Jean-Paul Rodrigue (2013), New York:
Routledge, 416 pages.
Freight Transportation and Value Chains
Author: Dr. Jean-Paul Rodrigue
1. Contemporary Production Systems
Production and consumption are the two
core components of economic systems
and are both interrelated through the conventional supply / demand relationship.
Basic economic theory underlines that what is being consumed has to
be produced and what is being produced has to be consumed. Any disequilibrium
between the quantity being produced and the quantity being consumed
can be considered as a market failure. On one side, insufficient production
involves shortages and price increases, while on the other, overproduction
and overcapacity involves waste, storage and price reductions. It is mainly through the
corporation and its perception of market potential that a set of decisions are made about how to allocate scarce
resources, reconciling production and consumption. The realization of
production and consumption cannot occur without flows of freight within
a complex system of distribution that includes, modes, terminals, but
also facilities managing freight activities, namely distribution centers.
Contemporary production systems are the outcome of significant changes
in production factors, distribution and production networks:
The development of global transportation and telecommunication networks,
ubiquitous information technologies, the liberalization of trade and
multinational corporations are all factors that have substantially impacted
production systems. Products are getting increasingly sophisticated
requiring a vast array of skills for their fabrication. One key issue is the array of
corporate expansion strategies available
in a global economy, including horizontal and vertical integration,
as well as outsourcing. In many cases, so called "platform
companies" have become new paradigms where the function of manufacturing
has been removed from the core of corporative activities. Corporations
following this strategy, particularly mass retailers, have been active
in taking advantage of the "China
effect" in a number of manufacturing activities. Yet, this
advantage is being eroded with rising input costs, inciting process of
re-shoring where activities that were outshored are brought back to
locations they were initially outshored from. This underlines that
locational decision are constantly being reassessed in light of changes
in global input costs.
Additionally, The attention of public policy is shifting from the
promotion of competitiveness to the
development of capabilities. The
main rationale is that competitiveness tends to focus on decreasing
different input costs, while capabilities is focusing on increasing
added value provided by the manufacturing sector.
2. Commodity and Value Chains
Commodities are resources that can be consumed. They can be
accumulated for a period of time (some are perishable while others can
be virtually stored for centuries), exchanged as part of transactions
or purchased on specific markets (such as futures market). Some commodities
are fixed, implying that they cannot be transferred, except for the
title. This includes land, mining, logging and fishing rights. In this
context, the value of a fixed commodity is derived from the utility
and the potential rate of extraction. Bulk
commodities are commodities that can be transferred, which includes
for instance grains, metals, livestock, oil, cotton, coffee, sugar and
cocoa. Their value is derived from utility, supply and demand, which
is established through major commodity markets involving a constant
price discovery mechanism.
The global economy and its production systems are highly integrated,
interdependent and linked through commodity chains.
- Production factors. In the past, the three dominant factors
of production, land, labor and capital, could not be effectively
used at the global level. For instance, a corporation located in
one country had difficulties taking advantage of cheaper inputs
(e.g. labor and
land) in another country, notably because regulations would not permit
full (and often dominant) ownership of a manufacturing facility
by foreign interests. This process has also been strengthened by
economic integration and trade agreements. The European Union established
a structure that facilitates the mobility of production factors,
which in turn enabled a better use of the comparative productivity
of the European territory. Similar processes are occurring in North
America (NAFTA), South America (Mercosur) and in Pacific-Asia (ASEAN)
with various degrees of success. Facing integration processes and
massive movements of capital coordinated by
global financial centers, factors
of production have an extended mobility, which can be
global in some instances. To reduce their production costs,
especially labor costs, many firms have relocated segments
(sometimes the entire process) of their manufacturing activities to new locations.
- Distribution. In the past, the difficulties of overcoming
distances were related to constraints in physical distribution as
well as to telecommunications. Distribution systems had limited
capabilities to transport merchandises between different parts of the
world and it was difficult to manage fragmented production systems
due to inefficient communication systems. In such a situation, freight
alone could cross borders, while capital flows, especially investment
capital, had more limited ranges. The tendency was to trade
finished goods, since it was more complex to trade intermediate
goods. Trade could be international,
but production systems were dominantly regionally focused and mainly built through
regional agglomeration economies
with industrial complexes as an outcome. With improvements in transportation
and logistics, the efficiency of distribution has reached a point
where it is possible to manage large scale production and consumption.
- Production networks. In the past, the majority of relationships
between elements of the production system took place between autonomous
entities, which tended to be smaller in size. As such, those
tended to be rather uncoordinated. The emergence of
multinational corporations underlines a higher
level of linkages within production systems, as many activities
that previously took place over several entities are now occurring
within the same corporate entity. While in the 1950s, the share
of the global economic output attributable to multinational corporations
was in the 2% to 4% range, by the early 21st century this share
has surged to a range between 25% and 50%. About 30% of all global trade
occurs within elements of the same corporation, with this share
climbing to 50% for trade between advanced countries.
Value Chain (also
known as commodity chain). A functionally integrated
network of production, trade and service activities that covers
all the stages in a supply chain, from the transformation of raw
materials, through intermediate manufacturing stages, to the delivery
of a finished good to a market. The chain is conceptualized as a
series of nodes, linked by various types of transactions, such as
sales and intra firm transfers. Each successive node within a commodity
chain involves the acquisition or organization of inputs for the
purpose of added value.
Value chains are thus a sequential process used by corporations
within a production system to gather resources, transform
them in parts and products and, finally, distribute manufactured
goods to markets. Each sequence is unique and dependent on product types,
the nature of production systems, where
added value activities are performed,
markets requirements as well as the current stage of the
product life cycle. Value chains
enable a sequencing of inputs and outputs between a range of suppliers
and customers, mainly from a producer
and buyer-driven standpoint. They also offer adaptability to changing
conditions, namely an adjustment of production to adapt to changes in
price, quantity and even product specification. This means that
value chains are constantly
upgraded to fit technological, costs and market changes. The flexibility of production
and distribution becomes particularly important, with a reduction of
production, transaction and distribution costs as the logical outcome.
The three major types of value chains involve:
3. Integration in Value Chains
Transport chains are being integrated into production systems.
As manufacturers are spreading their production facilities and assembly
plants around the globe to take advantage of local factors of production,
transportation becomes an ever more important issue. The integrated
transport chain is itself being integrated into the production and distribution
processes. Transport can no longer be considered as a separate service
that is required only as a response to supply and demand conditions.
It has to be built into the entire supply chain system, from multi-source
procurement, to processing, assembly and final distribution. Supply
Chain Management (SCM) has become an important facet of international
transportation. As such, the container has become a
transport, production and distribution
A significant trend has thus been a
growing level of embeddedness
between production, distribution and market demand. Since interdependencies
have replaced relative autonomy and self-sufficiency as the foundation
of the economic life of regions and firms, high levels of freight
mobility have become a necessity. The
presence of an efficient distribution system supporting global
value chains (also known as
networks) is sustained by:
- Raw materials. The origin of these goods is linked with
environmental (agricultural products) or geological (ores and fossil
fuels) conditions. The flows of raw materials (particularly ores
and crude oil) are dominated by a pattern where developing countries
export towards developed countries. Transport terminals in developing
countries are specialized in loading while those of developed countries
unload raw materials and often include transformation activities
next to port sites. Industrialization in several developing countries
has modified this standard pattern with new flows of energy and
- Semi-finished products. These goods already had some
transformation performed conferring them an added value. They involve
metals, textiles, construction materials and parts used to make
other goods. Depending on the labor intensiveness and
comparative advantages segments of the manufacturing process
have been offshored. The pattern of exchanges is varied in this domain.
For ponderous parts, it is dominated by regional transport systems integrated to regional
production systems. For lighter and high value parts, a global
system of suppliers tends to prevail.
- Manufactured goods. These include goods that are shipped
towards large consumption markets and require a high level of organization
of flows to fulfill the demand. The majority of these flows concerns
developed countries, but a significant share is related to developing
countries, especially those specializing in export-oriented manufacturing.
Containerization has been the dominant transport paradigm for manufactured
goods with production systems organized around terminals and their
The level of customization of a product can also be
indicative about how commodity chains are integrated. For
products requiring a high level of customization (or
differentiation) the preference is usually to locate added value
components relatively close to the final market. For products
that can be mass produced and that require limited
customization, the preference leans on locating where input
costs (e.g. labor) are the least.
4. Freight Transport and Value Chains
As the range of production expanded, transport systems adapted to
the new operational realities in local, regional and international freight
distribution. Freight transportation offers a whole
services catering to cost, time and reliability priorities and has consequently taken an increasingly
important role within value chains. Among the most important factors:
- Functional integration. Its purpose is to link the elements
of the supply chain in a cohesive system of suppliers and customers.
A functional complementarity
is then achieved through a set of supply/demand relationships, implying
flows of freight, capital and information. Functional integration
relies on distribution over vast territories where "just-in-time"
and "door-to-door" strategies are relevant examples of interdependencies
created by new freight management strategies. Intermodal activities
tend to create heavily used transshipment points and corridors between
them, where logistical management is more efficient.
- Geographical integration. Large resource consumption
by the global economy underlines a reliance on supply sources that
are often distant, as for example crude oil and mineral products.
The need to overcome space is fundamental to economic development
and the development of modern transport systems have increased the
level of integration of geographically separated regions with
a better geographical
complementarity. With improvements in transportation, geographical
separation has become less relevant, as comparative advantages are
exploited in terms of the distribution capacity of networks and
production costs. Production and consumption can be more spatially
separated without diminishing economies of scale, even if agglomeration
economies are less evident.
The results have been an improved
velocity of freight, a decrease of the friction of distance and
a spatial segregation of production. This process is strongly imbedded
with the capacity and efficiency of international and regional transportation
systems, especially maritime and land routes. It is uncommon for
the production stages of a good to occur at the same location. Consequently,
the geography of value chains is integrated to the geography
of transport systems. Among the main sectors of integration between
transportation and commodity chains are:
- Improvements in transport efficiency incited an expanded
territorial range to value chains.
- A reduction of telecommunication costs and the development
of information technologies, enabling corporations
to establish a better level of control over their value chains.
technologies have a wide array of impacts on the management
of freight distribution systems.
- Technical improvements, notably for intermodal transportation,
enabled a more efficient continuity between different transport
modes (especially land / maritime) and thus within commodity chains.
Most value chains are linked to regional transport systems, but
with globalization, international transportation accounts for a growing
share of flows within production systems. The usage of resources, parts
and semi-finished goods by commodity chains is an indication of the
type of freight being transported. Consequently,
transport systems must adapt to answer the needs of commodity chains,
which incites diversification. Within a commodity chain,
freight transport services
can be categorized by:
- Agricultural commodity chains. They include a sequence
of fertilizers and equipment as inputs and
cereal, vegetable and animal production
as outputs. Several transportation modes are used for this production
system, including railcars, trucks and grain ships. Since many food
products are perishable, modes often
have to be adapted
to these specific constraints. Agricultural shipments tend to be
highly seasonal with the ebb and flows of harvest seasons. Ports
are playing an important role as points of warehousing and transshipment
of agricultural commodities such as grain. A growing share of the
international transportation of grain is getting containerized.
In 2007, 100 million tons of grain were carried on bulk ships while
an additional 10 million tons was carried by container. Due to weight
limitations, the 20 footer container appears more suitable as they
can handle a full 20 tons load while bigger containers, such as
the 40 footer, are limited to a maximal load of 28 tons.
- Energy commodity chains. Include the transport of fuels
(oil, coal, natural gas, etc.) from where they are extracted to
where they are transformed and finally consumed (see for instance
oil transportation). They are linked to massive flows of bulk
raw materials, notably by railway and maritime modes, but also by
pipeline when possible. They tend to be very stable and consistent
commodity chains since a constant energy supply is required with
some seasonal variations.
- Metal commodity chains. Similar to energy commodity chains,
these systems include the transport of minerals from extraction
sites, but also of metals towards the
industrial sectors using them
such as shipbuilding, car making, construction materials, etc.
- Chemical commodity chains. Include several branches such
as petrochemicals and fertilizers. This commodity chain has linkages
with the energy and agricultural sectors, since it is at the same
time a customer and a supplier.
- Wood and paper commodity chains. Include collection over
vast forest zones, namely Canada, Northern Europe, South America
and Southeast Asia, towards production centers of pulp and paper
and then to consumers.
- Construction industry. Implies movements of materials
such as cement, sand, bricks and lumber, many of which are local
- Manufacturing industry. Involves a much diversified set
of movements of finished and semi-finished goods between several
origins and destinations. These movements will be related to the
level of functional and geographical specialization of each manufacturing
sector. Such flows are increasingly containerized.
Globalization also concomitant – a by-product
– of a post-fordist environment where just-in-time (JIT) and
synchronized flows are becoming the norm in production
and distribution systems. International transportation is shifting to
meet the increasing needs of organizing and managing its flows through
logistics. In spite of the diversity of transport services supported
various value chains, containerization is adaptable enough to cope
with a variety of cargo and time constraints.
- Management of shipments. Refers to cargo transported
by the owner, the manufacturer or by a third party. The tendency
has been for corporations to sub-contract their freight operations
to specialized providers who provide more efficient and cost effective
- Geographical coverage. Implies a wide variety of scales
ranging from intercontinental, within economic blocs, national,
regional or local. Each of these scales often involves specific
modes of transport services and the use of specific terminals.
- Time constraint. Freight services can have a time element
ranging from express, where time is essential, to the lowest cost
possible, where time is secondary. There is also a direct relationship
between transport time and the level of inventory that has to be
maintained in the supply chain. The shorter the time, the lower
the inventory level, which can result in significant savings.
- Consignment size. Depending on the nature of production,
consignments can be carried in full loads, partial loads (less than
truck load; LTL), as general cargo, as container loads or as parcels.
- Cargo type. Unitized cargo (containers, boxes or pallets)
or bulk cargo requires dedicated vehicles, vessels and transshipment
and storage infrastructures.
- Mode. Cargo can be carried on a single mode (sea, rail,
road or air) or in a combination of modes through intermodal transportation.
- Cold chain. A temperature
controlled supply chain linked to the material, equipment and procedures
used to maintain specific cargo shipments within an appropriate
temperature range. Commonly relates to the distribution of food and