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Transportation Impacts Upon Supply Chains
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Transportation Impacts Upon Supply Chains

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There is little good news on the horizon for transportation costs. However, supply chain professionals may be able to mitigate these impacts with strategic planning.

There is little good news on the horizon for transportation costs. However, supply chain professionals may be able to mitigate these impacts with strategic planning.

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  • Good evening! I’m Frank Scheer and welcome to tonight’s Early Bird Seminar. Out topic tonight is a review of transportation issues that will have profound economic impacts upon all supply chains during the next few years. I am generally optimistic by nature. Unfortunately, none of the items I discuss are positive. However, strategic purchasing approaches can mitigate impacts from some of the areas we’ll discuss. In other cases, a procurement should plan for these impacts so that an organization isn’t blind-sided.
  • Following a brief introduction, we’ll spend time discussing each transportation mode that you are likely to deal with. Few domestic supply chains utilize river and lake transportation, or pipelines. Therefore, we’ll drop those from discussion to conserve time. The remaining three modes –highway, railway, and airway– will be discussed in that order. My rationale is that nearly every supply chain utilizes highway transportation in some form, while fewer rely upon rail, or airline services.
  • Large shippers are concerned with infrastructure supporting economic growth Some are supporting increased fuel tax Many believe better to pay now than later (congestion / cost of inventory)

Transcript

  • 1. Domestic Transportation Trends Impacting Supply Management Frank Scheer Surface Transportation USPS Supply Management NAPM - NCA - Early Bird Seminar March 8 , 2011
  • 2. Introduction Transportation Trend overviews by Mode: Highway Railway Airway Summary and Discussion Transp. Impacts on Supply Mgmt. Agenda
  • 3. Transp. Impacts on Supply Mgmt. Introduction A supply chain consists of nodes and links between materiel sources and a user. Nodes are production or warehousing activities. Links are usually transportation functions to move materiel from one node to the next. Transportation permeates a supply chain, therefore capacity and cost impacts have a profound impact upon the procurement of all commodities.
  • 4. Transp. Impacts on Supply Mgmt. Highway Issue - Fuel
    • Supply sources are uncertain, creating upward pressure on crude oil
    • Demand is rising in countries that formerly consumed lesser amounts of petroleum products
    • Production capacity is trailing demand
    • Likely impacts:
      • Upward influence on carrier rates rates
      • May see spot shortages, limiting or delaying transportation in geographic areas
  • 5. Transp. Impacts on Supply Mgmt. Highway Issue - Drivers
    • Fewer drivers entering the occupation - average turnover 100 percent per year
    • Driver pay projected to increase
    • Not enough quality drivers
    • Desire to be home every night
    • Likely impacts:
      • Upward influence on carrier rates
      • May see spot shortages, limiting or delaying transportation in geographic areas
      • Fleets are having difficult time finding highly qualified drivers to expand
  • 6. Transp. Impacts on Supply Mgmt. Highway Issue - CSA
      • The Carrier Safety Act (CSA) operational model quantified the on-road safety performance of carriers and drivers to identify candidates for intervention
        • Determine the specific safety problems exhibited by a carrier or driver
        • Monitor whether safety problems are improving or getting worse
      • Likely impacts:
          • Upward influence on insurance rates
          • May reduce pool of available truck drivers.
          • Compliance costs may be significant
          • Carrier selection based on safety record will become crucial
  • 7.
    • October 2009 FMCSA announced it would reconsider the embroiled HOS issue
      • New draft rule released December 23 rd , 2010
    • FMCSA now collecting public comments
      • Final rule to be issued by FMCSA in June 2011
      • Likely Impacts
        • Loss of the 11 ‘drive’ hour and restart provision reduces miles driven per day
        • Very complex – not all supply chains will be impacted the same; shippers need to perform individual analysis
    Transp. Impacts on Supply Mgmt. Highway Issue – Hours of Service (HOS)
  • 8.
    • Annual need to repair and expansion of infrastructure: estimated $80-100 billion per year
    • Reduced speeds in an increasing number of work zones, resulting in longer transit times
      • Likely impacts:
          • Higher road use taxes included in fuel costs
          • Fewer productive miles per hour for assets and drivers
          • Reduced reach from distribution centers within one day
          • Potential for more accidents around work zones, increasing the incidence of insurance claims and thereby boosting premiums paid by carriers
    Transp. Impacts on Supply Mgmt. Highway Issue – The Highway Bill
  • 9. Transp. Impacts on Supply Mgmt. Highway Issue - Fuel
      • Fuel has become the most significant cost issue for highway transportation services
        • Substantial price volatility driven by multiple causes
          • Examples: availability, quality, competing demand for products refined from crude, societal uncertainty
        • Significant risk of spot shortages bringing commerce to a halt
      • Likely impacts:
          • Upward influence on trucking rates
          • Contract pricing now usually includes a fuel adjustment factor
          • Environmental controls may reduce miles per gallon
  • 10. Trans. Impacts on Supply Mgmt. Railway Issue – Right of Ways
      • Railroads own their own right-of-ways (ROW) and refer to it as their “franchise.” All maintenance, repairs, and improvements are recovered as a portion of freight rates.
        • Most railroads only make spot investments to relieve bottlenecks, not expand total capacity
        • Environmental concerns make new ROWs unlikely
      • Likely impacts:
          • Rail industry consider capacity to be fixed, and fill the system with traffic bearing the highest rates to maximize “franchise” benefits for its shareholders
          • Shippers seeking rail connections are limited to the existing network unless the shipments are intermodal
  • 11. Trans. Impacts on Supply Mgmt. Railway Issue - Equipment
      • Railways are increasing their orientation of becoming transportation wholesalers. They are reluctant to invest in rolling stock, preferring to have shippers supply their own equipment.
        • Railways have less incentive for speed or reliability when their equipment investment is tied up in system congestion
      • Likely impacts:
          • Shippers will need to lease or own railcars or manage maintenance in addition to paying for their movement
          • The rate concession offered for shipper-provided equipment is usually less that the shipper’s cost
  • 12. Transp. Impacts on Supply Mgmt. Railway Issue - Fuel
      • Fuel is a significant cost to railroads, but lower consumption per ton-mile that either highway or airway modes
        • Substantial price volatility driven by multiple causes
          • Examples: availability, quality, competing demand for products refined from crude, societal uncertainty
        • Lower risk of spot shortages because railroads stockpile fuel at major terminals
      • Likely impacts:
          • Rail industry will not pass along its fuel efficiency to shippers, but will capture the benefit for itself
          • Contract pricing now usually includes a fuel adjustment factor that bears little relationship for fuel consumption
  • 13. Trans. Impacts on Supply Mgmt. Airway Issue – Aircraft Replacement
      • Aged aircraft need to be replaced.
      • Purchases have been deferred because the recession, but will rebound as passenger and freight traffic rebound.
      • Code-sharing arrangements between airlines results in fewer scheduled trips.
      • Likely impacts:
          • Smaller air-craft with less cargo space will be acquired. This will result in less lift capacity for many routes.
          • Airplanes will be significantly more expensive than the ones replaced, forcing upward pressure on pricing.
  • 14. Trans. Impacts on Supply Mgmt. Airway Issue - Profitability
      • Airlines trail all other modes in profitability.
      • There will likely be further carrier mergers, or bankruptcies, reducing both the number of airlines as well as airports served.
      • Inadequate return on investment will result in fewer new assets being added to support both ground and air services.
      • Likely impacts:
          • Industry consolidation may reduce the number of competitive alternates to a given airline.
          • Survival is dependent upon reduced supply that supports higher pricing, and therefore improved ROI.
  • 15. Transp. Impacts on Supply Mgmt. Airway Issue - Fuel
      • Jet fuel is a substantial cost to cargo-hauling airlines. It has the highest consumption per ton-mile than highway or railway modes
        • Substantial price volatility driven by multiple causes
          • Examples: availability, quality, competing demand for products refined from crude, societal uncertainty
        • Lower risk of spot shortages because airline fueling services stockpile at major airports
      • Likely impact:
          • Rate increases to cover fuel cost changes are likely to be more pronounced because of high consumption per ton-mile.
  • 16. Transp. Impacts on Supply Mgmt. Summary All forms of domestic transportation are experiencing capacity and cost issues. Capacity or cost issues affect some transportation modes more than others, as well as some carriers within a mode. Although an average of ten percent of the delivered price is composed of logistics costs, it can be more for some items than others. Transportation permeates a supply chain, therefore capacity and cost impacts have a profound impact upon the procurement of all commodities.
  • 17. Questions? Thank you! Frank R. Scheer Contracting Officer, USPS Surface Transportation CMC [email_address] (301) 386-8970 1200 Mercantile Ln, Ste 109 Largo, MD 20774-5389 Transp. Impacts on Supply Mgmt. Discussion