9. Implications for Transportation/Logistics: Congestion and Infrastructure Decay
Stop, go. Stop, go. Stop, go.
Sound familiar? This is how many of us begin and end our workdays. Though traffic jams allow us to catch up on the latest news and sports scores while gaining “bumper sticker enlightenment,” they aren’t exactly the most enjoyable or productive part of the day. According to the 2011 Urban Mobility Report, produced by the Texas Transportation Institute (TTI) at Texas A&M University, the average annual rush-hour delay that commuters experienced in the United States was 34 hours, up from 14 in 1982. The TTI expects this average to rise another 3 hours by 2015 and 7 more by 2020. Washington, D.C. ranked as the worst commuter environment in the country, with delays that averaged 74 hours per year. In a not-too-distant second place, Los Angeles commuters endured 64 hours of lost time. Even smaller cities, like Columbus, Ohio, and Knoxville, Tennessee, see delays of 18 and 21 hours, respectively. The TTI estimates that annual congestion costs in the U.S. exceed a staggering $100 billion.
The U.S. is not alone when it comes to transportation congestion; this is a worldwide problem. Stuttgart, Germany, home to Porsche and some of the world’s fastest production automobiles, sees its cars stuck in neutral much of the time, with drivers there wasting 56 hours per year in traffic. The toll is 54 hours in London, 65 in Brussels, and 70 in Paris. Asia, with its increasing appetite for automobiles, is catching the driving bug. Guangzhou, China, sees more than 200 new personal vehicle registrations every day. Delhi, India, is adding about 1,000 new vehicles per day! This dynamic addition of vehicles to a static infrastructure is compounding the ailments of the driving bug in cities around the world, resulting in overcrowding, delays, and frustration. In one particularly famous 2010 incident, traffic was so backed up in Beijing that it took ten days to clear it out. But these instances pale in comparison to the 165-mile backup in the world’s most congested city, Sao Paulo, Brazil, in 2008. According to some estimates, congestion costs consume about 10% of Brazil’s GDP per year. If you think these statistics are eye-popping, imagine what they will look like when the city adds millions of tourists and other visitors into the mix. That’s exactly what will happen when Sao Paulo hosts the 2014 FIFA World Cup and the 2016 Summer Olympic Games.
Just as we waste time in traffic, so does freight. Congestion slows our goods’ transit times in our supply chains. Slower and less reliable transit times force many companies to hold more inventory because so many delays make it hard to guarantee on-time delivery. A 2004 Federal Highway Administration study estimated that U.S. shipper inventory costs associated solely with congestion exceeded $7 billion. The problem is exacerbated on a global scale when you consider that congestion is found not only on the roadways, but also at our ports, canals, intermodal shipping yards, railroads, and even on airplane tarmacs and in the friendly skies. According to one estimate, a runway incursion happens every day somewhere in the world.1
1 Allett, Tom. (2011). “Easing Congestion in Europe’s Busy Skies.” Airports International. www.airportsinternational.com/2011/11/easing-congestion-ineuropes-busy-skies/.
The macrotrend of urbanization, described in Chapter 2, “Global Population Growth and Migration,” will greatly exacerbate the congestion problem as more people and businesses cram into our largest cities. Freight too must make its way into these bustling urban areas to serve the growing populations. People’s relocation patterns and the goods needed to serve these highly clustered populations are sure to be challenged, and certain key questions will emerge. Can we maintain or improve our quality of life under constrained mobility? Can we “build our way out” of the problem through enhanced infrastructure? Is society willing to make tough decisions about transportation access and funding? How might our own behaviors change to embrace bold new opportunities? How will our supply chains adapt to the worsening congestion problem? Chapter 8 explores these critical issues and how they will affect the way we manage tomorrow’s supply chains.
Friction of Distance
Economic geographers often speak of a concept called the “friction of distance,” a measure of how easy or difficult it is to cover a certain distance, as measured by time, money, and/or energy. Historically we have found that distance friction decreases over time thanks to the advent of things like wheels, roads, and propulsion technologies. This is seen in the evolution of transportation methods, such as going from horse-drawn carriages to steam engines to internal combustion engines. Reducing distance friction allowed people to live remotely from the workplace and hence gave birth to the suburb. Suburban living represents independence, a certain isolation that separates one’s personal space from the world of work and big-city problems. U.S. suburbs experienced a boom following World War II, with cities throughout the country hosting abundant smaller cities on the outer fringe of the metropolitan area. The suburbs have come to represent the American Dream. This view of “ideal living” is gaining traction around the world as the burgeoning middle class in emerging nations seeks its own piece of the dream. Yet despite the advantages of this kind of living, congested roadways are putting the brakes on suburban sprawl, and many people are again seeking the conveniences and amenities of city living. According to 2010 U.S. Census data, urban populations grew by 12.1% since 2000.2 In California, the country’s most populous state, an astonishing 95% of people live in urban areas. In China, cities represent the exciting promise of prosperity for a youthful population looking for a life away from family farming in the rural regions. China now boasts more than 120 metropolitan statistical areas (MSAs) with populations exceeding 1 million inhabitants, compared to 51 such MSAs in the United States.
2 Lambert, Lisa. (26 March 2012). “More Americans Move to Cities in Past Decade.” Reuters. www.reuters.com/article/2012/03/26/usa-cities-population-idUSL2E8EQ5AJ20120326.
Distance friction is a significant factor in the World Bank’s Logistics Performance Index (LPI), which rates nations’ supply chain operations on their overall efficiency and ease of use. The United States, typically regarded as a worldwide trade and commerce focal point, ranked number 9 in the 2012 LPI ratings.3 Even though the United States’ performance in customs and international shipments weighed it down in the rankings, its fourth-ranked infrastructure was regarded as one of its strengths. However, some would argue that the infrastructure’s slipping capacity and performance are hobbling the economy—that distance friction is actually impairing the movement of people and goods across the country.
3 Singapore narrowly outperformed Hong Kong for the top ranking in 2012.
Table 9.1 describes the United States’ transportation infrastructure as of 2012. The numbers are impressive: The U.S. has enough roads to circle the globe 157 times! With almost 20,000 airports, virtually every 25,000-person town enjoys relatively easy access to an airport. But the complete story on the state of the infrastructure invites a closer look. For instance, the rail network isn’t quite what it used to be. In 1916, more than 254,000 miles of rails covered the nation and served as the most critical mode of transportation for intercity passengers and freight in the days before highways. Since then, rail coverage has declined steadily, and markedly so since 1980. In that year industry deregulation allowed carriers to more freely abandon unprofitable rail lines, leaving many shippers either captive to a single rail operator or unserved in rural areas. Despite its reduced coverage, rail still accounts for 35% of the freight ton-miles moved in the U.S. each year. This is slightly greater than trucking, even though trucks are involved in the transit of virtually all goods at some point during distribution. Motor transportation accounts for about 80% of all transportation revenues, which is why shippers consider it the most dominant method.
Table 9.1. U.S. Transportation Infrastructure Inventory
Source: The Pocket Guide to Transportation (2012), Bureau of Transportation Statistics, U.S. Department of Transportation
Given the burden placed on the United States’ highways and roads, its declining health is of great concern. Despite the seemingly endless orange barrels marking construction along our streets, roadway systems are aging faster than they can be repaired. In one tragic 2007 incident, the main span of the I-35 Bridge in Minneapolis, Minnesota, collapsed and fell into the Mississippi River. Even though it had been declared “structurally deficient” in 2005, the bridge remained in operation, and it was not scheduled for replacement for another 15 years. Throughout the U.S., more than one in ten bridges receive the same “structurally deficient” rating as the I-35 Bridge. Another 13% are rated “functionally obsolete,” meaning that they are too narrow, prone to flooding, or force drivers to slow down. That’s nearly a quarter of the country’s bridges that need almost immediate repair.
In a lesser-seen mode, the U.S. river network’s aging lock-and-dam system has limited the growth of an otherwise environmentally friendly mode of transportation. Since a single river barge has the capacity equivalent of 15 railcars or 60 large trucks, we should start to take a more serious look at our rivers as a way to alleviate congestion. In addition to offering superior carrying capacity, traveling by river can be far more fuel-efficient than doing so by rail or truck. Barge transportation averages 514 ton-miles per gallon of fuel, compared to 202 for rail and 59 for truck. Engineers constructed the majority of the locks and dams along the main barge corridors of the Mississippi River and Ohio River some 80 years ago, effectively outlasting their intended 50-year useful life. Investments in industrial river navigation pale in comparison to the urgency with which potholes are viewed. To meet the needs of a river system in desperate need of repair, as of 2012 the U.S. Congress authorized $8 billion for projects that will rehabilitate the dilapidated waterway mechanisms, but it chose to fund them in a piecemeal fashion.
The “fix when fail” approach to maintaining the lock system is characteristic of the short-term horizon that pervades many transportation-related infrastructure policies. An infrastructure that fails to keep pace with the needs of commerce creates distance friction that impairs quality of life and impedes growth. This holds true for all economies, but according to the World Bank, it represents the biggest gap between the highest performers and everybody else on the Logistics Performance Index.
It would appear that the best solution is to embrace a long-term vision and invest in the infrastructure. However, many hurdles must be overcome before such progress is seen. In most settings, a country’s infrastructure is both owned and maintained at federal, state/provincial, and local levels. Larger projects like those connecting major cities tend to be the federal government’s responsibility. Unfortunately, political gridlock is rampant across many of the world’s developed regions, including the United States, which prevents aggressive development of the infrastructure—especially during times of economic recession or flagging growth. Only in a national emergency or in the interests of national defense are large projects expediently addressed and subsequently funded. At the juncture of tenuous political circumstances and necessary infrastructure overhaul, a new solution must come forth.
Public-Private Partnerships and Other Solutions
One emerging trend offering promise is public-private partnerships (P3s), in which private-sector entities assume responsibility for maintaining—and, in some cases, building—transportation infrastructure. In return, they reserve the right to collect fees for their services. P3s have garnered significant interest because they afford the opportunity to improve infrastructure while bypassing political stalemates, generating revenues for the contracting government and private-sector operator. Partnership activities typically target toll roads, bridges, and tunnels but also include large-scale projects like outsourcing International Space Station supply missions ever since NASA halted its space shuttle program.
The United States employs P3s selectively, but China has relied on P3s to aggressively finance its extraordinary infrastructure development over the past two decades. China’s blossoming transportation infrastructure projects, ranging from expressways to subways, numbers well into the hundreds. Similarly, neighboring Kazakhstan is looking to a P3 to improve the transit link between China and Europe by implementing the “New Silk Way.” This promises to double freight flows by 2020 by providing a land route instead of a roundabout water route through the Suez Canal in northeastern Africa. One comparable United States P3 megaproject was the Trans-Texas Corridor. The proposed venture would develop roads, rails, and utilities that would crisscross the massive state. At the time, it was expected to take 50 years to complete and cost an estimated $184 billion. Although the plug was pulled on the overly ambitious project in 2011, these kinds of P3 initiatives will blaze the trail for future infrastructure upgrades.
Although P3s are gaining traction, critics condemn private operators for holding citizens captive to their profit motives. Others criticize governments for pinning high risks and minimal rewards on interested investors, thereby making P3s unattractive to savvy developers. Counterarguments suggest that the greatest benefit of P3s is that they aggregate the best minds—not just the government-appointed ones—when collecting proposals. These types of for-profit entity proposals flounder too often when only the government oversees them. For these reasons, P3s are viewed as a viable method for accelerating future transportation developments, despite the opposition to them.
Though P3s offer a significant infrastructure development alternative, the question remains as to how much new and rehabilitated infrastructure countries will require to keep pace with demand. Unfortunately, improving roadway capacity by 30% does not yield a 30% productivity enhancement. Such a relationship is perhaps best explained by the law of diminishing returns. This law embraces the idea that total output does not see as great a gain with only marginal improvements. Applying this idea to highway infrastructure, each successive lane added to the highway will be less productive than the lane added before it. One economic assessment suggests that every $1 invested in highway spending produced just $.08 in annual congestion cost savings!4 The precise number could be disputed, but nearly all experts’ opinions suggest similar, disappointing levels of return.
4 Shirley, Chad and Clifford Winston. (March 2004). “Firm inventory behavior and the returns from highway infrastructure investments,” Journal of Urban Economics, Vol. 55, No. 2, 398-415.
What solutions remain if adding capacity is not the best answer? Many suggest that the most effective method to solve transportation congestion is found not in improving supply, but in tempering demand. Some of the world’s major cities have found success in doing so by charging high tolls to enter the central business district during peak hours. Singapore pioneered the idea in 1975, with a handful of European cities (London, Milan, and Stockholm) following suit. New York City and the state of New York are among the most staunch advocates of congestion pricing in the United States. The state charges tolls amounting to $88 on freight traveling from Buffalo to New York City.5 The strategy is based on a fundamental economic principle—asking users of a resource to compensate others for the incursion of negative social effects (namely, congestion and pollution). However, some criticize the practice for introducing inequities to those who can and cannot afford to pay such fees. Opponents disapprove of charging trucking companies high tolls when they already face narrow operating margins. Others argue that the practice is unfair to city retailers, where congestion restricts consumers’ access.
5 In May 2012, the New York State Thruway Authority sought to increase tolls by 45%, raising this figure from $88 to $127.
Most of the evidence suggests, though, that this kind of congestion pricing is effective in reducing traffic while also reducing greenhouse gas emissions, energy consumption, and noise pollution. Among cities implementing such policies, reduction estimates range from 10% to 30%. This fact has generated considerable interest among many policymakers, but paying for something that has forever been free may prove unsavory to many.
Responding to Congestion, Distance Friction, and an Overwhelmed Infrastructure
To this point, our discussion has focused mostly on traffic congestion’s macroeconomic causes and effects. This is because individual companies or managers can do little to reduce congestion on their own. Instead, it requires a collaborative supply chain effort, where decision makers rely on microeconomic variables that lead to product supply matching customer demand. Not surprisingly, achieving this basic equilibrium proves extremely challenging when our infrastructure is choked with traffic and other congestion-related issues. Holding large inventories is neither attractive nor feasible when space is at a premium in crowded, congested areas. Therefore, supply chain managers must devise creative solutions that allow them to meet customer needs without relying on fallback inventories. Large urban retailers are already implementing practices likely to become common in the future, such as making optimal use of overnight hours, when traffic is not at its peak, to receive shipments and replenish store shelves. This often means hiring a third shift dedicated to receiving merchandise. Incurring labor costs while the store is closed can be hard for a retailer to accept, yet it allows for greater reliability in receiving and more expeditious restocking.
To make use of off-peak hours, the customer relationship management (CRM) and supplier relationship management (SRM) processes must devise product-service agreements that reflect suppliers’ and customers’ requirements. These contracts need to consider the delivery costs during peak hours and provide guidelines as to who should bear the burden of applicable tolls and fees. In turn, order fulfillment would be affected, because companies would have to operate more on a “just-in-time” basis. Suppliers could replenish more numerous and smaller distribution points with greater frequency. Starbucks delivers this way every night to its hundreds of stores in U.S. urban areas.
Shared distribution models may also become more common, a process where competitors share transportation capacity. Defined as “horizontal collaborations,” these arrangements are gaining traction among fast-moving goods companies in Europe. They are driven, in part, by the continent’s relatively expensive energy costs. It depends on imported energy inputs more than any other developed region. If vendors are serving the same customers, couldn’t we solve some congestion issues by filling half-empty trucks that permeate the industry, even if it means doubling up with competitors? Through close collaboration, companies could allow the freight to ride-share for the vendor’s and retailer’s mutual benefit. With shared transportation comes the prospect of shared storage. Though competitive advantage is lessened when companies share services, parity is preferable to being left out and facing the disadvantages presented by operating on your own.
Consolidating shipments might evoke a vision of using larger transportation vehicles to accommodate increased volume, but a more practical answer might be to increase delivery frequency with smaller vehicles. Lean logistics principles suggest that aggregating diverse assortments of small shipments frequently can result in better “in-stock” performance across a wide product portfolio and reduce logistics costs. Some savings can be found in lower inventory and warehousing costs, but more surprisingly, transportation costs can be reduced as well through these “milk run” deliveries. By virtue of achieving consolidated volumes, companies can improve how they use vehicles. With fewer half-empty trucks and less transshipment due to misallocated inventory, transportation costs would not increase with higher frequency. It is even possible that shippers might actually lose their infatuation with using 53-foot trailers in the United States should they be banned in the city. The city would become the domain of small (20-foot) “pup” trailers or, better yet, straight trucks and vans.
One area where heavy vehicles will gain traction is in truck-rail-truck intermodal transportation. Intermodal transportation could help lighten congestion by taking trucks off the road. Using intermodal modes for moves of 750 miles or more is giving way to shorter moves, such as 500 miles, as the following events occur:
• Trucks and drivers become harder to find
• Trucking companies develop aggressive intermodal strategies
• Intermodal service improves thanks to investments made by rail carriers
• Investments in transloading facilities improve how quickly trucks transition to railroads and back to the roads again
RoadRailer technology is an ongoing experiment offering faster transloading. If you have ever seen a train consisting of what looks like conventional road vans rolling down the railways, you have seen RoadRailer in action. RoadRailer allows modified van trailers to hook up to rail bogey carriages without the aid of the lifts and cranes required of conventional trailer on flatcar (TOFC, or “piggyback”) intermodal transportation. Trains of RoadRailer vans can more quickly assemble and disassemble than TOFC trains that rely on lift equipment. Though this experiment has existed in several forms for more than 50 years and its use was discontinued in the United Kingdom, Australia, and New Zealand for various reasons, it remains alive in the United States. This is particularly true with the support of the railroads in the eastern U.S., where congestion is greatest.
Beyond RoadRailer, there are also opportunities for railroads to deliver goods into cities. Rail has become the preferred mode for coal shipments from rural points to the electricity generation plants near the cities, and for shipments of grains (again, in rural areas) to food processors near cities. The question is whether rail might regain favor as a delivery mechanism into the core of cities, where it has established rail links in place. These links, which date back to the formation of the cities, will prove invaluable as corridors for heavy freight and commuter passenger service. They might also carry twilight freight and replenish the cities overnight. Companies like BNSF are already taking the initiative to mix commuter rail lines with freight lines along one of their most important freight routes into and out of Chicago.6 Someday soon we may see roads used specifically to transport goods in places where railroads do not exist.
6 Robl, Ernest. (25 April 2008). “Mixed-use rail.” Mass Transit.
Overseas shipments, meanwhile, continue to be hampered with extensive congestion at port locations. Despite significant investments in port facilities, like those on the U.S. eastern seaboard, Sao Joao da Barra, Brazil, and India, shipping is plagued by slow and variable transits over the deep blue seas as well as delays at export and import locations. As indicated in Chapter 8, “Implications for Production: Disrupted Process Flows,” it is difficult—if not impossible—to be lean and agile when crossing oceans to bridge supply and demand. Some companies are electing to produce in the markets in which they sell those goods in spite of higher labor costs as a way to avoid the long and variable transits altogether. In a fascinating development, athletic footwear manufacturer Nike designed a running shoe that requires very little stitching and labor to produce. The upper of the Flyknit Racer is made from a single piece of durable woven fabric to provide a sock-like fit with 35 fewer pieces than a conventional running shoe. This reduction in the number of materials reduces waste, but also the complexity and labor associated with assembly, essentially negating the labor cost differential between high- and low-cost countries.7 Until 3-D printing gets perfected, locating innovative production methods closer to consumption points might represent the next best way to reduce the stresses and costs associated with transporting goods over long distances and dealing with the congestion found on the roadways and water that separate disparate locations.
7 Townsend, Matt. (15 March 2012). “Is Nike’s Flyknit the Swoosh of the Future?” Businessweek.com. www.businessweek.com/articles/2012-03-15/is-nikes-flyknitthe-swoosh-of-the-future.
The future is laden with these challenges, each presenting an opportunity for advantage for the business that can navigate more effectively and expediently. Transportation will be instrumental in addressing the macrotrends. Table 9.2 illustrates several congestion-related impacts, supply chain implications, and considerations for transportation and logistics.
Table 9.2. Macrotrend Impacts, Supply Chain Implications, and Transportation/Logistics Responses
Diffusing Congestion with Advanced Technologies
Thanks to advances in information and communication technology, we are changing our work patterns and our household purchasing and consumption. These changes could affect the matter of congestion in some interesting ways. The Internet is one technology that continues to escalate and evolve. Though home grocery delivery has a checkered past in the United States, Internet retailers that sell books, electronics, fashion apparel, and so on suggest that the model can work if properly executed. Online business-to-consumer sales represented almost 8% of all 2010 U.S. retail sales, with a 14.8% average annual growth rate.8 Increasingly, confidence is growing such that many consumers in developed markets no longer think of starting their shopping process in conventional bricks-and-mortar stores. Most never venture there for the purchase, either. Is it possible that we might see consolidated deliveries to the household? Imagine individual households hiring third-party logistics providers (3PLs) for all their errands, shopping, and delivery needs. Webvan is regarded by some as the biggest flop of the dot-com boom of the early 2000s. But Peapod, another online grocery delivery service operated by Royal Ahold, has outlasted its competitors and is soon expected to turn a profit in major U.S. cities.
8 Internet Retailer Top 500 Guide, 2011.
How might the economics change, though, when a more diverse array of household items is introduced with bundled delivery? If this sounds familiar, the trajectory of Amazon might come to mind. What started out as an online purveyor of books and music has expanded to apparel, food, jewelry, and much more. The company is quickly adding distribution centers to its network to provide same-day delivery in several major metro areas of the United States. Further, Amazon has established self-service pickup stations at 7-Eleven stores and other neighborhood locations in select cities to add a new element of security and convenience for its customers.9 Take the concept of home delivery to another level, however. Consider the prospect of entire housing communities and neighborhoods contracting with 3PLs to provide service to the many households that compose them. Waste collection is handled on this basis. Might the forward deployment of inventory go this way, too? Might the likes of UPS, FedEx, DHL, or Amazon seek to be the delivery agent for your community?
9 Bensinger, Greg. (7 August 2012). “Amazon’s New Secret Weapon: Delivery Lockers.” The Wall Street Journal.
If we are willing to hand over our household shopping and errands to third parties, what other activities might we be willing to liberate? Suppose we let computers drive our cars for us. That’s the premise of intelligent vehicle highway system (IVHS) technology, which claims that doing so would be both safer and more efficient than relying on our imperfect judgment and driving skills. Many of us already put ourselves at the mercy of GPS systems to navigate for us, but are we willing to take the next step and let the computer actually drive us down the road? Studies indicate that, yes, many people are willing to do so. They also imply that we might be safer and reduce infrastructure congestion if intelligent vehicles make decisions instead of humans.10
10 “Self Driving Cars will take over by 2040,” Forbes.com. Retrieved September 20, 2012.
Recall this chapter’s opening paragraphs, detailing the monotony of the daily commute. Consider what happens when a driver taps his brakes. The car behind him slows down at least as much, which leads the driver two cars back to slow down even further, until traffic reaches a point where everyone must stop—all because the first driver tapped his brakes! Intelligent, self-driving vehicles would not tap the brakes in the first place thanks to advanced risk calculation and collision avoidance detectors. They also would better calculate speed changes for all following vehicles. In essence, cars could become personal transit pods programmed to take us to our destinations without causing congestion backups. Autopiloted vehicles would then group to form train-like bands, removing the imperfect whims of driver inconsistency from the routine. Cars would enjoy racecar-like drafting techniques, which is far more energy-efficient than traveling at varied speeds.
These IVHS technologies allow us to better utilize our existing roadways by all but eliminating the empty spaces, thereby fully utilizing capacity without moving at a snail’s pace. Imagine texting to your heart’s content while rolling down the road! Or if texting isn’t your forte, you could also read, write, talk, or conduct a meeting on the go. What will it take to make such a vision reality? At a minimum, more R&D to perfect the technology and devise a supporting infrastructure, drivers willing to give up control, and automakers willing to embrace it. Such automation might then transfer to commercial trucking, bringing even greater benefits to trucking operations that struggle to achieve efficient movement.
Congestion is a pressing problem facing our businesses and personal lives today. It has such a great effect on us that sometimes it even determines how we plan and spend our days. Distance friction is increasing, reversing a decades-long trend, making it more difficult to close the gaps in time and space. Moving forward, we need to take steps to lessen its impact. This issue surrounds our supply chains. Inability or unwillingness to act at both macro and micro levels is sure to invite the return of incidents like Carmageddon, described in Chapter 1, “Supply Chain Management in the 21st Century.”