California State Rail Plan 2007-08 to 2017-18

Chapter XVI – Major Freight Issuesto 10 percent of GDP) to over $2.4 trillion (equivalent to 27 percent of GDP) –a sevenfold increase.The three components of total logistics expenditures are administrative cost(management, insurance, warehousing, etc.), transportation cost (purchase oftransportation services), and inventory carrying cost. Between 1978 and 1998, thegovernment’s economic regulation of the airline, trucking, railroad, and oceanshipping industries was reduced sharply. As competition increased, transportationfirms were consolidated, merged, and restructured; operating networks wereexpanded; and freight rates were cut. Investments were made in larger trucks,double-stack trains, and mega-containerships; satellite communication and GPSvehicle-location systems were installed in trucks, trains, and ships; and new andbetter coordinated intermodal services were introduced.Shippers took advantage of the lower freight rates and improved services to adoptnew, just-in-time logistics strategies. Just-in-time operations allow businesses tosubstitute lower-cost transportation for high-cost inventory, achieving hugereductions in inventory carrying costs, and benefiting shippers, consumers, and theeconomy. Just-in-time logistics involves a shift from push to pull logisticssystems — from manufacture-to-supply or inventory-based logistics tomanufacture-to-order or replenishment-based logistics.In a push system, suppliers push materials to a manufacturer, who pushes thecompleted product to a distributor, who supplies the retailer, who fills thecustomer’s order. Each maintains an expensive inventory of parts and products asa buffer against fluctuations in supply and demand.A pull system relies less on expensive inventory and more on accurateinformation and timely transportation to match supply and demand. Inputmaterials are received just prior to production, and as little finished product aspossible is maintained in inventory. Point-of-sale data are used to pull productsthrough a system that may involve two or three tiers of suppliers; a manufacturerthat has spun off design and marketing functions to other firms; and a third-partylogistics provider who coordinates the movement of parts and products todistributors or directly to customers.Where the push model places a premium on fixed assets such as warehousing, thejust-in-time pull model places a premium on the reliability and timeliness of thetransportation system and substitutes time spent in the transportation network(highway, railway, ship, etc.) for time spent in the warehouse. But warehousingand distribution centers still play a major role in pull logistics. Businesses such asWal-Mart, Home Depot, Target, and K-Mart import huge amounts of cargothrough international seaports, move them to major regional distribution centers,and then to satellite distribution centers and local outlets as needed. California hasmany such centers located strategically through the State. These centers are225