Does rail intermodal have a role in DoD's defense transportation plans?

INTRODUCTION

This article proposes that defense transportation managers make greater use of intermodal transportation services, i.e., the combination of local drayage from shipper to the rail intermodal terminal, rail transportation for the long haul to an intermodal terminal near the customer and local drayage to the customer's dock.

Recently, former MTMC Commander, Major General Kenneth Privratsky noted, "Rail has the best on-time delivery. And I'm not sure we own up to it." (1) The Logistics Management and Distribution Report says that "intermodal appears to be back on track." (2) Logistics Management noted in their 11th annual "Giants of Shipping" survey, "Carrier performance metrics are similar to last year's with one exception: The on-time delivery ratio for railroads jumped by 5.4 percent." (3) In 2000 and 2001, shippers arranged for the transport of over 10 million containers by intermodal. (4) "Shippers typically expect to save 5 percent above the cost of shipping by truck, including any incremental costs associated with managing an intermodal net-work." (5) Thus, evidence suggests that intermodal should have a role in DoD's defense transportation plans.

But never has service to the war fighter been more important. This is not the time to expand services that could reduce service reliability levels. Truck service reliability still exceeds intermodal service reliability by a wide margin. Logistics Management notes in the same "Giants of Shipping" survey noted above that truck load on-time reliability was rated at 95.6 percent in 2002 vs. 83.4 percent for rail in 2002. Intermodal still only constitutes about 2.3 percent of the average freight dollar. (6) Commercial transportation firms with intermodal capabilities are not promoting its use to the Department of Defense. Not a single intermodal management company had an exhibit at either the 2002 MTMC or the NDTA conferences. However, in order for intermodal to have a role in defense transportation strategy, it is important for intermodal advocates to convince defense transportation managers of its value to the DoD by providing new perspectives and tools that focus on each defense transportation manager's needs. This article attempts to begin the process of building the tool kit for managers so that they can take advantage of the potential cost and service benefits that are being realized in the commercial sector. (7)

Defense transportation managers have to evaluate service and economics of intermodal while working with intermodal's pricing structure. In addition, defense transportation managers, as agents of the people, need to consider intermodal's impact on small business and the environment.

SERVICE

Today, defense transportation managers have to consider many service issues. The most recent addition to that list is the need to evaluate the impact of terrorism prevention when developing transportation strategies. Increasing highway and rail congestion also challenges the defense transportation manager's abilities to deliver materiel on time. "In many metropolitan areas the congestion index has grown by one-third over the last decade. The rail system, which carries about 50 percent of the volume (ton-miles) of goods transported overland, has experienced major bottlenecks." (8)

There is no reason why intermodal service reliability should not equal truck service reliability now. These are brave words; nonetheless, dependable service levels can be achieved. Service reliability is a direct result of the promises that intermodal service providers make to customers whether it is in the form of published schedules, written proposals, or verbal commitments. In effect, intermodal service providers simply need to do what they promise.

In a highly competitive environment, intermodal service providers have quoted aggressive transit times. One carrier manager suggested that the answer is to quote conservative schedules and "just add a day or two to the transit times." Quoting excessive transit times can result in the cure being worse than the disease as this could lead to higher inventories in transit and unnecessary congestion in facilities. There is a better answer for defense transportation managers.

Decision support systems can be developed using statistics to help defense transportation managers evaluate carrier commitments and achieve realistic expectations. New in-transit visibility tools, such as APL's See Change Service, contain the data on actual pick-up, rail in-gate, rail notify, rail out-gate, and delivery date and time information for each shipment. The data could be transferred into a decision support system. Then, decision support systems can be used to sort the information by lane, for example, from Richmond, VA to Travis Air Force Base, CA. The data can be further categorized by winter and summer months, by day of week or in a variety of other ways. A decision support system can be programmed to calculate average transit times and, importantly, confidence limits.

Until decision support systems are developed, defense transportation managers can use computer-spread sheets to develop plan transit times that are highly reliable. One approach is described in Appendix 1. (9) Although not perfect, computerized spreadsheets can be used to significantly improve the quality of defense transportation plans now.

Carriers and shippers alike can use factual information to quote accurate transit times to their customers. For example, a carrier can quote eight days from Richmond to Travis AFB with a 95 percent confidence level, or quote an on-time delivery of November 1, 2002 with a confidence level of 95 percent. Defense transportation managers who use statistics, information technology, and performance metrics can significantly improve the economic and service performance of their customer's supply chains.

Transit times differ between modes, but reliability should not. For example, an intermodal service provider may quote eight days from Richmond to Travis AFB with 95 percent confidence, and a truck carrier may quote five days with 95 percent confidence. Equalizing the confidence levels of transit commitments between modes simplifies decision making for defense transportation managers. It is important not to generalize that one mode is always faster than another. In lanes with long distances, intermodal transits can be equal to or better than truck.

Equalizing service reliability confidence levels at different levels is especially useful to defense transportation managers who are often faced with moving materiel on short notice. Field logisticians may need low cost parts that are critical for getting a system back on-line. Decision support tools can be designed to allow users to set reliability confidence factors at different levels using the same underlying data. For example, under normal circumstances defense transportation managers make mode/carrier decisions based on a 95 percent reliability confidence factor (assuming a normal degree of risk in making a transit commitment to his customer). But under special circumstances, defense transportation managers could set the reliability confidence factor at, say, 99 percent (assuming a low degree of risk in meeting transit commitments to the customer) against the same underlying database and then compare two or more modes or carriers.

It will be important for defense transportation managers to continuously evaluate the changing characteristics of the data that feed a decision support system. The data need to be evaluated on an ongoing basis to determine the reasons that confidence factors and transits change. Continuous improvement efforts by the logistics providers and the underlying rail roads and truckers can lead to shorter transits and improved on-time deliveries for the same reliability confidence factor. Underlying railroad schedules may change. Equipment shortages, weather, new regulations, and a host of other factors conspire to diminish service. All of these factors need to be reviewed by defense transportation managers on an ongoing basis assisted by the intermodal service providers.

One way to manage exceptions or failures is to code each shipment that is late. Carrier customer service personnel could enter service exception code data into their transportation IT system at the appropriate times. For example, a driver calls in and reports that the ramp cutoff was missed. The customer service representative enters this data into the carrier's computer system, and later this information is uploaded to the defense transportation manager's computer system. (10) Then defense transportation managers can quantify the problems and use Pareto charts (see Figure 1 below) and other tools to help prioritize continuous improvement efforts. (11) Once the exceptions are prioritized defense transportation managers and intermodal service providers can work jointly to improve service levels and efficiency. In the early 1990s the author formed over a dozen intermodal customer action teams with leading U.S. companies that included customer and APL personnel (APL was the intermodal service provider). This col laboration between customers and one intermodal service provider resulted in improved service, lower costs, and increased intermodal throughput.

Once carriers and shippers alike begin to use service reliability confidence factors based on actual performance to quote customer wait times, they will significantly simplify the trade-off decisions between truck and intermodal. Today defense transportation managers are forced to make subjective judgments on whether or not they believe a service provider's commitments. Equalizing the service reliability confidence factors allows defense transportation managers to focus on minimizing customer wait times cost effectively and achieving time definite delivery expectations. (12)

EQUIPMENT AVAILABILITY

Intermodal service providers in peak seasons and in certain directions, e.g., from the west coast headed east, have problems providing equipment. However, the government has programs in place to manage carrier performance that should minimize the impact of this issue to the DoD. First, Government RFPs stipulate clearly the government's expectations. Carriers know in advance the government's expectations and should quote rates to achieve the expectations. Second, carriers are often selected based on best value as opposed to technically acceptable performance and price. Poor carrier performance will impact future market share. Third, the government conducts routine performance reviews with carriers. These actions help carriers understand the importance of equipment availability and to improve upon it.

In addition, the government is potentially one of the largest customers for many intermodal service providers. As a result, some intermodal service providers may decide to place a higher priority on government offerings than other customers.

A positive feature of intermodal is that it offers a wide variety of equipment types and sizes. In addition, intermodal service providers can establish equipment pools at certain locations when that is needed.

ECONOMICS

A major advantage of using intermodal is that the transportation cost is generally cheaper when container shipments are moved over 700 miles. (13) As noted above, shippers can typically expect to save five percent when they use intermodal. (14) It is also important to evaluate the inventory carrying costs. If the intermodal transit time is longer than truck, then the carrying cost of high value goods in inventory may exceed the differential in intermodal transportation savings. Appendix 2 provides a model and an example that can be used to evaluate the economics of intermodal vs. truck transportation. (15)

The economics are impacted by transit times if they differ between modes. If materiel can be moved faster consistently, then the government's inventory carrying costs can be reduced. Inventory carrying costs include the cost of capital, insurance, obsolescence of product (e.g., shelf life limitations), and operating costs in storing inventory. (16) Inventory carrying costs are reduced by consistently reducing cycle times or transit times. As noted above, intermodal transits may be similar or faster than truck in long distance lanes. In addition, the effect of equipment pools provided by intermodal service providers may lead to lower cycle times. Thus, it's important to evaluate the true cycle time performance of each mode and then if the total cycle times are different evaluate the economic impact.

On the other hand, it may be preferable to store intransit even though the cycle time is extended. This is because the consignee doesn't plan to use the goods immediately upon arrival. John J. Coyle, et al, notes that carrying inventories in-transit typically costs less than carrying inventory in the warehouse. (17) In these cases intermodal saves transportation and storage expenses. Thus, don't use the materiel break-even analysis (in Appendix 2) without considering the actual needs of the customers.

Understanding the service and economic factors impacting intermodal transportation permits defense transportation managers to offer their customers more choices. Customers can pick from a menu of transportation services and rates. This benefits customers, suppliers, and defense transportation managers.

PRICING STRUCTURE

In order to take full advantage of intermodal it is important to understand the pricing structure that intermodal uses (see Figure 2). This pricing structure is different than the current standards in the Tailored Transportation Bid. (18)

For example, intermodal would desire to quote $2,500 from Richmond, VA to Travis Air force Base, CA.

One may ask why intermodal can't convert to the current standards. Intermodal economics are heavily dependent on two key factors:

* Distance between the origin and load ramp and the distance between the discharge ramp and the destination.

* Line-haul rates charged by the railroads.

A load from Richmond, VA to Tracy, CA will cost more than a load from Portsmouth, VA to Stockton, CA, because the dray costs to and from the origin/load ramps and the discharge/destination ramps are significantly higher since ramps are located in Portsmouth and Stockton. At the time a bid is being prepared, intermodal pricing analysts must use forecasts and weighted averages to predict point-to-point moves between regions. Since the forecasts and weighted averages could be wrong, analysts are forced to hedge by quoting higher prices. This is unfortunate because the fundamental economics of intermodal transportation may well be superior to truck in many lanes. The solution is to allow each mode, i.e. truck and intermodal, to quote prices in a manner consistent with the economics of that mode. COTS Transportation Management Systems with bidding tools or even spreadsheets can be used to compare bids fairly between modes.

SMALL BUSINESS

Intermodal offers two to three opportunities on each shipment to use small business drayage companies (see Figure 3 below). On a move from Richmond to Travis, AFB, a small business can be used to pick-up materiel at the shipper's facility and bring it to the rail ramp. In Memphis where containers are moved from the CSX to the Union Pacific, there is another opportunity to use a small business to do the cross-town dray. Finally, at the destination there is an opportunity to use a small business to dray the container from the rail ramp to Travis, AFB. Over 13,000 truckers are registered in the intermodal Trucker Database. (19)

ENVIRONMENT

"The intermodal alternative has cut long-haul transportation costs while retaining transit competitiveness with trucking. Equally important are the side benefits - improved safety for motorists as well as reduced fuel consumption, air emissions, congestion and highway wear and tear." (20) Intermodal provides a good means to reduce adverse consequences to the environment. Defense transportation managers can also schedule off-hour pick-ups and deliveries that reduce "truck emissions during idle time at gate and staging areas, and peak period emissions along major urban corridors." (21) Defense transportation managers should also include environmental impacts in their reviews with carriers.

CONCLUSION

Intermodal offers defense transportation managers an effective and efficient mode of transportation. In order to take advantage of intermodal and to simplify decision making, this article suggests that defense transportation managers and their intermodal service providers develop common service reliability confidence levels across modes, tools to evaluate economic differences between modes, and to allow for the unique pricing structures of each mode. Effective intermodal management offers defense transportation managers potentially excellent service reliability, more choices, significant cost savings, and can offer favorable small business and environmental impacts.

APPENDIX 1

Transportation Transit lime Model (TTTM)

Defense Transportation managers can use this Transportation Transit Time Model (TTTM) to develop plan transit times between any two locations with high confidence that the transit time can be achieved. An actual example from November, 2002, is used to illustrate the TTTM, but other information is disguised or withheld.

Step 1

Import individual shipment transit time data into an Excel spread sheet.

5  6  5  5  3
4  7  7  4  3
3  6  7  4  4
5  4  4  5  4
4  4  6  4  5
5  6  4  4  5
4  3  5  3  4
4  5  4  4  6
4  5  5  4  6
5  5  4  3  4
3  4  4  4  6
7  4  4  4  4
6  5  4  4  4
4  4  5  3  3
6  7  5  5

Individual shipment transit times in days.

Mo Town to Boom Town. Total = 74 shipments

Step 2

Group Shipment Transit times into Transit Time Intervals (TTI)

TTI     No. Shipments

3 days        9
4 days       33
5 days       18
6 days        9
7 days        5

Use the "count if" function in Excel to develop this chart.

Step 3

Calculate Transit Time Interval percentages of the total and cumulate
percentages

TTI     TTI % of Total  Cumltv. %

3 days       12%           12%
4 days       45%           57%
5 days       24%           81%
6 days       12%           93%
7 days        7%          100%

[GRAPH OMITTED]

Step 5: Determine Plan Transit Time for a lane at the desired service reliability level.

Using the table in Step 3 or the chart in Step 4 the defense transportation manager can estimate that 6 days can be achieved 90 percent to 95 percent of the time. Thus the manager could select 6 days as the plan transit time. On the other hand, if the defense transportation manager needs to ensure 99 percent on-time performance then 7 days should be selected as the plan transit time.

APPENDIX 2

Transportation Mode

Economic Comparison Model

Defense Transportation Managers can use the Transportation Mode Economic Comparison Model (TMECM) to evaluate the economics of intermodal vs. truck transportation. The model is presented in 3 parts. First, the model is used to analyze transportation cost differences, second to determine the materiel value/container break-even point, and third mode selection. An example will be used to illustrate the model.

Example Given Data

* Lane being evaluated is Richmond, VA to Travis AFB

* Distance = 2,803 miles

* Truck cost per mile = $1.05

* Intermodal door-to-door rate = $2,500

* Estimated volume = 100 containers/year

* Inventory Carrying Cost = 15 percent

* Transit time via truck = 5 days

* Transit time via intermodal = 8 days

Part 1

Evaluate transportation cost differential.

Transportation Cost Analysis

        Truck          Intermodal  Transportation
$/Mile  Miles  Cost    Cost        Cost
                                   Difference

$1.05   2,803  $2,943  $2,500      $443

NOTE: White fields denote raw data. Gray fields denote calculations.

The defense transportation manager will define the exact lay out of the spreadsheet based on the nature of operations and available data. In this case truck costs are determined by multiplying the rate per mile by the number of miles. The intermodal company provides the point-to-point rates. In this case the defense transportation manager can save $443/shipment by using intermodal or $44,300 per year ($443 x 100 shipments/year) in this lane.

Part 2: Determine the inventory carrying cost break even point per container.

Often materiel values per container are not available to defense transportation managers. This is particularly true when bids are being evaluated. Thus, it is suggested that a materiel break-even point be determined. Then the defense transportation manager can make a considered decision based on experience. For example, if the manager knows that in this lane the shipper transports primarily canned foods then it is unlikely that the materiel value/container will exceed $359,444.

Calculate the break-even point as follows:

1. Calculate the inventory carrying Cost rate /day which is done by dividing the annual rate by 365 days/year.

2. Determine the transit time differential between the modes.

3. Multiply the inventory carrying cost rate/day by the transit difference to derive an incremental inventory carrying rate per trip.

4. Divide the transportation cost savings ($443 in this example) by the carrying rate per trip.

This part is not applicable if the consignee plans to store the goods at destination for a time period longer than the transit difference over the fastest mode.

Part 3: Select the mode with the highest economic advantage using the decision tree below.

In this example, if the value of the materiel/container is less than $359,444 then the value of the transportation cost savings exceeds the inventory carrying costs of 3 additional days in transit. DTJ 

Donald McKay has been with APL for 28 years. Don is currently Managing Director, Government Logistics for APL Limited and a member of the executive committee for APL Logistics. Don is also the application director of transportation and distribution for SOLE, The Society of International Logistics, and a member of the board of advisors at Maine Maritime Academy. Don is a frequent guest speaker at The US Naval Post Graduate School in Monterey, CA.

Don holds an MBA from New York University, a BS from Maine Maritime Academy, a Certificate in Integrated Resource Management from the American Production and Inventory Control Society, and a Certificate in Management of Production Operations from Stanford University.

The opinions expressed in this article do not necessarily reflect the opinions of the NDTA or its members.

Photos courtesy of APL archives.

[FIGURE 1 OMITTED]

[FIGURE 3 OMITTED]

FIGURE 1

                            Exception
Failure Description           Code

Flat Car Shortage               A
Dray company missed cutoff      B
Chassis Shortage                C
Truck Maintenance               D
Shipper Misroute                E

FIGURE 2

PRICING STRUCTURE COMPARISON - INTERMODAL AND TAILORED TRANSPORTATION
REP

Quote Basis  Intermodal      Tailored Transportation RFP

Geography    Point-to-Point       Region-to-Region
Metric        Single rate           Per Mile rate

REFERENCES

(1.) "Rail Gives Its Best On-time Delivery". Translog. September/October 2002. p 13.

(2.) Bob Trebilcock. "Back On Track". Logistics Management & Distribution Report. March 2002. p45.

(3.) Peter Bradley. "How Far Can You See", Logistics Management. September 2002. p 34.

(4.) "Year 2002 Industry Statistics-Overview". www.intermodal.org Web page viewed on 10/3/02.

(5.) Bob Trebilcock. "Back On Track". Logistics Management & Distribution Report. March 2002. p 45.

(6.) Peter Bradley. "How Far Can You See". Logistics Management. September 2002. p 34.

(7.) General William Tuttle (Retired) has provided guidance to help the author understand the value of DoD using commercial practices in defense logistics.

(8.) William Tuttle and Kenneth Wykle. "The Third Transportation Revolution", forthcoming. p 4.

(9.) Benjamin S. Blanchard. "Logistics Engineering and Management Fifth Edition". Prentice Hall. p 57. This model is designed to provide realistic guidance using readily available spread sheet software. A sample of intermodal transit time histograms consistently reveals that the data has a log normal distribution. Dr. Benjamin Blanchard's description of maintainability factors provides lessons for transportation managers as well. Although the TTTM proposed here is an imperfect model, I used Dr. Blanchard's Mmax concept to validate that the TTT Model results would be reasonable.

(10.) For Defense this data would be uploaded to the Military Traffic Management Command's Transportation Management System developed by IBM Business Consulting Services.

(11.) "Joe Tunkl, Manager Intermodal Operations for APL Limited, provided data that was used to prepare Appendix 1 and Figure 1.

(12.) Lt. Gen John M. McDuffie, Col. Scott West, Col. John Welsh, Lt. Col. H. Brent Baker. "Logistics Transformed: The Military Enters a New Age". Supply Chain Management Review. May/June 2001.

(13.) APL Limited. Intermodal Management Services. Updated October, 2002.

(14.) "Bob Trebilcock, "Back On Track", Logistics Management & Distribution Report. March2002. p 45.

(15.) The Transportation Mode Economic Model is presented to illustrate the factors to consider in making an economic comparison between transportation modes. Users will want to tailor a model to fit their specific situation. Joyce Aliphin, Director, Pricing for APL Logistics, provided data used to prepare Appendix 2.

(16.) Thomas E. Vollman, William L. Berry, D. Clay Whybark. "Manufacturing Planning and Control Systems 4th Edition. Irwin McGraw-Hill. 1997. p 694. Donald J. Bowersox, David J. Closs. "Logistical Management The Integrated Supply Chain Process". The McGraw-Hill Companies, Inc. 1996. p 233.

(17.) John J. Coyle, Edward J. Bardi, and C. John Langley, Jr. "The Management of Business Logistics 6th Edition". West Publishing Company. 1996. p 177.

(18.) "Tailored Transportation Bid. June, 2002.

(19.) www.intermodal.org "Year 2002 Industry Statistics-Overview". Web page viewed in October, 2002.

(20.) APL Limited. "The Green Alternative: A Transportation Assessment". June 1995. p2.

(21.) APL Limited. "The Green Alternative: A Transportation Assessment". June 1995. p 1.