Structure and Dynamics of Transportation

As we are entering a never-ending change within the structure and dynamics of transportation, we need to approach this topic with an ever-greater emphasis on transport infrastructure elements within our urban and metropolitan plans; an up-to-date view is required in order to optimize transport concepts in any given strategic exercise. How does the different modes of transportation benefit and hurt the economy?
Given limited transportation investment dollars, how do we really know the extent to which mode of transportation will benefit the economy?

Book Title The Definitive Guide to Transportation: Principles, Strategies, and Decisions for the Effective Flow of Goods and Services
Author / Editor CSCMP, Thomas J. Goldsby, Deepak Iyengar, Shashank Rao
Publication Date 2014

3. The Economics of Transportation
Transportation economics occupies its own branch of the economics discipline. Economics is concerned with determining the best means of allocating scarce resources to achieve the greatest overall benefit. Governments use economics to determine projects in which they should invest, such as those of transportation infrastructure (for roadways, bridges, ports, locks and dams, among others). Businesses also must use economic principles to make the most informed and educated decisions in resource allocation. On matters of transportation, these decisions include determining how many facilities in which to operate for serving customers (distribution network design), whether to invest in private fleet operations or buy services from carriers in the marketplace, and which modes to use for inbound and outbound shipping, just to name a few.
This chapter focuses on the economics of transportation operations for carriers, firms that provide transportation services. With an understanding of the costs incurred by carriers, we examine the implications of pricing services for customers. Under efficient market conditions, carriers should earn sufficient revenues to cover costs, yet competition in the market will prevent carriers from earning exorbitant or excessive rents. This example is initiated by reviewing the different ways to view costs that carriers face in their operations.
Accounting Costs and Economic Costs
One way to distinguish the costs of transportation operations is to consider accounting costs and economics costs. Accounting costs involve actual outlays in money and are recorded in the financial statements of a company. Economic costs, on the other hand, reflect the revenue that is lost in pursuing a different course of action. Consider, for instance, that a carrier elects to invest in information technology rather than a new truck terminal. The investment in the information technology represents an accounting cost. Economic cost is found in the incremental revenues that the company misses by not investing in the expanded capacity provided by a truck terminal. Economic costs are Figure 3-1 illustrates typical behavior for fixed, variable, and total costs in the case of distance. Note that fixed cost is a flat line that does not change with distance. Variable cost, however, rises with distance. The total cost curve, then, is the sum of fixed cost and variable cost, and increases at the same rate as variable cost. Discussions of variable costs lead to an understanding of marginal cost. Marginal cost refers to the additional cost incurred with an incremental increase in an activity.
Figure 3-1, marginal costs are reflected in the slope of the total cost curve (and variable cost curve, which is the same). Close examination of the total cost curve suggests that the slope of the curve decreases somewhat as distance increases. This decrease in marginal cost suggests that an economy of scale is present. An economy of scale is found when, the further one pursues an activity, the less each additional unit costs than the one before it. In our example with distance as the focus, each additional mile costs less than the one before it. This is called the tapering principle. Economy of scale is also found with volume, as suggested by our discussion of how variable costs can increase.
Figure 3-1. In the case of distance, at some point, a shipment can reach limits beyond which it can no longer support a shipment, such as when a truck runs out of road in a transoceanic shipment. The truck must hand off the load to a ship or airplane. This is called geographic discontinuity. Therefore, the total cost curve reflects the cost of the movement by truck, and then when the truck reaches its terminal point, the total cost curve takes a jump to a higher level before reflecting the marginal cost of the second mode of transportation employed in the shipment (either air or ship). Of course, when the airplane or ship hands off the shipment to another mode for final delivery to the customer, we would see another jump.
Similarly, sudden increases occur in the total cost curve for shipment volume. With increasing volume, a shipment exceeds the capacity of a vehicle to carry the load at some point. This is true of the weight capacity and the space capacity of a vehicle. When a vehicle reaches its maximum weight, it is said to have “weighed out.” When a vehicle reaches its spatial capacity, it is said to have “cubed out.” To ship volumes in excess of a vehicle’s weight or a container’s weight or cubic capacity, we must enlist another vehicle (or container). The enlistment of the second vehicle would result in a jump in the total cost curve, reflecting the fixed-cost investment in the second vehicle (or container).
Chapter 2, “A Survey of Transportation Modes”). The measurement used to reflect the efficiency of a carrier’s business is operating ratio (OR). The calculation of OR follows:
Operating ratio = [(Operating costs) / (Operating revenues)] × 100
The lower the OR, the more money a carrier has available to invest back into the business. The OR serves as a valuable measurement of a carrier’s financial health. Although it is less meaningful when comparing carriers in different modes, the OR can be useful in assessing the operational efficiencies of carriers competing in the same mode. Table 3-1 lists the OR of several carriers competing in the less-than-truckload (LTL) market in the United States. The average OR of 97.0 percent for 2013 indicates that the carrier margins in this sector are quite thin. Again, the lower the OR value, the more funds a carrier has to reinvest in the business.
Chapter 2 the difference in speed for a barge traveling downstream with the river current, as opposed to upstream against the current (12 miles per hour versus 5 miles per hour). The towboat supporting the barge would consume more fuel heading upstream than downstream. Also, consider the customer that requires service provisions such as special handling of freight or unique communications and support. These simple examples underscore the importance of understanding a customer’s specific demands and the costs incurred to meet those demands, or the CTS.
One method that many organizations have applied over the years to ascertain the cost to serve a distinct customer is activity-based costing (ABC). Devised in the early 1980s, ABC became common among infrastructures for assigning overhead costs to products and customers. Transportation and logistics companies have employed ABC as a way to understand the relationship between customer demands and resource consumption. As its name implies, the method requires a company to track its activities. This is accomplished with mapping processes, such as loading and transporting freight, and administrative processes, such as communicating with the customer and issuing the invoices. After the processes are mapped, they are linked to the resources consumed and costs incurred in performing the processes. This requires examining the company’s financial records and expenses, including general ledger activity, statements of cash flow, and income statement. Today’s CTS systems can ease this step. Out of this, a cost per activity is devised for each of the various activities the company performs in serving costs. The final step, then, is to integrate the activity log in the analysis. This illustrates how frequently the service provider performs each activity for a customer over the allotted time period (usually the previous 12 months). The company sums the activity costs for each customer to determine the CTS. Figures 3-2 and 3-3 illustrate the logic employed.
1 Recall that truckload carriers place limits only on the maximum weight of the load and charge the same price regardless of the volume. LTL carriers, on the other www.nmfta.org) is the party responsible for maintaining the commodity classifications. The NMFTA maintains the National Motor Freight Classification (NMFC), which codifies products in 18 different classes, ranging from 50 to 500. Products rated at Class 50 enjoy the lowest rates per hundredweight, as a reflection of their ease in “transportability.” They are likely to be dense, easily stowed and handled, sturdy, and relatively free of hazard and liability. Materials such as bricks or packaged sand shipped on pallets are examples of Class 50 freight. At the opposite extreme, products rated as Class 500 are low in density, difficult to stow and handle, fragile, extremely valuable, and/or laden with hazard or liability. Gold and Ping-Pong balls are examples of Class 500 freight. Gold is extremely valuable, earning the high rating, and Ping-Pong balls are extremely light. Both products would receive a higher price (as expressed in $/cwt) than items with lower classifications.
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Carriers might also charge a fee for diverting a shipment from its original destination in favor of another location. Diversion or reconsignment applies when a shipper and carrier have agreed on the movement, but the shipper issues a change in destination, perhaps when the shipment is already in transit. Such an arrangement is most likely to occur in the road transport mode, which can more easily accommodate a change in the destination for a shipment. This might be the case for a shipment that was originally planned for one distribution center in a company’s logistics network but that must be diverted to another facility deemed to be in a shortage situation. The carrier’s reconsignment fee ensures that it is compensated for the inconvenience of repositioning its equipment and driver to accommodate the dynamic routing of the shipment.
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One reason for the driver shortage is the frustration of drivers who are forced to wait at pickup and drop-off locations. The tradition in driver wages is to pay the driver for distance traveled, but not for waiting. Under this scenario, drivers experience considerable aggravation, and many choose to leave the industry. A study conducted among truckload carriers in the late 1990s found that the average longhaul truck driver wasted 33.5 hours each week waiting to load and unload freight!4 Adjustments in hours-of-service (HOS) that challenge drivers’ available drive time place an additional premium on how the driver’s time is spent. To combat the problem, carriers have become quite aggressive in charging detention fees and passing along much of the proceeds to the drivers. Shippers that refuse to pay the detention fees then run the risk of being declined service in the future. Furthermore, shippers that gain a reputation of detaining drivers and not paying detention fees gain a reputation in the industry as being uncooperative. The term demurrage applies to the fee that charter ship owners and rail carriers charge customers for extended use of vehicles and containers in their respective modes. Demurrage is usually charged on a per diem (daily) basis instead of being levied hourly, as for trucking.
Motor carriers sometimes enter into agreements that allow shippers several days to load or unload a trailer. Drop trailer service refers to a provision of leaving trailers with a shipper or receiver for an extended time to allow more loading or unloading at times that are convenient for the customer. Carriers charge a daily fee for such provisions. The provision of dropping trailers also allows optimal utilization of the driver’s time.
Surcharges refer to any additional fee applied to a shipment. Fuel surcharges are among the most common. When fuel prices prove volatile, carriers incorporate a surcharge to protect themselves against the risk of rising energy costs. Carriers in the United States typically reference the U.S. Department of Energy fuel price index as an objective resource. When fuel prices exceed an agreed-upon standard, the surcharge kicks in. Surcharges might also come into play when carriers must pay tolls to access roads or rights of ways. Motor carriers often apply surcharges to deliveries in the busy downtown district of cities, where deliveries are likely to take longer.
1. All carriers employ a minimum charge for shipments, even for small volumes and short-distance moves, to cover the accounting costs and opportunity costs of the move.
2. Chapter 5, “An Overview of Transportation Management,” has more on consolidation strategies.
3. “Toot-Toot. Germany Wants More Truckers,” Bloomberg Businessweek (2 September 2013): 20–21.
4. Truckload Carrier Association, Dry Van Drivers Survey, June 1999.

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