III. Changing Practices and Priorities in Freight Transportation Demand

Changing Business Practices

In the past few decades, the US economy has undergone changes as dramatic as the industrial revolution. These changing business practices are a reflection of major evolutions in key economic sectors, such as manufacturing and trade.

The nature of transportation demand has also changed to meet the new needs of businesses and consumers. In addition, recently, US businesses now recognize that innovative distribution systems can be a key competitive factor. Accordingly, transportation is now viewed as one of the crucial components of doing business. Performance is measured in terms of reliability, transit time, efficiency and quality of service. Translated into infrastructure requirements, these trends heighten the need for effective intermodal connectors.

Changing business practices include:

The restructuring of traditional manufacturing. To regain their competitiveness, during the past decade American companies have modernized their manufacturing and distribution systems, as well as downsizing and restructuring their operations. Traditional manufacturing industries have also become more technology intensive. The end result is that the manufacturing sector of the U.S. economy is far more efficient today than in the recent past.

Manufacturers are continually searching for opportunities to restructure their operations, consolidate production at fewer, lower cost locations closer to major consumer markets, etc. Manufacturing industries increasingly also rely on multinational production.

In the new global economy, American manufacturers must be able to efficiently move raw materials, partially assembled products and finished goods to and from all areas of the world to remain competitive. Their logistics systems must be able to rapidly adjust to changing demand and inventories during the various stages of the production and distribution cycle around the globe.

Decentralization of manufacturing processes additionally leads to an increase in the total number of freight movements required for production. Domestically, as trucking accounts for a large share of intercity and metropolitan transport, this trend puts immense pressures on the roadway system.

Product shifts. Another important trend in manufacturing is the shift from heavier, lower value, manufacturing products towards higher value, less bulky, lighter products, typically associated with the use of new materials and new production technologies. The physical inputs of goods produced also tend to be smaller, although many are highly valuable. Even the older, traditional manufacturing of durable goods now produces smaller and less bulky products through greater use of plastic and other less bulky and lighter materials. These developments have important implications for transportation demand and the relative use of transportation modes in the future. For example, lower volume, higher value goods increase demand for fast transportation of small quantities, thereby increasing demand for air freight and truck services relative to water and rail services.

Production runs and JIT. An important cost element of traditional manufacturing has been the need for large volume production runs of the same product. Frequently, the uncertainty as to demand levels results in larger or smaller-than-required inventory levels at certain times in the economic cycle. As the value of products have increased, many manufacturers have adopted techniques that permit rapid adaptation to changes in demand. Manufacturing now involves smaller, shorter production runs, in many cases aimed at specialized, differentiated market segments responding to different consumer preferences and tastes. Companies have adopted techniques that permit the production of various goods with the same production line. These new production processes often require the ability to receive inputs just-in-time (JIT).

JIT is one of the most important trends in manufacturing over the past two decades. The JIT inventory control system was developed in response to the high interest rates of the 1970's and the high inventory carrying costs it generated. However, it continues to be increasingly used as a means of reducing inventory requirements and manufacturing costs. The use of JIT is especially important in some industries, e.g. electronics and automobiles. More and more manufacturers are carefully scheduling deliveries so that parts arrive when needed – not a day before or a day after. Through careful management of the transportation pipeline to the assembly plant, the inventory costs in storage and transit are kept to a minimum, thereby reducing warehouse and carrying costs. JIT requires more frequent, smaller shipments, emphasizing reliability.

The emphasis on reduced inventory levels, JIT delivery, quality, and quick response, means a significant change in the nature of transportation demand. First, it requires more frequent, smaller shipments. Secondly, it means that the transportation infrastructure must be able to function with sufficient reliability, so that businesses can count on their deliveries being on-time, without being affected by congestion at airports, highways, intermodal terminals, or ports. The sequential impacts of designing transportation infrastructure that responds to JIT is further discussed in the next section.

Reducing the length of product cycles. Transportation and distribution requirements are also evolving as companies place greater importance on reducing "cycle time," i.e., the time that it takes for a company to respond to changes in the market. For example in the garment industry, seasons and changing fashions demand quick turnaround if a company is to remain competitive. Cycle times are increasingly important as they provide a competitive advantage.

Competition to reduce the time necessary for producing or distributing goods is as significant as price or style competition. Products that do not move quickly through the distribution system can become obsolete, due to lower priced new products or changes in style. For several industries, including auto parts, electrical components and apparel, the need for a reduction in time for products to move from concept to manufacturing to the selling floor requires more frequent, and smaller size shipments, even if transport costs are higher.

"Lean manufacturing." The essence of "lean manufacturing" is low work-in-process supported by multi-disciplinary teams. Low work-in-process is expected to result in quality improvement, since work-around options are limited, and low work-in-process forces shorter cycle times, because fewer items are worked in parallel. The lean manufacturing model is based on many of the underlying principles of JIT production. A critical distinction, however, is in the focus on low work-in-process rather than JIT delivery as a strategic factor, so the intent is not only to have parts or intermediate products delivered just in time for final production, but producing those intermediate products just in time. A highly reliable, cost efficient transportation system is a prerequisite for these types of operations.

The emergence of high technology and knowledge-based industries. The composition of the U.S. manufacturing sector has changed significantly. Basic industries have declined, as new industries have emerged. These new industries are characterized by the "knowledge-intensity" and the "technological innovation" of their products. The physical inputs and outputs of these new industries are particularly small, light, but highly valuable.

These "high-technology" industries, e.g. drugs, medical equipment and supplies, electronic products, office and computer equipment, have been growing and are anticipated to continue growing at a faster rate than other manufacturing industries. From 1977 to 1992, the share of technology-based and information intensive manufacturing industries has increased from 35% to 42% of total manufacturing. This development is particularly interesting, considering that the contribution to GDP of the manufacturing sector has been decreasing during this period.

One characteristic of the newer manufacturing industries is that they are typically composed of a large number of smaller firms, with less concentration in the larger firms than is the case in the older industries. These industries have a smaller production scale, smaller volumes of inbound materials, and are particularly dependent on the latest technology and research. As new, smaller firms, they also typically depend on other firms for supplies and basic services and are not as integrated in their manufacturing and distribution processes.

E-commerce. The development of new computer, communications and related technologies have also created new specialized information, entertainment, trade and business service industries. These new technologies, culminating in what is now referred as internet-based electronic commerce, have huge implications for transportation demand. They facilitate complex multi-location and multinational production and distribution, and will likely affect retail distribution patterns and the transportation needs of the retail industry. For example, the 1998/1999 Boeing World Air Cargo Forecast noted that "consumers are increasingly using the Internet for home and business purchases, fueling growth in air/truck logistic networks."[1]

Demanufacturing/Remanufacturing. Demanufacturing and remanufacturing are two new elements in product life cycles. Accordingly, they are also new elements in the logistics chain. Demanufacturing involves the disassembling of such products as electronics, automobiles, and household appliances after the end of their useful life. The disassembled parts are then recycled. In remanufacturing, the disassembled or retrieved parts are reused.

Demanufacturing and remanufacturing is increasingly used in the US and globally. From an environmental perspective, companies are being asked to take fuller responsibility for their products – from their creation to their ultimate disposal. From a cost perspective, remanufacturing offers an opportunity for companies to save money. As a result, laserjet toner cartridges can be sent back, free of charge, to the manufacturer. "Disposal camera" flash units, retrieved when the cameras are sent for photo processing, are reused in new disposal cameras.

Demanufacturing and remanufacturing processes also require freight handling – reverse logistics. Similar to the supply chains and distribution channels which have become increasingly specialized for industry/commodity clusters, reverse logistics is similarly customized to individual firms and businesses. Nevertheless, the processes add freight flows and considerations to the transportation system.

The globalization of the economy. With more multinational production and foreign trade, the economies of all countries are increasingly intertwined. In many industries, the trend has been towards one global market. For many firms, transportation costs can define the economical reach of their products in the global marketplace. An efficient transportation, logistics and distribution system can increase the market for a product or a service, thereby achieving economies of scale that result in increased competitiveness and profitability. There are also fewer products today that can be easily categorized as being only foreign or domestic. The best example is the automobile industry, where it is no longer possible to neatly categorize American versus import cars. A large percentage of the parts used in vehicles assembled by foreign and domestic manufacturers in the U.S. originate in foreign countries. Many of the foreign manufacturers also export the U.S. assembled cars to other countries.

The U.S. has led in the growth in international trade over the last 20 years, and the impact of foreign trade on the American economy has increased significantly. The share of trade (imports and exports) as a percentage of GDP (in constant 1987 dollars) increased from 12.4% in 1970 to around 25% in the mid-1990's. Although there has been a persistent trade deficit in the US trade balance since the 1970's, the international service trade balance has been consistently positive and growing.

World trade trends are also setting the stage for further integration of the economies of individual countries into several economic blocks. In North America, Canada and the United States signed a Free Trade Agreement in January 1989 covering trade between the world's largest trading partners. The U.S., Canada and Mexico signed NAFTA in December 1992, which was approved in 1993, and became effective January 1994. Many countries in Central and South America are emulating the example set by their northern neighbors. Countries in the Central American Common Market, the Caribbean Common Market, along with the Andean Pact countries (Peru, Bolivia, Ecuador, Colombia, and Venezuela), and the Mercosur countries (Argentina, Uruguay, Paraguay, and Brazil) have all been lifting trade barriers and strengthening economic ties among themselves. A Free Trade Area of the Americas covering the entire American continent is also under discussion, with specific goals set by the leaders of all the countries to achieve steps towards integration by 2005.

In Europe, a single economic market was established in accordance with previous agreements in January, 1993. Europe is proceeding towards economic and monetary union (EMU), including a single currency. Although there are still many obstacles to be overcome, the major economies in the European continent are beginning to function to a large extent as a single market.

Finally, the Asia-Pacific Economic Cooperation (APEC) group of countries in November 1994 adopted the Bogor Declaration, a statement of common resolve by APEC economic leaders aimed at achieving free and open trade and investments by 2020 (2010 for industrialized economies).

The pattern of U.S. foreign trade is likely to change as efforts to create multinational trade blocks evolve. For the U.S., over the past decade, the fastest growing area in foreign trade has been with the Far East, which became the U.S. largest foreign trade area during the 1980's. Coupled with the significant trade volume with Europe, the double stack rail system in the US and major world trade lanes have grown mostly along east-west corridors. With the potential for free trade extending "from Alaska to Tierra del Fuego", new transportation corridors and trade lanes are emerging with a north-south orientation.

Focusing on core competencies within a firm. As businesses continue to pursue strategies to improve their competitiveness in world markets, they have simultaneously focused in their core competencies. As a result, increasingly businesses are outsourcing many functions (including accounting, payroll, engineering, information, computer, legal, travel and other business services) in order to reallocate their resources toward their core business. One of the functions being outsourced is freight distribution. In this manner, significant cost cuts can be achieved, redeploying capital (by not financing truck fleets and buildings for warehousing and distribution purposes).

Third-party logistics companies (3PL) have emerged to fulfill a range of distribution and logistics functions including trucking, warehousing, billing, inventory management, and fleet maintenance. Some rail, truckload and less-than-truckload (LTL) firms, in particular, have diversified to provide such services; newly created logistics firms have also formed to serve a market niche or tailor a service to a firm's specific needs. These third parties have increasing control over the flow of goods – the modes used and the routes taken.

Focusing on Transportation Characteristics Rather than Modes and Routes

The increasingly competitive environment in which firms must operate has fundamentally altered the use of freight transportation services and infrastructure. Businesses view freight transportation as a means for better serving customers, for better supporting their operations, and for reducing costs. Businesses view freight transportation in terms of what it achieves for their firms, rather than as trucks, trains, vessels and aircraft. In fact, the actual physical movement and routing of cargo are increasingly likely to be handled by a 3PL on behalf of the firm.]

Firms now seek five qualities in their freight transportation service – reliability, transit time, efficiency, cost and damage minimization.

Reliability is defined as consistently ensuring that goods are delivered on the specified date at the specified time in the specified amount in the specified condition. Reliability is often written into contracts with transportation providers with exacting specifications – often requiring meeting delivery targets close to 100 percent of the time. The penalties can be severe, ranging from monetary fines to loss of the work.

Transit Time is also a consideration. With JIT, the movement of goods replaced inventory and, often, had to be moved quickly. However, overnight shipment is expensive. Accordingly, with more advanced planning, an emphasis on reliability, and better communications and information technology, the objective of JIT has matured and is now to simultaneously reduce inventory and transportation costs. As long as shipments arrive when specified, they do not have to travel overnight. The 1996/1997 Boeing World Air Cargo Forecast found that "growth in 'deferred' air cargo shipments (next afternoon or later) has been faster in recent years than the growth in 'overnight' shipments." Continuing this trend, the 1998/1999 Boeing World Air Cargo Forecast also found strong growth and noted, "Deferred services, which are less expensive than traditional overnight express shipments, appeal to shippers who need to reduce their shipping cost but still require time-definite transport."[2]

Reliability combined with a known transit time is sometimes referred to as "time definite service." The interviews with shippers have found that use of time definite service now extends from the highest priced commodity to the lowest priced bulk commodity. It is a common element in inventory management for businesses. For example, a major shipper recently noted, "In all cases, meeting arrival dates is important. We put a premium on consistency as opposed to pure speed." For transportation providers, meeting time definite service requirements can impact the modes and routes used. The availability of effective intermodal connectors can also influence these choices.

Efficiency refers to optimally using transportation equipment so as to minimize costs. Efficiency is often left to the transportation providers to achieve. However, efficiency objectives can impact a shipper's purchase and use of transportation services, including modes and routes. Companies want to see their transportation equipment in constant motion, rather than sitting in traffic. For example, with a mandatory ten hour workday, congested roadways can significantly reduce the number of trips that a vehicle can make. Congestion on intermodal connectors can significantly affect the productivity of all the modes involved and can affect routing decisions. For example, port selection criteria equally consider the availability and ease of waterside access; the efficiency of the maritime terminals and labor; and the ease and availability of inland connections.

The efficiency of all modes tends to be dependent on efficient roadway access. Roadways handle the end moves of an intermodal movement. Roadways also link freight facilities. For example, roadways link maritime terminals to rail yards that are not "on-dock."

In addition, many shippers, especially those who use a third party logistics firm to handle their outbound goods movement to customers, also ask the 3PL to work with their suppliers to fill what would have been an empty back haul truck movement with inbound commodities to the firm. This ultimately reduces the transportation cost for the firm since they can negotiate a "back haul allowance" with the supplier rather than pay the cost associated with moving that freight to their firm. Efficiency considerations can, therefore, affect routing (in that trucks may be routed differently to service supplier locations in addition to customer locations) and modal choice (since the objective is to fill a truck in both directions). Back haul considerations extend throughout the modes, with trucking firms, railroads, shipping lines and air cargo carriers all seeking to "balance" their loads. No company wants to move equipment that is empty.

Cost has always been a consideration in freight movement, that is, obtaining the lowest possible cost for moving goods. Central to business' efforts to better manage transportation and distribution and their acceptance of outsourcing of services has been a drive toward greater productivity and closer examination of the entire production and supply chain, as well as the administrative functions. As companies face growing competition domestically and globally, efforts have increased to get total freight logistics cost down and achieve better returns on assets.

However, there are new considerations regarding cost. For example, shippers focus on the overall cost of moving a shipment from origin to destination, regardless of the number of modes involved. As discussed previously, the overall cost often now encompasses both the supply chain to a firm and the distribution channel to its customers. In addition, shippers now consider cost within the framework of reliability, transit time and efficiency. Within this framework, reliability and quality service can be more important that obtaining the lowest cost.

Damage Minimization and Safety are also a "given" in freight movement. It is no use to a company if the goods arrive damaged. Different modes and equipment types have different "ride" characteristics. Accordingly, companies may select certain modes to minimize damage to shipments, as well as minimize delays. Similarly, shippers and transportation providers have become more cognizant of safety considerations in freight movement, leading to improved driver training, new handling procedures, and changes in equipment designs.

Expecting More from Transportation Providers. Total Quality Management (TQM) principles in American business culture have encouraged businesses to expect and demand more from the freight transport provider. Shippers are seeking to diminish the number of carriers in favor of long-term agreements with single suppliers or a limited number of such providers, demanding global coverage from their transportation providers. Carrier firms are willing to make a commitment to greater reliability and on-time performance in exchange for the shipper's commitment to concentrate its business. Shippers are also demanding customized information on a real-time basis. Shippers want to have real-time access to shipment location and status; the ability to enter bookings by computer directly from their many production, warehousing and office locations; access to billing, payment and other information. Electronic Data Interchange (EDI) with carriers and agents is an increasingly essential requirement for many companies. The minimization of damage or loss, along with the safe transport of goods through communities and to customers – proven by past and on-going performance – is a basic requirement for transportation providers to obtain business from shippers.

A Reduced Focus on Modes and Routes by Shippers. As shippers set these new parameters for freight service, they may also outsource all or part of their distribution and logistics operations to a third party, thereby distancing themselves from modal and routing decisions, as previously noted. The old paradigm was for the company to select the mode, the transportation providers, and the routes. Under the new paradigm, the purchase and management of transportation and distribution shifts to a third party tasked with delivering the exacting specifications in reliability, transit time, efficiency and cost established by the shipper. In many respects, this trend builds on the model set by Federal Express, United Parcel Service and others in offering to deliver packages by a specified time and date without the customer having the hassle of selecting the mode or route.

The new paradigm also creates a new class of stakeholders for the nation's transportation system – the 3PLs. With their multimodal, door-to-door focus, these new stakeholders have a greater interest in the availability and effectiveness of intermodal connectors.

The Responses of the Transportation Industry

As shippers have demanded higher quality transportation and value added services, the transportation industry has responded with an increasing number of innovative services. Deregulation of the industry has made it possible for carriers to become more responsive to their customer needs, to tailor special services for individual customers, and to merge or forge alliances and partnerships. Transportation carriers and other service providers in the transportation industry are responding to the changing needs of businesses by broadening their service offerings, so that one company can be held accountable for the overall service and cost.

Cost and Service Requirements. Today's shipper needs emphasize reliable, fast freight transportation service, but cost remains an important component. As the US economy becomes more integrated into the global economy, and as manufacturing processes are increasingly decentralized at multinational locations, business requirements have then become more complex. A greater need exists for simplified, door-to-door transportation to and from a more diverse list of origins and destinations, frequently beyond the shores of the continental United States. Furthermore, businesses now require a greater variety of transportation-related services to meet these more specific needs than the historical emphasis on large volume moves between the smaller number of origins and destinations.

Competition. Transportation providers have responded with more aggressive competition, as well as mergers and alliances. For example, domestic doublestack rail service competes with over-the-road trucking. Trucking firms are competing with traditional air cargo carriers to provide "deferred, time definite" deliveries. Intermodal connectors facilitate competition among modes and provide additional choices for shippers.

In addition, as shippers demand lower cost and fast service from vendors offering door-to-door service, carriers have developed agreements and procedures to be able to offer "seamless" intermodal door-to-door transportation service from origin to destination. The shipper deals with one vendor only, who guarantees delivery, sets the price for the entire move, manages and monitors the intermodal transfers, interfaces electronically with the shipper, and administers the paperwork. However, the actual physical move can involve a railroad, a steamship line, a trucking firm, and/or an agent. It can involve two, three and even four modes, and several intermodal transfers, again, highlighting the growing significance of intermodal connectors.

Mergers and alliances. Transportation companies are merging or establishing partnerships and alliances as means to reduce costs, rationalize capacity, achieve greater equipment utilization and enhance service offerings. Railroads, airlines, trucking firms and steamship lines have merged or expanded to create larger, more competitive companies, both within the US and internationally. Major US railroads have merged – most recently with the Conrail restructuring – and some have expanded into Mexico, Europe, New Zealand, and other countries. Airlines have merged, established code-sharing agreements, and entered into marketing partnerships. Steamship lines have merged or entered into vessel-sharing agreements, and they operate double-stack rail, trucking services, and joint terminals with other steamship companies. Trucking firms have also merged and emphasized different market segments, such as overnight, express, less-than-truckload (LTL), or truckload services

Similar to 3PLs, some companies and alliances have chosen to specialize as asset based companies relying on others to market and put together integrated multimodal services. Other companies have chosen to specialize in marketing, customer service, brokerage, and value added services. For example, the role of third parties or shipping agents, that traditionally have handled a major share of rail intermodal sales, drayage and customer service functions has been redefined.

Some companies have also established logistics subsidiaries or expanded the scope of their business to internally broaden their service offerings. In other cases, to be able to compete and meet shipper demands, carriers are setting up agreements and alliances with other modal carriers or through third parties that provide the shipper with better service options, in effect resulting in increased frequency of service, more integrated offerings, more efficient services, or broader geographic coverage. Even those companies that continue to view themselves as single modal carriers are entering into agreements with other modal carriers to be able to broaden the services that they can offer shippers.

Innovation and standardization. Carriers, in addition, continue to innovate, introducing more efficient equipment and new technology, improving asset management, and expanding service and operating patterns to reduce costs. Each carrier will be continually searching for ways to increase productivity that can be reflected in its rate and service package.

One of the major opportunities for future cost savings and service improvement is through new technology. The container revolution, the development of doublestack technology and the new information handling and interchange systems are the most significant technological breakthroughs in freight transportation over the past few decades. Further innovations in equipment and line-haul modal systems have the potential to increase the speed, reliability, capacity and productivity of the existing transportation system. For example, intelligent transportation systems (ITS); greater automation; larger capacity vehicles; modern intermodal facilities with improved methods of cargo handling or equipment interchange; simpler, expedited information exchange and billing systems; and new vehicle technologies (ship, rail car, truck and aircraft) with greater speed and/or increased size can all help achieve significant increases in productivity and capacity.

Standardization of equipment and creation of large interchangeable equipment pools also offers opportunities to improve equipment utilization and eliminate empty back hauls, as discussed previously. For example, rather than return an empty container to a port, carriers have been increasingly filling it with domestic cargo. The integration of international and domestic equipment pools offers further opportunities to balance export/import moves with domestic cargo, and minimize any imbalances in various trade routes and domestic lanes.

The demand by manufacturers and shippers to achieve greater integration of their core processes with the logistics and distribution functions is creating opportunities for transportation companies to offer a broader, more complete service package. An integrated logistics/distribution service package can include:

• Warehousing
• Consolidation
• Tagging and hanging of merchandise
• Packaging,
• Minor assembly,
• Order tracking,
• Cost management, and even
• Installation and Customer Service.

In-transit visibility and flexibility. Manufacturing and distribution processes are evolving into more efficient integrated systems. Stores can reorder electronically and manufacturers can schedule production based on the latest demand information from retail sales. Purchase orders go directly from store computers to the suppliers, in many cases directly to the manufacturing facility. These "point-of-sale" based systems, made possible by the use of bar code scanning, allow firms to respond to real-time demand. However, because the demand is in the present, rather than projected, the ability to control inventory while it is in-transit becomes paramount. Reliability and transit time become critical considerations in freight movement – if the product is not there when the customer wants it, then it is a lost sale.

In-transit visibility refers to firms knowing where their inventory is at all times although they may not actually have it physically on their premises. Bar codes, radio frequency systems, transponders on vehicles, and advanced information and telecommunications equipment allow in-transit visibility to occur. In-transit flexibility occurs when these systems allow firms to quickly respond to changes in real-time demand. For example, if a product is moving very quickly at one store, stock can quickly be repositioned to be available to meet customer demand.

Using the best combinations of modes. As previously discussed, shippers typically do not care how cargo is routed or what mode is used, as long as delivery is timely and reliable. Carriers also want to move the cargo using the best combination of modes to provide the service sought by the shipper at the lowest cost.

As a result of deregulation, modal distinctions have been disappearing. Many of the services provided by all transportation companies now include multimodal movements and/or intermodal connections that cannot be identified separately or disaggregated by mode. For example, the air cargo industry includes both trucking firms and air carriers, as well as integrated carriers that operate both trucks and aircraft. It has been noted that as much as 20 percent of the integrated carrier activity that takes place at an airport never enters a plane. Rather, the entire movement is handled by trucks. However, this is not important to the end user – they are paying to have a product delivered when and where specified, not for the mode and route used.

Doublestack trains represent another example of using the best of each mode. Originally developed by American Presidents Line, doublestack trains (where containers are stacked two high on a platform) provided a most cost effective means for transporting goods between the Far East and the US East Cost. Rather than use an all-water route to the East Coast, steamship lines found that they could save time and cost by "landbridging" their cargo. Further, with door-to-door movement arrangements, such multimodal use would be invisible to the end user.

Doublestack use now extends beyond the movement of maritime containers. Shippers now view intermodal rail as an economical alternative to over-the-road trucking, providing that the intermodal move can meet similar reliability, transit time and cost parameters. Rail is used for the long distance move, where it is considered the most efficient mode, and trucks are used for the short-haul moves at either end, which are considered the most efficient mode for picking up and distributing freight.

In all these cases, the intermodal connectors play a key role in facilitating the move. They allow the efficient combination of modes.

The "amodal" transportation company. It is becoming increasingly difficult to characterize transportation companies as modal carriers. Multimodal companies are now operating that include combinations of rail and truck service, steamship line and rail service. Most important, many single mode operating companies offer their services through many third parties or through logistics firms that package them as part of integrated services offerings. Shippers are then able to buy a seamless service that utilizes the most effective combination of modes that meets his needs. The emphasis is on the cost and service level offered, not on the technology or mode used.

It is within this context that third party logistics firms have emerged. The role of 3PLs has been previously discussed. In structure, the third party firms generally fall into two categories – asset based and non-asset based. Asset based 3PLs have their own transportation equipment and facilities. Non-asset based 3PLs, in contrast, do not own their equipment but rather contract with or assemble transportation providers to meet customer needs. Approximately 1,000 companies are now providing 3PL services, generating $34 billion in gross revenues in 1997.[3]

New National Security Requirements

Private sector freight customers are not the only ones seeking reliability, transit time, efficiency and cost. In an era of downsizing and budget constraints, the US Department of Defense (DOD) is seeking similar improved performance in its movement of freight and personnel.

The military is increasingly a customer of the commercial transportation system and has requirements that could potentially overwhelm the existing system. DOD is already a major user of commercial services, spending $2 billion annually on freight services alone. Further, the military anticipates, in the current "do more with less" environment, that it will rely on commercial providers for 90 percent of its peacetime movements and 85 percent of its wartime movements.[4] Looking into the near future, DOD recently enacted a new requirement that by 2001, the military must be able to respond to two geographically divergent major regional contingencies, each the size of Desert Storm, at nearly the same time. Even optimized, these surges could overwhelm the U.S. commercial transportation system with the need to ship 7,000 containers a week, along with troop and rolling stock movements.

Case Study: Desert Shield and Desert Storm. Over 3.5 million tons were moved to southwest Asia as part of Desert Storm/Desert Shield. This is roughly the equivalent of moving the entire city of Atlanta (the people, their belongings and their cars) half way around the world. However, as documented by Transcom's own analysis, the US had plenty of time to prepare, and the lift was conducted under favorable conditions. The military had unopposed transits, host nation support, superior port facilities, and ample use of foreign flag shipping vessels. Even under these somewhat ideal circumstances, the military classified the move as inefficient. Innumerable things were lost somewhere in the supply chain. When they could not be located, the items were sent again and again.

Similar Needs. Accordingly, similar to the private sector, the military is seeking in-transit visibility and flexibility. DOD needs the same reliability, transit time, efficiency and cost sought by the private sector. However, the DOD movements are potentially much larger, with greater surges, and with even greater consequences if real-time demand is not met.

Unlike the private sector freight customers, the military's greatest intermodal demand will occur during an unscheduled crisis and will require immediate capacity to move men and materiel from the continental United States overseas to a conflict area, possibly even in two diverse regions of the world at the same time. DOD needs a reliable, rapid, safe, efficient, and cost-effective commercial transportation system to meet these national security requirements. The challenge of the military's needs for rapid deployment are measured in human terms and the more quickly the equipment and material arrive in the conflict site, the lower the loss of U.S. lives.

Since the last major mobilization of Desert Storm/Desert Shield in the 1980's, the DOD has taken measures to address the inefficiencies evident in moving the over 3.5 million tons of materiel required for that conflict. These have included the Voluntary Intermodal Sealift Agreement (VISA) which establishes conditions and terms, including payment considerations, for the use of U.S. commercial ships and intermodal equipment during national emergencies. This pre-planning for sealift, airlift, and surface capacity requirements along with agreed upon terms among the private sector, labor, and military, will lessen the burden on the overall transportation system as surge and sustainment requirements occur. Using advanced simulation technologies, it is relatively simple to theoretically plan for deployments; but in actuality, successful deployment will depend upon the immediate availability of infrastructure and support services. With joint public/private/military planning, the transportation system's capability to handle the military's requirements with minimum disruption to the commercial freight system will be there when needed.

Current projections made by TRANSCOM suggest that out of a $259 billion military budget, about 34%, or $88 billion, is expended on the logistics function. Ongoing budget cuts and re-engineering requirements are moving the DOD to reduce their transportation costs by following several of the operational and organizational tactics of the private sector. When the military consolidates functions, locates manufacturing and storage at transportation sites, and jointly invests their capital expenditures in transportation infrastructure, they are reflecting industry's recent efforts to maximize the opportunities for partnering, streamlining, and minimizing costs. Investment in applying commercial technologies to improving DOD's power projection system will assure that its "just-in-time" system delivers the goods.

Seeking Solutions. The military has recognized the unique set of transportation challenges that it faces. At a 1997 DOD sponsored "Power Projection Symposium", three objectives were cited:

• Educate industry and government on deployment process and challenges;
• Identify commercial technologies of interest to the Army in improving power projection; and
• Enhance defense and commercial research and development partnerships.

During this meeting, DOD noted its projected freight needs. Specifically, it was projected that between 1996 and 2002 there would be a notable increase in military lift: Military airlift will move up from 48.9 ton miles/day to 49.4 ton miles/day in 2002. More significantly, the increase in Sealift is projected to move from 4.1 million square feet in 1996 up to 9.3 million square feet in 2002.

Learning from the private sector. DOD has expressed an increased level of interest in fostering an exchange of information and developing partnerships that address the common needs of the commercial and military freight movement. Just as the commercial sector was able to reduce the cost of distribution and logistics from a high of nearly 17 percent of the Gross Domestic Product (GDP) in the early 1980s to below 11 percent in the 1990s, the military has the same need to streamline. Timely information and accuracy of that information is what the military refers to as "strategic agility." The commercial sector has also streamlined its organizations, mapped its processes, and re-engineered to drive out costs. The military realizes that they must move down the same avenues as the commercial sector, and is carefully transplanting the best practices which accommodate surge and security requirements.

Military organizations outside of the US have also reached the same conclusion and are seeking to use the best logistics practices from the private sector. For example, in September, 1998, Emery Worldwide was awarded a two-year contract to provide third party logistics services for the Royal Australian Air Force.[5] Emery will provide consolidation, warehouse, inventory control and ocean container loading under the contract.

Passenger Movements

Reliability, transit time, efficiency and cost are also often the parameters sought by passengers in their use of transportation infrastructure and services. But use of multiple modes is not as invisible for the end user, and information systems are generally set up to provide only single-mode data. For example, if a passenger wants information on an airline trip, that information is readily available. However, if the passenger also wants to obtain information on either connecting rail service or local transportation options, this data is not as readily obtainable. As the passenger industry moves towards integrating modes and facilities, the best practices and lessons learned from the intermodal experiences of the freight industry could be instructive.

In addition, in many instances, passenger and freight operations share transportation corridors, particularly highways and rail track. This can result in potential conflicts, such as the need to move freight trains at off-peak times to avoid commuter windows or balancing automobile and truck use of roadway capacity. There are also safety considerations – freight and passenger vehicles have different operating characteristics yet often must share the same transportation corridors. However, the overarching objective remains the same – to put each mode to its highest and best use.

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