Falling product prices

Higher value freight is better able to absorb transport costs than is lower value freight, with the 'transport cost penalty' imposed by having to move freight over greater dis­tances often being somewhat offset by the fact that the freight is of higher value. Hence, we refer to a generally reducing transport cost sensitivity of freight.

Indeed for some products it is now not even necessary to ship physical product at all. Just think for example of the way much software is now transmitted around the world via the internet. This replacement of physical product by virtual product is referred to as material substitution.

In many markets, increased competition and failing marketplace prices have forced numerous companies to reduce costs, just think of the falling prices of various electron­ics products in recent years such as DVD players, or the fact that the prices of many automobiles have stayed flat in real terms at best, despite the fact that product specifica­tions, performance and quality have improved dramatically. This has forced companies to focus on other areas where savings can be made, and the storage and movement of inventory is a key area in this regard. Thus companies will seek to ensure that any products (especially those with flat or declining value) being transported are configured (in terms of product design, packaging etc.) so as to reduce as much as possible their transport cost sensitivity.          .            .

Deregulation of transport

The important role played by transport in logistics will be discussed later in the book in particular in Chapters 6 and 8. There are ffve principal modes of transport namely air, road, water, rail and pipeline. In recent decades transport markets in many countries have been deregulated by various governments. The essence of effective deregulation is that by removing unnecessary barriers to competition, markets become more contest- able and (in theory at least) prices should come down and service should improve. We say 'in theory' because the reality in some deregulated markets has been somewhat different (with private monopolies sometimes replacing public ones) but, in general and over the long run, deregulation has had a positive impact on many transport markets, leading to the provision of both more and cheaper services. This of course in turn makes it easier and more efficient to move freight around the world.

managers to be separate and distinct. However, firms began to realise that cost savings and significant efficiency gains could be harnessed from more integrated and focused management of inventory. As far back as 1962 the late Peter Drucker, one of the foremost management thinkers of the twentieth century, wrote a celebrated Fortune magazine' arti­cle entitled 'The Economy's Dark Continent'.³ In this article he suggested that distribution represented the last frontier for significant cost reduction potential in the firm.

Increased market competition and customer requirements also led to the necessity to see improvements in the management of inventory as an essential competitive weapon. In the increasingly competitive, global marketplace firms began to realise that they could leverage marketplace advantage through superior logistics performance. Cost savings were identified through eliminating unnecessary inventory and just-in-time (JIT) deliver­ies became normal operating practice in many industries. Indeed many companies came to recognise the risks associated with holding too much stock which rendered them less flexible in their ability to respond to changing demand conditions.

Changes in company structure

A more recent trend concerns changes in how companies aré structured and operate. In recent years many companies have become less vertically integrated (a concept that implies ownership or at least control of upstream suppliers and downstream cus­tomers) and more specialised. Outsourcing has become more common, with suppliers playing a more central role for many manufacturers (subsequent chapters in the book will consider in detail strategies and practices .such as JIT, outsourcing, etc). Many companies have also come to realise that so-called functional or silo-based thinking (viewing the various departments within the firm as separate and non-overlapping entities) will only hinder the overall performance of the company and they have as a result endeavoured to ensure that the various functions and activities across the company are integrated more closely. In more recent years in particular, competition based on time, for example order to delivery time, has become a key success factor (KSF) in many markets.

All of the above six trends, while they emerged independently, have both placed an increased emphasis on the role of transport and inventory, and have led to improvements in the way freight is handled and moved around the world. They have led to what is often termed the supply chain revolution.

Before proceeding further it is important to highlight one small, but important, distinc­tion. People often use the terms 'freight' and 'cargo' interchangeably, however, they are in fact distinct, at least in terms of their use within the logistics sector. In essence: cargo = freight + mail. Mail, also known as post, is of course still a very important component of trade and commerce, despite the many technological advances which shape today's world. It is an important and regular source of revenue for many transport companies, especially airlines. Sometimes people also use the term 'goods', usually to refer to freight (not cargo), but we will try to avoid use of this term. Another term worth defining at this juncture is consignment which the Collins English Dictionary defines as 'a shipment of