Transportation

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
 Overview of transportation
• Transport functionality and participants
• From regulation to a free market system
• Transportation modal structure
• Specialized transportation service
• Transportation economics and pricing
• Transportation pricing
• Documentation
• Product pricing and transportation
 Transport functionality primarily consists of
product movement services
• Product movement is the movement of inventory
to specified destinations
– Restrictive element—in-transit inventory is “captive”,
usually inaccessible during transportation
– Flexible element—inventory can be diverted during
shipment to a new destination
• Transportation consumes time, financial, and
environmental resources
– Transportation is more than 60% of the cost of logistics
– One of largest consumers of oil and gas in US
– Impacts traffic congestion, noise and air pollution
 Transport also functions as storage services for
products while in a vehicle
• In-transit inventory is captive in the transport system
– Managers strive to reduce in-transit inventory to a minimum
• Product can also be stored in vehicles at origin or
destination (trailers, trucks, railcars, etc)
– Usually more expensive than traditional
warehousing
• Must pay rental or demurrage charges on vehicles used
for storage
• Diversion occurs when a shipment destination is
changed after a product is in transit
 Two fundamental transport principles
• Economy of scale is the cost per unit weight decreases
as the size of the shipment increases
– At least until you totally fill the carrying vehicle!
– Cost decreases because the fixed cost of the carrier is
allocated over a larger weight of shipment
• Economy of distance is the cost per unit weight
decreases as distance increases
– Often called the tapering principle
– Longer distances allow fixed cost of the carrier to be spread
over more miles, lowering the per mile charge
• Goal is to maximize the size of the load and distance
shipped while still meeting service expectations
 Transport participants
• Shipper
• Consignee (Receiver)
• Carrier and Agents
• Government
• Internet
• Public
Major relationships among transportation
participants

Figure 8.1 Relationship Among Transportation Participants

 Transportation infrastructure supports the flow
of our nations economy
Table 8.1 The Nations’ Freight Bill ($ billions)
 Role and perspective of participants
• Shipper and consignee have a common interest in
moving goods from origin to destination within a given
time at the lowest cost
• Carriers desire to maximize their revenue for
movement while minimizing associated costs
• Agents (brokers and freight forwarders) facilitate
carrier and customer matching
• Government desires a stable and efficient
transportation environment to support economic growth
• Public is concerned with transportation accessibility,
expense, and standards for security, safety and the
environment
 Role of the Internet in transportation
• The Internet now provides the vital
communications links between the
transactional participants (shipper-carrier-
consignee)
– Replacing phone and fax technologies
• Web-based enterprises provide information
marketplaces
– Freight matching
– Fuel, equipment, parts and supplies purchases
 Transportation regulation by the government
focuses on
• Economic regulation seeking to make transportation
equally accessible and economical to all without
discrimination
– Government created infrastructure (roads, canals, ports)
– Intended to prevent carriers from taking advantage of suppliers
while ensuring long-term financial stability for carriers
• Social regulation which takes measures to protect
public safety and environment
– Department of Transportation (DOT) (1966) has active role in
hazardous material safety and driver safety
– Hazardous Materials Transportation Uniform Safety Act (1990)
took precedence over state and local regulations
 History of transportation regulation
• In 1800’s, rise of steamships and railroads created
immense wealth and monopolies
– (e.g. Commodore Vanderbilt and the railroad “barons” )
• Interstate Commerce Commission (ICC) created in 1887
to oversee regulation of interstate transportation
– To stop the railroad monopolies
• Other regulatory acts passed from 1906 to 1973 placed
motor carriers, shipping, air transport and pipeline
transport under ICC oversight
• By 1970, ICC had oversight on 100% of rail and air, 80% of
pipeline, 43% of trucking and 6% of water carrier
operations
 Transportation deregulation (1980)
• Motor Carrier Act of 1980 deregulated the motor carrier
industries
– Entry restrictions for new businesses were relaxed
– Restrictions for types of freight and range of services were abolished
– Individual carriers were given the right to price their services
– Trucking industry’s collective rate-making practices were abolished
• Staggers Rail Act of 1980 deregulated the rail industry
– Provide railroad management with freedom necessary to revitalize
the industry
– Rail carriers were authorized to use selective pricing to meet
competition and cover operating costs
– Carriers given increased flexibility with respect to surcharges
– Contract rate agreements between individual shippers and carriers
were legalized
– Rail management given liberal authority to proceed with
abandonment of poorly performing rail service
Transportation regulation in the new millennium
is stimulated by technology and global issues
• Electronic Signatures in Global & National Commerce
Act of 2000
– Gave digital signatures legal status
• Patriot Act of 2001
– Increased inspections at ports, airport security, and
increased security at border crossings
• Continued Dumping and Subsidy Act
– Fines for artificial underpricing and “dumping” of foreign
goods in U.S. markets
• Jones Act
– Only U.S.-built ships operating under a U.S. flag with U.S.
crews can ship goods directly from a U.S. port to another
U.S. port
 Transportation structure
• Consists of rights-of-way,
vehicles, and carriers
operating within five
basic modes
• A mode identifies basic
transportation method or
form
– Rail
– Highway
– Water
– Pipeline
– Air
 Table 8.1
Nation’s freight bill
1960 1970 1980 1990 2000 2009
Truck 32.3 62.5 155.3 270.1 481.0 542.0
Railroad 9.0 11.9 27.9 30.0 36.0 50.0
Water 3.4 5.3 15.3 20.1 26.0 29.0
Pipeline 0.9 1.4 7.6 8.3 9.0 10.0
Air 0.4 1.2 4.0 13.7 27.0 29.0
Other Carriers 0.4 0.4 1.1 4.0 10.0 28.0
Other shipper costs 1.3 1.4 2.4 3.7 5.0 9.0
Grand Total 47.8 83.9 213.7 350.8 594.0 697.0
GNP (Trillions) 0.5 1,046 2,831 5,832 9,960 14,256
Grand Total of GNP 9.00% 8.03% 7.55% 6.02% 5.92% 4.89%
Source: U.S. Freight Transportation Forecasts to 2021, American Trucking Association, Inc.,
2010, p. 25.
 Table 8.2
Domestic shipments by mode and volume

Mode Freight Volumes Percent

Mode Share %
and Volume (Millions of Tons) Change

2009 2015 2021 2009 2015 2021 2009 - 2015

Truck 8,849 10,515 11,498 68.0% 69.8% 70.7% 29.9%
Rail 1,773 1,957 2,033 13.6% 13.0% 12.5% 14.6%
Rail Intermodal 139 193 253 1.1% 1.3% 1.6% 82.6%
Air 12 15 18 0.1% 0.1% 0.1% 57.3%
Water 829 929 964 6.4% 6.2% 5.9% 16.4%
Pipeline 1,417 1,453 1,502 10.9% 9.6% 9.2% 6.0%
Total 13,018 15,061 16,269

Source: U.S. Freight Transportation Forecasts to 2021, American Trucking Association, Inc.,
2010, p. 25.
 Table 8.3
Domestic shipments by mode and revenue

Mode Freight Volumes Percent

Mode Share %
and Revenue (Billions of Dollars) Change

2009 2015 2021 2009 2015 2021 2009 - 2015

Truck 544 748 933 81.9% 82.8% 83.0% 71.4%
Rail 40 51 61 6.0% 5.7% 5.4% 51.6%
Rail Intermodal 9 16 24 1.4% 1.7% 2.1% 151.1%
Air 20 29 40 3.0% 3.2% 3.6% 99.5%
Water 10 13 15 1.5% 1.5% 1.3% 51.5%
Pipeline 41 46 51 6.2% 5.1% 4.5% 24.6%
Total 665 903 1,123

Source: U.S. Freight Transportation Forecasts to 2021, American Trucking Association, Inc.,
2010, p. 25.
 Rail mode has historically handled the largest
number of ton-miles within continental US
• Track mileage has declined
by over half since 1970
• Traffic shifted from broad
range of commodities to
hauling specific freight in
traffic segments
– Carload
– Intermodal
– Container
• New technologies include
articulated cars, unit trains
and double-stack cars
 Truck mode has expanded rapidly since the end
of World War II
• Nearly 1 million miles of
highways in U.S.
• Key benefits include
– Speed of transit
– Ability to operate door-to-door
• More efficient than rail for
small shipments over short
distances
• Dominate freight moves
under 500 miles and from
manufacturing to
wholesalers to retailers
• Many companies run their
own truck fleets as well
(e.g. WalMart)
 Water mode is the oldest form of US transport
dating back to the birth of our nation
• Percentage of ton-
miles has stayed
between 19 and 30%
since 1960’s
• Ranks between rail
and truck in fixed
cost
• Right of way (canals
and rivers)
maintained by
Federal government
Pipeline mode accounts for about 68 percent of all
crude and petroleum ton-mile movements in US
• Have the highest fixed
cost and lowest variable
cost of all modes
• Unique transportation
mode
– Can operate 24 hours a
day, 7 days a week
– No emissions
– No empty container or
vehicle to return
• Not flexible, and
limited to liquids and
gases
 Air mode is the newest and least utilized
transport mode for freight
• Accounts for only 1%
of intercity ton-miles
• Fastest of all the
modes
• Fixed cost is 2nd lowest
but variable costs are
extremely high
• Most products air-
shipped have high
value, high priority or
extreme perishability
 Comparison of fixed and variable cost
structure of each transport mode
Table 8.4 Cost Structure For Each Model
 Operating characteristics used to classify
transport modes
• Speed is the elapsed movement time from
origin to destination
• Availability is ability of a mode to service any
given pair of locations
• Dependability is the potential variance from
expected delivery schedule
• Capability is the ability to handle any load size
or configuration
• Frequency is the quantity of scheduled
movements a mode can handle
 Highway transport is appealing partly due to its
relative ranking across characteristics
Table 8.5 Relative Operating Characteristics by Mode

Lowest rank is best

Note: Lower is better

 Transportation service is achieved by
combining modes
• Traditional carriers are firms that provide service using
only one of the five basic transport modes
– E.g. trucking firm or an airline
• Package service uses intermodal transportation (ground
and air) to handle small shipments or parcel deliveries
– E.g. USPS, FedEx, or UPS
• Intermodal transportation combines two or more
modes to take advantage of the inherent economies of
each and provide an integrated service at a lower total
cost
– E.g. piggyback service integrating rail and motor service
• Non operating intermediaries include several business
types that do not own or operate equipment
– Act to broker services by other firms
 Package service provides both regular and
premium service
• Package service is growing rapidly with the rise
in e-Commerce and Internet consumer sales
• Ground package service offers regular delivery
within metropolitan areas and between cities
– United Parcel Service (UPS), Federal Express Ground
and United States Postal Service (USPS)
• Air package service is a premium service to
deliver certain packages door-to-door by next-
day or second-day
– Integrates truck and air modes seamlessly
 Examples of expanded parcel carrier
services (Freight services)
• Same day air
• Next day delivery
• Second day delivery
• 3 day select
• Ground
• Worldwide express
• Standard to/from foreign country
• World ease
 Examples of expanded parcel carrier
services (Optional value-added services)
• Collect on delivery (COD)
• Delivery confirmation
• Hazardous materials
• Hold for pickup
• Saturday pickup/delivery
• 10KG and 20KG boxes
• Hundredweight service
• Returns
• Excess value insurance
 Piggyback is an intermodal transport
that integrates rail and motor service
• Most widely used systems
are
– Trailer on a flatcar (TOFC)
– Container on a flatcar (COFC)
• Trailer or container is
hauled by truck at origin
and destination
– Railcar hauls for portion of
intercity travel
• A variety of coordinated
service plans have been
developed
 Containerships are oldest form of
intermodal transport
• Loads a truck trailer, railcar or
container onto barge or ship
for the line-haul movement on
inland waterways

• Land bridge concept moves

containers in a combination of
sea and rail transport

• Transfer of freight between

modes often requires handling
containers and imposition of
duties

• Port throughput is big concern

for supply chain managers
Coordinated air-truck is commonly used to
provide premium package services
• Many smaller cities
lack airfreight
services
• Costs can leveraged
with delivery time
by linking the modes
Non-operating intermediaries do not own their
own equipment
• Freight forwarders—businesses
that consolidate small shipments
from various customers into bulk
shipment for a common carrier
for transport

• Shipper associations and agents

—groups of shippers who employ
an agent to consolidate purchases
and shipments for them

• Brokers—intermediaries that
coordinate transportation
arrangements for shipper,
consignees and carriers, operating
on a commission basis
Sampling of Non-operating Intermediaries

8-34
Transportation operations seeks an optimal
balance between low cost and high service
• Transportation is single
largest element of
logistics cost
– Rising fuel costs
– Environmental cost of
carbon footprint
• Transportation
managers are
responsible for
inventory to be
positioned in a timely
and economical manner
Transportation economics and pricing are
concerned with factors that drive cost
• An effective logistics strategy must understand
four interrelated topics
– Economic drivers that influence rates
– Costing methods to allocate costs
– Carrier pricing strategy used to set rates
– Rates and rating mechanics used by carriers
 Economic drivers influence rates
• Distance
• Weight
• Density
• Storability
• Handling
• Liability
• Market
 Distance is a major influence on cost
• Directly contributes to
variable expenses
– Labor, fuel, and
maintenance
• Cost curve starts above
zero because of fixed costs
associated with pickup and
delivery regardless of
distance
• However, rate of cost
decreases as distance
increases
– This is called the tapering
principle
Figure 8.2 Generalized Relationship between Distance
and Transportation Cost
8-38
 Weight is the second major factor for most
transportation costs
• Cost per pound
decreases as weight
increases until the
carrier vehicle is full
– Relationship starts
again for the next
vehicle load
• Small loads should be
consolidated into
larger loads to
maximize scale
economies
Figure 8.3 Generalized Relationship between
Weight and Transportation Cost/Pound
8-39
 Density is the combination of weight and
volume
• Volume is important
because vehicles are
typically constrained
more by cubic capacity
than by weight loaded
• Cost per unit of weight
declines as product
density increases
– Higher density products
allowed fixed transport
costs to be spread over
more weight

Figure 8.4 Generalized Relationship between

Density and Transportation Cost/Pound 8-40
Storability is how product dimensions fit into
transportation equipment
• Odd package shapes
and sizes can waste
cubic capacity
• Items with rectangular
shapes are easier to
stow
• Nesting refers to ability
of product to be placed
in itself or collapsed
for better storability
 Handling some products may require special
equipment
• Special equipment
may be needed to
load and unload
trucks, railcars, or
ships
• How products are
grouped together in
boxes or pallets will
also impact handling
cost
 Liability includes product characteristics that
can result in damage
• Carriers must pay for
liability insurance or
accept financial
responsibility
• Shippers can reduce
their risk by
– Improved packaging
and loading
– Reducing susceptibility
to loss or damage
Market factors such as lane volume and
balance influence transportation cost
• Transport lane refers
to movements between
origin and destination
points
– Carriers must find a
backhaul load or vehicle
is returned empty
• Imbalances in volume
between shipping
points can result in
higher transport costs
 Variable costs change in a predictable, direct
manner in relation to some level of activity
• Variable costs in
transportation are only
incurred if you operate
the vehicle
• Transport rates must
cover these at the very
least!
• Generally measured per
mile or unit weight or
both
– E.g. per ton-miles
 Fixed costs must be paid even when the
company is not operating
• Fixed costs are not
influenced by shipment
volume
– Includes vehicles,
terminals, rights-of-way,
information systems, and
support equipment
• Must be covered by
contribution above
variable costs on a per
shipment basis
 Joint costs are created by the decision to
provide a particular service
• Typical example is the
implicit decision to incur
a joint cost for a backhaul
from a destination
– E.g. Big and Little Enos in
Smokey and the Bandit
• Significant impact on
charges
– Carrier quotations must
include implied joint costs
based on assessment of
back-haul recovery
 Common costs are incurred on behalf of all or a
select group of shippers
• Terminal or
management
expenses are typical
examples
• Usually allocated to
shippers based on
level of activity for
that customer
– E.g. number of
shipments
Carrier pricing strategies for setting rates follows
one or two of the following approaches
• Cost-of-service strategy
• Value-of-service strategy
• Combination pricing strategy
• Net-rate pricing strategy
 Carrier pricing cost-of-service strategy
• Cost-of-service is similar
to cost-plus pricing
strategy for manufacturing
• Carrier estimates cost of
providing service then
adds on a percent profit
margin
• Commonly used for pricing
transport of low value
goods or in highly
competitive situations
Carrier pricing value-of-service strategy
• Value-of-service price is
based on value as perceived
by the shipper rather than
the carrier
• Higher margins than cost-of-
service pricing
• Depends on the value of the
goods being shipped
• Used for high value goods or
when no competition exists
– E.g. 1980’s FedEx overnight
delivery
 Carrier pricing combination strategy
• Combination price is set
at a value between cost-
of-service minimum and
value-of-service
maximum
• Most carriers use some
form of combination
pricing
– Common in highly volatile
markets and changing
competitive situations
 Carrier pricing net-rate strategy
• Net-rate is a simplified
pricing format made
possible by
deregulation
• Established discounts
and accessorial charges
are rolled into one all- UPS commercial:
inclusive price “What can Brown do
• Pricing is tailored to for you?”
the individual
customer’s needs
 Rates and Rating Mechanics used by Common Carriers

• Freight class is a standardized shipping industry pricing

classification establishing uniform parameters for commerce
between multiple brokers, warehouses and carriers. It is
determined based upon a range of factors, including: ease of
handling, value, weight, length, height, density and liability
• Classification is the grouping of similar products into uniform
classes that are assigned a rating
• Rate determination is based on the classification rating,
shipment origin, and destination (Route determination is done
based on the target country and transportation zone along with
the shipping point. If you have the same shipping points for two
deliveries to the same country and same transportation zone,
then the same route determination is applied to both)
• Cube rates
• Exception rates are special rates to provide prices lower than the
prevailing class rates
• Special rates and services include

- FAK ,Joint rates, Transit services, Split delivery, etc.

– (Demurrage fees are charged when import containers are still full and under

the control of the shipping line. ... Detention occurs when the consignee holds
onto the carrier's container outside of the port, terminal, or depot beyond the
free time that is allotted)
– basically before the full container is picked up, Demurrage is charged (after
expiry of free days) and after the container has been picked up, till the time
the empty is returned to the lines nominated depot, Detention is charged..
– VOLUME is the space something takes up. WEIGHT is how heavy it is.
Measuring by weight is more accurate. Consider that some liquid oils may be
heavier than others.
Three Factors Determine the Base Rate
• How much are you shipping?
– Truckload (TL) or
– Less than truckload (LTL)
• What are you shipping?
– Determines freight class
• How far are you shipping from origin to
destination?
– Determines rate table
 Special Rates and Services
• Freight-all-kind (FAK) rates • Diversion and consignment
allow a mixture of different allows changing the destination
products to be transported and/or consignee prior to
under a negotiated rating arrival at the original
• destination
Joint rates can be negotiated
if shipper needs to use a • Split delivery is delivering
combination of carriers portions of a shipment to
multiple destinations
• Transit services permit
• Product storage services
shipments to be stopped at an
– Demurrage (rail) charge for
intermediate point between holding a railcar for more than
origin and destination for 48 hours before unloading
special processing – Detention (motor) charge for
holding a truck for more than a
few hours before unloading
– (Demurrage fees are charged when import containers are still full and under the control
of the shipping line. ... Detention occurs when the consignee holds onto the carrier's
container outside of the port, terminal, or depot beyond the free time that is allotted)
– basically before the full container is picked up, Demurrage is charged (after expiry of
free days) and after the container has been picked up, till the time the empty is returned
to the lines nominated depot, Detention is charged..
– VOLUME is the space something takes up. WEIGHT is how heavy it is. Measuring
by weight is more accurate. Consider that some liquid oils may be heavier than others.
 Transportation Administration Activities
Include
• Operational Management
• Consolidation
• Negotiation
• Control
• Auditing and claims
administration
• Logistical integration
 Key elements of operational management

• Equipment scheduling and

yard management
• Load planning
• Routing and advance shipment
notification (ASN)
• Movement administration
• Transportation Management
System (TMS)
– An integral information
technology solution to help
oversee day-to-day activities
 Consolidation
• Consolidation is combining LTL or parcel shipments
moving to a general location
• Shift to “response-based” logistics has made the industry
rethink consolidation
• Two groups of techniques
– Reactive approach does not attempt to influence composition
and timing of transportation movements, but reacts to
shipments as they come
• Example is UPS nightly sorting of package freight for intercity
movement
– Proactive approach includes preorder planning of quantity and
timing with the shipper to facilitate consolidated freight
movement
 Negotiation
• Seeking win-win
agreements where both
shippers and carriers share
transportation consolidation
and productivity gains
• Both parties seek the
lowest total logistical cost
consistent with the
shipper’s needed service
level (i.e. delivery time)
 Control Responsibilities include Tracing,
Expediting and Driver Hours Administration
• Tracing is procedure to
locate lost or late shipments
– i.e. tracking with RFID and
GPS systems
• Expediting involves the
shipper notifying carrier
that it needs a specific
shipment to move quickly
and with no delays
• Tracking driver hours of
service (HOS) to comply
with federal regulations
 Auditing and Claims Administration is Needed
when services are not performed as promised
• Auditing is checking freight bills to
ensure accuracy
– Preaudit determines proper charges
prior to payment
– Postaudit does the same after
payment
• Claims can be
– Loss and damage resulting from poor
performance
– Overcharge/undercharge when
amount billed is different from
expected
 Logistical Integration is the primary role of the
Traffic Manager
• Integration is finding
the best combination
of packaging,
selection of carrier,
mode and
consolidation for
lowest total logistical
cost consistent with
the shipper’s service
needs
 Transportation Management
• Operational management
– Equipment scheduling and yard management
– Load planning
– Routing and advanced shipment notification (ASN)
– Movement administration
• Consolidation
– Reactive consolidation
– Proactive consolidation
• Negotiation
• Control
• Audit and claim administration
Primary Purpose of Documentation is to Protect
all Parties Involved in the Transaction
• Bill of lading is the basic document utilized in
purchasing transport services
– Serves as a receipt and documents products and
quantities shipped
– Specifies terms and conditions of carrier liability
• Freight bill represents a carrier’s method of
charging for transportation services rendered
– Can be prepaid or collect
• Shipment manifest lists the individual stops or
consignees when multiple shipments are placed on a
single vehicle
 Pricing practices have a direct impact on
logistical operations
• Traditionally, logistics
pricing was “bundled” into
the price for a product or
service
• Trend has been to
debundle these charges so
they become separate and
visible to the customer
• Focus is still on delivering
value to the customer
 Pricing fundamentals of F.O.B. pricing
• F.O.B (freight on board) pricing
– F.O.B. origin—seller states price at point of
origin, and agrees to load a carrier, but
assumes no further responsibility. Buyer selects
carrier and mode, pays transportation and
assumes the risk for in-transit loss or damage
– F.O.B. destination—seller arranges for
transportation and adds charges to the sales
invoice. Title does not pass to the buyer until
delivery is completed
Three different payment options for each F.O.B.
price

Figure 9.5 Terms of Sales and Responsibilities

 Pricing fundamentals of delivered pricing

• Delivered pricing—the seller includes

transportation in the product price
– Single zone delivered pricing
• Buyer pays a single price regardless of where they are located
– Example, USPS First class letters
– Multiple zone pricing
• Seller charges different prices for different geographic areas
– Parcel carriers use this.
– Base point pricing
• Final delivered price is determined by the product’s list price
plus transportation cost from a designated base point
Illustration of different net returns using a
base-point pricing system

Figure 8.6 Base-Point Pricing

 Pricing issues
• Potential discrimination—Zone pricing may be
discriminatory because some buyers pay more than the
actual transportation cost while others pay less
– Sellers have to be careful about Federal price discrimination laws
• Quantity discounts—may be discriminatory against
smaller buyers
• Pickup allowances—discounts given if buyer picks up the
shipment themselves
• Promotional prices—special prices given for large sales
promotions
– EveryDay Low Pricing (EDLP) is a collaborative pricing framework
developed by Wal-Mart
 Menu pricing system consists of three
components
• Platform service price is expected to be paid by all
customers, whether or not they require or desire the
specified services
– Must establish the basic service platform to be offered all
customers
• Value-added service costs are specific upcharges for
performing customer requested value-added services
– E.g. for customized unit loading such as configuring retail-
ready unit loads
• Efficiency incentives encourage customers to
comply with specified practices that reduce logistics
costs