Moving freight in the new economy: Payoffs, perils and paradoxes

Logistics Spectrum, Jan-Mar 2001 by Barami, Bahar

The infusion of information technology in all industrial processes has elevated the performance of the U.S. economy to new heights. Yet, our transportation system is still guided by many of the obsolete infrastructure investment and pricing paradigms of the old economy. Consequently, our freight network suffers from congestion and environmental degradation. The network also faces severe capacity shortages in some segments and is underutilized in others. We need new accounting tools for infrastructure pricing and new strategies for incorporating the full costs and environmental impacts of network use.

The New Economy: Shifts in Production and Distribution Paradigms

By "new economy" I mean the spectrum of changes that has transformed the rules of the economy, its structure and functions in the past decade and a half. While the term refers broadly to many qualitative and quantitative aspects of the modern economy, it can be defined more narrowly as a "knowledge-based economy." It is driven by innovation, and characterized by the prevalence of technology imbedded in an array of services and manufactured products.1

The drivers of the new economy have been trade globalization, information technology (IT), deregulation of transportation, communications and banking industries in the past two decades. Four major shifts in the paradigms governing the nation's production and distribution system characterize the new economy.

Shift From a Goods-producing Paradigm to a Knowledge-producing One

In the past half century, manufacturing as a percentage of Gross Domestic Product (GDP) has declined steadily. In 1960, nearly a third of the domestic output was from manufacturing activities and 58 percent from services. Today, less than one-fifth of the GDP is from manufacturing and close to three-quarters from services (Refer to Figure 1). Not only is the share of services in the economy growing, but also what is left of manufacturing is becoming infused with information. With the growing share of knowledge in the production process, the economy is moving toward a "virtual system of production,"2 and manufacturing itself is "dematerializing." A convergence of goods and services has tilted the balance in favor of a product's information input. By one estimate, three-fourths of the value-added in manufacturing is information. Whereas in the old economy we bought and sold "congealed resources," in the new economy we trade "congealed knowledge."3

Transition to a "Weightless" Economy

The corollary of the shift to knowledgebased economy is a two-pronged shift in production processes toward shedding material weight. First, the goods produced and distributed in the system are "lighter;" and second, the share of the "intangibles," i.e., the information and knowledge components of the value-added in GDP, is growing. In the 1950s, a beer can was made of steel and weighed about 1.5 ounces. Today, a typical beer or soft drink can weighs just 0.48 ounce. The original IBM personal computer that was introduced in 1981 came in three pieces and weighed 44.3 pounds. Today an average laptop weighs less than 6 pounds. Figure 2 shows that the growth in tonnage in the US. has been at a far slower pace than the growth in GDP Relative to the base year of 1950, the index of total tonnage transported has grown by 2.5 times while GDP has had nearly a five-fold growth.

Shift from Economies of Scale to Economies of Scope

Industrial age prospered to a large extent because of economies of scale. Standard products could be manufactured with decreasing unit costs by increasing the volume of production. Production cost relationships changed in the 1990s. Infusion of high levels of knowledge generated economies of scope in production, permitting an enterprise to produce different products on the same assembly line without incurring higher costs. By moving away from mass-production to "mass customization" and build-to-order (BTO) production, manufacturers have increased the breadth of their market reach. By giving customers precisely what they ask for, manufacturers can maximize revenues. Motorola, for instance, makes pagers in a single Florida plant in up to 29,000 different varieties in lot sizes as small as one. Each customer's pager is designed on the sales person's laptop, and the specifications are dialed into the factory to produce and deliver on-demand. This practice significantly changes demand for transportation, as it reduces the average load size and increases shipment frequency.

Substitution of Transportation for Inventory Investment

Just-in-time (JIT) production and logistics strategies have enabled businesses to substitute transportation for inventory. Inventory investment constitutes the third component -- after fixed business and residential investment - of aggregate investment spending in our economy. Inventory investment has historically been highly sensitive to business cycles. In the recession years of the early parts of the 1950s, '60s and '70s, inventory investment as a percentage of GDP dropped to zero or negative figures. When the recovery came, the ratios rose to 3.5 percent of GDP.4 During this period, the annual ratios of investment to final sales fluctuated between 25 percent and 35 percent.