OPTIMIZATION OF FREIGHT TRANSPORTATION WITHIN NAFTA COUNTRIES: FRAMING THE ISSUES

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OPTIMIZATION OF FREIGHT TRANSPORTATION WITHIN NAFTA COUNTRIES: FRAMING THE ISSUES

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OPTIMIZATION OF FREIGHT TRANSPORTATION WITHIN NAFTA COUNTRIES: FRAMING THE ISSUES

  1. 1. OPTIMIZATION OF FREIGHT TRANSPORTATION WITHIN NAFTA COUNTRIES: FRAMING THE ISSUESJosue I HernandezEnvironmental Policy AnalysisJohns Hopkins UniversityAbstractTransportation supports and makes possible most other social and economic activities andexchanges, making its influence felt in all economic sectors. Optimization in freight transportationis a determinant factor in the success of global manufacturing and marketing strategies. Recentfree trade agreements in the Western Hemisphere, such as NAFTA, give a natural advantage tothe United States granted its geographical proximity to markets. Despite advances incommunications and technology, there are still transportation efficiency and efficacyshortcomings. Further improvements can be achieved through the optimal management oflogistics processes. The ISTEA provides the support and resources to engage in research anddevelopment activities.Freight Transportation in the United States In order to be competitive in global markets, the transportation system of the UnitedStates (U.S.) needs to meet the requirements of shippers and carriers, of consumers andproducers. The role of the transportation system is key for a dynamic economy. According tothe Bureau of Transportation Statistics (BTS), the share of transportation-related final demandin gross domestic product (GDP) provides the best description of the influence of thetransportation sector in the economy. The transportation-related final demand in GDP (U.S.DOT, Transportation In the U.S., p.11) is defined as “the value of all transportation-relatedgoods and services, regardless of industry origin, delivered to the final customer, and includesconsumer and government expenditures, investments, and net exports”. Under this perspective,transportation inputs in the economy as a share of the GDP has been close to 11 percent since1989, adding $777.2 billion to a $7.25 trillion of GDP in 1995. During the last years, 1
  2. 2. transportation activity has increased steadily, moving more goods and people, singularlywithout an increase in the consumption of resources. The share of transportation to the U.S.economic activities has remained constant. During the last years, international trade has become an increasingly important activityin the U.S. economy. The total imports and exports of goods and services increased from 11.3percent of the GDP in 1970, to 24.7 percent in 1995 (U.S. DOT, Transportation in the U.S.,p.2). An extensive network of roads, railroads, waterways, pipelines, and air routes supportfreight transportation across the country. The trade of goods, which can be considered areliable indicator of freight movement, more than duplicated, from 8.1 percent in 1970 to 19.5percent in 1995 (U.S. DOT, Transportation in the U.S., p.4). Maritime freight transportation,involving trade with other countries, also increased from 581 million tons in 1970 to over 1.1billion in 1995. According to the Commodity Flow Survey (CFS) conducted by the BTS in 1993,during a normal day in that year, roughly 33 million tons of goods were carried an averagedistance of 298 miles. The US transportation system shipped more than 12 billion tons ofgoods, generating a total of 3.6 trillion ton-miles throughout 1993. A nationwide survey of200,000 shippers provided information about the nature of their goods, what mode wasutilized, and the destination of their products (U.S. DOT, Truck Movements in America, p.1).The most probable paths used by the carriers were determined by Oak Ridge NationalLaboratory. They used advanced network simulation models and data on highways, railroads,waterways, pipelines, and air routes located in the National Transportation Atlas Database,published by the Bureau of Transportation Statistics. The data generated accounts for almostall truck activity, but it does not consider U.S. imports, foreign trade crossing U.S. territory,and national goods forwarded by household, rental, services, and government shippers. 2
  3. 3. The BTS remarks that during 1993, food and similar products, such as cereals, accountfor barely under 15 percent of the total value of shipments. However, they constitute thelargest category of commodity by cost, and the fourth largest category by tonnage. The mostimportant goods by value were processed products like chemicals or associated products;transportation equipment; non-electrical machinery; and electrical machinery, equipment, orsupplies. By weight, other important commodity categories contain raw materials such aspetroleum or coal products; non-metallic minerals; and bulk clay, concrete, glass, or stone.Transportation in the U. S. by Mode Type The transportation of goods by truck has the largest proportion of freight movement inthe U.S. For shipping distances less than 500 miles, trucks dominate by far the U.S.transportation system. They move close to 75 percent of the value and just over 50 percent ofthe weight of all goods forwarded. Oak Ridge National Laboratory calculations for theCommodity Flow Survey (Table 1) estimates that trucks transported close to 900 billion ton-miles of goods, with an estimated worth of $4.6 trillion during 1993. The most importantvariables that influence the demand for road and rail freight transportation are distance, cost,quality of service, existing alternatives, and economic and environmental conditions. Customersare influenced not only by rates and speed, but also by the perceived service quality ofalternative modes of transport. The importance of intermodal freight transportation has increased in recent years, dueto the economic advantage for shippers of using efficiently connected modes. Intermodalcarrying is defined as unitized loads, such as containers or trailers that can be transferred fromone mode to another. An important change in the development of intermodal transportation isthe increased use of the international maritime container, which is revolutionizing the railroadbusiness almost to the same degree it had previously transformed maritime transportation. The 3
  4. 4. adaptation of the container as a “container on flat car” (COFC) and its recent “double stack”(DS), has offered the possibility to the railways to compete with long-haul trucking. Table 1. U.S. Freight Shipments by ModeMode Tons % Tons-mi % Value % (Millions) (Millions) (Billions)Trucks 6,386 52.5 869,536 24.0 4,403 71.9Water 2,128 17.5 886,085 24.4 251 4.1Rail 1,544 12.7 942,561 26.0 247 4.0Pipeline 1,343 11.0 592,900 16.3 180 2.9Air 3 0.03 4,009 0.1 139 2.3Intmod. Tot. 208 1.7 235,856 6.5 660 10.8Unknown 545 4.57 96,972 2.7 244 4.0Total 12,157 100 3,627,919 100 6,124 100 Source: Pocket Guide to Transportation (U.S. DOT, p. 10), 1998 The share of intermodal movement has increased during recent years. The traditionalcombination of rail and truck transportation shipped around 41 million tons of cargo, valued at$83 billion in 1993. The prices of goods shipped by intermodal transportation are usually high.According to the BTS (U.S. DOT, Transportation in the U.S. p.11), commodities shipped bypostal, parcel, and courier services averaged $14.90 per pound, while intermodal shipmentsusing railroads and trucks had an average cost of $1.02 per pound. While the most expensivetransportation costs arise when air and air-truck combinations are used, costing an average of$22.15 per pound, the least expensive ones are under $0.10 per pound for railroads, watertransportation, and pipeline.Research and Development under ISTEA The Intermodal Surface Transportation Efficiency Act (ISTEA) was enacted in 1991, and at that moment, the statistics of transportation in the U.S. had moved through two completely different stages. The Department of Transportation (DOT) and the Census Bureau of the Department of Commerce during the 1970s conducted a comprehensive analysis of 4
  5. 5. national transportation information. Significant data-collection activities in all modes oftransportation originated comprehensive publications such as the National TransportationAtlas. This shared effort was at its best around 1977. Due to government deregulation anddiminishing federal budgets, many statistical programs were ended. As a consequence, thefederal government did not conduct any comprehensive national analysis of transportationbetween 1979 and 1989, and no national multimodal data on commodity traffic was gatheredbetween the years of 1977 and 1993. The essentiality of this class of information for thetransportation sector kept a high demand for publications. The Bureau of Transportation Statistics (BTS) was created to generate a set ofknowledge relevant to the interest of policy-makers, and to inform the public abouttransportation in the U.S. and its consequences. Its basic functions include the collection,analysis, and publication of relevant data. The BTS was directed by congress to assess thecurrent state of the transportation system, how well the information was analyzed, and toreport the statistics in the Transportation Statistics Annual Report (TSAR). So far, the BTS has delivered the requested information in most of the areas specifiedin the ISTEA. Among others, it has initiated attempts with Canada and Mexico to generate aconnected representation of freight transit in North America. The ISTEA provides the necessary resources and guidance for research anddevelopment activities. Abundant provision of resources is contributed for investigation andthe consequent application of generated innovation to solve existing highway issues. Thecreation of a new Applied Research and Technology Program is focused on the test,evaluation, and implementation of innovations to enhance the durability, efficiency, efficacy,productivity, and safety of highway, and intermodal transportation systems. As usual, required 5
  6. 6. funds are available for new construction, but the program will emphasize the protection,improvement, and increased efficiency of existing facilities. ISTEA has the authority to initiate an integrated plan at a national level to promoteresearch and development for the surface transportation. The Research Advisory Committeeand the National Council on Surface Transportation Research are in charge. The function ofthe Committee is to provide timely advice to the secretary about issues with respect toresearch and development activities in the short and the long run. With the creation of a newInternational Highway Transportation Outreach Program, the U.S. highway community willbe able to promote and to transfer domestic transit expertise to other countries. The activitiesof the Council include the analysis of technology developments in the U.S. and around theworld; the identification of discontinuities and duplications in the national system; and thedetermination potential areas in which productivity, efficiency, safety, and durability of thenational network can benefit.Global Trade and Freight Transportation Transportation accessibility nourishes and promotes most of the current social andeconomic activities in the nation. Transportation of merchandise is a determinant activity inthe U.S. economy, not only as compared by its proportion in the economic activities of thecountry, but also by the growing predominance that the transportation and distribution ofcommodities have on the performance of essentially all the different sectors of the economy. The world economy of today is totally different from the world economy that existedin 1948, when the General Agreement on Tariffs and Trade (GATT) started at BrettonWoods. Worldwide economic deregulation has changed the economic landscape during thelast two decades. In addition to the increased membership and the reach of the GATT, theeconomic benefits for its constituents have also expanded. For instance, tariffs around the 6
  7. 7. world have diminished from an average of around 40 percent after World War II, to thepresent level of about 5 percent (Sager, p.240). However, the increased number of GATTmember nations and the increasing complexity of trade issues considered in GATT meetingshave encouraged the formation of preferential and regional trade agreements. The start of regional trade agreements is a natural response to geographical proximity.Normally, members of a regional trade agreement are close geographically and, in response tolower transport and communication costs, they can be expected to have intensive trade,regardless of the status of a multilateral trading system such as the GAAT. The increasedglobalization of the economy and the need for long distance movement of freight, people, andinformation, usually in trips that can be characterized as intermodal, accentuates theimportance of transportation for all economic activities. The international commercial activity of the 1990s has benefited from a sequence offree trade agreements. The objective of these pacts, in both a global and a regional scale, is todevelop an even economic environment among pact partners. As trade barriers are lowered,trade pacts are enabling profound market changes across the globe and are accelerating globaltrade activity. Modern market changes include the reduction of quotas and tariffs, moreeconomic stability, and a developed consumerism in many new markets. However, in order tohave a successful free trade agreement, one of the determinant factors is freight transportationcost. A trade agreement is justified, in economic terms, if it improves the social welfare ofthe participant countries. One way to characterize trade costs, is to locate them among thepolar cases of zero and infinite inter-regional transportation costs, respectively. In order tohave a complete analysis, there is the need of a general model that can manipulate theintermediate realistic case, where transportation costs between regions are less than infinite, 7
  8. 8. while greater than zero. Data collected through the period of 1965 to 1990 indicates thatthose real values for intra-continental cost range from 10 percent, the proportion of the totalcost of the commodity at which transportation costs are beginning to be a burden, to 16percent. Hauling through long distances can generate costs greater than the freight value andinsurance amount required by the physical transport of goods. Transportation costs of 16percent are frequent, but local production and imports from closer suppliers make itunsustainable on the long run. As expected, negative returns to regionalization may begin toset when transportation costs reach about 23 percent (Frankel, et. al., p.68). Despite theobvious importance of distance in transportation costs, and the impact of the latter in thevolume of trade, empirical studies repeatedly underestimate the importance of this factor. Thedistances considered by some researchers are usually between the major cities of the regions inquestion. The recent market changes and the drop of trade barriers have encouraged trafficshifts, moving to new, untapped locations. For instance, economic improvements inMERCOSUR countries have allowed U.S. exports growth of over 40 percent to this regionfrom 1993 to 1996. As a consequence, shippers are now transporting different types ofproducts to new locations, as new markets open. Economic development in different regionsof the world demand products from industrialized countries. Commodities like railroadequipment, power station components, and industrial equipment, are being transported fromall points on the world to new, and often distant, locations. Freight transporters areconfronting new demands. Carriers must be able to manage the challenge of physically movingthese goods to unusual destinations. They must also consider cost-related new complications,such as the improbability of any sort of back-haul from these places.Trade in the Western Hemisphere 8
  9. 9. In the Western Hemisphere, as in the rest of the world, the natural determinants oftrade are the physical proximity of related countries, their sizes and GDP, and whether theyshare a common language or a common border. It is a normal practice that countries, evenwithout the formation of regional trade areas or preferential trading arrangements of any sort,trade more with their neighbors than with other countries, in a large part because of freighttransportation costs. Most of the regional trade agreements in the Western Hemisphere that wereestablished in the past did not initially come to much, such as the 1960 Central AmericanCommon Market (CACM), the 1960 Latin America Free Trade Association (LAFTA) or the1969 Andean Pact. However, recent trade agreements have been more serious, for example,the Canadian-US Free Trade Agreement negotiations were successfully concluded in 1988,and the treaty went into effect in 1989. MERCOSUR was negotiated between Argentina,Brazil, Paraguay and Uruguay in March 1990, scheduling an elimination of all regional tariffsby the end of 1994. Colombia and Venezuela revitalized the Andes Pact in the 1990-1991period. The North American Free Trade Agreement (NAFTA) started negotiations betweenthe Canadian, Mexican, and U.S. governments in 1992, and went into effect on January 1 st,1994.The North American Free Trade Agreement According to information provided by the BTS Trans-border Surface Freight Dataset,released by the Census Bureau in 1995, nearly $274 billion worth of goods moved by landbetween Canada and the U.S., up 10.5 percent from 1994, the first year NAFTA was in effect.By freight worth, 68 percent of this traffic moved by truck, 20 percent by rail, and 4 percentby pipeline. The rest moved by other surface modes. Trade between Mexico and the U.S.moved by land during 1995 was over $97 billion worth of goods, up 7.8 percent from 1994. 9
  10. 10. By value, 81 percent of this trade moved by truck, and 14 percent by rail. Along the U.S.-Mexican border, there were approximately 11,000 truck crossings from Mexico to the U.S. onan average weekday of 1995. This represents a 27 percent increase from 1992, and there arestrong indications that the trend will continue into the future. There is evidence that NAFTA is making improvements on both the dimension andcomposition of trade flows. During 1994, NAFTA’s first year, trade between the NAFTApartners grew by 17 percent over 1993, reaching a record of $350 billion. Recentdevelopments suggest shippers are likely to see more opportunities for efficiency as privateinvestment and lowering trade barriers force market changes forward. For example, theMexican government is privatizing the national railroads, speeding the sale of its containerterminals, and improving the performance major highways. These changes should improveinland transportation efficiency. However, meaningful improvements will likely take severalyears to implement. Meanwhile, changing market dynamics resulting from the NAFTA have allowed U.S.businesses to increase their share in the North American market, for instance, U.S. auto partsstarted to get a competitive advantage over Japanese ones to supply auto manufacturers inCanada and Mexico. This competitive advantage has been driven by reduced tariffs, integratedrules of origin and amplified transportation arrangements. Combined, these have loweredcosts and reduced cycle time. Other companies are taking advantage of new marketopportunities by relocating production. For example, market changes generated by NAFTAcompelled Kodak to repatriate some of its production back to North America from Europe; inorder to accommodate expected increased film exports in the region. However, companies and governments need to be aware that in the long run, unstablemarket forces can block commercial opportunities in emerging markets like Mexico. 10
  11. 11. Developing markets typically experience cycles of economic unrest, characterized by politicalturmoil, trade imbalances, and currency fluctuations. For example, since the commercial tariffsopened to Mexico in 1994, there were episodes of political strife, export surges and recedes,and a major devaluation of the peso.Addressing the Issues The rules of the game are changing along the implementation of the free trade pactsand are driving changes in the fundamental rules of the logistics structure. These dynamics areproviding freight forwarders with many opportunities and challenges that previously were notpart of their decision alternatives. The implications of these rule changes can have immenseconsequences for both shippers and carriers. This perception is supported by an AmericanManagement Association survey, in which half of the 146 companies surveyed feel that tradeglobalization will have the greatest impact on their business in the coming years (Zubrod,p.62). These companies can have new opportunities as changes in trade flows occur: they canreduce costs by rationalizing and relocating sourcing and production to different locations, byminimizing transportation costs. They can also take the opportunity to serve with reasonableprofits a broader consumer base in the newly expanded markets. Policies established by governments can significantly affect the amount of traffic andtherefore the utilization and efficiency of a transportation system. Prevalent examples ofgovernment rulings include energy pricing and taxation, mode imposition, infrastructureutilization pricing, etc. Changes in the regulation of transportation can have a powerfulimpact on the operation and competitive environment of transportation firms. Thederegulation effort of the 1980s, particularly in North America and currently starting to gainmomentum in Europe, has seen governments remove numerous rules and restrictions. Themain effects can be seen in the entry of new firms in the market and in the fixing of tariffs and 11
  12. 12. routes, resulting in a more competitive industry and in changes in the number andcharacteristics of the transportation firms. Simultaneously, more stringent safety regulationshave been imposed, resulting in complicated planning and operating procedures. As producers of commodities look to capitalize on new opportunities brought bymarket changes, they also encounter new challenges. For example, small and medium-sizedcompanies are finding themselves under strong competition, missing free trade opportunitiesbecause they lack the scale and financial agility to react quickly to changing trade flows. In thecase of large corporations, that do have the scale and financial agility to extend a portion oftheir supply chain to newly liberalized markets, they are mostly restrained because oflimitations of the transportation infrastructure. As an example, exporters sending rawmaterials to Mexico for manufacturing, face new logistics challenges such as transportationequipment shortages, long and unpredictable inland transit times, and long delays at thecustoms. Even as shippers stretch their supply chains across unfamiliar and distant markets, theyare continuously raising expectations for reduced cycle times, lower inventory levels andincreased market responsiveness. As producers of goods are restructuring their logisticsnetworks, they are also looking for different alternatives to meet their transportation needs,looking at the way they buy transportation services. Consequently, their key purchasingfactors for logistics services are now based on capabilities such as mobilizing and managingincreasingly complex information and physical flows at reasonable prices.Carrier Demands Freight carriers in North America are increasingly facing constant changes in theprocess of supplying production and distributing commodities, as requests from NAFTAshippers arrive. To meet those changes transportation providers need to accommodate to 12
  13. 13. frequent shifts in buying behavior, just-in-time (JIT) deliveries requests, and increasedcomplexity in information. Those carriers who want to participate and succeed in the evolvingglobal market require three new capabilities such as access to information and technology,increased scale throughout the world, and the ability to integrate the components of thesupply chain. Access to Information and Technology. Transportation providers can obtain earlieraccess to useful information such as raw material orders, target cycle times, and salesforecasts, linking up with shippers. Current demands for information are related with thedomestic transportation of international trade, costs of transportation, motor vehiclesavailability, and railroad geography and condition, among others. There are sophisticatedsystems that can provide carriers with the ability to manage both information and physicalflows by linking with information centers. The centers can provide internal analysis, such asplanning and execution information, purchase order data, and shipment interface information. Scale Expansion. One of the fundamental skills of transportation providers is theability to be immediately responsive, with cost-competitive, seamless global service. Thiscapability requires a certain critical mass of the transportation firm to efficiently mobilizecommodities for customers anywhere in the world. Some small and medium-sizedtransportation forwarders are finding themselves able to compete only in price, and mayeventually be driven out of business. They are disadvantaged because of their inability toprovide the reliability of service or the physical equipment needed to flexibly respond to thedemands of shippers. Supply Chain Integration. Another important advantage is the ability to integrate andaggressively manage the components of the regional supply network. Transportationproviders are the link between shifting global supply and demand locations. To be successful, 13
  14. 14. freight forwarders require the management capability to orchestrate real-time informationacross different modes and geography. An overview of the U.S. transportation system clearly indicates that despite extensivetransportation infrastructure and technological advances, connections between the differenttransportation modes are typically the weakest links in the national transportation system.Bottlenecks at transfer terminals can result in costly delays, as currently happens in most WestCoast international maritime ports. Historically, the national railroad network has been dividedin eastern and western railroad companies, with one of the railroads providing coast-to-coastservice on a single set of tracks. A strong NAFTA concern is about whether north-southtransportation costs could obstruct the growth of trade among the U.S., Canada and Mexico.However, highway, railroad, and water links provide states in the Midwest comparativelygood access to eastern Canadian cities, which, in turn, have relatively good access to the U.S.Gulf Coast ports. U.S. trade with Canada is concentrated in the industrialized Northeast andMidwest. Trade with Mexico is even more concentrated geographically, remarkably withTexas and California. As a summary, the tasks ahead to develop a transportation system that can enhancethe commercial performance of companies, individuals, and governments in the NAFTAcountries, given the current competitive global pressures to dominate markets, are as follows:identify what kind of information is needed in order to carry sound transportation planning,and design the means to collect it; develop a NAFTA-wide inventory of modes of freighttransportation; locate where there are bottlenecks and where there is under utilization; andidentify present and future sources of supply and demand, across all different kinds ofcommodities, from natural resources to manufactured products. 14
  15. 15. Based on existing and forecasted information, planners have to develop transitscenarios that can meet present and future transportation needs in an efficient and effectiveway. In case the analytical tools identify non-existing better alternatives, economists shouldrun benefit-cost analyses to evaluate the construction of new railroads, highways, intermodalinstallations, maritime ports, etc. Planners should also maintain awareness of potentiallydisturbing factors that can affect freight transportation, such as oil prices, demographychanges and migration, regional policies towards trade, depletable resources, globalenvironmental concerns, etc. Basically, what is needed is to create a NAFTA scheme, capable of recognizinginefficiencies and opportunities, making the right decisions, building up infrastructure, andabove all, capable of and prone to provide timely and meaningful information to the public.The market place will make optimization run efficient trade in North America.Transportation Models Transportation anywhere in the world is a complicated field, with multiple players andlevels of decision, where investments are usually capital intensive and the implementationtakes a long time. Freight traffic needs to be flexible enough to react to changes in thepolitical, social, and economic trends. It is a field where timely and efficient methods andinstruments are needed to help and to improve the planning and decision-making processes.For the benefit of the NAFTA region, the freight transportation industry has to accomplishhigh efficiency in terms of economic efficiency and service quality. Economic performance today is not just in terms of regional optimization; NorthAmerican dependence in imported oil, cheaper and better foreign technology, raw materials,among others, can exercise a negative effect in the trade balance. 15
  16. 16. Industry is aware of these competitive trends, and it is adapting to new paradigms onproduction and management. Practices such as small or no inventories associated with JITsupply, production, and distribution; quality control of the entire logistics process driven bycustomer demands and requirements, etc., compels high service standards on thetransportation industry. This applies, in particular, to absolute delivery time and reliability ofthe transportation sector. The Council of Logistics Management (Fawcet, p. 18) has defined logistics as “theprocess of planning, implementing, and controlling the efficient, effective flow and storage ofmaterials, finished goods, services, and related information from origin to the location wherethey are used or consumed”. The success of business competing in global markets depends inthe implementation of sound management of logistics strategies. Reliable decision-making induces the development of policies and operating strategiesthat can be operative over long time horizons. These decisions determine the design andconstruction of physical infrastructure (highways, railroads, loading and unloading terminals,etc.), where to locate the facilities, on what lines to add capacity or which ones to abandon,etc. The above issues can be collectively recognized as logistics system design. With thisunified approach, regional, national, and international levels of integration can be examined,and strategic models and plans for the freight transportation industry can be consideredsimultaneously. The models most frequently used are the following. Location Models. The sitting of one or several facilities, in this case transportationinfrastructure, are considered location problems by the systems engineering discipline. Themost frequent objective is to facilitate the transportation of goods or the supplying of servicesalong a given transportation network. They can be classified as follows. 16
  17. 17. • Covering problems are usually dealing with the optimal location of public facilities such as schools, post offices, and libraries. These models position infrastructure at the vertices of a network, so that the remaining vertices are covered by the chosen facility. One of the objectives can be to minimize the total cost of locating them. • Center problems frequently originate when there is the need to locate emergency facilities such as ambulance, police, and fire stations. Center models position infrastructure at vertices of a network to minimize the distance between a vertex and a facility. • Median problems are reasonably applicable to freight distribution, usually in the form of intermodal terminals, storage and distribution centers. Median models locate infrastructure at vertices of a network and designate demands to these facilities to minimize the total weighted distance between facilities and demand areas. More complicated location problems can arise in production and transportationplanning. For example, the models for a multi-commodity site location. The formulation couldaim to determine the logistics design of the land distribution and transportation of aninternational freight transportation company. The planning scheme could include thedetermination of inland depots, the assignment of customers to depots for each commoditytype, and direction of operations and the determination of the main repositioning flows ofempty containers to counter the regional differences between supplies and demand. Currently,there are computer applications that can work through new communications technology suchas the Internet. Model 204, a product of Computer Corporation of America, is databasesoftware that can be able to handle complex information needs, such as the ones required bythe logistics problem stated above. Network Design Models. Network design problems are considered a generalization oflocation formulations. They are graphically represented by nodes or vertices connected bylinks. The vertices usually represent origins or destinations of some transportation supply ordemand of commodities. The links can have several properties such as distance, carryingcapacity, and costs. 17
  18. 18. From a planning perspective, freight transportation can be divided in operations thatare concerned primarily with long-distance movements of commodities, such as railroadtransportation and less-than-truckload (LTL) trucking, and those that execute several pickupand delivery operations, over relatively short distances. The first case is often recognized asthe service network design problem, and the second type of operations is frequently identifiedas vehicle routing problems. Spatial equilibrium models can be useful for companies, governments and multilateralorganizations interested in a wider perspective of a regional economic performance. Decision-makers can improve the quality of their analysis and resolutions if they integrate spatialmodeling in their information package. This analytical tool is embodied in the theory ofcompetitive spatial market equilibrium, which investigates and examines trade andtransportation expenses between different locations, with explicit supply and demandcharacteristics. The prediction of multicommodity freight flows over multimode networks is animportant component of the economics of transportation. However, perhaps due to theinherent difficulties and complexities of such problems, the study and modeling of freightflows at the regional, national or international levels have not yet achieved full development.Conclusions Within the NAFTA context, freight transporters must find ways to improve theirresources and capabilities. In order to serve more complex global demands and to face thecompetitive challenges of a deregulated environment, transportation providers need toestablish strategic associations with both shippers and other carriers to meet the NorthAmerican success requirements. By cooperating with and partnering with shippers,transportation providers can become more integrated with their customers. There is the 18
  19. 19. strategic need to share information, facilities, equipment, and personnel since their jointperformance can improve decisions, costs, and reliability. By cooperating with and partnering with other transportation providers, carriers candevelop virtual global transportation networks and take advantage of someone else’s scale ofcompetence. This “virtual scale” gives carriers, regardless of their size, access to integratedsupply chain skills, more flexible service, and better resource utilization. Transportationproviders can become more informationally integrated and physically interdependent. As apossible result of this cooperation, we could see a new class of carrier in North America, verydifferent from the common definition. Transportation systems comprehend a great deal of material and human resources.They exhibit complicated relationships and tradeoffs among the several decisions andmanagement policies affecting the system. The policies concerning any entity interested in thegood performance of trade are the following. Strategic policies involve long-term planning, and the decisions are made at the highestmanagement levels. They usually require considerable capital investments over a long periodof time. Infrastructure such as physical networks, construction of service facilities, andresource acquisition are good examples. New infrastructure can be constructed or improveexisting ones. Decisions also include the abandonment of underused and unprofitable facilities. Tactical policies are for medium-term planning, and they look for an efficient use ofresources aimed to get better performance of current facilities. This type of decision addressesissues located between the long-term and day-to-day operations. Route choices, type ofservices to operate, and repositioning of supplies are among the tactical decisions made at thislevel. 19
  20. 20. Operational policies involve local management in very active surroundings. Its domainis the short-term planning, where the time factor plays a significant role. Activities such as thescheduling of services, maintenance activities, and crew management, are relevant operationaldecisions. Efficiency in freight transportation is good not only for shippers and transporters, butalso to the entire NAFTA economy. Therefore, the participation of governments in providingdata, communications, and physical infrastructure at the expense of taxpayers, is going tocome back in the form of improved social welfare. In the case of Canada, for example, transportation is a sector that presents specialproblems for the government at all levels. It is one of the few economic sectors in which allindicators are moving in the wrong direction. In addressing the challenge, Canada will requirethe work and cooperation of all levels of the public sector, in many different facets of societaland economic activities. One aspect of this challenge will require a stronger reliance ontransportation demand management (TDM) in order to reverse current indicators. In the U.S., despite recent investments in information systems, logistics informationcapabilities are still inadequate to support strategic business decision-making. Capturing,analyzing and disseminating relevant information in a timely manner is a major challenge tosupport global operations of freight carriers. As a consequence of a demanding marketplace,excellence in logistics has become the objective of manufacturers throughout the NAFTAcountries. The rationale is that optimization in logistics allows manufacturers to effectivelyand efficiently produce and deliver a more competitive product/service package to theircustomers, wherever they operate in today’s global market. What this all means, is thatexpanding trade activity has prompted market changes that have, in turn, transformed the 20
  21. 21. mechanisms for international supply chain management. Recent developments suggest thatglobal logistics is becoming an activity indexed by cooperation and integration capabilities. The future success of freight transportation firms will depend in finding ways tocompete on information and management service capabilities, rather than on a traditionalasset-based capability. What is at stake is not only the future of the freight forwarders, butalso the economic well being of suppliers and consumers to which they provide services.Confronted with other economic regions, the European Community is gearing up, the ultimatecasualty may be the North American economy. It is up to the governments of Canada,Mexico, and the United States to provide the adequate support to facilitate and enhance tradein the NAFTA area. References 21
  22. 22. Fawcett, S. E. and Clinton, S. R. (1997) “Enhancing Logistics to Improve theCompetitiveness of Manufacturing Organizations” Transportation Journal V31 N1.Frankel, J., Stain, E., Wei, S. (1995) “Trading Blocks and the Americas: The Natural, theUnnatural, and the Super-natural” Journal of Development Economics V47 N1.Lustig, N. C. (1997) “NAFTA: Setting the Record Straight” The World Economy V20 N5.Sager, M. A. (1997) “Regional Trade Agreements: Their Role and the Economic Impact onTrade Flows” The World Economy V20 N2. Check.U.S. Department of Transportation Bureau of Transportation Statistics (1998) “Pocket Guideto Transportation” U.S. Department of Transportation. U.S. Department of Transportation Bureau of Transportation Statistics (1997)“Transportation in the United States: A Review” U.S. Department of Transportation.U.S. Department of Transportation Bureau of Transportation Statistics (1997) “TruckMovements in America” TranStats May 1997.Zubrod, J. F. and Barron, M. B. (1996) “Trade Pacts Fuel a Transformation in the Rules ofGlobal Logistics” Transport &Distribution V37 N4. 22

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