GE 541

Institutional and Organizational Innovations in Transport Systems

September 16 - 18, 2008
(Lectures 4 & 5)

Parallel to the physical innovations (e.g. containers) there has been a flurry of non-physical innovations in transportation There are the institutional and organizational innovations.

Such nonmaterial innovations are of two types:

A. Change of economic institutions governing transport. e.g. deregulations, privatization liberalization
B. Change of operational processes of goods transport

Economic Institutions Governing Transport

Recent Reform:
The rise of free trade regimes

- creation of IMF and the World Bank General Agreement on Tariffs & Trade (GATT)
WTO NAFTA, EU, MERCOSUR

An Advanced Transport & Trade Facilitation System

Components of an Advanced Transport and Trade Facilitation System
Physical Infrastructure
Transport subsystems Information subsystems

Nonphysical infrastructure (knowledge and competencies in transport and trade facilitation)

Overall governance of transport and trade facilitation Business logistical systems Financial coordination Governance of physical flows

Promotion of Cross-border Flows

A. Deregulation of Transport Services
- Removal of cabotage - Privatization of transport infrastructure - Reform of commercial & legal frameworks - Reinvention of the customs function

B. New Business Logistics Systems

(Lower costs, minimum inventory, quick market feedback & expanding market reach)

C. Better Financial Coordination

(New payment systems, lower risk)

D. Use of IT and other knowledge technologies to speed up cross border flows

Factors Underlying the Transformation of the Transport Enterprise

Transportation Innovations

Globalization & Competitive Forces

Logistical Innovations and the 'New' Transportation Enterprise

Public Policies of Trade & Transport, Deregulation, Liberalization & Competition

Drive for Corporate Advantage

Emerging Knowledge So ciety: Changing Nature of Work & Work Force

Changes in Firm & Industry Structure

Technical & Social Factors Source: Chatterjee, 2001

Business Factors

Adap ted from OECD, 1996

Railroad Operating Costs per Revenue Ton-Mile, Costs per Revenue Ton-Mile, 1980-1995, in 1995 Dollars
0.06

0.05

0.04

0.03

0.02

0.01

0 80' 81' 82' 83' 84' 85' 86' 87' 88' 89' 90' 91' 92' 93' 94' 95'

Operating Costs of Less than Truckload and Truckload Carriers, 1988-1995, in 1995 dollars per vehicle mile
6 5 4 3 2 1 0

1977

1987

1993

1995

The Passenger Cost for the Airline Industry, 1980 - 20000 (in current USD)

Post 1990, Transport Logistical Structure

The Logistical Channel Just-in-Time (JIT) Quick Response Services Containers tracked around the world & visible in transit Old paper system on cargo replaced by Electronic Data Interchange (EDI) and e-mail

Freight flow faster, cheaper and more reliable

New types of Transport & Logistical Services (e.g. reliability & timeliness
- strategic outsourcing of a firms distribution function - flexibility in destination choices - additional production value and strategic competitive advantage - operation of distribution & warehousing facilities - where to source intermediate goods

Management of value chains of other firms

Moving into e-commerce

Consumer demand oriented pull system

The Evolution of Novel Freight Service Attributes, Logistical Systems, and Economic Benefits
Transport and Information Technologies Transport Service Innovations Transport Process Innovations

Transport Policy Reforms

Logistics
- Travel co sts - Warehousing - Inventory stock New Fre ight Transport Service Attributes and i ts reorganization

Transport sector productivity effects

Transport Infrastructure Investments

Transport - Using Sectors Lower Costs, Changing Production Processes, and New Services, Market Expansion, Economies of scale a nd Scope

Source: Lakshmanan and Ande rson (2002)

Worldwide Logistics Costs Exceed $1 Trillion, of which $610 Million is Non-Transport Logistics Service Charges
100%

4% Administration 6% Order Processing 24% Inventory Carrying Cost

27% Warehousing

61% Logistics Systems

39% Transportation Charges 0%

Source: P.O. Roberts, SAIC, "Presentations on Supply Chain Management: New Directions for Developing Countries", page 6, no date.

Real Inventory Sales Ratio for Durable Goods in Manufacturing Industry (1980-2005, quarterly data)

Real Inventory Sales Ratio for Motor Vehicles in Manufacturing Industry (1980-2005, quarterly data)

The Context
Globalization
Process - Cross-national integration across the world

Attributes
Multidimensional-cultural, political, economic, spatial Economic - functional integration of production/consumption Spatial-coordination of demand/supply across international boundaries

Convergent Forces Leading to the Rise of the Globalization and Dynamic Cities
Change Factors
Material Technologies
(Knowledge-rich Transport Communications & Production Technologies) A. Global Network Corporations, Dynamic Small and Medium size (SME) Enterprises B. Public Sector Entrepreneurial Agents C. Social Sector Entrepreneurial Agents

Change Agents

Outcomes
Economic and Spatial Evolution A. Global Transformation Global organization of production systems (economic volatility)

Non-Material Technologies & Infrastructures

(Neo-liberal Ideologies, Open Trade Regimes, Logistical, Property Rights and Financial Innovations, Entrepreneurship as a Pervasive Model)

B. Rise of Dynamic Learning Regions

Rise of the Entrepreneurial City (Emphasis on Wealth Creation) A. The production of Urban Dynamic Competitiveness B. Innovations in Governance in Policies in Institutions C. De-emphasis of Redistributive Functions

Weakening of the Earlier Economic Regime

[Rise of customized production and quality competition & demand for variety; the weakening of the National Keynesian apparatus]

Global Network Corporations (GNC)

Major agents of current globalization
(e.g. GE, Toyota, Microsoft, Pfizer, GM)

Take advantage of:

- Economies of scale in knowledge - Economies of scope in the use of corporate Networks (knowledge, financial, marketing etc.) - Variations in local labor & other input costs

Create & maintain production units around the world in urban areas with high global accessibility.
Global Corporations use cities and urban regions as organizational structures to maximize returns on capital.

continued.

Production Consequences
Competitive and comparative advantages

Global Sourcing harmonization across economic systems

JIT- lean and flexible production Flexible Specialization horizontal replacing vertical integration

Cost Advantages of Spatial Economies in addition to scale and scope economies

Increasing Trade as % of GDP

Transport Implications of Globalization

Objective - Reliable delivery through low-cost/high-value services World-wide coordination of production and distribution Capture upstream /downstream advantages of material-component-output linkages for cost reduction across supply chain Attribute - Technology Advances - Transportation - larger, faster - Information Systems - Logistics Innovations

Transportation Logistics: Supply Chain Strategic and Operational Issues

Strategic Supply Chain Site/ location Capacity sizing Sourcing, production and marketing coordin. Tactical Production planning Sourcing Network alignment Load size IT Operational Enterprise resource planning (ERP) Transit time minimization Storage and stocking Vehicle dispatch Communicat. infrastructure Order handling Transportation Warehouse location Fleet composition Fleet forwarding decisions Shipment Internal/ outsourcing Dispatch centers Fleet sizing Delivery frequency Routing strategy Mode choice Zone alignment Storage retrieval IT infr astructure Warehousing Warehouse layout Level of automation Material handling design and equip.

Order pickup

Logistics Definition and Components

Definition Integrated management of overall value chain
through time compression.

Objectives Efficient movement and storage of raw materials,

intermediate and final goods with associated information flows through the supply chain. Effective inventory management and distribution for cost minimization. Right product, right place at right time.

Transportation and Supply Chain Links

Supply Chain Consideration
Inbound Network Distribution Network

Vendors

Production Center

Distribution Center Transportation Consideration

Customers

Infr astructure

Assets

Logistics operation environment

Airports, rail, ports, roads

Warehouse depots

Fleet size and composition

Equipment

Drivers

Source: Chatterjee (2000).

Types of Logistics
Integrated Logistics Management- Global Optimization
Transport Logistics Inbound/Outbound Logistics movement of goods through the supply chain

Effective management of transportation, warehousing and distribution

Pull Logistics

Outbound logistics Inbound logistics Harmon ization of supply chain with product. needs Sourcin g and procure ment Transpo rt mode choice - sea river/ca nal - air - rail - road Distribu tion network - direct delivery to factory wareho use Valueadded in production Demand forecasting Transport to warehouse In-house / third party logistics Warehouse characteristics Network Design -central - regional Warehouse location Delivery to customer Market/ vendor choice Network pattern - hub and spoke - point to point - route Transporta tion mode frequency - on demand - daily weekly - monthly Speed of delivery Tracking equipment Shipment size -package - LTL - TL Damage considerati on breakage - spoilage - theft - accident On-timedelivery

Production design Manageme nt - total quality mgt - just-intime - others Location choice

* Frequency of delivery

Warehouse Internal Layout Mode choice Fleet size Fleet compositio n Optional routing IT and EDI for harmonizing orders and shipments Quantity and inventory

Transportation Logistics: Strategic Issues in the Value Chain

Cost

Speed/ cycle time

Agilit y/ flexibility

Accuracy

Source: Chatterjee (2000).

TNT Information Systems

Integrated logistics Inbound logistics Import - import clearance - transport to fa ctory Local raw materials transport Inventory mgmt Transport system design

Manufacturing materials mgmt. Purchasing/ order placement Invoice payme nt Warehouse design, layout and mgmt (dedicated or shared) Production order taking P icking Delivery to production line/warehouse

Production

Finished goods warehousing Warehouse design, layout and mgmt (dedicated or shared) Inventory management Security systems EDI capabilitites

Not tradionally contracted out

Distribution -wholesale - retail - end user Delivery order taking P icking Assembling Packing Transport from plant /warehouse to retailer, wholesaler, consumer / end user Cross docking

Export logistics

Post delivery service

Customs clearance Transport to port

Invoicing Product installation Inquiry handling Customer follow-up interviews Return of defects

Elements of the Integrated System of TNT

Trends
Pre production/Post production decisions to location and production decisions Internet and e-commerce
Traditional to Web logistics

Reverse Logistics

Raw material

Primary manufacturing

Material Flow

Secondary manufacturing

Order Flow

Traditional Logistics Supply Chain

Warehouse

Retail outlet

Customer

Information

Products and Materials

Marketing & Sales

Pricing manufacturing

Raw Materials

Assembly

Customer

Logistics

Distribution Material flow Logistics Information flow

Retail Outlet

Source: Greis and Kasarda, 1997

Rethinking the Logistics Supply Chain: Web

Supply Chain Characteristics of Newly Industrializing Countries

Supply chain characteristics Supply Limited local supply Manufacturing Vertical integration Labor-intensive processes Growth of economic processing zones Concentration of production in metropolitan areas Investment in production, transportation and communication technology Assembly operation of final goods Exports of components and intermediated goods Distribution Distributors play the major role Inadequate infr astructure Limited avail. of logistics services Retail 50% or more sales through informal markets Direct store deliveries (DSD) Consumer Small middle class High proportion of lowincome consumers Consumers with buying power concentrated in large cities

Emerging Trends

Increased use of suppliers drawn fr om advanced economies and other NICs

Development of improved transportation service

Increasing multinational retail presence

Growing middle class purchasing power

Third-party logistics

Increasing info about product diversity, quality and name brand Increasing compet. between multinl firms for market share

Source: Modified from Waller (1995).

Logistics Challenges in Indonesia

Supplier (manufacturers) Coordination of wide network of distributors Distribution Achieving geographic and store coverage - Heavy investment in fleet and facilities - Mgmt. of lg. number of subscale transport agents Managing high-SKU but low-vol. deliveries to retail outlets - frequency - narrow delivery windows Expensive, less-thantruckload shipments Transport Lack of equipment available en route Customer Coordination of >100 deliveries per day at each outlet

Cost management

Lack of profe ssionalism - goods mishandling - delays Substandard trucks

Lack of central warehousing on lg. storage facilities Slow order processing system with suppliers (high lead times) Warehousing security

Low customer service levels

Need to hold > 14 days inventory due to supply chain complications

Lack of interisland shipping - missed schedules - poor quality

Note: SKU = stock keeping unit Source: Knoop, (1996)

Comparative Information on Selected Logistics Markets

Market Estimated Estimated market growth size ($ rate billion) 100 15 - 20 >300 250 1.0-2.5 >250 >15 20 - 25 >20 >25 Years behind UK in market maturity 0 8 10 5 15 % of companies outsourcing 40 - 50 10 - 30 10 - 20 20 - 30 <5

United Kingdom North America Europe Australia Asia

Time Delay and Exports