Transportation Market Structures

Transportation Market Structures

1. Pure Competition
• A purely competitive market consists of many sellers offering identical products or services and many buyers with no buyer or seller able to influence the market
• A seller who prices above the market even by a small amount will lose substantial sales to competitors
• A seller who prices below the market will quickly sell out, but suffer lower profits
• Truck transportation going out of California provides a regional example of a highly competitive market, but the competition results from excess supply of trucks, not from general market structure
  
2. Monopolistic Competition
• Many buyers and many sellers characterize Monopolistic Competition, but sellers offer products and services that differ slightly from one another
• Both regulatory and financial entry barriers may exist, but are not insurmountable.
• If an individual wants to start a trucking company, the largest barrier to getting started is financial (Cost of a Tractor and Trailer is around $100,000)
• But compared with buying a train engine (several million dollars), the barrier is reasonably low.
• Price competition is substantial and buyers can shop for the best price
• Motor carriers operate in an environment of monopolistic competition
  
3. Oligopoly
• There are only a handful of sellers in an oligopoly, but a very large number of buyers.
• Sellers are interdependent and greatly influence price
• Products and services substitute readily for one another in an oligopoly
• The market for new automobiles is an example of oligopoly
• Both financial and regulatory barriers may obstruct entry in an oligopoly
• Airplanes, Pipelines, Rail Roads, and Water Carriers, all operate in Oligopolies
  
4. Monopoly
• Monopoly has one seller and many buyers
• The seller decides the price charged as there are no substitutes for the product or service
• The barriers to create monopolies are quite extensive and normally are regulatory or geographic
• Regulatory barriers refer to entry being restricted by the Government. Geographic barriers refer to the product/service being offered only in certain locations
• No mode of transportation operates in a monopoly, but a carrier may enjoy a monopoly in a location due to lack of competition

Transportation Cost Structures

1. Fixed Costs
• A fixed cost does not vary with a change in output
• Certain costs are constant regardless of the firm's activities
• Example: The capital invested in Rail Road Tracks, Airplanes, or Tractors
  
2. Variable Costs
• A variable cost changes as output changes
• Examples: Fuel Costs, Water, Maintenance Costs
• High variable costs increase as volume increases while fixed costs do not increase
  
3. Joint Costs
• A joint cost occurs when the production of one product or service requires or offers the production of another product or service
• Example: A railroad moves goods from New York to Los Angeles. It now haqs engines available in LA to provide back-haul service to NY or additional transportation from LA. Cost of placing the train in LA is a Joint cost with the NY to LA run
• All modes incur Joint Costs to some extent.
  
4. Common Costs
• Common costs cannot be directly associated with a product or activity.
• Example: A trailer/tractor traveling from Dallas to Chicago with three shipments breaks down and requires $500 in repairs.  This cost is added to all the three shipments
• Common costs are expressed as a percentage of Overall Costs

Airlines are a variable cost mode because they do not own their rights-of-way
Motor Carriers, like Airlines, do not own the path of travel and therefore considered Variable Cost Carriers.
Pipelines are heavy fixed cost carriers (Very capital intensive).
Railroads are fixed cost carriers as they own their equipment and tracks.
Water Carriers are Variable Cost Carriers because they do not own the waterways

Transportation Management

Transportation Strategy:

1. What mode of transportation should be used?
2. What carriers in each mode should be used?
3. Will the firm operate its own fleet or hire outside carriers for transportation services?
4. Will the firm manage transportation operations or hire a third party?

Modal Characteristics

1. Nature of the Goods
• The nature of goods and nature of shipment affect modal choice
• Examples:
• Low valued bulk goods are never sent by air transportation
• Diamonds and Silicon Ships are never transported by ships
• The choice between truck and rail for packaged consumer goods demands more analysis and care
  
2. Access to Carriers
• Navigable water system for the United States does not reach all points
• Similar limitations of access applies to air, rail, and pipeline.
• Roads go almost everywhere.  Therefore, most goods will reach their destination by truck
• As motor carriage is expensive, trucks my carry goods for shorter distances and Intermodal transportation used to cover large areas
  
3. Price
• Pricing based on costs takes into account the total cost of the service, which includes both time and money
• Time is measured in how quickly the goods move, not how quickly the vehicle moves
  
4. Transit Time
• Time from the shipment of the order at the origin to the receipt of the order at the destination
• Transit time is measured from the shipper door to customer door, not from terminal to terminal
  
5. Security of the Goods
• Terminals and other stops in the system jeopardize goods
• Motor carriers maintain the security of goods better than other modes of transportation
  
6. Government Regulations
• Government imposes regulations on transportation of hazardous materials and load sizes
• Regulations focus on safety
  

Carrier Characteristics

1. Price
• Cost-of-Service pricing
• Cost-of-Service Pricing is defined as charging a rate that at least covers the expense of providing that service
• Low valued products often move under COSP
• Cross-Subsidizing refers to rates for some products covering only marginal costs while rates for other products can be higher
  
• Full-Cost pricing
• Full-Cost pricing refers to a price that covers all variable costs of shipment plus a fair share of the fixed costs
• Full-Cost pricing allows the carrier to cover all costs
  
• Value-of-Service pricing
• Value-of-Service pricing refers to what the traffic will bear
• The rate charged maximizes revenue regardless of costs
  
• Pricing variables
• Other variables that influence the price for transportation services include: Volume, Handling Requirements, Liability, Market Factors, Density, Stowability and Distance
  
2. Accessibility
• Transportation capacity must be available when and where the integrated system needs it
• Often Rail and Motor carriers place equipment at customer sites
  
3. Responsiveness
• This refers to how readily the carrier responds to changing customer needs
• Some carriers provide only those services desired in their contract
• This gives the opportunities to small, flexible carriers to grow
  
4. Claims Record
• Some carriers damage goods more often than others
• The low-priced carrier may not be the low-cost carrier due to claims for damaged goods
  
5. Reliability
• Carriers that consistently deliver goods on time add more value than those that do not
• The importance of reliable delivery and pickup rises as firms move towards just-in-time and quick response systems

Private Fleet or For-Hire Carriage

• Private fleet provides control but the management has to solve the following types of problems:
• Back-Hauls
• Lane Imbalances
• Driver Turnover
• Pallet Return
• Container Utilization
• etc.
• Using For-Hire carriage sacrifices control, but leaves the worry of vehicle utilization to the carrier's management

Third Parties vs. In-House Transportation

• A third party is neither a carrier nor a shipper, but arranges logistics operations for shippers and receivers
• Third parties include brokers, network firms, and asset based logistics firms

Terminal Operations

• In truckload operations, the terminal serves as a Driver Center, A Clearing House for Customer Information, A Sales Office, and a Maintenance Shop
• Rail Yards also sort and consolidate, but instead of single shipments or packages, they sort railcars
• Goods arrive at a retail distribution center in Bulk-In Cartons, or truckloads, or pallet loads
• The bulk is broken into smaller shipments for delivery to retail stores

Transportation Manager Activities

1. Contract Negotiations
• A transportation manager may negotiate to buy transportation services, to sell transportation services or both
• Buyers focus on the ability of the seller to meet specific delivery requirements
• Sellers focus on the profit margin, labor requirements, frequency of shipments and lane balance
  
2. Efficiency Improvement
• Transportation managers seek to improve operational efficiency by reviewing potential for cost cutting and customer service enhancing opportunities
  
3. Evaluation of Customer Service Quality Levels
• Transportation managers must measure customer service
• This requries a process to monitor and improve those services
• Quality is measured by customer standards
• Key Issues:
• Terms of Sale
• Credit Arrangements
• Transit-Time Reliability
• Door-to-Door Transit Time
• Los and Damage percentages
• Handling of Lost and Damaged Shipments
  
4. Supervision
• Integrated Logistics Managers oversee supervisors and managers charged with customer service, materials handling, transportation, and inventory control
  
5. Skill Requirements
• Integrated Logistics Managers and Staff must thoroughly understand the management of these services
• Even when using purchased 'For-Hire' transportation, Logistics Professionals still need a sound understanding of transportation management
6. Documentation Requriements
• The Bill of Lading includes the terms and conditions of transportation
• The terms address issues like reasonable dispatch requriements, carrier liability for loss and damage
• Common carriers are typically held liable for the full value of lost or damaged products unless they can prove one of the five exceptions:
1. Act of God (Example: Earthquake)
2. Act of Public Enemy (Example: Military attack against us)
3. Act of Shipper (Example: Improper Packaging)
4. Act of Public Authority (Example: Impounded by the Police)
5. Act Resulting from Inherent Nature of the Goods (Example: Rust)
• One or more of the4se exceptions must be solely responsible for the loss or damage or the common carrier will most likely be found liable for the goods
• A Freight Bill is an invoice from the carrier to the shipper for the transportation services.
• Freight Charges are usually handled as either Prepaid or Collect Charges
• PrepaidFeight Bills are issued on the date of shipment
• Collect Bills are issued on the Date of Delivery
• A Shipping Manifest lists individual stops when multiple shipments are on the same vehicle
• Less-than-Load (LTL) Operations require Shipment Manifests, since a Basic LTL Operation consolidates small shipments as a full load
• A Shipping Manifest improves handling and scheduling of multiple shipments
• The result is a more efficient delivery