U.S.

Freight Transportation Industry

Freight transportation has played a vital role in the development of the United States. The location
of cities and their subsequent growth were often dictated by access to transportation and the
economic prosperity that access ensured. For example, New York City and New Orleans owe their
early growth and development to their origins as ports with access to the interior of the continent
via the Hudson and Mississippi rivers, respectively. Chicago gained prominence as a hub for the
early railroads and Atlanta, originally the easternmost, or “Atlantic,” terminus on a rail line, now
boasts one of the world’s busiest internationa1 airports.

Gary, Indiana, Youngstown, Ohio, and Pittsburgh, all three “steel towns,” owe the growth of their
steel industry to the ease with which coal and iron ore, the raw ingredients of iron and steel
production, could be transported to their locations. Similarly, Kansas City’s long history in
meatpacking derives from its location at the intersection of the earliest western rail lines and the
old cattle trails heading north from Texas.

Prior to the development of rail transport, commercial transportation in the United States was
largely limited to the country’s seaboards and rivers. The rai1roads played a pivotal role in
opening much of the North American continent to economic development: one historian has
ranked the building of the railroad network as one of the most important developments in
American history. Although rail still plays a vital role in the U.S. economy, transporting one
quarter of all intercity freight tonnage, other modes of transportation (motor carriers, airlines,
waterways, and pipelines) have grown to assume increasingly important roles. This note examines
various modes of freight transportation, describes their operation, and compares the characteristics
of the transportation service that each mode offers. The note also describes changes in the industry
brought about by regulatory reform in the 1980s.

The Economic Importance of Transportation

Freight transportation plays a critical role in the U.S. economy, moving raw materials to
manufacturers and finished goods to consumers. In 1998, freight costs for all modes of
transportation comprised 6% of the gross national product (GNP). Although this percentage has
decreased from 7.8% in 1980, at $529 billion it nevertheless represents a significant share of the
economic activity in the U.S. For a logistics manager, transportation costs often represent the
largest component of logistics costs. In 1996, transportation consumed 39% of all logistics
expenditures in the U.S. economy.

Regulation of the Transportation Industry

Government participation in the transportation industry has a dual role: promotion and regulation.
A viable transportation network is vital to commerce. For this reason, governments (local, state,
and federal) in the United States provide promotion and subsidies to portions of the industry and
actually operate portions of the transportation system.

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Federal regulation of the transportation industry dates back to the Act to Regulate Commerce of
1887 (later amended and renamed the Interstate Commerce Act of 1920) that regulated the
railroads. Government involvement in transportation, however, has a long history and precedence
dating from English common law of the 1600s and 1700s. It was recognized that transportation
affected the public interest and thus should he treated differently from other industries.

Current regulation is of two forms. The first is noneconomic regulation covering issues of safety,
registration, and environmental protection. Seat belt laws, licensing requirements, aircraft
smoking rules, and vehicle emission limits are all examples of noneconomic regulation.

The second form of regulation is economic regulation controlling rates and competition. Much of
this regulation arose out of early monopolistic abuses by railroads and oil companies. Over time,
regulation spread to all modes of transportation with legislation such as the Hepburn Act of 1906
(pipelines), the Motor Carrier Act of 1935 (truck), the Civil Aeronautics Act of 1938 (air), and the
Transportation Act of 1940 (water).

Today, the transportation industry is regulated and controlled by a vast array of government
agencies and departments. Within the executive branch of the federal government, the Department
of Transportation (DOT) is the most important, although the Departments of Agriculture,
Commerce, Defense, Energy, Justice, Labor, and State each have jurisdiction over some aspects of
the transportation industry. Within Congress, the Senate’s Commerce, Science and Transportation,
and Environment and Public Works Committees and the House of Representatives’ Commerce
Committee and the Transportation and Infrastructure Committee all have jurisdiction over
transportation matters. In addition, there are over a dozen independent agencies and organizations
established by Congress that oversee the transportation industry. Some of the more influential ones
are the Federal Aviation Administration (FAA), the Federal Highway Administration (FHWA),
Surface Transportation Board (STB), Maritime Administration (MARAD), the Federal Energy
Regulatory Commission (FERC), and the Environmental Protection Agency (EPA).

Deregulation

Regulatory reform in the transportation industry began in the mid-1970s in the airline industry and
spread to encompass most modes of transportation. Legislation amending or rescinding many
earlier regulatory acts became law, such as the Motor Carrier Act of 1980 (truck), the Staggers Rail
Act of 1980, the Shipping Act of 1984 (water), and the Freight Forwarder Act of 1985. In 1994,
Congress deregulated intrastate trucking.

The statutes listed above represent but a small portion of regulatory reform. Administrative
decisions and rulings of the numerous agencies and commissions with oversight of the
transportation industry have also reduced or eliminated many constraints on the industry. That
process continues as regulatory bodies, shippers, and carriers adjust to a new competitive
environment.

The rationale for regulatory reform was to reduce or eliminate many of the inefficiencies in the
transportation sector engendered by regulation. It was thought that a loosening of regulatory
constraints would reduce many entry and exit barriers in the industry and allow significant

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restructuring. This restructuring has occurred and continues to occur resulting in increased
competition, lower rates, and greater operating efficiencies. One unanticipated impact of
regulatory reform was a significant consolidation in the rail and LTL trucking sectors.

Following deregulation, transportation companies have much more flexibility in pricing and, in
many cases, are pricing aggressively to attract and retain business. The use of contract rates,
particularly contracts offering volume discounts, is rising. In addition, the government is cutting
back many of its subsidies for the industry, relying instead on user charges and taxes on the
industry to pay for the maintenance and operation of the transportation infrastructure. The
transportation industry entered a period of tremendous change and transition due to deregulation.
The sections below examine some of that change in greater detail.

Modes of Transportation

Railroads

The railroads have a long and colorful history in the United States. The first railroads were built in
the 1830s in the Northeast, and construction, although slowed temporarily by the Civil War
continued unabated for 80 years. The first transcontinental line was completed in 1869 and the
total amount of track in the United States peaked at 254,037 miles in 1916. In 1998, total track
mileage just exceeded 128,000 miles and continued to decline. In recent years, liberalized
regulation of the railroad industry has accelerated the reduction in mileage by allowing greater
consolidation among railroad companies and permitting the abandonment of less profitable track.

Rail transport accounted for over half of the ton-miles of intercity freight through the end of World
War II, when the development of trucking lessened rail’s dominant position. As of 1998, the
railroads carried 40.2% of the country’s intercity ton-miles. Railroads still carry a major share of
bulk commodities such as grain and coal.

The emergence of the “mega-lines” following deregulation was the result of a number of mergers
among existing lines. In 1998, 9 railroads (Burlington Northern, CSX Transportation, Union
Pacific, Norfolk Southern, Kansas City Southern, Illinois Central, and Consolidated Rail
Corporation or Conrail), out of a total of 559 railroads in the United States, were classified by the
ICC as “Class I” railroads, each having revenues in excess of $250 million. At that time, Class I
railroads accounted for 91% of total freight revenues, 89% of employees, and 71% of the mileage
operated. Since the relaxation of regulations in the early 1980s, both regional and local railroads’
lines have risen to greater prominence. Regional railroads are lines serving several primary
customers on an interstate basis. These lines cover a smaller geographic area than the larger lines
and have a much smaller customer base. Local railroads are short lines that often feed traffic to
larger carriers. Many local lines have no more than 100 miles of track.

The smaller railroads are often the most innovative according to a vice president of the Association
of American Railroads (AAR). In his view, the regional lines are serving as the prototype for how
large railroads could be operated if they were allowed by the government to be more efficient. The
efficiency of the regionals is a result of several factors: relaxed labor rules and flexible salaries,

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less stringent government requirements for track and equipment maintenance and record keeping
standards, and the decision by some carriers to focus on more specialized and customized services
to shippers.

The large railroads are also improving their operations and efficiency through the development
and implementation of new technologies and decision support systems that aid track maintenance,
car identification and sorting, and vehicle and staff scheduling. In addition, these large carriers are
expanding their range of services. In particular, through the acquisition of companies offering
competing modes of transportation, several large railroads are offering a wide range of intermodal
services. In recent years, railroads have made major efforts to improve the quality of their services
by increasing reliability, providing better handling of freight (less damage), and improving the
monitoring of freight in transit.

Railroads, whether large or small, incur very high fixed costs for the acquisition of expensive
equipment, rights-of-way, switching yards, and terminals. Because this economic structure drives
the rail industry towards consolidation, railroads are often considered to be “natural monopolies.”
Rail shipments have cost structures characterized by high fixed costs (for car loading and train
make-up) and relatively low variable costs. This cost structure, combined with the heavy load
capability of railroads, makes rail transport ideal for carrying low-value commodities and large
tonnage over long distances. For this reason, the bulk of railroad shipments are minerals and
agricultural commodities.

Railroads offer low-cost transport for large, heavy or high-density products moving over medium
to long distances. For short hauls or less-than-carload (LCL) shipments, however, rail is generally
not competitive due to the high costs and time delays of terminal handling. Terminal delays can be
considerable: at each classification yard cars must be uncoup1ed from their existing train, sorted
and recoupled to a new train. In one typical example a rail car moving from a terminal in
Harrisburg, Pennsylvania to a terminal in Fresno, California took 225 hours (9 days, 9 hours) to
complete the 3,615-mile trip. During 87 (39%) of those hours the car was idle in terminal yards. In
this example, the rail car averaged only 16 miles an hour over the course of its trip. Terminal
delays aside, the average track speed was 26 miles per hour. In order to decrease total transit times,
railroads are making efforts to minimize the sorting of railcars in terminals by routing all cars
going to the same destination at the same time.

In addition to the time taken to move a car between terminals, the time to move the car (or its
contents) to and from the terminals must also be considered. If an origin or a destination has a rail
siding (a short segment of track connecting the customer site with the main track), then the car can
be delivered directly. If not, then the contents are generally carried between the terminal and the
customer site by truck, thereby incurring additional handling time and charges.

Rail transport is fairly reliable. Although slow, train speed is generally unaffected by weather.
Variation in transit time is largely a function of delays rail cars experience in classification yards,
where the cars are sorted, held, and coupled into trains. Transport by rail is considerably less
flexible than by truck, both in terms of schedule flexibility (rail cars must he linked into trains) and
physical accessibility (rail cars can only travel on existing track). Moreover, the availability of cars
may be limited during times of high usage. In general, the movement of cars over the vast rail

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network makes positioning cars where they are needed at the time they are needed a difficult task.

The railroads face stiff competition from other modes, particularly trucking, and are attempting to
strengthen their position by expanding their use of trailers and containers on flatcars and offering
services tailored to their customers’ needs. The major lines are expanding into other modes,
buying trucking and shipping firms and offering a broader range of transportation products and
distribution services. They are both consolidating and diversifying in an effort to strategically
reposition themselves. Long viewed as carriers of commodities, the major lines are looking to
offer higher value services as a means of becoming full-service logistics companies. In an effort to
enhance customer service in 1998, Class I railroads spent a record $7.2 billion on new equipment,
roadway, and structures in addition to initiating outreach meetings for the purpose of discussion
and problem solving.

With their extensive rail networks, the larger lines can now bypass many of the smaller lines, thus
reducing the amount of interchange traffic between lines and increasing the percentage of single
line service. One industry observer noted that as the railroads gain complete origin-destination
control of their products and services, they will be able to innovate in a free and cost-efficient
marketplace.

Motor Carrier

Transport by truck or motor carrier has generally replaced rail as the dominant mode of freight
transportation. Although railroads still carry more on a ton-mile basis, expenditures for truck
freight nationwide are more than twelve times expenditures for rail freight.

The motor carrier industry can he divided into two segments: carriers moving full-truckload (TL)
quantities and carriers handling less-than-truckload (LTL) shipments. Of the two, TL operations
are much simpler and lower in cost. LTL operations require sophisticated operating procedures
and systems, as well as an expensive infrastructure, including consolidation and break-bulk
terminals and local pick-up and delivery fleets. Since the regulations governing motor carrier
transport were loosened by the passage of the Motor Carrier Act of 1980, the TL portion of the
industry has experienced a tremendous growth in the number of operators. This growth is driven
by the cost structure of the TL trucking industry, which is characterized by low fixed costs (the
cost of a rig, tractor and trailer, is relatively low and there are no fixed costs associated with the
construction or acquisition of right of way) and higher variable costs (which include taxes and
labor, fuel, and rig maintenance costs). In contrast, the LTL portion has been experiencing a
consolidation in the number of competitors. This consolidation is driven by economies of “flow”:
larger companies can achieve substantial operating efficiencies and lower costs by moving greater
volumes through their facilities.

Truck transportation, particularly TL, is often the fastest mode of freight transportation. It offers
the most extensive service over a wide geographic area. With over 3.8 million miles of streets and
highway (intercity highways comprise over 957,000 miles) in the United States, trucks can provide
door-to-door service virtually anywhere. And with over one million tractor-trailer combinations
on the highways, that service is both competitive and flexible. Its advantages are strongest in short
and intermediate length hauls, and it dominates the transport of fragile or perishable cargo. Motor

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carriers are unaffected by most weather conditions, thus providing dependable service. Truckload
size is, however, subject to weight and size restrictions dictated by state and federal limitations on
maximum load and vehicle size.

The trucking industry is moving in two different directions: the TL segment is fragmenting while
the LTL segment is experiencing consolidation. In the first decade of deregulation, a substantial
number of new carriers entered the TL industry; over one-third failed. Service and utilization
determine success in the TL portion of the business. As transportation practitioners remarked:

“As a shipper you are looking for service and price, in that order. Consistency of service is
critical. As a trucker, the key to good trucking is utilization: to make money, you have to
operate fully loaded in both directions. Those trucking firms that can provide on-time,
consistent service will get the business, and those that can operate a better-than-90%
loaded miles will be successful.”

The key to the LTL portion of the business is hubbing, which is a complex capital- and
labor-intensive business. Carriers that can make the investment in systems and centralized
facilities for the transfer and storage of goods can achieve greater efficiencies and “economies of
flow,” thereby gaining a competitive advantage.

Another area of change in the trucking industry is in the use of private fleets. Prior to deregulation,
companies operating their own trucks were restricted in their ability to carry backhauls, could not
carry goods of other companies, and sometimes could not even carry goods of other divisions of
their own company. Now, the new opportunities brought about by regulatory reform permit greater
operating efficiencies for private fleets. On the other hand, regulated rate-making created a price
umbrella under which private fleets could previously be cost justified. Because that umbrella has
now been largely removed, private fleets must now be justified against more cost-competitive
for-hire carriers.

Another change resulting from deregulation is the increase in independent truckers. Regulatory
reform has allowed owner-operators to more easily obtain operating authority for most goods and
commodities. Most of the independent haulers operate in the TL arena, offering their services to
shippers and trucking companies alike. A post-deregulation study, however, found that although
the use of independent carriers reduces trucking costs and increases productivity, many logistics
and transportation managers were eschewing the owner-operator alternative for service, reliability,
availability and safety considerations. Some managers expressed a concern that some independent
truckers drive old or poorly maintained equipment. This, they felt, could lead to more frequent
breakdowns, late pickups and deliveries, a higher incidence of accidents, greater damage to goods,
and increased insurance costs.

Finally, truck leasing companies, which previously provided vehicles to private fleets, are now
emerging as full-fledged carriers, offering both leasing and for-hire shipping services. For
example, Ryder Systems, Inc., one of the largest commercial truck leasing companies, now
focuses on a second core competency, global integrated logistics, and is today the second largest
third party logistics provider worldwide.

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Water

Water transportation via river canal and coastal waters was the first domestic system for moving
freight. Today, the U.S. Army Corps of Engineers maintains over 25,000 miles of inland
waterways, including the Mississippi River system, the Great Lakes, and river systems feeding the
Atlantic, Gulf, and Pacific coasts. In 1998, 1,006 million tons of freight was moved by water
representing a decrease in market share from 16.5% in 1988 to 12.4% in 1998.

Water transportation is unsurpassed in its ability to carry very large loads at low cost. Like railroad
freight, barge freight is composed primarily of minerals, chemicals, and agricultural products. An
average dry cargo barge can carry over 1,200 tons, and tank barges have an average 2,500-ton
capacity. Barges have no engines, but rather are propelled by towboats and tugs. A typical river
towboat pushes a string of four to twelve barges.

Transportation by water is among the slowest of all transportation modes. Not only do delays
occur at terminals for loading and unloading, but barges are subject to delay at the many locks on
inland waterways. Delays on the order of two weeks are not uncommon at locks due to lock
maintenance activity or simply a backlog of barges waiting to pass through. Additional delays at
terminals and ports also occur. Weather can also hamper the operation of waterborne freight,
particularly along the freeze-prone portion of the upper Mississippi River system and during
spring flooding. In addition to the slow speed of transport, another major limitation of water
transport is its limited accessibility. Only customers located directly on the waterway can take full
advantage of its low-cost capabilities.

In the barge industry, attention is being focused on safety issues, in the aftermath of a 1993
Amtrack train derailment in Big Bayou Canot, Alabama, in which 47 people died. The train
derailed after a six-barge tow hit and damaged a railroad bridge. The major industry trade
association is recommending that its members adopt new training procedures and additional
navigation equipment, among other safety measures.

Pipeline

Pipelines are used primarily for the transport of crude petroleum, refined petroleum products, and
natural gas. Liquid chemicals and slurries can also be transported by pipeline. (A slurry is a solid
that is ground into fine particles and suspended in a liquid medium; as long as the mixture is
agitated and the particles do not settle out, a slurry will behave like a fluid in a pipeline.)

In 1998, trunk pipelines used for the intercity transportation of crude oil totaled 87,663 miles in the
United States, with an additional 90,985 used for the transport of petroleum products. The average
haul length was 689 miles for crude oil and 393 miles for petroleum products. Pipeline for crude
and petroleum products is shrinking: in 1998, pipeline mileage totaled 178,648 miles, 35,000
fewer miles than a decade earlier.

Natural gas is transported via 178,648 miles of interstate transmission pipeline owned and
operated by approximately 40 natural gas pipeline companies. Of the 4.3 millions of barrels of
natural gas consumed in the United States in 1998 for transportation purposes, about 60-65%

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moved via interstate pipelines. Water carriers are the other dominant mode of petroleum
transportation.

Pipeline transport is a low-cost mode of transport. The investment in pipelines and pumping
stations is high, but the useful life of the equipment is long and variable costs are very low.
Pipelines are very dependable, but have limited access as they can move product only between
stations on the pipeline. Although the speed of transport is slow, averaging 10-15 miles per hour,
pipelines can move tremendous quantities of fluid because they operate 24 hours a day. Careful
scheduling of product flow is essential to prevent intermixing of different shipments during
transport.

Air

Although air carriers transport a very small percentage of domestic freight, airfreight transport
experienced the fastest growth in the past decade due to the strong growth of the small express
package market. In 1998, domestic carriers carried 14.1 billion ton-miles of freight, less than 1%
of the total traffic. However, since these carriers move high-rate cargoes, their revenues accounted
for a much higher percent (4.5%) of the total domestic intercity freight bill in 1998. Airfreight is
relatively expensive, and despite the speed of jet aircraft, door-to-door delivery performance for
short to medium length hauls is comparable to trucking. Air transport links terminal to terminal,
and hence requires pickup and delivery, with its attendant delays, at each end. Only in long
distance hauls does air transport offer superior speed to transport by truck.

Passenger airlines offer freight service to major metropolitan areas, whereas dedicated airfreight
carriers can deliver to virtually any airfield in the United States. Air operations are generally
reliable, but are subject to weather conditions that can delay or halt traffic. Capacity restrictions
limit both the weight and size of air shipments.

Most airfreight shipments are either time-sensitive (urgent or perishable) or small, high-value
products. Airfreight is also used when other factors dictate fast delivery. An example of an
innovative use of airfreight is the delivery of flowers by air express. A California entrepreneur
started a business for door-to-door delivery of flowers; in some instances, flowers were picked in
Holland and sent to customers around the world.

Intermodal Transport

Intermodal transport is the fastest growing segment of the U.S. transportation industry. Not only
are shippers using more than one mode to meet their transportation needs, but freight carriers are
increasingly offering “one-stop shopping.” Railroads, in particular, have increased their
capabilities through the acquisition of trucking companies, water freight lines, and other freight
transportation suppliers.

Intermodal transport combines the service and cost characteristics of each component mode. The
most common forms combine trucking with another mode. These combinations provide the
short-haul and accessibility advantages of trucking with the low-cost service of rail or water or the

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speed of air transport. Most common are truck/rail combinations, known popularly as “piggyback”
systems. Piggyback systems have two distinct forms: either an entire trailer assembly or a
container is loaded onto a railroad flatcar. These are known as trailer-on-flatcar (TOFC) and
container-on-flatcar (COFC), respectively. Many variations of piggyback systems are possib1e,
depending on who owns the truck and who provides pickup and delivery, but the central concept is
that rail is used for bulk movement between terminals and truck for local service. Truck trailers
can also be driven onto ships, to form an intermodal combination known as roll-on-roll-off, or
RORO.

Transit times for intermodal freight are often much shorter than those using exclusively rail. For
example, intermodal freight could move from the East coast of the United States to the West coast
within four days (estimated transit times of 80-96 hours).

Containerization has facilitated greatly the move toward intermodal transportation. Containers
allow the mechanization of intermodal transfers, reduce damage and pilferage, and reduce
handling costs. Most containers are about the size of a truck trailer and can be carried by truck, rail
or ship. Special containers designed to fit the rounded holds of airplanes are also in use.

There are, however, drawbacks associated with the use of containers. Most cranes for lifting and
transferring containers are limited to capacities of 80,000 pounds or less. Furthermore, the weight
of the container itself increases the cost of transport. Weight considerations are particularly
important for airfreight. In addition, empty containers must be tracked and returned and the
scheduling of containers can be an extremely complex task.

Other intermodal combinations in use include railcars on barges and barges on ships. Grain, coal,
and other bulk commodities are often transferred between rail and barge. This combination is
perhaps the lowest cost form of transportation for bulk commodities, but is constrained by the lack
of transshipment terminals to handle the freight, the cost of transshipment, the investment required
for new transshipment facilities, the poor state of health of the barge industry, and the lack of
integrated rail/barge ownership.

Regulatory Categories

Transportation companies can operate under a variety of regulatory categories. The four most
common are: common carrier, contract carrier, exempt carrier, and private carrier. Deregulation,
or more accurately, regulatory reform, has blurred the once clear distinction among these
functional forms and many operators operate under more than one form. (For example, the ICC
Termination Act of 1995 eliminated the distinction between common and contract carriers as of
January 1, 1996, but the FHWA is authorized to continue to register applicants as common or
contract carriers due to different insurance requirements.)

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Common Carrier

Common carriers provide service to the public on a published rate basis. This category is the most
closely regulated of the four forms. In return for regulatory authorization to operate, common
carriers have three obligations:

• Service - A common carrier must serve all customers whose request for service falls within
that carriers scope of operation.

• Delivery - A common carrier must deliver the goods entrusted to it to the receiver in a
reasonable time. The carrier is liable for losses and damage to the goods while in transit.

• Reasonable Rates - Competition is limited due to regulatory constraints on new entrants to

the industry. Rates, therefore, should be maintained at a reasonable level.

Contract Carriers

A contract carrier provides service to selected customers based on negotiated rates or a contract.
Although entry into this service sector is regulated, contract carriers are not required to serve all
shippers and are free to establish rates for their services. Contract carriers often tailor their services
to meet the specific needs of each customer. The contract between the carrier and shipper specifies
the conditions (rates, equipment, liability, service) under which those services will be rendered. In
contrast to a common carrier’s published rates, a contract carrier’s rates are a private matter
between the carrier and its customers. In addition, common carrier applicants must file proof of
cargo insurance while contract carrier applicants are not required to do so.

Exempt Carriers

Exempt carriers are free from pricing and operating regulation. Entry into this sector is not subject
to government regulation. Areas of exemption include: the transport of agricultural goods,
livestock, fish, and newspapers; local delivery services (for example, those operating within the
“commercial zone” of a major metropolitan area); transport by shipper associations that operate
for the purpose of aggregating small shipments; most boxcar freight movement; and piggyback rail
shipments.

Private Carriers

A company that owns or manages its own transportation service is a private carrier as long as its
transportation service is incidental to its primary business. Private carriers are not subject to
regulation, other than universal licensing, safety and weight restrictions. Under recent regulatory
reforms, private carriers can also provide service to other corporations.

In the years since deregulation, many firms with private trucking fleets have decided to use those
fleets to haul goods for other firms. On a given truck route, the private fleet operators generally
carry their own goods on the outbound portion of the trip and sell the return or “backhaul” portion.
Some fleet operators have found this backhaul service to be very profitable as the incremental cost

10
to offer this service is low. Other companies, however, have found that the backhaul business
interfered with the service on the outbound leg, and have decided that the costs and headaches
outweigh the benefits.

Other Services

There are several other transportation-related services of interest to logistics managers. They
include small package service, freight forwarders, shippers’ associations, shippers’ agents, freight
brokers, traffic management companies, and third-party logistics (3PL) providers.

Companies such as United Parcel Service, Federal Express, and Airborne Express provide
shipping services for small packages (typically less than 100 pounds). Until recent years, package
freight consisted primarily of express documents and nonroutine shipments of parts and product.
Recent years have seen accelerated growth in small package services due to the growth of
“just-in-time” (JIT) sourcing arrangements, e-commerce, and home delivery via the Internet.

Freight forwarders provide services to small shippers by consolidating many small shipments in
order to obtain lower transportation rates. Freight forwarders are most active in international
shipping, although some compete for LTL business domestically. Freight forwarders typically do
not own or operate long-haul transportation equipment, but purchase transportation services from
other carriers.

Shipper associations serve much the same role as freight forwarders. A shippers’ association,
however, is composed of firms in a common industry or geographic area, which pool their
shipments to obtain more favorable rates. The garment industry in New York is an example of an
industry that uses shipper associations.

Shippers’ agents provide services related to piggyback transport. By consolidating the loads of
many shippers, they build shipments large enough to qualify for piggyback transport, thereby
achieving a substantially lower rate than an individual shipper could. In fact, many railroads will
not provide their piggyback services directly to shippers, but deal only with agents. The shipper’s
agent is, in effect, a distributor of piggyback services, buying the services at wholesale and selling
at retail.

Freight brokers play a similar, though more comprehensive, role as shippers’ agents. Freight
brokers are not limited to piggyback services, and in contrast to shippers’ agents, who provide
terminal-to-terminal service, they provide door-to-door service. They deal with all modes of
transport, essentially providing “one-stop shopping” to their customers.

Traffic management companies offer a complete transportation service to their customers. They
sell their services to shippers to augment or replace a shipper’s traffic department. Traffic
management companies can provide a special expertise that many shippers do not have. Moreover,
since they work for more than one firm, they can pool the traffic from those firms and achieve
economies and negotiating power with suppliers. A number of these firms are expanding their
services to include the management of their customers’ entire logistics operations. Many

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companies are turning to third-party logistics services because they offer flexibility, expertise, and
low rates achieved by pooling.

Third-party logistics providers (3PLs) manage a full range of logistics activities for businesses
which do not see managing logistics as a core competency. Customers benefit from this
intermediation because they are no longer required to manage non-core transportation
relationships themselves and are often able to reduce their overall transportation costs by
consolidating their shipping business through one channel. Due to an increase in outsourcing
non-core competencies, the growth of the Internet as a means of communication, and the focus on
JIT production and delivery, the 3PL industry is expected to grow at rapid rate. We are seeing both
traditional transportation companies, such as FedEx and UPS, and new B2B marketplaces emerge
to provide third-party logistics functions.

Adapted from HBS Note 9-688-080 by Hammond and Morrison (2000)

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