This document provides an overview of transportation's role in supply chain management. It discusses how transportation helps to integrate supply chains and make organizations more efficient. Effective transportation is important for bridging the physical gaps between production and markets. The document then covers topics like the economic impact and measurement of transportation, the derived demand nature of freight transportation, how transportation influences the location of economic activity, and the development of supply chain management concepts from physical distribution to business logistics to the modern integrated view.

1. Management of
Transportation
Seventh Edition
Coyle, Novack, Gibson & Bardi
© 2011 Cengage Learning
Chapter 1
Transportation’s
Role in SCM
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duplicated, or posted to a publicly accessible website, in whole or in part. 1

2. Introduction
• Chapter focus: The role transport plays in:
– Fostering improved supply chain integration
• Integration is not achievable without effective transport
– Helping organizations to be more efficient and
effective
• Chapter organization
– Conceptual dimensions of transport
– Fundamentals of supply chain management
– Role of transport in the supply chain
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3. Introduction
Economics of Transportation
• Transportation
– Pervasive element of daily life
– Impacts citizens’
• Economic well being
• Safety
• Social interaction
• Quality of physical environment
• Quality of daily life
– Chapter focuses on the economic impact
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4. Introduction
Demand for Transportation
• Regions or areas tend to specialize in certain
economic activities
• This specialization creates physical gap
between markets and areas of production for
a given good
• This gap creates a demand for transport
• Fundamental economic role of transport is to
bridge this supply-demand gap
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5. Introduction
Transport Measurement Units
• Typical measurement units
– Ton-miles (freight) and passenger-miles (people)
– Caution: Both units are heterogeneous. Two
units may have
• Very different costs of production
• Very different service requirements
• Levels of measurement unit aggregation
– Total transport output (freight or passenger)
– Transport output by mode (mode share)
– Transport output by carrier (market share)
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8. Introduction
Price Elasticity of Demand
• Sensitivity of demand to price change
• Relative measure between price change and
quantity change. Measured as:
% change in quantity ÷ % change in price
• Terminology
– Price elastic: demand is sensitive to price change
– Price inelastic: demand is insensitive to price
change
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9. Introduction
Price Elasticity of Demand
• If % change in quantity < % change in
price, then demand is price inelastic
(insensitive to price change)
– Price increase leads to revenue increase
– Price reduction leads to revenue reduction
• If % change in quantity > % change in price,
then demand is price elastic
– Price increase leads to revenue reduction
– Price reduction leads to revenue increase
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10. Introduction
Price Elasticity of Demand
• Aggregate demand for freight transportation
tends to be price inelastic
– Cost for transport generally small % of product’s
landed cost
• Demand for particular mode or carrier tends
to be price elastic
– Often, substitutes are available
• Service elasticity
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11. Freight Transportation
Derived Demand
• Definition of derived demand
– Demand for transport service to move a product
to a given location depends upon the existence of
demand to consume (use) that product at that
location
• Remember, demand is a relationship between price
and quantity demanded
– Aggregate demand for freight transport cannot be
easily affected by individual carrier actions
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13. Value of (Transport) Service
• Transport cost is a component of landed cost
– Landed cost includes:
• Cost of production
• Transport cost from production point to market
– Transport costs influence a producer’s landed cost
advantage/disadvantage vs. competitors, thus
determining the market value of the transport
service
• Similar to place utility concept (see Ch. 2)
– Landed cost also determines extent or range of a
producer’s market area (Lardner’s Law) and thus the
value of transport service
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16. Value of (Transport) Service
Service Components of Freight Demand
• Critical service characteristics and related
supply chain cost impacts
– Transit time
• Volume and cost of holding inventory
• Potential stockout and/or safety stock costs
– Reliability or consistency of transit time
• Safety stock and/or stockout costs
– Accessibility: impacts transport cost and time
– Capability: “special” service requirements
– Security: safety stocks and/or stockout costs
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17. Value of (Transport) Service
Location of Economic Activity
• Historically, transportation influences location
of cities, particularly ports
• For firms, transport influences the location of
manufacturing plants and distribution facilities
– Influences very pronounced for firms producing or
marketing globally
• Influences are dynamic
– As economic activity locations shift, the pattern of
transport demand also shifts and vice versa
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18. Supply Chain Concept
Development of the Concept
• Concept evolves in three phases
– 1960s: physical distribution concept
– 1980s: business logistics or integrated logistics
– 1990s: supply chain management concept
• A systems approach to analysis and decision-
making is common to all three phases
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19. Supply Chain Concept
Development of the Concept
• Physical distribution concept
– Focuses on physical distribution system costs and
tradeoffs
– Objective was to find lowest total physical
distribution system cost
– Example: transportation mode or carrier selection
• Involves tradeoffs between transport, inventory,
materials handling, and packaging costs
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20. Supply Chain Concept
Development of the Concept
• Business logistics concept
– Adds analysis of inbound or sourcing side to the
outbound physical distribution side
– Development facilitated by
• Economic deregulation of transport in U.S.
• Rising degree of international or global sourcing
• Both create additional opportunities for cost savings
through integrated management and coordination
– Notion that logistics contributes to customer service
and revenue generation begins to emerge
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21. Supply Chain Concept
Development of the Concept
• Supply chain management concept
– Key underlying principles
• Systems analysis and management
• 3 key flows: product, information, and cash
• Integrated management of extended enterprise
• Focus on ultimate consumer of end product
– Transport: most direct influence on product flow
• Product flow is two way
• Growing importance of reverse logistics systems
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22. © 2011 Cengage Learning. All Rights Reserved.
May not be scanned, copied
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23. Supply Chain Concept
Development of the Concept
– Information flow
• Sales trigger replenishment orders flowing upstream
• Traditionally, replenishment orders used by upstream
supply chain members to forecast downstream demand
– Long intervals between orders create demand uncertainty
– Safety stocks used to buffer against uncertainty
– Magnitude of uncertainty and safety stocks amplify upstream
in a phenomenon known as the bullwhip effect
• SC compression via improved two-way information flow
reduces uncertainty and cost impact of bullwhip effect
– Transport carriers contribute to uncertainty reduction (reliable
and fast deliveries) and improved two-way info flow (advanced
shipment notices, bar codes, radio frequency tags)© 2011 Cengage Learning. All Rights
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24. Supply Chain Concept
Development of the Concept
– Financial or cash flow
• Payments flowing upstream for goods ordered
• If order and replenishment cycles shorten (orders and
product flow faster) then cash flows faster
• Faster cash flow reduces working capital requirements
for financing operations and processes and contributes
to improved profitability
– “free” cash flow cycle
• High transport service levels contribute to improved
customer service and faster cash flow
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