# Freight Carriers

# From Modal Fragmentation to Coordinated Logistics [^1]

## Executive Summary

Over the last few years, as shippers and carriers have sought to
wring-out even more cost from the logistics process, a new concept has
emerged in the marketplace: coordinated logistics. Coordinated logistics
is the integration of distinct logistics activities, such as cross-modal
coordination or the bundling of transportation and inventory control.
The emergence of coordinated logistics is being driven by the growth in
global trade and the rapid evolution of information technologies that
permit service providers to assemble information and coordinate products
that cross traditional modal and functional boundaries. Through this
"bridging", carriers are seeking to combine the inherent advantages of
each mode or submode, in a coordinated logistics system, with superior
efficiency and effectiveness for shippers. This trend has spawned a new
type service provider, one that offers "mode-neutral" products.

Transportation providers have traditionally been organized along modal
lines, with shipment size, product handling characteristics, and service
quality giving birth to numerous submodes. But the rapid expansion of
global and "hemispheric" (such as NAFTA) trade and rising shipper
expectations have forced many carriers to abandon single-mode product
offerings, and develop mode-neutral service products. The mode-neutral
product is a clear attempt to exploit cross-modal advantages with
coordinated logistics. The implication is that by offering the shipper a
selection of time-definite services, the carrier becomes more
productive.

Most carriers are reluctantly embracing coordinated logistics: non-asset
providers use it as a way to improve revenue quality while maintaining
low asset contribution, while asset-based carriers use it to improve
utilization and network efficiency by adding density. Coordinated
logistics also offers carriers a method of increasing "switching" costs
to shippers, and thus improving carrier market leverage. The adoption of
coordinated logistics also fundamentally changes the competitive unit
from the truck or container to the "network." It is expected that
intermodal alliances of service providers will lead to the formation of
international "logistics networks", providing a broad array of services
to multinational shippers.

Pressures on both the shipper and carrier side continue to encourage
cross-modal coordination, but many challenges remain. Whereas shippers
see the opportunity for better and more cost-effective service products,
carriers see the high cost of information systems necessary to manage a
coordinated product. But while shippers favor coordination, the present
reality is that carriers are not inclined or prepared to insure product
reliability across multiple operations and participants. The
implications for infrastructure are uncertain. Will carrier "networks"
emerge, leveraging proprietary assets to build density, or will niche
providers prevent the formation of intractable alliances? There is no
certainty yet.

## Introduction 

Less than thirty years ago, "logistics management" was an emerging
concept that advocated a holistic approach to designing physical supply
and distribution programs. Shippers, it was reasoned, could improve the
efficiency and effectiveness of their networks by making internal
trade-offs between faster and more reliable transportation alternatives
and lower inventory levels. Over the last few years, as shippers and
carriers have sought to wring-out even more cost from the logistics
process, a new concept has emerged -- coordinated logistics.

Coordinated logistics is the integration of disparate logistics
activities, such as cross-modal coordination or the bundling of
transportation and inventory control. It appears to have evolved as a
result of heightened shippers' service expectations, market pressures
that have kept freight rates depressed, and the desire to improve
in-transit product visibility. The enabling factor for the emergence of
coordinated logistics is the rapid evolution of information technology
that allows carriers to support the bridging modal boundaries. Through
bridging, carriers are combining the inherent advantages of each mode or
submode, in a coordinated logistics system, with superior efficiency and
effectiveness for shippers.

To some extent, coordinated logistics is not a new strategy; freight
carriers have sought to integrate between modes and submodes, and third
parties have arranged "serial" transport for decades. What is new is the
capability -- through advanced information systems and the Internet --
to make material improvements in coordinating service, minimizing cost,
and improving in-transit visibility. This is now true whether the
transport provider owns all elements of the product or not. Carriers
adopting this strategy are describing their products as mode-neutral.
Such carriers are able to offer varying levels of speed, capacity,
commitment and on-time precision, while managing diverse and even
changeable delivery modes. Though identified initially as the
convergence of modes and submodes, this trend is really the advancing
front of change in the organization of transport providers. As
successful organizational forms are worked out, carriers have acquired
some of the characteristics of third parties. Meanwhile, reacting to the
need for scope, scale, and size in a market measured by competitive
networks, the transport provider organizations themselves are pursuing
growth, alliance, and consolidation.

The theme of cross-modal logistics coordination is explored in this
paper, first by considering the market and competitive forces at play,
then by looking at the trend itself, and finally by examining product
development and the reorganization of transport providers in this new
environment. This paper will outline the trends shaping the development
of cross modal operations, the issues associated with cross modal
operations, and the implications of cross modal operations upon both
carriers and their associated modal infrastructure.[^2]

## Trends toward Cross Modal Operation

Freight carriers traditionally have organized along modal lines, with
shipment size, product handling characteristics, and service quality
giving birth to numerous submodes. In several areas, these historical
boundaries are crumbling. The pressures on service and cost performance
imposed by modern neurologistics systems are described in another paper
in this series, "Business Logistics: From Push to Pull Logistics". The
first consequence of these pressures is that carriers are driven to the
limits of their modal technol­ogy, and cross into other modes in search
of better performance. The second consequence is that shippers will not
be satisfied with a cross-modal service unless its coordination is
seamless. The transportation products that are arising in this market
are mode-neutral, in the sense that the shipper is unconcerned with the
manner of operation. Instead, the shipper is focused on results:
predictable time service from pickup to delivery, from door to door.

There are five trends pushing and shaping cross modal operational
strategies: (1) the rapid development and adoption of information
technologies for tracking shipments and managing fleets; (2) economic
competition for capital; (3) carrier concentration and consolidation;
(4) globalization in the economy; and (5) the evolution of networks.

### Widespread Application of Information Systems 

The rapid pace of changing business processes brought about by
information technology development can be legitimately termed a
revolution. In the transportation sector, such terminology is certainly
appropriate in that information technology has been a source of
significant productivity gain, and the catalyst of significant industry
restructuring. A commentator in *The Economist* (9/23/00) compared
information technology to previous technological revolutions, and noted
that:

\[One\] "test of a new technology is how far it allows businesses to
reorganize their production processes, and so become more
efficient....Now computers and the Internet are offering the means for a
sweeping reorganization of business, from online procurement of inputs
to more decentralization and outsourcing."

The constellation of technologies presently available for freight
transportation can be grouped into three major categories:

1.  Shipment and asset tracking technologies such as mobile
    communications for field personnel (cellular phones, two-way radios,
    on-board computer systems), passive asset tracking and monitoring
    systems for trailers and power units (satellite and mobile tracking
    systems), and bar codes and radio tags on the shipment handling
    units (envelope, shrink-wrapped skid, container) that can be tied
    back to bar-coded stock keeping units (SKUs).

2.  Routing and dispatch optimization models -- Operations Research
    software that is able to manage and reconfigure routing, matching,
    blocking and consolidation decisions.

3.  Commercial transaction management software -- such as marketing
    software that is able to re-price and manage yields in response to
    differential costs and supply/demand relationships.

The increased availability of sophisticated information technology is
bringing change to the way volume is managed in the operating stream,
affecting the creation of fundamental economies of consolidation and
density[^3]. It alters the question of cross-modal coordination, by
making it possible to monitor and even control shipments from door to
door, improving handoffs and mitigating their effects. Logistics
companies that lack physical operations but possess strong coordination
skills become more competitive, and operating companies can consider
shedding some assets in favor of management roles. Recognizing the
transforming importance of information systems, the huge motor carrier
United Parcel Service has stated that it is "*no longer a trucking
company with technology, but rather a technology company with
trucking."*

Yet the cost of these cutting-edge systems may still be too expensive
for all but the largest of carriers, and could thus serve as a motive
for consolidation and a barrier to market entry. A top truckload and
logistics operator believes that information technology

"potentially (has) a huge impact, but the big question is whether it's
going to reduce costs. It certainly improves information to the
customer. ... Developing technology costs loads of money and it requires
some kind of economic payoff. The winners are going to be the ones with
the biggest pockets."

### Economic Competition for Capital

Transportation has historically been a capital-intensive product. The
significant investment in assets such as ships, locomotives, facilities,
and tractor-trailer equipment, often places transport providers at a
competitive disadvantage in the capital markets to more asset efficient
industries. Transport providers are finding it difficult to attract the
reinvestment capital necessary to maintain service quality.

The railroad capital gap is well documented, as is shown in the
accompanying Chart. Internally generated funds have fallen short of
capital expenditures for years, while returns on investment have been
increasingly uncompetitive. Truck lines also find their external sources
of funds inadequate. In the words of the CFO of a top LTL company:

"Wall Street is not interested in companies whose market capitalization
is less than \$1 billion, which exceeds the market capitalization of all
but a few motor carriers. Access to capital is becoming more of a
problem for many carriers, and the industry just doesn't offer
competitive opportunities versus the financial alternatives.
Consequently, the cost of capital has gone up and its availability has
declined."

![](media/image1.wmf){width="3.176388888888889in"
height="2.463888888888889in"}As a result, carriers have sought to reduce
asset requirements while maintaining revenue levels through the
expansion of products and services beyond their traditional base.
Coordinated logistics offers one kind of solution. For a non-asset
provider, it works to promote revenue quality while reducing the need to
own assets. Coordinated logistics for an asset-based carrier provides a
way to improve utilization and network efficiency through economies of
density, by retaining certain volumes on-line and subcontracting others.
As one trucking company stated:

"\[These carriers\]...establish partnerships in order to improve the
density of fleet operations; for example, \[they\] farm out delivery in
regions where they do not have very good density but some other carrier
will." 

This same truck line also uses rail intermodal line-haul services to
improve its own fleet productivity.

### Concentration and Consolidation 

The core carrier programs initiated by many shippers over the past two
decades encouraged consolidation within modes by concentrating larger
volumes of freight among fewer carriers; carriers gained economies and
shippers gained leverage. Shippers now seek to extend this strategy and
widen their influence through combinations, alliances and web exchanges.
These larger shipper networks control more business by moving up (adding
vendor traffic) or across (combining with similar shippers) supply
chains; they retain for themselves a larger share of the volume
economies available in the market, then put them out to bid from a
position of considerable advantage. The result, according to one
trucking executive, is:

"more consolidation of freight and volume and control on the shipper
side," and "carrier consolidation (taking) place in order to equalize
the leverage."

![](media/image1.wmf)While the trucking industry as a whole remains
fragmented, the degree of concentration among the largest lines has
grown. Carriers with annual revenue over \$100 million commanded two and
a half times the business in 1998 as in 1990 (the accompanying Chart
displays this.) Domestic air freight has became an industry thoroughly
in the hands of a half dozen integrated carriers. U.S. flag steamship
companies have merged with foreign lines. Railroads have reduced to the
point that there are less than ten major systems in all of North
America. In the eyes of some shippers, these changes have brought a
material shift of market power that favors the carriers. Several
shippers we interviewed suggested that the vertical and horizontal
integration of carriers has significantly reduced their ability to share
in the efficiencies these consolidations were intended to create.

Shipper programs and equalization of market leverage are hardly the only
reasons for carrier consolidation, and the freedom wrought by
deregulation has been a strong force from the outset. (The eighth paper
in this Series explores the theme of Regulation further.) Even so, much
of this trend can be seen as an attempt to capture volume economies, and
coordinated logistics is a further means to this end. Most of the
largest freight carriers are substantial cross-modal operators; although
consolidation across modes is not yet a strong force (we discuss this
further below), the use of modal coordination in developing traffic
concentration is significant and appears to be growing.

### Emerging Global Economy[^4]

The availability of globally produced goods in most major consumer
markets is enormous. The spillover benefit of this trend has been a rise
in transport as producer and consumer sub-economies trade around the
globe. Most international transportation touching the United States is
characterized by coordinated logistics, either because the operation is
intrinsically intermodal (as with overseas shipping), or because border
regulations and equipment standards require interchange (as with NAFTA
shipping). Cabotage and immigration provisions impose further
restrictions, so that the only international freight networks with real
freedom of movement are coordinated networks.

The increased transport opportunities available in the world economy
have also spawned an increasingly competitive environment for
transportation services. As shippers seek to establish product advantage
and use their logistics chains as tools to the purpose, carriers are
forced to reduce the costly transfers of intermodal service, and have
begun to look for opportunities to integrate operations forward and
backward for commercial advantage and cost reduction. Some small package
carriers have been building global capabilities to satisfy this new
demand, NVOCC operations have become relatively common in LTL, and at
least one truckload operator is allied with a proposed high-speed
container line.

Nevertheless, the globalization of freight transportation is in its
infancy. Apart from air and marine companies who expressly serve an
international market, freight carriage in the U.S. and elsewhere is
predominantly regional or continental. Though many carriers have
attempted some measure of expansion beyond borders, synergies with
domestic operations have been few. International containers, for
example, normally are an inferior good for U.S. domestic transportation
and do not contribute to equipment balance. A railroad-based
transportation conglomerate with facilities on three continents finds
*"...precious few synergies in being a global carrier"*. And, while
large shippers commonly conduct manufacturing and retail operations in
multiple countries, this carrier reports that *"dealing with customers
globally does not offer any particular advantage yet."* [^5] Where there
are efficiencies, they come from the coordination of compatible
networks, such as the rail‑marine interface and the run-through trailers
between U.S and Mexican truck lines, and the logistics information
networks third party operators and others are working to construct.

### Evolution of Transportation Networks

Freight operators have grown through core carrier programs, but also
have been forced to grow, and to make fixed capacity commitments in
their networks. Coordinated logistics initiatives are one way to manage
these commitments, and to make meeting them less costly. Coordination
takes place through simple purchase of service, through partnership or
sharing of a portion of capacity, through management by information
technology, or through control of another modal operator by acquisition.
A newer form of coordination is the web-based carrier exchanges. Among
other things, these are aimed at more efficient matching of supply and
demand in a virtual carrier network - but in effect they thereby seek to
control a larger share of the available volume economies (and
counter-balance the advantage of shippers).

Cross-modal coordination in many networks is a fundamental requirement.
Air freight typically supplies a highly reliable door-to-door product,
but its first and last miles are accomplished by truck, usually in a
tightly controlled, company owned operation. Railroads have merged for
the sake of network economies, but also have dropped route miles and
have seen industrial development take place far away from trackside.
Progressively, trucks on the streets of cities and industrial parks have
performed railroad pickup and delivery.

Infrastructure management and carrier operating performance are bound up
with each other (as railroads attest), and both affect the efficiency of
supply chains. One consequence is that facility complexes are being
designed for cross-modal coordination. Freight villages and inland ports
are an example of this, where the staging, transfer and control of goods
is supported by a local network of information systems and modal
infrastructure, often with a major shipper or carrier center at its
heart. More traditional infrastructure providers like seaports and
airports are deploying information technology, establishing links to
distant facilities, and working in consort with groundside carriers to
assure the continuous flow of goods.

Increasingly, for both the shipper and carrier communities, networks are
becoming the unit of competition. The performance of supply chains is
vital to shippers, not only for the sake of bringing goods to market,
but because logistics itself has become a source of market advantage.
For carriers, the size and strength of networks will be the key
determinants of market power, according to the chairman of
fast-expanding Deutsche Post -- now a significant player in the U.S.
market: [^6]

"In the future, the large international customers will need logistics
providers with large international networks. They don't want 150
logistics suppliers\... they want about 10. And to be one of the 10 when
there is a bidding, you have to have a strong international network. The
one with the strongest international network will be the winner."

These comments apply equally well to domestic systems. Operating
networks represent sustained investments in client relationships,
construction of volume economies, and service management, quite apart
from mentioning technology and infrastructure. If scale in a network
matters -- and in some ways it certainly does -- then market entry
becomes an open question. Will the formation of expansive logistics
networks -- by their sheer size and complexity - preclude new entrants
from developing competing products? But concentration within a network
also matters -- the ratio of dynamic capacity (force) to geography
(space). A major U.S. motor carrier reports that "smaller fleets are
effective in the Fortune 500 market in niches," and this is corroborated
by one of its capacity-hungry Fortune 500 customers. The smaller carrier
competes because its network is dense, and its limited scope supports a
high level of performance. The risks for the smaller fleets may come
from information technology, where competing in sophistication may never
be cheap, and from larger operators capturing logistics coordination
franchises across broad sections of market, leaving less efficient
segments for other players, or relegating them to the role of commodity
providers.

## Implications for Products & Organizations

The transportation marketplace over the past two decades has seen an
explosion of intermodalism. The freight industry's operational and
commercial channels that have historically been split along modal lines
are increasingly being repackaged into customer, industry, and product
segments. Shippers outsource single and multiple mode coordination
responsibilities to asset and non-asset-based carriers, and service
providers have formed units around the needs of single shippers or
industry sectors. The result is that the service products from multiple
modes are being assembled both operationally and commercially to provide
combined services, and are giving rise to new organizational forms.
There are three basic models currently in use:

1.  Cross-modal service alliances (e.g. truckload carriers utilizing
    rail intermodal as line-haul substitution).

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4.  Coordinators and integrators, such as third- and fourth-party
    logistics companies integrating multiple mode products within a
    common commercial and operational framework (e.g. APL's coordinated
    service package for DuPont covering TL and LTL services). Sequential
    transport managed by a forwarder or intermodal marketing company is
    an earlier and still active version of this model.

5.  Cross-modal mergers and acquisitions (e.g. FedEx's acquisition of
    RPS, Roberts Express and American Freightways combining air freight,
    parcel, express truckload and LTL services).

### Purchasing Practices

As shippers have sought to reduce in-house transportation expenses,
eliminate inventory in favor of rapid replenishment, and simultaneously
replace traffic expertise lost to attrition and organizational
decisions, they have aggregated traffic volumes to selected carriers,
matching capabilities and quality to corporate objectives. In addition,
shippers have selected several new models for purchasing of
transportation services that expand on the concept of these programs and
include several outsourcing alternatives:

1.  Single mode outsourcing, transferring transport coordination to a
    single carrier within a mode (e.g. various catalogue shippers to
    UPS).

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6.  Multiple-mode outsourcing, transferring the coordination of several
    traditional modes to a single coordinator -- normally to a logistics
    company, whether asset or non-asset based.

7.  All mode outsourcing, transferring the coordination of all modal
    alternatives to a single integrator or fourth-party provider.

Logistics outsourcing has altered the way transportation services are
purchased. Carriers often market services not only to shippers, but also
to brokers, logistics providers and even other carriers. The
coordinators -- with the support of the shippers -- further bundle
traffic through the use of consolidation and de-consolidation centers;
milk-run pick-up and delivery services; and the assembly of traffic
volumes from multiple shippers into full-load quantities. These efforts,
intended to reduce transportation cost through the substitution of
less-expensive line-haul transport, have facilitated the expansion of
coordination services among both asset-based and non-asset-based
providers. Essentially, these are all manifestations of a shift in
logistics roles: just as intermodal marketing companies are created when
line-haul operators withdraw from, or never accept a retail role, so the
coordinators are created when shippers withdraw from, or never undertake
management of their logistics function. When coordinators take on the
business of multiple shippers and are able to combine their activities,
they become yet another competitor for control of the market's volume
economies.

Not surprisingly, shippers have reported that the trend to coordinated
logistics has created better and more cost-effective service products.
They have noted that the evolution in the industry towards fewer, larger
service providers had been a positive outcome of deregulation where
barriers to entry are comparatively low. The shippers we interviewed
believed that deregulation in the motor carrier industry had resulted in
several large high-quality providers[^7], while deregulation, but more
importantly, consolidation in the rail industry, had lowered quality[^8]
in the near term and reduced alternatives significantly.

From the carriers' perspective, coordinated logistics has yielded a
mixed result. Some carriers express difficulty in financing the
investments in information systems necessary to manage a coordinated
product. Some also express frustration in their attempts to capture the
synergies believed to exist in cross-modal coordination. With the
limitations of current infrastructure, systems and business practices
have thwarted their ability to coordinate the disparate products
successfully.

### Product Offerings

The central questions in coordinated logistics concern the types of
products offered, and the forms of organization required to supply them.
On the product side, time definite and mode indefinite characteristics
are on the rise -- even for bulk commodities \-- and a primary issue is
the product integrity maintained door to door. On the organizational
side, new models of transportation providers are being established in
some sectors (and not at all in others), and are expressions of new
business strategy. Neither set of developments is mature, and novel
solutions to the central questions are still to come.

The mode-neutral product is a clear attempt to exploit cross-modal
advantages with coordinated logistics. In essence, it proposes to meet
the requirements of shippers for service, cost, visibility,[^9] and
other product features in specific ways, while reserving the choice of
operating method to the provider. Traditionally, a transportation buyer
gained trust in suppliers by understanding their operation, and
observing the results they produced under a broad set of commitments.
The mode-neutral supplier substitutes a more precise set of commitments,
backed up by its own control systems. The product typically is
time-definite to the hour or day, with mode selection a function of
shipment size, consolidation opportunities, and transit requirements.
The supplier is responsible for the price, the quality of service,
in-transit visibility, and the institutional reliability -- encompassing
management processes, financial stability, integrity, and
responsiveness -- by which performance is assured.

Not only modal coordinators favor the advantages of this product form.
Truckload and LTL carriers report that identifiable distinctions in
levels of service discourage their customers from demanding higher
performance than necessary. Because carriers are able to institute
differential prices that reward service and promote choice, they in turn
derive a greater breadth of operating flexibility than a uniform product
allows. One company, describing the payoffs from their ability to sell
varying levels of service quality, stated that 35 percent of freight in
their system is not deliverable on the day of arrival. As a result, a
sizeable portion of their capacity is consumed unnecessarily; the
implication is that by offering the shipper a selection of time-definite
services, the carrier becomes more productive.

### Ownership & Control

The challenge in mode-neutral, coordinated logistics services is the
institution of product reliability across multiple operations and
participants. Does the provider have to maintain control door to door,
and does control have to take the form of ownership -- which implies
asset ownership? Is ownership necessary for all stages of the operation,
or are the pickup and delivery (the so-called "last mile") stages most
important, and the line-haul better suited to delegation? The freight
industry is divided on these questions, with third parties and some
capital-intensive companies hoping particularly to succeed with fewer
assets -- and while there are no definitive answers, a variety of points
and comments from participants can be considered:

-   One railroad envisions the international intermodal product not as
    an integrated door-to-door service, but rather as one coordinated
    among providers through information technology, and possessing
    enough in-transit transparency to make service performance
    manageable. Still, this same railroad is concerned with the
    commoditization of its products and the lack of adequate returns for
    its assets. It is arguable that intermediation breeds
    commoditization - and this railroad showed concern for the effects
    of intermediation in its domestic services.

-   A different railroad reports that the portion of the market that
    demands integrated door-to-door products is not currently the
    portion that uses rail. As to the method of integration, this
    carrier expects to see both ownership, and coordination through
    information technology. However, it also asserted that the history
    of carrier alliances is not favorable, and that alliances are most
    successful when one party is dominant and the other acquiescent.

-   A maritime expert describes steamship companies as deeply concerned
    about losing control of their customer and becoming subject to
    commoditization. Their solution is to set up logistics units in
    order to manage through service, to introduce satellite and
    radio-tag technologies for service and asset control, and to raise
    margins by offering a differentiable product.

-   A motor carrier, a high-volume user of rail line-haul services,
    introduced a GPS-based tracking program for its trailer fleet. One
    explicit motivation for this substantial investment was that the
    technology established a mechanism for door-to-door intermodal
    service control.

-   Another motor carrier attempted to guarantee truck-quality service
    regardless of its manner of line-haul. When unreliable rail
    performance simultaneously raised costs through the carrier's
    efforts at service recovery, and depressed prices as the carrier
    became viewed as an intermodal marketing company, the company
    addressed the problem by splitting the intermodal from the
    over-the-road product, and offering them both to customers at
    different price levels.

Perhaps most significantly, a leading shipper states that it has found
an empirical relationship between the ownership of assets and the
quality of a carrier's service, and attributes this to the positive
effect of service performance on asset utilization. From such
indications several conclusions can be drawn:

-   That operating control contributes to an improved product;

-   That ownership contributes to the quality of control; and,

-   That an owner who does not control service door-to-door risks
    commoditization.

-   These conclusions are not incontrovertible, and the way that a
    carrier or integrator resolves the issue of control has great
    influence on its organizational strategy, asset requirements, and
    investments in information technology.

### Organizational Form

The recent history of transportation conglomerates is unimpressive. The
CSX purchase of SeaLand never lead to any meaningful advantages, and the
unit was ultimately spun off. Overnite in the hands of Union Pacific has
not become much more than an independent subsidiary. American President
Lines sold its trucking and distribution division, and then was sold
itself. The Roadway Caliber venture led to a split up; J.B. Hunt's foray
into new segments of the trucking market brought them back into the dry
van business. There are diversified companies with more impressive
records, but few compelling cases for modal synergy. If cross-modal
coordination is a viable strategy, and especially if ownership really
matters to success, how is this to be accomplished?

The simplest answer is that operations will remain separate, and product
improvements will arise from information technology. This appears to be
the approach of many transportation providers, and certainly is the one
favored by most third-party firms. A more complex answer comes from
considering organizational forms in different segments of the freight
market. For example, local trucking in the form of intermodal drayage is
described by one railroad executive as impervious to the productivity
gains of the past decade even through the adoption of information
technology. Companies seeking to consolidate draymen have appeared now
in the market, but their influence remains to be seen in the future.

**LTL:** Regional LTL companies have grown because of attrition among
unionized firms, and because of the economic strength of distribution
markets. Organizations have not changed, but they have invested heavily
in information technology. Long-haul LTL carriers have reorganized
terminal networks and line-haul systems, and found a strong correlation
between cost reduction and service improvement. One states that it
employs information technology to improve growth and returns, using it
to create and manage diversity in its services. They believe that
*"companies that provide the broadest transportation capabilities will
be the most successful."*

**Rail:** There is a call for new business models in the railroad
industry, and pessimistic predictions in their absence. One version
outlined by a Class I carrier calls for railroads to become logistics
providers and adopt the integrator role; to move heavily into
information technology; to streamline operations, schedule trains, and
exit certain commodity and vertical markets. A different version,
presented by a railroad whose operations already are heavily scheduled,
calls for carriers to sell capacity and not just transportation; to
provide time-definite service and improved utilization of assets; and to
treat on-time performance as the constraint to which other aspects of
performance must conform.

**Truckload:** New organizational developments are taking place in the
small package and in parts of the truckload sector, and both have
consequence for coordinated logistics. The truckload model involves
over-the-road carriers who utilize intermodal operations as an
alternative transport channel, and have applied information technology
to bring them under common control. More substantively, the logistics
subsidiaries formed by these carriers uncover and organize volume
economies latent in customer supply chains, for the client's benefit and
often (but not solely) for the carrier's. This is effectively a channel
of highly filtered business prospects. The subsidiary may also provide
brokerage services that help sustain the capacity commitments made to
customers and at a lower cost.

Beyond pricing and commercial development, applications of information
technology may be extended to demand management and the production of
consistency in traffic volume. These are powerful efficiencies if they
are realized. For an organization with scale, they establish the means
to maintain asset and technology investments, and perhaps to operate
from a more favorable position on the cost curve. The combination of
several truckload carriers in the Transplace[^10] web exchange is an
attempt to add to scale, and to discover and claim market volume
economies sooner than competitors.

![](media/image1.wmf)**Package:** The small package model represents a
different approach to the transportation conglomerate, and a different
view of the synergies. Federal Express, for example, has acquired a
string of subsidiaries, most of who are leaders in freight applications
of information technology, and cover a spectrum of submodes including
small package ground service, express ground, and regional LTL. In
addition, the company buys line-haul services from truckload carriers
and intermodal railroads. The subsidiaries are left as separate
operating streams, distinct in their service capabilities and shipment
size accommodation. Products are specified on a mode-neutral,
time-definite basis, with prices varied to the level of service. The
network has global extent and exceptional in-transit product visibility.
The product is controlled door to door, with pickup and delivery service
under company ownership throughout much of the world.

The synergies in this model are created *at the point of network entry,*
when the shipment is routed into one of the operating streams. Some
shipments, due to size or service characteristics, will be suited to a
single stream while others are suited to several. Exploiting this
operating option and guided by information technology, the carrier is
able to make daily real-time adjustments to optimize load consolidation
and line-haul patterns. This method yields the best load factors, street
density, lane and terminal balance, and overall utilization of assets
that the daily available volume allows. Compared to a carrier operating
a single stream, the company has many more opportunities to create
service economies, and a substantial competitive advantage. Unlike
earlier modal conglomerates whose efficiencies were so often elusive,
attempts to merge operations generally have not been made. This approach
can be termed a metacarrier strategy, and it is a new solution to the
questions of coordinated logistics.

## Issues

Shippers endorse the coordinated logistics models as a more favorable
alternative to the mode-based model. More innovation and competitive
parity than had been available in the earlier structure have been cited.
In addition, the lower total cost and enhanced service performance
demonstrated by the early incarnations of the model have been praised.
But while earning shipper praise, these early products offer only
vertically integrated [information.]{.underline} Significant challenges
lie ahead as carriers move to add vertically integrate service products
to the information stream.

The logical outcome of continued cross-modal coordination is a move
towards greater harmonization. Issues that often go unresolved in the
traditionally fragmented logistics model are eliminated and could be
more easily addressed as intermodal hand-offs. Included among these
issues are intermodal container and shipment tracking. However, private
sector initiatives may not move forward rapidly enough to be of value in
the next decade, and there appears to be modest progress on the issue of
international standards. This factor appears to be limiting the interest
of carriers in performing international coordination activities.
Furthermore, while shippers and carriers alike are anxious to bring
about the harmonization features of coordinated logistics, both question
the economic benefits necessary to fund the information technology
improvements, and each ascribes the greater benefit to the other party.
Shippers point to equipment utilization and productivity increases,
carriers highlight supply chain management and transparency advances,
and neither thinks their own savings or efficiency rewards have been
compellingly large. The information technology issues related to
coordinated logistics, as in other aspects of transportation, appear to
hold the greatest promise of overall productivity gain, but not
sufficient gain for any party to make the needed investment
independently.

A related item is the requirement of scale for information technology
development. This ties into the possibilities for scale offered by new
organizational forms, and the competition for market economies between
shippers, carriers, and integrators. Carriers of unprecedented size and
global scope already exist, one of which is still owned by a sovereign
government. More carriers of this magnitude are sure to arise in the
domestic, hemispheric, and world markets. The policy issues are
challenging, apart from the jurisdictional boundaries. Should transport
providers be allowed to expand the size of their multinational
customers? Is it counterproductive to interfere with the scale required
for information technology investment. If so, should information
technology be made accessible through financing vehicles and thereby
lower the barriers to competition?

The triumph of the coordinated logistics model over the fragmented modal
structure that has long dominated the transport sector is not assured.
It is most appropriate in certain transport sectors such as small
package, truckload, and longer haul industries. It is perhaps irrelevant
to most local trucking and various bulk transportation industries. The
current incarnation of the trend, since it is technology driven with a
broad base of support among modal sectors, may be more sustainable than
in previous times.

Whether the evolution is complete or partial, the effects on the
industry will continue. The profitability models for carriers in
traditional mode classes will change as the business mix changes and new
products and organizations may arise in other sectors, just as in the
small package market. The success of the new models will determine the
rate of duplication, and the speed at which coordinated logistics
expands.

In addition, these new models create a need for a more flexible
regulatory framework, one that can adapt to the cross-modal alternatives
and encourage their productive potential. The traditional, modally
defined regulatory structures could stifle cross-modal coordination, and
result in costly and cumbersome guidelines.

# Appendix -- Cargo Security

## Introduction

The issue of cargo security was discussed with several transportation
executives, and reinforced the perspective that cargo theft is
anticipated to be a larger issue over the next decade than in the past
one. The greater sophistication of cargo thefts and the increasing cost
of cargo losses are combining to make solutions to this problem more
elusive. Respondents affirmed that cargo theft, or pilferage, has
increased dramatically over the past decade, and the number and scale of
reported incidents continues to grow.

For purposes of this Appendix, the chief concerns and developments in
cargo security are presented, as well as the comments of industry
executives.

### Discussion

It is estimated that cargo theft and pilferage represent an annual
economic loss of between \$10 and \$20 billion, with the value of a
single theft averaging approximately \$500,000. This astounding growth
has drawn the attention of insurers and federal officials.

Pilferage, once the primary concern of the transportation industry, has
been reduced through technological changes in the handling of freight
(containerization, etc.) and the use of sophisticated surveillance and
detection methods. In its place, outright cargo theft has eclipsed
pilferage, and become a preferred activity for an increasingly
sophisticated and organized criminal element. The FBI believes the
reason for its growth is simple. Stealing cargo is safer than running
drugs, with less chance of prosecution, but still with ample potential
for large profits.

Carriers have historically been reluctant to report thefts, fearing a
shipper backlash. Law enforcement officials are often unable to quantify
losses without carrier or shipper cooperation, and theft crimes
frequently go unreported. Judicial officials have historically viewed
cargo theft as a victimless crime, and have thus been more lenient in
sentencing.

One of the areas most commonly targeted for cargo thefts is consumer
electronics. In the past several months, computer manufacturer and
retailer groups have organized to exchange information and strategies to
combat this growing problem. Other common targets of cargo theft include
grocery items, meats, cigarettes, perfumes, clothing, jewelry, and
seafood. A truckload of shrimp could be worth upwards of a half million
dollars.

With the upscaling of criminal activity has come a trend to more violent
and sophisticated thefts. Cargo theft has graduated from a box lifted
from the loading dock to gunpoint hijackings of entire trailers or
containers. The increased violence and scale of cargo theft has
attracted the attention of the FBI, who has traditionally participated
in any freight theft that involves an armed robbery or a loss exceeding
\$50,000. The FBI has increased its effort to stem the increase in cargo
theft, and has increased the size of its Interstate Theft Task Force
nearly fivefold in the last three years. Generally, the FBI agents work
to support local law enforcement officials by investigating organized
groups of thieves and fences. Officials agree that local law enforcement
agencies are not well equipped to capture the new breed of cargo thief.

Many officials believe that the increasing violence and sophistication
in cargo theft are linked back to organized crime. The NCSC estimates
that traditional organized crime is involved in 40 percent of cargo
theft incidents.

## Trends

With the increase in reported thefts, insurers, carriers, shippers, and
law enforcement agencies have united to promote congressional action to
increase the arsenal of weapons in the fight against cargo theft. In
1999, the Transportation Security Coalition assisted Senator Frank
Lautenberg, D‑N.J., in drafting legislation, S. 1512, that would:
1) stiffen penalties for cargo theft; 2) broaden the definition of
cargo-related crime; and 3) establish a national database on cargo
theft. Within specific modes, the issues related to cargo security are
somewhat different.

### Air

Air cargo has been particularly hard-hit by cargo theft. The attractive
combination of small shipments, high-valued cargo, and a complex chain
of handling has made theft prevention a particularly daunting task.
Officials cite that criminals frequently infiltrate air cargo
organizations to provide inside information on shipment manifests and
cargo security. Several carriers have worked to reduce security risk
with sophisticated surveillance techniques, 10-year background checks on
current and potential employees, and more aggressive information
security procedures. One carrier reported spending between one and two
percent of gross revenues on security efforts. Air cargo theft has most
often been linked to organized crime, and several major FBI
investigations, such as "OPERATION KAT-NET" ("Kennedy Airport Theft
Network") have been undertaken to reduce the theft problem.

### Rail

Railroads have traditionally provided private cargo security, or
railroad police, for the beneficial interest of shippers and the
railroads. Railroad police, unlike most private security agents, are
state-certified law enforcement officers. Railcar thieves generally
target intermodal containers, although automobile tires in boxcars are
also preferred. Automobile theft has been all but eliminated, but radios
and sound systems are common targets. Railroad police frequently
coordinate their activities with local law enforcement officials, and
have been successful in obtaining arrests and convictions of railway
thieves.

### Trucking

The trucking industry has been a long-time leader in the area of cargo
security. The American Trucking Associations (ATA) is underwriting the
development of a nationwide database of reported cargo thefts, and has
lobbied aggressively for congressional action to strengthen cargo theft
laws. The ATA routinely sponsors various national workshops and
conferences to facilitate the exchange of strategies and tactics in the
fight against cargo theft. Historically, security risks for motor
carriers were limited to those times when a loaded trailer was
unattended, such as at a truck stop or terminal. The trucking industry,
in the U.S., Canada, and Mexico, has responded with more aggressive
security tactics, larger recovery and information rewards, and the
formation and support of several theft prevention coalitions.

### Water

Most of the cargo theft in the ocean carrier industry occurs on the dry
land of port terminals and freight staging facilities. Like all
transportation industries, cargo is most susceptible to theft when it is
stationary. The growing congestion at major port facilities has only
served to increase the opportunity for pilferage as customs officials
often streamline procedures during busy periods. Today's cargo thieves
have significant experience with complex international shipping
documents and thefts often go undetected for long periods. Ocean
carriers have responded with tighter levels of security at port and
terminal facilities, but the complexity of port activities has made
finding permanent solutions to the problem rather vexing.

## Issues

-   The growing problem of cargo theft has drawn greater attention and
    involvement from private and public sector officials.

-   The expansion of Government supported crime databases is perceived
    to be a meaningful asset in the war on cargo theft.

-   Insurers, carriers, and shippers are aggressively promoting
    legislation to strengthen and expand the arsenal of weapons
    available to prevent and deter cargo theft.

[^1]: This working paper was prepared by Reebie Associates, Inc., and
    Cambridge Systematics, Inc., members of the Battelle Team providing
    research and analysis support to the Federal Highway Administration
    Office of Freight Management and Operations. It is one in a series
    of working papers providing initial analysis and discussion of the
    trends and issues affecting freight transportation productivity in
    the United States and North America. The series is available at
    http://www.ops.fhwa.dot.gov/freight/adfrmwrk/index.htm. The working
    papers were prepared under contract DTFH61-97-C-00010, BAT-99-020.
    The opinions expressed in the working papers are those of the
    authors, not the Federal Highway Administration. The working papers
    are being circulated to generate discussion about emerging freight
    issues and may be updated in response to feedback from public and
    private sector stakeholders.

[^2]:

[^3]: This phenomenon is discussed in additional detail in the related
    theme papers, "Economy: Rapid Change in Manufacturing and Service
    Sectors," and "Business Logistics: From Push to Pull Logistics."

[^4]: The theme paper, "Trade: From National Markets to Global Markets,"
    in this series treats this subject further.

[^5]: J. Reilly McCarren, President of Wisconsin Central Ltd., which at
    the time of interview ran railroads in the U.S., Greta Britain, New
    Zealand, and Australia.

[^6]: Klaus Zumwinkel, interview in *Traffic World,* 9/25/00. Deutsche
    Post is the former government-owned German Postal Agency that has
    expanded through the acquisition of Danzas, DHL, and the
    diversification into financial services (Postbank) to become one of
    Europe's largest logistics providers. Deutsche Post seeks to provide
    an array of transportation and logistics services including small
    package, freight forwarder, and third-party services for clients all
    across Europe. The firm has entered the US market for air freight
    and third-party logistics services through its purchase of Air
    Express International and the DHL acquisition.

[^7]: Comments by DuPont during FHWA interviews.

[^8]: Comments by General Motors and DuPont during FHWA interviews. More
    specific information on these interviews is covered in the theme
    paper titled "Business Logistics: From Push to Pull Logistics"

[^9]: "Visibility" and "transparency" are terms used to describe the
    availability of electronic location-specific information for
    in-transit shipments. To take an ideal example, a shipped product is
    assigned a bar-coded tracking number, and then followed through all
    of the stages of transport from shipper door to receiver door, with
    accurate, real-time information about the product's location and
    arrival schedule accessible 24 hours a day. The idea is that a
    product in transport should be much in the customer's control as a
    product in the warehouse.

[^10]: Transplace is a leading Web-based transportation exchange,
    founded by several of the nation's largest truckload carriers. It
    serves as an Internet forum for logistics collaboration and
    transactional coordination.

    Real-time information enables parties to optimize freight and assets
    while reaping the benefits of cost-efficient systems for acquiring
    goods and services. By connecting shippers, carriers, and suppliers
    through an [online
    marketplace](../../../../../../../../fleetservices/marketplace.jsp),
    Transplace streamlines processes and reduces associated trade and
    procurement costs.