Procurement in Transportation the Role

Procurement in Transportation

The Role of Procurement in Transportation Planning and Policy

As industries struggle to maintain an edge in the marketplace, often one of the first places they look to find cost cutting measures is in their procurement processes. This is true in the transportation industry as well. As the transportation industry seeks to streamline and economize the procurement of goods and services while maintaining safety standards and service quality, other industries seek to streamline their procurement of transportation services. This paper analyzes the role of goods and services procurement within the transportation industry as well as the role of transportation procurement within the broader marketplace.

Types of Procurement in the Transportation Industry

Procurement plays two roles in the transportation industry: an internal role and an external role. Both of these roles must be taken into account when addressing transportation planning and policy.

Within the transportation industry, procurement of supplies and services is an integral component in the design, construction, implementation, and maintenance of infrastructure and machinery. The procurement of sites, construction services, materials, and engineering services is the most important part of infrastructure establishment in terms of cost. In addition, the procurement of the transport machinery itself is always a concern in the transportation industry, as such a process must weigh cost-benefit, cost-utility, and safety concerns. Especially in a tight economic atmosphere, an efficient and accurate procurement process that is able to collect and process bids, analyze them according to the appropriate variables, and acquire the goods and services within manageable timeframes and monetary constraints is key to ensuring the maximum return for minimum outlay.

For other industries, transportation can be one of the most expensive components of the supply chain and therefore transportation procurement is one of the first places they look when operational expenses need to be streamlined. In the current economic climate, transportation procurement is the "hot topic" of logistics seminars and conferences (Gonzalez, 2009). Internet-based procurement processes and bidding optimization has made retooling transportation costs much more efficient and timely. The current climate has propelled a recent upward trend in the use of internet-enabled logistics networks and exchanges (Kuyzu, 2007). These networks and exchanges facilitate the communication between shippers and carriers and allow for more competitive bidding environments.

Procurement Challenges within the Transportation Industry

In the last forty years, a combination of deregulation, fuel price volatility, and environmental pressure have drastically changed the way the transportation industry engages with the procurement process. Between 1977 and 1980, Congress passed a series of acts designed to increase competition in air, water, motor, and rail shipping transportation. This deregulation was furthered by legislation in the 1990s such as the Transformation Industry Regulation Reform Act of 1994.

By increasing competition and eliminating the bureaucratic burden of regulation, the government hoped to make the domestic transportation industry more efficient and more attractive to shippers. While shippers did find many benefits in deregulation, carriers found themselves in a tight squeeze. As Monckza et al. (2007) point out, "these laws took away a comfortable blanket of governmental protection and significantly reduced profit margins on almost all national contracts" (p. 625).

In addition to the financial pressures created by government deregulation, carriers have recently had to absorb a wildly volatile fuel market. The fuel price spike in 2008 and 2009 forced most carrier companies to rethink their procurement methods for fuel. Many fleets found it necessary to negotiate preferred fuel rates, become part of a fuel purchasing system, and/or retrofit their fleet for fuel economy.

Many also turned to fuel purchase optimization programs, designed to get the best price-per-gallon within company-specific parameters such as existing routes and cleanliness and safety factors. Sometimes these optimization programs were as simple as having drivers compare prices along their routes before purchasing fuel, or having them take advantage of internet-based fuel price comparison programs on their cell phones. Some companies opted for a more comprehensive fuel purchase optimization system specifically tailored to their fleet. For instance, FleetNav, developed by Maptuit Corp., is designed to be used in conjunction with a vehicle's in-cab navigation and routing system. This program makes suggestions based on many fleet-specific variables, including "existing fuel purchase arrangements, the amount of fuel onboard, the size of the fuel tanks, and the out of route miles required to fuel at a particular station" (Leavitt, 2006). With optimization programs such as these, companies found that they were able to save as much as 4 cents per gallon (Ibid).

As an indirect result of the recent fuel crisis, carriers have found themselves under an enormous amount of market pressure to provide environmentally friendly, or "green," transportation alternatives. Sustainability has become a major business driver, stemming from a combination of fuel price worries, foreign oil concerns, and consumer sentiment about global warming. More and more, companies are creating green procurement procedures and insisting that transportation companies meet their sustainability requirements. This often involves monitoring CO2 emissions and using biofuel.

Monitoring CO2 emissions involves an additional procurement step for carriers. While it is not currently mandated by federal regulations, many shipping companies are feeling pressure from clients and consumers to comply with international standards of CO2 emissions. In Europe, carriers are subject to environmental regulation and must absorb the cost of procuring and implementing CO2 tracking technology. Some large companies have decided to skip this procurement altogether, opting instead to develop their own carbon emissions measurement software (Green Transportation Report, 2009).

Procurement of biofuel has been a difficult road for the transportation industry. Ethanol, made from corn products, seemed to be the answer to the non-renewable resource problem and for a while it was also proving helpful in keeping fuel costs low. The high demand, however, caused ethanol prices to rocket upward, and many carrier companies found it no longer economically feasible (Kanellos, 2007).

Whatever difficulties transportation companies may have complying with demands for green transportation initiatives, the marketplace is begin to reward those who have implemented environmentally friendly changes. A 2008 survey found that 62% of participating companies expected to see "both a financial and public relations ROI on their green investments over the next three years" (Green Transportation Report, 2009).