Freight Transportation and Value Chains

Author: Dr. Jean-Paul Rodrigue

1. Contemporary Production
Systems Production
and
consumption
are
the
two core
components of economic systems and are both interrelated
through the conventional supply / demand relationship. Basic
economic theory underlines that what is being consumed has to
be produced and what is being produced has to be consumed.
Any disequilibrium between the quantity being produced and the
quantity being consumed can be considered as a market failure.
On one side, insufficient production involves shortages and price
increases, while on the other, overproduction and overcapacity
involves waste, storage and price reductions. It is mainly through
the corporation and its perception of market potential that a set of
decisions are made about how to allocate scarce resources,
reconciling production and consumption.
The realization of production and consumption cannot occur
without flows of freight within a complex system of distribution
that includes, modes, terminals, but also facilities managing
freight activities, namely distribution centers. Contemporary
production systems are the outcome of significant changes in
production factors, distribution and industrial linkages:

Production factors. In the past, the three dominant factors

of production, land, labor and capital, could not be
effectively used at the global level. For instance, a
corporation located in one country had difficulties taking
advantage of cheaper inputs (e.g. labor and land) in another
country, notably because regulations would not permit full
(and often dominant) ownership of a manufacturing facility
by foreign interests. This process has also been
strengthened
by
economic
integration
and
trade
agreements. The European Union established a structure
that facilitates the mobility of production factors, which in
turn enabled a better use of the comparative productivity of
the European territory. Similar processes are occurring in
North America (NAFTA), South America (Mercosur) and in
Pacific-Asia (ASEAN) with various degrees of success. Facing
integration processes and massive movements of capital

coordinated by global financial centers, factors of production

have anextended mobility, which can be global in some
instances. To reduce their production costs, especially labor
costs, many firms have relocated segments (sometimes the
entire process) of their manufacturing activities to new
locations.
Distribution. In the past, the difficulties of overcoming
distances were related to constraints in physical distribution
as well as to telecommunications. Distribution systems had
limited capabilities to ship merchandises between different
parts of the world and it was difficult to manage fragmented
production systems due to inefficient communication
systems. In such a situation, freight alone could cross
borders, while capital flows, especially investment capital,
had more limited ranges. The tendency was to trade finished
goods. Trade could be international, but production systems
were dominantly regionally focused and mainly built
through regional agglomeration economies with industrial
complexes as an outcome. With improvements in
transportation and logistics, the efficiency of distribution has
reached a point where it is possible to manage large scale
production and consumption.
Industrial linkages. In the past, the majority of
relationships between elements of the production system
took place between autonomous entities, which tended to be
smaller in size. As such, those linkages tended to be rather
uncoordinated.
The
emergence
ofmultinational
corporations underlines a higher level of linkages within
production systems, as many activities that previously took
place over several entities are now occurring within the
same corporate entity. While in the 1950s, the share of the
global economic output attributable to multinational
corporations was in the 2% to 4% range, by the early 21st
century this share has surged to a range between 25% and
50%. About 30% of all global trade occurs within elements of
the same corporation, with this share climbing to 50% for
trade between advanced countries.
The development of global transportation and telecommunication
networks, ubiquitous information technologies, the liberalization
of trade and multinational corporations are all factors that have

substantially impacted production systems. Products are getting

increasingly sophisticated requiring a vast array of skills for their
fabrication. One key issue is the array of expansion
strategies available in a global economy, including horizontal and
vertical integration, as well as outsourcing. In many cases, so
called "platform companies" have become new paradigms where
the function of manufacturing has been removed from the core of
corporative activities. Corporations following this strategy,
particularly mass retailers, have been active in taking advantage
of the "China effect" in a number of manufacturing activities.
2. Commodity and Value Chains
Commodities are resources that can be consumed. They can be
accumulated for a period of time (some are perishable while
others can be virtually stored for centuries), exchanged as part of
transactions or purchased on specific markets (such as futures
market). Some commodities are fixed, implying that they cannot
be transferred, except for the title. This includes land, mining,
logging and fishing rights. In this context, the value of a fixed
commodity is derived from the utility and the potential rate of
extraction.
Bulk commodities are commodities that can be transferred, which
includes for instance grains, metals, livestock, oil, cotton, coffee,
sugar and cocoa. Their value is derived from utility, supply and
demand, which is established through major commodity markets
involving a constant price discovery mechanism. The global
economy and its production systems are highly integrated,
interdependent and linked through commodity chains.
Value Chain (also known as commodity chain). A functionally
integrated network of production, trade and service activities that
covers all the stages in a supply chain, from the transformation of
raw materials, through intermediate manufacturing stages, to the
delivery of a finished good to a market. The chain is
conceptualized as a series of nodes, linked by various types of
transactions, such as sales and intrafirm transfers. Each
successive node within a commodity chain involves the
acquisition or organization of inputs for the purpose of added
value.
Value chains are thus a sequential process used by corporations
within a production system togather resources, transform them

in parts and products and, finally, distribute manufactured goods

to markets. Each sequence is unique and dependent on product
types, the nature of production systems, where added value
activities are performed, markets requirements as well as the
current stage of the product life cycle. Value chains enable a
sequencing of inputs and outputs between a range of suppliers
and
customers,
mainly
from
a producer
and
buyerdriven standpoint. They also offer adaptability to changing
conditions, namely an adjustment of production to adapt to
changes in price, quantity and even product specification. The
flexibility of production and distribution becomes particularly
important, with a reduction of production, transaction and
distribution costs as the logical outcome. The three major types of
value chains involve:

Raw materials. The origin of these goods is linked with

environmental (agricultural products) or geological (ores and
fossil fuels) conditions. The flows of raw materials
(particularly ores and crude oil) are dominated by a pattern
where developing countries export towards developed
countries. Transport terminals in developing countries are
specialized in loading while those of developed countries
unload raw materials and often include transformation
activities next to port sites. Industrialization in several
developing countries has modified this standard pattern with
new flows of energy and raw materials.

Semi-finished products. These goods already had some

transformation performed conferring them an added value.
They involve metals, textiles, construction materials and
parts used to make other goods. Depending on the labor
intensiveness and comparative advantages segments of the
manufacturing process have been offshored. The pattern of
exchanges is varied in this domain. For ponderous parts, it is
dominated by regional transport systems integrated to
regional production systems. For lighter and high value
parts, a global system of suppliers tends to prevail.
Manufactured goods. These include goods that are
shipped towards large consumption markets and require a
high level of organization of flows to fulfill the demand. The
majority of these flows concerns developed countries, but a
significant share is related to developing countries,
especially those specializing in export-oriented

manufacturing. Containerization has been the dominant

transport paradigm for manufactured goods with production
systems organized around terminals and their distribution
centers.
3. Integration in Value Chains
Transport chains are being integrated into production
systems. As manufacturers are spreading their production
facilities and assembly plants around the globe to take advantage
of local factors of production, transportation becomes an ever
more important issue. The integrated transport chain is itself
being integrated into the production and distribution processes.
Transport can no longer be considered as a separate service that
is required only as a response to supply and demand conditions. It
has to be built into the entire supply chain system, from multisource procurement, to processing, assembly and final
distribution.
Supply Chain Management (SCM) has become an important facet
of international transportation. As such, the container has become
a transport, production and distribution unit. A significant trend
has thus been a growing level of embeddedness between
production,
distribution
and
market
demand.
Since
interdependencies have replaced relative autonomy and selfsufficiency as the foundation of the economic life of regions and
firms, high levels of freight mobility have become a necessity. The
presence of an efficient distribution system supporting global
value chains (also known as global production networks) is
sustained by:

Functional integration. Its purpose is to link the elements

of the supply chain in a cohesive system of suppliers and
customers. A functional complementarity is then achieved
through a set of supply/demand relationships, implying flows
of freight, capital and information. Functional integration
relies on distribution over vast territories where "just-intime" and "door-to-door" strategies are relevant examples of
interdependencies created by new freight management
strategies. Intermodal activities tend to create heavily used
transshipment points and corridors between them, where
logistical management is more efficient.

 Geographical integration. Large resource consumption by

the global economy underlines a reliance on supply sources
that are often distant, as for example crude oil and mineral
products. The need to overcome space is fundamental to
economic development and the development of modern
transport systems have increased the level of integration of
geographically separated regions with a better geographical
complementarity. With improvements in transportation,
geographical separation has become less relevant, as
comparative advantages are exploited in terms of the
distribution capacity of networks and production costs.
Production and consumption can be more spatially
separated without diminishing economies of scale, even if
agglomeration economies are less evident.
The level of customization of a product can also be indicative
about how commodity chains are integrated. For products
requiring a high level of customization (or differentiation) the
preference is usually to locate added value components relatively
close to the final market. For products that can be mass produced
and that require limited customization, the preference leans on
locating where input costs (e.g. labor) are the least.
4. Freight Transport and Value Chains
As the range of production expanded, transport systems adapted
to the new operational realities in local, regional and international
freight distribution. Freight transportation offers a whole spectrum
of services catering to cost, time and reliability priorities and has
consequently taken an increasingly important role within value
chains. Among the most important factors:

Improvements in transport efficiency incited an expanded

territorial range to value chains.

A reduction of telecommunication costs and the

development of information technologies, enabling
corporations to establish a better level of control over
their value chains.Information technologies have a wide
array of impacts on the management of freight distribution
systems.

 Technical improvements, notably for intermodal

transportation, enabled a more efficientcontinuity between
different transport modes (especially land / maritime) and
thus within commodity chains.
The results have been an improved velocity of freight, a decrease
of the friction of distance and a spatial segregation of production.
This process is strongly imbedded with the capacity and efficiency
of international and regional transportation systems, especially
maritime and land routes. It is uncommon for the production
stages of a good to occur at the same location.
Consequently, thegeography of value chains is integrated to
the geography of transport systems. Among the main sectors
of integration between transportation and commodity chains are:

Agricultural commodity chains. They include a sequence

of fertilizers and equipment as inputs and cereal, vegetable
and animal production as outputs. Several transportation
modes are used for this production system, including
railcars, trucks and grain ships. Since many food products
are perishable, modes often have to be adapted to these
specific constraints. Agricultural shipments tend to be highly
seasonal with the ebb and flows of harvest seasons. Ports
are playing an important role as points of warehousing and
transshipment of agricultural commodities such as grain. A
growing share of the international transportation of grain is
getting containerized. In 2007, 100 million tons of grain were
carried on bulk ships while an additional 10 million tons was
carried by container. Due to weight limitations, the 20 footer
container appears more suitable as they can handle a full 20
tons load while bigger containers, such as the 40 footer, are
limited to a maximal load of 28 tons.

Energy commodity chains. Include the transport of fuels

(oil, coal, natural gas, etc.) from where they are extracted to
where they are transformed and finally consumed (see for
instance International oil transportation). They are linked to
massive flows of bulk raw materials, notably by railway and
maritime modes, but also by pipeline when possible. They
tend to be very stable and consistent commodity chains
since a constant energy supply is required with some
seasonal variations.

 Metal commodity chains. Similar to energy commodity

chains, these systems include the transport of minerals from
extraction sites, but also of metals towards the industrial
sectorsusing them such as shipbuilding, car making,
construction materials, etc.
Chemical commodity chains. Include several branches
such as petrochemicals and fertilizers. This commodity chain
has linkages with the energy and agricultural sectors, since
it is at the same time a customer and a supplier.
Wood and paper commodity chains. Include collection
over vast forest zones, namely Canada, Northern Europe,
South America and Southeast Asia, towards production
centers of pulp and paper and then to consumers.
Construction industry. Implies movements of materials
such as cement, sand, bricks and lumber, many of which are
local in scale.
Manufacturing industry. Involves a much diversified set
of movements of finished and semi-finished goods between
several origins and destinations. These movements will be
related to the level of functional and geographical
specialization of each manufacturing sector. Such flows are
increasingly containerized.
Most value chains are linked to regional transport systems, but
with globalization, international transportation accounts for a
growing share of flows within production systems. The usage of
resources, parts and semi-finished goods by commodity chains
is an indication of the type of freight being transported.
Consequently, transport systems must adapt to answer the
needs of commodity chains, which incites diversification. Within
a commodity chain, freight transport services can be
categorized by:

Management of shipments. Refers to cargo transported

by the owner, the manufacturer or by a third party. The
tendency has been for corporations to sub-contract their
freight operations to specialized providers who provide more
efficient and cost effective services.

 Geographical coverage. Implies a wide variety of scales

ranging from intercontinental, within economic blocs,
national, regional or local. Each of these scales often
involves specific modes of transport services and the use of
specific terminals.
Time constraint. Freight services can have a time element
ranging from express, where time is essential, to the lowest
cost possible, where time is secondary. There is also a direct
relationship between transport time and the level of
inventory that has to be maintained in the supply chain. The
shorter the time, the lower the inventory level, which can
result in significant savings.
Consignment size. Depending on the nature of production,
consignments can be carried in full loads, partial loads (less
than truck load; LTL), as general cargo, as container loads or
as parcels.
Cargo type. Unitized cargo (containers, boxes or pallets) or
bulk cargo requires dedicated vehicles, vessels and
transshipment and storage infrastructures.
Mode. Cargo can be carried on a single mode (sea, rail, road
or air) or in a combination of modes through intermodal
transportation.
Cold chain. A temperature controlled supply chain linked to
the material, equipment and procedures used to maintain
specific cargo shipments within an appropriate temperature
range. Commonly relates to the distribution of food and
pharmaceutical products.
Globalization also concomitant a by-product of a post-fordist
environment
where just-in-time(JIT)
and synchronized
flows are becoming the norm in production and distribution
systems. International transportation is shifting to meet the
increasing needs of organizing and managing its flows through
logistics. In spite of the diversity of transport services
supported various value chains, containerization is adaptable
enough to cope with a variety of cargo and time constraints.