What total cost must the carrier cover for a 40-unit shipment? 160+ xà x= 40 à total cost = 200

Q2. What price should the carrier charge that shipper? At least 200 to cover the costà with 200 it is zero profits , anything greater than 200 you start making profits

Q3. What is your new answer for Q1 if a second shipper (with a 60-unit shipment) can be accommodated on the same trip? same trip à 160+40+60 à 260 is the total cost

A Sample of Allocation Schemes

  1. Proportional to weight: Shipper A: 0.4×260=104       Shipper B: 0.6×260=156
  2. Proportional to separate cost: Only shipper A: 160+x=160+40=200   Only shipper B: 160+x=160+60=220
  • Shipper A: 200/(200+220) = 47.62%, à4762×260=123.8 Shipper B: 220/(200+220) =52.38%, à  0.5238×260=136.2 --à Make sure u use them separate first then add back the pervious total cost
  1. Equally allocate common costs plus allocation of separable cost: Only shipper A: (160/2)+x=80+40=120 Only shipper B: (160/2)+x=80+60=140 à make sure u divide the fixed cost

Generic Example of cost of service: The variable or marginal cost of providing the service should serve as the floor for carriers when setting prices.  A carrier will be able to recover related costs of providing a service, at least in the short runà  Variable or marginal cost : The min of price is the marginal cost (pricing based on cost of service ) don’t accept anything below your marginal cost

  • Pricing under Backhaul Uncertainty: The following diagram depicts a scenario in which a TL carrier makes a forward haul from its domicile (city X) to city Y.  The probability of a load from city Y to city Z is p.  By taking this load, the carrier will have to make an empty back-haul trip from Z to its domicile in city X.

 c= $1/KM

A practical question is that if the carrier’s costs amount to c per kilometer and the carrier always takes the back-haul when it is available then: “What is the single rate or price (r) per revenue km (F + B km) that would ensure the carrier’s profitability in the long-run?” à The price has to be more than the cost otherwise it wont be right to be profitable

The revenue (r×200)+0.6×(r×180)=308 The cost of moving loads (c×200)+0.6×(c×180)=308c=308

Revenue – Cost > 0


  Xà Y (200 x Y)

 Yà Z  p(180 x Y ) à (200 x Y ) + 0.6( 180 x Y) à 200 Y + 108 Y à 308 Y

Cost =

Xà Y (200 X c) à c= 1 à 200

Yà Z p ( 180 x c) à 0.6 (180 x 1) à 108 à totaling cost = 308 

The revenue (r×200)+0.6×(r×180)=308r

The cost of moving loads (c×200)+0.6×(c×180)=308c=308

Traveling empty to city (x) from city (y): (0.4)(c×200)=80c=80

Traveling empty to city (x) from city (z): (0.6)(c×50)=30c=30

Profit: 308r-418 à 308r-418>0, then r>$1.36

Value of service pricing: This is sometimes defined as charging what the traffic will bear. One common definition for value-of-service pricing in transportation is pricing according to the value of the product. For example, high-valued products are assessed high prices for their movement, and low-valued commodities are assessed low prices. The value of the commodity is a legitimate indicator of elasticity of demand. For example, high-valued commodities can usually bear higher prices because transportation cost is such a small percentage of the final selling price.

By Demand curves: The demand curves of two different types of commodities for transportation services are shown. The high-value item has a gradual sloping demand curve implying price inelasticity. On the other hand, the low-value item has a steep slope, implying price elasticity

To see how these elasticities relate to how a transportation firm can set prices based on product value, consider a price increase from price P1 to price P2. When the price of the transportation service increases for the high-value product, a small quantity-demanded decrease is observed from quantity Q1 to quantity Q2.  For the same price increase, the low-value product cannot absorb the increased price. This inability to support the added price of the service is seen as a drop in the quantity demanded from Q1 to Q2. Clearly the decrease in quantity demanded for the low-value product is of a larger magnitude than the decrease for the higher-value product for the same price increase

Value of service: has also been defined as third-degree price discrimination (differential pricing)à ppl pay differently for same service Or, a situation in which a seller sets two or more different market prices for two or more separate groups of buyers of essentially the same commodity or service. Three necessary conditions must exist before a seller can practice third-degree price discrimination: 1. The seller must be able to separate buyers into groups or submarkets according to their different elasticities of demand.2. The seller must be able to prevent the transfer of sales between the submarkets. à EG: ID PASSES 3. The seller must possess some degree of monopoly power.

à This separation enables the seller to charge different prices in the various markets

Differential pricing methods: Differential pricing can be done based on several methods of segregating the buyers into distinct groups: By commodity (e.g., such as coal versus computers) By time (e.g., seasonal discounts or premium rates, )By individual person, By place  These conditions for third-degree price discrimination can be fulfilled in the transportation industry, as well as in other industries

Differentiation by places: 1- Different transported quantity à charge higher for LTL then TL  2- Traffic imbalance:  Charge more where traffic is higher to cover for low traffic areas eg Taxies

EXAMPLE: Assume that a truckload carrier moves a shipment from point A to point B with a variable cost (fuel and driver wages) of $90, an average cost of $100, and a price of $110à This is called the carrier’s headhaul (linehaul) because it is this move that initiated the original movement of the carrier’s equipment and the shipper’s goods. As such, the carrier might be able to use value-of-service pricing, charging $110 (profit maximization) because of commodity and competitive circumstances.

With the carrier’s equipment at point B, it is necessary to bring the equipment and driver back to point A (usually the home domicile of the driver).

This is called a backhaul because it is the result of the original move (headhaul). The carrier now faces a totally different market in this backhaul lane. If the carrier decides to price based on its marginal cost of $90 (cost-of-service pricing),it is very possible that the market from point B to point A will not bear this price and the carrier will be forced to return empty. This will result in a loss to the carrier of $90.

Now suppose that the carrier prices this backhaul in accordance with market demands at a level of $80. Although this results in a price below marginal cost, the carrier has minimized its losses by losing only $10 on the move instead of $90. Pricing in this manner can be called “loss minimization

Summary: So it can be argued that value-of-service pricing can be used as the price ceiling. Variable cost: It can be also used as the price floor.

Cost of serviceà $80  don’t accept since its below marginal cost -- > loss will be $90 

Value of service à $80 we do accept it becuz our loss will only be $10 à this is based on your clients

Marginal cost is $90

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