Freight Transportation in a Changing Business Environment

A host of economic and political forces here and abroad have reshaped America and freight transportation services. After World War II, America began to transition from a mass-production and consumption society to a post-industrial, or information, society with an expanding service sector. Economic deregulation and globalization of production and trade are salient features of post-industrial America. These shifts are characterized by subtle, but significant, changes in production, distribution, and logistics requirements.

The Shift from Manufacturing to Services

The shift from a manufacturing to a service economy is neither a new nor a short-term phenomenon. Productivity improvements in agriculture, manufacturing, and communications aided by continued technological gains, have allowed a large-scale shift in resources toward providing a broad range of services related to health, education, travel, legal, entertainment, and many other personal and business services. This shift has various direct and indirect implications for transportation:

• Customers demand more flexible, reliable, on-time service.
• Traffic growth is greatest for smaller shipments.
• Demand for traditional, high-volume transportation services will continue to grow but account for a smaller portion of the industry's revenues and volume.

Deregulation

Economic deregulation has led to a wave of carrier and network restructuring, new market entrants, mergers and consolidations, greater efficiencies in the use of labor and equipment, and price reductions for shippers. Deregulation has also facilitated the growth of multimodal solutions to improve freight mobility.

Deregulation has been particularly important in the railroad industry. The Staggers Act of 1980 allowed railroads to negotiate directly with shippers for services, more readily set rates, and enter and exit markets. As a result, the volume hauled has increased, average rail rates have decreased dramatically, and labor productivity has increased four-fold since 1980.

Deregulation of trucking prompted an explosion in the number of interstate motor carriers, increasing from 18,000 in 1975 to over 500,000 in 2000 (USDOT BTS 2001c). Existing carriers developed new services and routes. Reliance on in-house trucking declined, as shippers decided to rely on the more efficient services offered by for-hire carriers. And, deregulation reduced empty back-hauls, improving productivity and reducing prices.

The ocean carrier industry has undergone several major changes over the past few decades as well. These include building new alliances, abandoning less profitable routes and ports, contracting with motor carriers for feeder and distribution services, and focusing on more profitable, high-volume, international routes. Rationalizing services permitted carriers to take advantage of the benefits of larger container ships that reduce costs, thus allowing smaller shippers and non-vessel owning common carriers to operate under the same rules as ocean carriers.

Deregulation in the air transportation industry has lowered prices for shippers, stimulated growth in air freight, and virtually doubled labor productivity. It also has spurred dedicated air-freight carriers, like passenger airlines, to develop hub and spoke operations. Furthermore, carrier investments in technologies for tracking time-sensitive shipments have enabled growth in overnight air delivery of documents and small packages.

From Push to Pull Logistics

Businesses are in the midst of an evolutionary shift from "manufacture-to-supply" or inventory-based logistics ("push" logistics) to "manufacture-to-order" or replenishment-based logistics ("pull" logistics). The latter relies less on expensive inventory and more on accurate information and timely transportation to match supply and demand. Overall, the result has been a move to coordinated logistics, the integration of distinct logistics activities such as cross-modal coordination or the bundling of transportation and inventory control. Coordinated logistics has been made possible by cross-modal mergers and acquisitions, cross-modal service alliances, web-based carrier exchanges, and the development of coordinators and integrators (third and fourth-party logistics companies). The amount of money being invested in supply-chain management tools is an indication of the increasing importance of supply-chain logistics and freight operations. It is estimated that the market for shipment tracking tools that make freight visible door-to-door will quadruple between 2000 and 2005.

Logistics are now more efficient, but in some ways more fragile that in the past. Economic deregulation over the past twenty-five years has allowed carriers to optimize the transportation system, resulting in higher productivity, but little or no excess capacity or redundancy. Excess capacity is gone from many parts of the rail network. As a result, operations have become more susceptible to even minor disruptions. The lack of redundancy limits options available to shippers, decreases competition, and contributes to price volatility. These factors place tremendous strains on the transportation system in terms of demand and reliability.

Another trend in logistics over the past few years is the increasing integration of defense logistics with commercial logistics systems. Underlying this trend is the drive to improve efficiency, particularly with the use of new information and telecommunications technologies that are affecting all supply chain processes.

Globalization

Companies and consumers in the United States and around the world increasingly rely on international trade to satisfy their demand for goods and services. Several factors have spurred this growth, including the liberalization of trade policies such as the North American Free Trade Agreement (NAFTA), the internationalization of supply chains, and changes in both transportation and information technologies that make possible the global organization of production and consumption. As a share of gross domestic product (GDP), nominal U.S. exports and imports have grown from 9 percent in 1960 to 24 percent in 1999. U.S. international trade is forecast to reach 37 percent of GDP by 2025 (DRI WEFA). Much of that trade is with NAFTA partners, followed by Japan, China, Germany, and the United Kingdom.

Figure 4. World and U.S. Merchandise Trade

View the data for figure 4 [HTML, Excel 17KB]

The growth of international trade also has influenced the location and development of air and marine cargo facilities, land border crossings, and intermodal connectors and needed improvements to existing infrastructure. Likewise, increasing reliance on containerized transport in international trade has spurred demand for larger, and more specialized container facilities and ships and more intermodal capacity to handle increased landside traffic.

previous | next