Chapter 8: Transportation

Transportation Economics and Pricing Concerned with Factors that Drive Cost

An effective logistics strategy must recognize four interrelated financial topics: 1. Economic Drivers 2. Costing Elements 3. Carrier Pricing Strategy 4. Rates and Rating Mechanics

Documentation

Primary purpose of documentation is to protect all parties involved in the transaction ▪ Bill of Lading (BOL) 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

Air

▪ Accounts for less than 1% of US freight by ton-mile, but 7% of total transportation spend due to the high shipping costs. ▪ Newest transport mode and the least utilized ▪ Generally the fastest mode of transportation. For longer distances. ▪ Most expensive mode of transportation. ✓ Fixed cost is 2nd lowest ✓ Variable costs are extremely high ▪ Cannot carry extremely heavy or bulky cargo. Ideal for items with a high cost to weight ratio. ✓ Shipments involve very light, high-value, and/or high priority goods that need to travel long distances quickly including; jewelry, fine wines, pharmaceuticals, racehorses, extremely perishable products, etc.

Cargo Aircraft

▪ Cargo planes are specifically designed to move freight. ▪ They come in a variety of sizes, and the inside space is maximized to accommodate all kinds of cargo — from small pallets of goods to massive machinery. ▪ Because these planes don't carry people, they have fewer restrictions, meaning they can also move hazardous materials (HAZMAT).

Air Charter Services

▪ Exclusive use of a plane with direct service to the destination. ▪ For critical freight, charter services may be the best option. The quickest way to ship to anywhere, including remote locations. ▪ Often used for urgent shipping needs in the energy, mining and automotive industries, and for sporting events, motion picture shoots and product launches.

Air Freight Delivery Options - International International Delivery Options: - Express service - Deferred service

▪ Express service: This is the fastest option for shipping goods globally. While it is more costly, goods will arrive at the destination airport within 2-3 days. ▪ Deferred service: This is the standard option for international flights. Freight usually arrives at the destination within 3-5 days.

Economic Drivers Influence Rates

1. Distance 2. Weight 3. Density 4. Stowability 5. Handling 6. Liability 7. Market

Rail - Safety

According to the Association of American Railroads, the rate of accidents on railroads decreased by 23% since 1980. ▪ There are more investments in rail infrastructure that are increasing the safety and efficiency of rail transportation. ▪ Rail offers a higher safety level because of less human involvement and the absence of highway congestion. ▪ Various technologies are being applied to improve safety, one of them being Positive Train Control (PTC) - an automated system that slows or stops the train in the case of possible accident or human error.

Parcel

Accounts for approximately 10% of total US freight spend FedEx: ▪ Has 2 separate operations - One for air - One for ground ▪ Drivers are independent contractors UPS: ▪ Has one operation for both air and ground ▪ All drivers are UPS employees Characteristics: ▪ Parcel Shipments are usually packages that weigh < 150 lbs ▪ There are multiple service levels - Next Day, 2nd Day Air, 3rd Day Air, and Ground (1 - 5 days)

Less-Than-Truckload (LTL) continued

Advantages: ✓ Can be cost effective. Don't pay for a whole truck if you don't need one. ✓ There are more available carrier options. ✓ Ideal for small businesses. Disadvantages: ✓ Increased risk of theft or damage. ✓ Increased shipping times and delays as other shipper's freight will be on the same truck with your freight. Additional pick-ups and deliveries

Air Freight Equipment Options

Air freight is typically handled by three different categories of aircraft: ▪ Cargo Aircraft ▪ Commercial Aircraft ▪ Air Charter Services Half of the goods transported by air are carried by freight-only airlines, e.g., FedEx. Other half in passenger planes with luggage

Carrier Pricing Strategies

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: Combination Strategy

Combination pricing is set at a value between cost-ofservice minimum and value-of-service maximum ▪ Most carriers use some form of combination pricing - Common in highly volatile markets and changing competitive situations

Fundamental Transport Principles (continued) *The overall transportation goal is to maximize the size of the load and distance shipped while still meeting service expectations

Economies of Distance: The cost per unit decreases as distance increases. Also known as the tapering principle - For example, a shipment of 800 miles will cost less than two shipments (of the same combined weight) of 400 miles. - The relatively fixed expense incurred to load and unload the vehicle must be spread over the variable expense per unit of distance. - Longer distances allow the fixed expense to be spread over more miles, resulting in lower overall per mile charges

Pricing Fundamentals of F.O.B. pricing

F.O.B (freight on board) pricing aka "free-on-board" ▪ 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 intransit 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. The seller assumes the risk for in-transit loss or damage. ▪ Hybrid Approach: EXAMPLE: Novartis negotiated F.O.B. Origin with its customers, but pays for the freight and insurance to the buyers destination in order to be able to recognize revenue immediately upon shipment.

Costing Elements: Fixed Costs

Fixed costs must be paid even when the carrier is not operating its equipment ▪ Fixed costs are not influenced by shipment volume - Includes buildings, land, terminals, vehicles, rights-of-way, information systems, and support equipment. ▪ Must be covered by a contribution above the variable costs, on a per shipment basis

Economic Drivers: Handling

Handling some products may require special equipment ▪ Special equipment may be needed to load and unload trucks, railcars, or ships - And . . the special handling equipment will need to be available at both ends of the transport ▪ How products are grouped together in boxes or pallets will also impact handling cost

Intermodal Transportation

Intermodal is sometimes referred to as the sixth mode of transportation, but it is really the use of multiple modes of transportation to execute a single transport shipment. ▪ Intermodal is growing substantially because it is efficient and effective. - Currently represents approximately 11% of ton-miles − The benefits of intermodal shipping include: ─ Lower costs. ✓ Shippers can take advantage of lower rates, more predictable pricing, and the flexibility of loading and unloading goods in a dropped trailer environment, which reduces handling costs. ─ Environmentally friendly. ─ Reliability, capacity, and safety advantages.

Costing Elements: Joint Costs

Joint costs are unavoidably created by the decision to provide a particular service Transportation carriers make "round trips" (i.e., "to" and "from" a location) Transportation costing models must account for both legs of the trip ▪ For example, when a carrier elects to haul a truckload from point A to point B, there is an implicit decision to incur a joint cost for the back-haul from point B back to point A. ▪ Joint costs have a significant impact on transportation charges because carrier quotations must include implied joint costs. - Either a back-haul shipper must be found - Or the joint cost must be covered by the original shipper from A to B and built into the quote.

Less-Than-Truckload (LTL)

Less-Than-Truckload (LTL) is the transportation of relatively small freight which does not require the space of an entire truck. ▪ When shippers are searching for a cost-effective solution to moving a few pallets of freight, LTL shipping is often used. ▪ This mode of shipping freight is ideal for various kinds of businesses that do not have their own trucks. ▪ LTL freight is in the range of 150 lbs. up to 20,000 lbs. ▪ The LTL shipping market is estimated at $70 billion USD

Economic Drivers: Liability

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

Truck (continued)

Motor carrier transportation has expanded rapidly since the end of World War II − Over 2 million miles of paved roads in the U.S. − Key benefits of Motor Carriers include: - Speed of transit - Ability to operate door-to-door − Dominate freight moves under 500 miles and from manufacturing to wholesalers & retailers − More efficient than rail for small shipments over short distances − Many companies run their own truck fleets as well (e.g., Walmart)

Carrier Pricing: Net-Rate Pricing Strategy

Net-rate is a simplified pricing format made possible by deregulation ▪ Established discounts and accessorial charges are rolled into one all-inclusive price ▪ Pricing is tailored to the individual customer's needs

Pricing Practices

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 de-bundle these charges so they become separate and visible to the customer ▪ Focus is still on delivering value to the customer

Ocean Transportation (cont'd)

Tankers: ▪ Tankers are specially designed to carry oil, petrol and such other liquids and have a large capacity. Tramps: ▪ Tramps are ships which have no fixed routes, and no set rules or rate schedule. Usually, they do not sail till they have full cargo. ▪ They can be chartered by exporters and are ready to sail anywhere and at any time. ▪ Tramps are more suitable to carry seasonal and bulky goods. Liners: (Passenger and Cargo) ▪ Liners are the ships which have regular fixed routes, time and charges. ▪ Liners sail on scheduled dates & time, whether full of cargo or not.

Economic Drivers: Weight

Weight is the second major factor for most transportation costs ▪ Cost per pound decreases as weight increases until the carrier vehicle is full (Generalized Relationship between Weight and Transportation Cost/Pound) - Relationship starts again for the next vehicle load ▪ Small loads should be consolidated into larger loads to maximize scale economies

Transportation Regulation

1. Economic regulation seeks to make transportation equally accessible and economical to all without discrimination - Government created infrastructure (roads, canals, ports, etc.) - Intended to prevent carriers from taking advantage of shippers while ensuring long-term financial stability for carriers 2. Social regulation which takes measures to protect public safety and the environment - Department of Transportation (DOT) (1966) took an active role in hazardous material safety and driver safety - Hazardous Materials Transportation Uniform Safety Act (1990) took precedence over state and local regulations

Administrative Activities: Auditing & Claims Administration

Auditing and claims administration is needed when services are not performed as promised ▪ Auditing is checking freight bills to ensure accuracy - Pre-audit determines proper charges prior to payment - Post-audit does the same after payment - Pay particular attention to accessorial charges ! ▪ Claims can be: - Loss and damage resulting from poor performance - Overcharge/undercharge when amount billed is different from expected

Green Freight Solutions

Better capacity utilization would reduce the number of required freight runs. ▪ Today 15 to 25 percent of U.S. trucks on the road are empty. ▪ For non-empty miles, trailers are 36 percent underutilized. ▪ Capturing just half of this under-utilized capacity would cut freight truck emissions by 100 million tons per year and reduce expenditures on diesel fuel by more than $30 billion a year.

Inland Waterways - Rivers, Canals, and Lakes (continued)

Canals: ▪ Artificial waterways made for the purpose of irrigation or navigation or both. ▪ Canal transport requires a huge amount of capital investment in construction and maintenance. ▪ Therefore, the cost of the canal transport is, higher than that of river transport. Lakes: ▪ Lakes can be either natural like rivers or artificial like canals. Not all rivers, canals, and lakes are viable for commercial transport. ▪ In some cases, they must be deepened, widened and straightened through the use of dredging which is excavating the lake or river bed to provide greater depth and draft for larger vessels ▪ Transport on inland waterways is typically by large lake freighters or by barges which are flat-bottomed vessels which may or may not have motorized propulsion. ▪ Primarily used for heavy, low value bulk quantities of minerals such as iron ore, limestone, coal, grain, sand, and gravel as well as petroleum and other chemicals.

Pricing Fundamentals of Delivered Pricing

Delivered Pricing — the seller includes transportation in the product price, i.e., Bundled Pricing ▪ Single Zone 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

Examples of Railcars

Typical railcars include: ▪ Boxcars ▪ Center Beam ▪ Covered Coil ▪ Double Door ▪ Flatcars ▪ Gondola ▪ Goods Wagon ▪ Hicube Boxcar ▪ Hopper ▪ Intermodal ▪ Open Wagon ▪ Refrigerated ▪ Specialty ▪ Tank

Transportation Participants (continued)

Underlying Demand: Concerned with: ▪ Expense ▪ Effectiveness ▪ Environment ▪ Safety ▪ Security Consignor (Shipper) Consignee (Receiver)

Carrier Pricing: Value-of-Service Strategy

Value-of-service pricing 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 "When it absolutely, positively has to get there overnight" FedEx Marketing Slogan

Costing Elements: Variable 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 per unit weight or both - e.g., per ton-miles transported

Transport Participants

− Consignor (Shipper) − Consignee (Receiver) − Carrier and Agents − Government − Internet − Public

Transportation Topics

− Functionality, Principles, and Participants − Regulation, Deregulation, and Security − Transportation Modal Structure − Specialized Transportation Services − Economics and Pricing − Administration − Documentation and Product Pricing

Transportation Regulation (continued)

▪ Motor Carrier Act of 1935 - brought motor carriers under Interstate Commerce Commission control. ▪ Transportation Act of 1940 - established Interstate Commerce Commission control over domestic water transportation. ▪ Federal Aviation Act of 1958 - created air traffic and safety regulations and the national airport system. ▪ Department of Transportation Act of 1966 - coordination of all transportation-related matters. ▪ By 1970, the Interstate Commerce Commission had oversight of - 100% of rail and air - 80% of pipeline - 43% of trucking - 6% of water carrier operations

Transportation Administration Activities

▪ Operational Management ▪ Consolidation ▪ Negotiation ▪ Control ▪ Auditing and Claims Administration

Administrative Activities: Operational Management

Key elements of operational management ▪ Equipment Scheduling and Yard Management ▪ Load Planning and Routing ▪ Advance Shipment Notification (ASN) ▪ Movement Administration - Managing for-hire and private transport carriers ▪ Transportation Management System (TMS) - An integral information technology solution to help oversee day-to-day activities "According to recent Logistics Management research, only 35 % of logistics operations are using a transportation management system (TMS) as part of their overall supply chain management strategy"

Less-Than-Truckload (LTL) (continued)

LTL carriers operate on the basis of sharing the trailers' capacity among multiple shippers. The trailer is filled up with pallets from individual shippers who are paying for space based on the dimensional space their goods occupy. 1. The LTL carrier collects freight from multiple shippers located along the driver's assigned route. 2. The truck then returns to the terminal, where it joins with other trucks that collected freight from other shippers. 3. All the trucks are unloaded and the freight is sorted and reconfigured by destination. 4. Freight is then reloaded and delivered. 5. Drivers will also collect more freight along the assigned route while making deliveries.

Economic Drivers: Market Factors

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

Economic Drivers: Stowability

Stowability 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 the ability of product to be placed in itself or collapsed for better stowability

Ocean - How are Containers Positioned on a Ship?

Stowage Planning is the act of allocating space to containers on board a container ship in the order of the discharge ports. Variables considered: ▪ Scheduled list of ports that the ship will be calling at, in the order of rotation ▪ A summary of the number of containers - size/type/weight per port that are planned to be loaded on the ship ▪ A summary of the number of hazardous, reefer, and dry containers per port that are planned to be loaded on the ship ▪ A list and summary of containers that are on board after discharge of the containers at a port

Transportation

The function of planning, scheduling, and controlling activities related to the mode, carrier, and movement of inventories into and out of an organization. *Get the right product, to the right place, at the right time by ensuring the product is moved as efficiently as possible from origin to destination.

Truck Driver Shortage *The 2018 shortage of 60,000 drivers is from a base of 500,000 over the road drivers = 12% shortage.

The industry is facing a record shortage with an estimated 50,000 more drivers needed to meet demand, according to the American Trucking Associations. ▪ The lack of available drivers is rippling through the supply chain, causing a bottleneck of goods that is delaying deliveries and prompting some companies to increase prices. ▪ The shortage has been growing for some time, as younger generations expressed less interest in the industry due to low wages and work-life balance issues. ▪ Driver churn is also a problem — at large fleets, turnover rose to an annualized rate of 95 percent in 2017, according to industry figures. ▪ The median wage is $43,800 a year, according to the Bureau of Labor Statistics. ▪ Women and minorities make up just fractions of the overall trucking population: 94% of drivers are men, and two-thirds of all drivers are white, according to a 2017 report released by the American Trucking Associations.

Transportation Structure - "Mode" refers to the way in which goods are transported. - "Carrier" refers to the company that transports the goods.

− Consists of rights-of-way, vehicles (conveyances), and carriers operating within five basic modes − A mode identifies a basic transportation method or form 1. Truck (i.e., Motor Carrier) 2. Rail 3. Air 4. Pipeline 5. Water ▪ Intermodal - a combination of the above modes

Rail cont'd - Greener Transportation - Resurgence - Stability - Safety

− Most freight that moves by rail is not contained on pallets or in boxes. − Quite often railroads carry bulk cargo. − Some cargo requires enclosure while other cargo does not. − New technologies include: A. Articulated Cars - rail vehicles which consist of a number of cars which are semi-permanently attached to each other and share common Jacobs bogies or axles B. Unit Trains - a train transporting a single commodity C. Double-stack Cars - a form of transport where intermodal containers are stacked two high on railroad cars

Pipeline (continued) Most reliable form of transportation ▪ Can operate 24 hours / 7 days ▪ No emissions ▪ No empty container or vehicle to return ▪ No traffic congestions or weather related issued to deal with Little maintenance needed once the pipeline is running. ▪ Pipeline Inspection Gauges (PIGs) are devices sent through pipelines to clean debris and inspect interior surfaces. These preventative measures help to foresee potential threats to a pipeline's integrity. ▪ Physical inspection by ground personnel, and drones equipped with highresolution cameras and advanced sensors are used to inspect above-ground pipelines. ▪ Sealants are applied to pipe exteriors to prevent corrosion. And fiber optic cables are ran alongside the pipeline to detect any threats to pipeline integrity.

▪ Accounts for approximately 15% of US freight by ton-mile, but only 4% of total transportation spend ▪ The U.S. has more than 1.3 million miles of pipeline (if all the pipelines in the U.S. were connected end-to-end, it would reach to the moon and back almost three times) ✓ 1,232,999 miles of pipeline deliver trillions of cubic feet of natural gas annually ✓ 149,570 miles of pipeline deliver hundreds of billions of tons of liquid petroleum annually ✓ Pipelines that transport natural gas and oil range anywhere from two inches to four feet in diameter ▪ The first recorded use of an iron pipeline in the US started soon after the first commercial oil well was established in 1859.

Rates and Rating Mechanics used by common carriers

- Classification - Class Rates - Rate Determination - Cube Rates - Commodity Rates - Exception Rates - Special Rates and Services

Transportation Functionality (continued) The transfer of inventory consumes time, money, and environmental resources.

1. Product Movement Product movement is the transfer of inventory to specified destinations. Two important aspects to consider during the transfer of inventory are the: ▪ Restrictive Element — in-transit inventory is "captive", meaning that it is typically inaccessible during transportation. ▪ Flexible Element — inventory can be diverted during shipment, to a new destination if necessary. 2. Product Storage Occurs while product is held in a transport conveyance or vehicle but is not moving. − Can be done by design or because in-transit inventory is captive in the transport system − Product can be stored in transport equipment at the origin, in-route, or at the destination ❖ In trailers, containers, railcars, pipelines, etc. ❖ Usually more expensive than traditional warehousing. ❖ Must pay "rental charges" on transport equipment used for storage. ❖ Less secure than traditional warehousing. ❖ Special handling (e.g., cold chain), could be an issue with this type of storage. Freight is Time-Sensitive ▪ Examples: fresh seafood is perishable; newspapers must be delivered promptly, etc.. ▪ Shippers have money invested in inventory and often want to use faster modes of transportation to reduce the amount of time they must wait for payment. ▪ For some goods, the cost of transportation is nearly the same as the cost of the product, and therefore influences demand for both the product and its carriage.

Electronic Logging Devices (ELD's)

An ELD is technology that automatically records a driver's driving time and other aspects of the hours-of-service (HOS) records. ▪ An ELD monitors a vehicle's engine to capture data on whether the engine is running, whether the vehicle is moving, miles driven, and duration of engine operation (engine hours). ▪ The ELD rule went into effect on 12/18/17 and applies to carriers and drivers who are required to maintain records of duty status. ▪ Law enforcement can review a drivers HOS records by: ✓ Viewing the display screen ✓ Printout from the ELD ✓ Retrieving electronic data from the ELD

Parcel Shipping Costs Things to Consider: 1. Weight 2. Service Level 3. Dimensions 4. Accessorials 5. Zone

Assessorial Examples: - Additional Handling - Adult Signature Required - Delivery Inaccessible - Dangerous Goods - Inside Pickup Charge - Invalid Account Number - Saturday Delivery - Address Correction - Fuel Surcharge - Invalid 3rd Party - Oversize Charge - Priority Alert - Residential Delivery Return

Motor Carrier Ownership

Asset-based carrier ▪ Transportation carrier (i.e., company) having their own tractors and trailers and responsible for maintenance of all their equipment. Truckload carriers look to replace tractors every 3-4 years and trailers every 7-8 years. Owner operator ▪ Person who owns his/her own tractor and is responsible for the maintenance and upkeep of his/her tractor. ▪ Types of owner operators: - Sole source - Free agents Non-asset based (i.e., Broker) ▪ Person or company who does not own their own equipment. They contract with an asset-based carrier (or an owner operator) for the carriage of goods.

Costing Elements: Common Costs

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

Transportation Company Classifications Companies transporting freight are classified according to the following categories: - Contract Carriers - Private Carriers - Common Carriers - Exempt Carriers

Contract Carriers: Person or company who transports freight under contract to one or a limited number of shippers. Private Carriers: Person or company that transports its own cargo as a part of a business that produces, uses, sells or buys the cargo that is being hauled. Common Carriers: Person or company who transports freight for a fee that can be hired by anyone to transport goods. Exempt Carriers: Person or company specializing in services or transporting commodities exempt from regulation by the Interstate Commerce Act.

Administrative Activities: Control

Control responsibilities include tracing, expediting and driver hours of service administration ▪ Tracing is procedure to locate lost or late shipments - i.e., tracking with RFID and GPS systems - Proof of delivery ▪ 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

Carrier Pricing: Cost-of-Service Strategy

Cost-of-Service pricing is similar to a cost-plus pricing strategy for manufacturing ▪ The carrier estimates the cost of providing the service and then adds on a percent profit margin ▪ Commonly used for pricing transportation of low value goods or in highly competitive situations

Economic Drivers: Density

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 (Generalized Relationship between Density and Transportation Cost/Pound) - Higher density products allowed fixed transport costs to be spread over more weight

Economic Drivers: Distance

Distance is a major influence on cost ▪ Distance directly contributes to variable expenses through: - Labor, fuel, and maintenance ▪ Cost curve starts above zero because of fixed costs associated with pickup and delivery regardless of distance (Generalized Relationship between Distance and Transportation Cost) ▪ However, rate of cost decreases as distance increases - This is called the tapering principle

Fundamental Transport Principles There are also two fundamental transport principles: (1) Economies of Scale and (2) Economies of Distance

Economies of Scale: The cost per unit decreases as the size of the shipment increases - At least until you totally fill the conveyance (i.e. "max out" or "cube out"). - Cost decreases because the fixed cost of the carrier is allocated over a larger volume/weight of the shipment. ▪ Railroads benefit the most; a stretch of track between two cities has the same fixed daily costs whether it handles 1 or 10,000 railcars per day. ▪ Airliners have a break-even point at a load of about 70 percent of capacity. ▪ A carrier enjoying economies of scale tries to increase volume by lowering rates to attract additional traffic. ▪ Economic Density is used to describe benefits to carriers of having certain heavily used routes that are full, or dense, with traffic.

Non-Operating Intermediaries *Do Not Own Their Own Equipment

Freight Forwarders: Companies that arrange storage and shipping of merchandise on behalf of their customers. ▪ They physically take charge of merchandise, usually ship under their own bills of lading, and provide preparation of shipping and export documents. ▪ They combine smaller shipments from various shippers into larger shipments in order to create costs savings for all shippers. ▪ Consolidation, transportation and insurance are the responsibility of the forwarder. ▪ They also book cargo space and negotiate rates for transport. ▪ Shipping Associations: groups of shippers who employ an agent to consolidate purchases and shipments for them (without a fee or commission) ▪ Brokers: Intermediaries that coordinate transportation arrangements for shippers, consignees and carriers, operating on a commission. A freight broker never takes possession of items being shipped.

Less-Than-Truckload - Freight Class & Rates

Freight classes are designed to standardized freight pricing for shipments when working with different carriers, warehouses and brokers. There are 18 freight classifications as defined by the National Motor Freight Traffic Association (NMFTA). Each commodity / product is assigned a classification. To determine the freight class for a shipment, you must identify certain factors about the specific freight being shipped. Commodities are evaluated and grouped based on four characteristics: ▪ Density - Space in relation to its weight ▪ Stowing - Ability to load other freight in the same trailer ▪ Handling - How difficult it is to actually handle the freight ▪ Liability (value and risk) - Potential claims from damage or loss Each carrier has a minimum charge for LTL. Some have one overall minimum charge, but may also have a specific minimum charge for hard to reach destinations. Fuel and accessorial charges then applied onto the base rate.

Full-Truckload (FTL) a.k.a. "Truckload"

Full-Truckload (FTL) is the transport of goods that fill up a full truck, or a partial load shipment occupying an entire truck. The cargo is typically homogeneous and stays on the same vehicle from the origin to the destination ▪ This is a "one-touch" door-to-door service, collecting freight at an origin and delivering it directly to the destination without any intermediate stops. ▪ The entire trailer is filled with goods from the same shipper. Full-Truckload shipping offers cost-savings when you have a significant amount of goods to ship and can maximize the space available in the full trailer

Motor Carrier Types

General Freight Carriers - A trucking company which handles a wide variety of commodities in standard trailers. Freight is generally palletized. ✓ These can be LTL or FTL carriers. ✓ They carry the majority of goods shipped. ✓ Does not require the use of specialized equipment. Specialized Carriers - A trucking company which handles the movement of cargo that requires specialized equipment for transportation because of the shipment's size, weight and shape. ✓ Transport commodities like liquids, petroleum, household goods, building materials, and other specialized items.

Inland Waterways - Rivers, Canals, and Lakes

In addition to ocean transportation, inland waterways are an important means of moving cargo. ▪ Transport over rivers, canals, and lakes can connect critical trade cities and provide access to ocean transport for global markets. ▪ Right of way for rivers and canals are maintained by Federal government Rivers: ▪ A natural waterway which can be used as a means of transport. ▪ They are suitable for small boats as well as big barrages. ▪ River transport played a very important role prior to the development of modern means of land transport. ▪ Their importance has gradually declined due to more reliable and cheaper transport services offered by the railways.

Transportation Regulation (continued) [1870 to 1970] Period of Regulation

In the 1800's the rise of steamships and railroads created immense wealth and monopolies. As a result, regulation was enacted to bring balance and economic stability to the industry. ▪ Granger laws (1870s) - regulated the Railroads ▪ Interstate Commerce Act of 1887 - created the Interstate Commerce Commission (ICC). ▪ Transportation Act of 1920 - changes to Interstate Commerce Act ▪ Merchant Marine Act of 1920 - 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 - The thought at one time was that such a law would promote U.S. shipping by providing preferential treatment of US vessels over "foreign" vessels. *Section 27 is known as the Jones Act

Transportation (continued)

Objectives of Transportation: 1. To maximize the value to the company through price negotiations 2. To make sure service is provided effectively 3. To satisfy customers' needs Transportation: ▪ Accounts for more than 60% of the total cost of logistics ▪ Is one of the largest consumers of oil and gas ▪ Negatively impacts traffic and congestion and contributes to noise and air pollution. *Transportation Represents 63% of Total US Logistics Costs *Total US Logistics Costs ≈ $1.636 Trillion

Transportation Security - Recent Concern *Not all measures have improved security as envisioned

Particularly important since September 11, 2001 ▪ Patriot Act of 2001 - increased inspections at ports, and increased security at border crossings ▪ Aviation and Transportation Security Act of 2001 - created the Transportation Security Administration (TSA) ▪ Department of Homeland Security (DHS) created in 2003 - to provide overall U.S. security leadership.

Pipeline

Pipeline, line of pipe equipped with pumps and valves and other control devices for moving liquids, gases, and slurries (fine particles suspended in liquid). ▪ Pipeline sizes vary from the 2-inch-diameter lines used in oil-well systems to lines 30 feet across in high-volume water and sewage networks. ▪ Pipelines usually consist of sections of pipe made of metal (e.g., steel, cast iron, and aluminum), though some are constructed of concrete, clay products, and occasionally plastics. ▪ The sections are welded together and, in most cases, laid underground. ▪ Most countries have an extensive network of pipelines. ▪ Because they are usually out of sight, their contribution to freight transport and their importance to the economy are often unrecognized by the general public.

Intermodal Transportation aka "Piggy-back" service

Rail and Motor Carriers (trucks): Offer point-to-point pickup and delivery service known as Trailer-on-Flatcar (TOFC) Rail and Water Carriers: Offer point-to-point pickup and delivery service known as Container-on-Flatcar (COFC) Roll-On/Roll-Off Ship: Specifically designed to allow trucks to be driven directly on and off the ship without the use of cranes. Provides flexibility and speed

Rail (cont'd)

Rail is the leading form of transportation for shipments of 750 to 2,000 miles. ✓ A single railcar can carry approximately 150,000 lbs of cargo ─ enough grain to make 258,000 loaves of bread. ✓ A train can consist of 100+ railcars (i.e., 15 million lbs of cargo per train compared to 45,000 lbs of cargo per truck) ─ The longest freight train in American history was longer than 60 football fields. − Traffic shifted from a broad range of commodities, to hauling specific freight in selected traffic segments (i.e., bulk items, heavy items) 1. Carload 2. Intermodal 3. Container

Rail - Resurgence

Rail transportation experienced a business downtime starting in the 1980s, but it seems like rail is making a major comeback. ▪ After years of operating in the shadow of the trucking industry, improved performance and dependability have made the freight rail sector a growing force in U.S. commercial transportation. ▪ Shifts in the logistics industry such as the rising demand for capacity, concern over gas emissions, and the aging generation of truck drivers are major reasons behind the resurgence in rail transportation. ▪ Rail companies are experiencing strong growth, particularly in the intermodal sector, in which freight-filled truck containers are loaded onto trains and shipped long distances.

Rail - Stability

Railroads don't face many of the risks common to other industries: ▪ Railroads have no foreign competition. ▪ The huge cost of laying and maintaining tracks deters domestic rivals from encroaching on one another's turf. ▪ Rail companies face little threat from new technology, whose disruptive effects have upended other industries. ▪ Railroads have neither product cycles that lead to sharp earnings volatility nor retail-oriented brand names that are vulnerable to shifting consumer sentiment.

Regulation Pro's and Con's -vs- Deregulation

Regulation Pro's: ▪ Tends to assure adequate transportation service throughout the country. ▪ Protects consumers from monopoly pricing, safety, and liability. Regulation Con's: ▪ Discourages competition ▪ Does not allow prices to adjust based on demand or by negotiation. Deregulation encourages competition and allows prices to adjust as demand and negotiations dictate. U.S. transportation industry remains mostly deregulated

Transportation Regulation and Deregulation *For many years, the economic practices of much of the transportation system in the United States were regulated. Today, interstate pipeline and some interstate railroad traffic is regulated, as is intrastate motor carriage in most states. At one time, nearly all intercity transportation was subject to economic regulation.

Regulation: Relying more on laws and policies than on market forces to govern economic activity. Deregulation: Removing regulations to allow the market to prevent excesses and correct itself.

Air Freight Shipments

Shipment size is > 150 lbs (70 kg) − Parcel is < 150 lbs Always palletized or in rigid container − Parcel is never on a pallet *Paired with trucks for door-to-door delivery

Benefits of Air Freight Shipping

Shippers often choose air freight as their transportation method for a couple of key reasons: ▪ Speed: Air freight is usually the fastest way to get goods to their destination. ▪ Reliability: Despite occasional weather delays, air freight has the lowest possibility of impediment. ▪ Lower inventory carrying costs: Faster deliveries mean your freight spends less time in the warehouse. ▪ Opportunity to capture market share: Ability to fit into tight deadlines can be a winning sales strategy.

Rail - Greener Transportation

The most obvious advantage of rail over trucking is being less harmful to the environment. ▪ Rail can handle a much higher volume of freight and goes through a more solid / fixed route than other transportation methods. ▪ Automation and faster transit times, in general, cause less carbon emission impact on the environment. ▪ Rail freight is environmentally friendly. Moving freight by rail instead of by truck requires 75% fewer greenhouse gas emissions. ▪ If just 10 percent of truck shipments shifted to intermodal, one billion gallons of fuel per year could be saved in the U.S, reducing carbon pollution by more than 11 million metric tons every year.

Transportation Functionality

There are two elements of Transportation Functionality: (1) Product Movement and (2) Product Storage

Rates and Rating Mechanics

Three Factors Determine the Base Rate: 1. How much are you shipping? - Truckload (TL) - Less than truckload (LTL) 2. What are you shipping? - Determines freight class 3. How far are you shipping from origin to destination? - Determines rate table *Some companies have their own tables, zones, classes established with carriers (J&J does for LTL, for example)

Costing Elements

Transportation costs are both Fixed and Variable. ▪ The fixed-cost component refers to costs which do not change with the volume of material moved. ▪ The variable-cost component refers to costs that do change with the volume of material moved. The areas where these costs occur in transportation are: ▪ Ways: land, water, road, space, etc., over which goods are moved. May be owned by the operator (e.g., railroad tracks), run by the government (e.g., highways, canals), or made by nature (e.g., oceans). ▪ Terminals: used to sort, load/unload goods, connect between line-haul and local deliveries or between different modes or carriers as well as dispatching, maintenance, and administration. ▪ Vehicles: owned or leased by the transportation companies and have a mix of fixed (e.g., capital investment) and variable (e.g., fuel, labor) operating costs.

How are Air Freight Rates Calculated?

What you're shipping, the carrier and airline you use, and the shipment's chargeable weight affect the rate. ▪ The chargeable weight is the gross weight (including the freight, packaging and pallet) or the volumetric weight — whichever is greater. ▪ Volumetric weight is calculated using a formula that divides the cargo's measurements (L x W x H) by a dimensional weight factor. ▪ Typically, larger items that weigh less take up more space than small, heavy items, which is why air cargo carriers use the chargeable weight formula. Other factors impacting the cost: ▪ Fuel surcharges ▪ Container freight station fees ▪ Airport security costs ▪ Airline handling charges ▪ Customs clearance fees ▪ Associated trucking costs

Rail

▪ Accounts for approximately 40% of US freight by ton-mile, but only 8% of total transportation spend due to the low cost. ▪ Rail transportation is the: ✓ slowest mode of transportation ✓ least flexible, but it has the most capability ✓ lowest cost mode of transportation ▪ Competes for transportation volume when the: ✓ distance is long ✓ shipments are heavy or bulky ▪ Typical cargo includes building materials, construction equipment, coal, gravel, sand, lumber, containerized cargo (intermodal), etc.

Full-Truckload (FTL)

▪ Booking a shipment requires at least 24 hours advance notice ▪ Rate structure - can be flat rate or cost per mile ▪ Using team drivers results in roughly 10% - 15% up charge on the standard rate (depending on the carrier) ▪ Option of "drop trailers" versus "live load/unload" Advantages: ✓ Best way to transport large shipments. ✓ Ideal for high risk or delicate freight shipments. ✓ Considerably faster than Less-than-Truckload (LTL). Disadvantages: ✓ Costs more than LTL ✓ Fewer options available

Rates and Rating Mechanics (continued)

▪ Classification is the grouping of similar products into uniform classes that are assigned a rating ▪ Class Rates are the price in dollars and cents per hundredweight to move a specific product (i.e., class) between two locations ▪ Rate Determination is based on the classification rating, shipment origin, and destination ▪ Cube Rates replace the 18 traditional freight classifications of the National Motor Freight Classification (NMFC) with five cube groupings ▪ Commodity Rates are for a large quantity of product which moves between two locations on a regular basis - Typical for most rail freight today ▪ Exception Rates are special rates to provide prices lower than the prevailing class rates ▪ Special Rates and Services include (see next few slides) - FAK rates, Joint rates, Transit services, Split delivery, etc.

Administrative 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. - The trend towards smaller, more frequent shipments make reduced time in-transit more important. LTL consolidation generally requires multiple stops and longer routes which is not conducive to this trend. ▪ Two groups of techniques (Reactive and Proactive) - 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

Ocean Transportation (continued)

▪ Containerships are among the "greenest" forms of transportation available, putting out fewer emissions than trucks and airplanes. ▪ A typical containership travels an annual distance that is equivalent to three-quarters of the way to the moon and back. ▪ A large containership engine weighs up to 2,300 tons has about 1,000 times more power than a family car. ▪ Large containerships can be operated by teams of just 13 people utilizing sophisticated computer systems. ▪ Traversing the oceans of the world to move cargo can take weeks. Very slow and inflexible. Ocean vessels typically travel at speeds from 20 to 24 knots (23 - 28 miles per hour). ▪ In recent years ships have been "Slow-Steaming" - reducing their speeds to improve fuel efficiency and reduce carbon emissions, but speed is not usually the highest priority as customers are seeking the lowest price, and predictable, reliable delivery. ▪ Inspectors at U.S. ports inspect a mere 5% of all containers that arrive at her border on an annual basis. The same can be said in other countries, as only between 2% and 10% of containers are thought to be physically inspected.

Special Rates and Services (continued)

▪ Diversion and re-consignment allows changing the destination and/or consignee prior to arrival at the original destination ▪ Split delivery is delivering portions of a shipment to multiple destinations (aka, "a milk run") ▪ Product storage services: - Demurrage (rail) charge for holding a railcar for more than 48 hours before unloading - Detention (motor) charge for holding a truck for more than a few hours before unloading

Elements of Ocean Transport Rates

▪ Full Container Load: is a cost per container. ▪ Less than Container Load: is a cost based on whichever is greater, the space in cubic meters or the weight in metric tons ▪ Demurrage: Holding a container at port beyond a certain time limit and incurring a penalty charge such as a daily rent after the free time ends. This is commonly referred to as storage when container is held at a rail yard. ▪ Per Diem: Holding a container off port beyond a certain time limit and incurring a penalty charge such as daily rent after the free time ends. ▪ Fuel: Bunker is the type of fuel burned by vessels. BAF, or Bunker Adjustment Factor, is a per container fee charged by the carriers for this fuel.

Special Rates and Services

▪ Joint Rates can be negotiated if a shipper needs to use a combination of carriers ▪ Transit Services permit shipments to be stopped at an intermediate point between origin and destination for special processing ▪ Freight-All-Kinds (FAK) rates allow a mixture of different products to be transported under a negotiated rating

Pipeline (cont'd)

▪ Lowest per unit cost for transportation - Highest fixed cost of all modes - Lowest variable cost of all modes ▪ Pipelines generally run very slow - 3 - 5 miles per hour. ▪ Pipelines can be located above or below ground. ▪ Areas prone to earthquake require lines to be built with some degree of flexibility ▪ Not flexible. Materials must be liquid, gas, or slurry - Limited in the variety of commodities they can carry. Examples: petroleum, gasoline, drinking water, and natural gas.

Full-Truckload (FTL)- Shipment Characteristics

▪ Max Freight Weight: 45,000 pounds - Entire truck weight cannot exceed 80,000 pounds - Typical tractor weighs 35,000 pounds ▪ Standard trailer: - 53' Long x 8'6" Wide x 9' High - Max Cube Utilization: 3,509 cube - Max Pallets: 60 (assuming 40"L x 48"W x 48"H) Typical Equipment: A. 53' dry van B. 53' reefer C. Day cab

Ocean Transport Entities

▪ Non-Vessel Operating Common Carrier (NVOCC): A company who does not own or operate the carrying ship, but who contracts with a shipping line for the carriage of the goods. ▪ Steamship Line: Asset based company operating the ships with whom both cargo owners (sometimes called BCO - Beneficial Cargo Owner) and NVOCCs contract with for the carriage of goods. - Note, a steamship line cannot handle a LCL (less than container load) booking directly. A Freight Forwarder would need to be involved. ▪ Drayage: Commonly used to mean the short distance transportation of containerized cargo by specialized trucking companies from an ocean port to a rail ramp, warehouse, or other destination. It also refers to the fee for this type of transport.

Ocean Transportation

▪ Ocean transportation is one of the oldest and most convenient methods to move goods across the world. ▪ More than 1.5 million people are employed in the ocean transport industry. ▪ 90% of the world's commodities are carried by cargo ships. ▪ There are approximately 55,000 cargo ships carrying freight around the world. ▪ Cargo ships are technically sophisticated, high value assets which can cost over US $200 million to build. ▪ The operation of cargo ships generates an estimated annual income of over half a trillion US Dollars. ▪ At any given time, there are around 20 million containers that are loaded on cargo ships and sailing the world's oceans.

Transportation Deregulation [1970 to Today] Period of Deregulation

▪ Railroad Revitalization and Regulatory Reform Act of 1976 - Railroads could change rates without ICC approval ▪ Air freight deregulated in 1977 ▪ Motor carriers deregulated in 1980 - to promote competition - Trucking industry's collective rate-making practices were abolished - Individual carriers were given the right to price their services - Restrictions for types of freight and range of services were abolished ▪ Staggers Rail Act of 1980 - deregulated the rail industry - Rail carriers allowed to use selective pricing to meet competition - Carriers were given increased flexibility with respect to surcharges - Contract rate agreements between shippers and carriers were legalized - Rail management given authority to eliminate unprofitable routes.

Air Freight Delivery Options - Domestic Domestic Delivery Options: - Same-day air/next flight out - Next-day air - Second-day air - Deferred air

▪ Same-day air/next flight out: This is the fastest way to ship by air, outside of charter services. Choose this option to deliver goods on the same day they fly. ▪ Next-day air: Next-day air gets time-sensitive freight to its destination by the end of the following business day. ▪ Second-day air: Second-day air is a good balance of speed and cost, and the freight will arrive by the second business day. ▪ Deferred air: This is the most economical shipping option and is optimal for lower priority cargo that can wait to ship until there is space on an aircraft

Administrative Activities: Negotiation

▪ Seeking win-win agreements where both shippers and carriers share transportation consolidation and productivity gains ▪ Collaborative Negotiation: Both parties seek the lowest total logistical cost consistent with the shipper's needed service level (i.e. delivery time)

Transportation Deregulation (continued)

▪ Shipping Act of 1984 - Allowed ocean carriers to pool shipments, assign ports, publish rates, and enter into contracts with shippers ▪ ICC Termination Act of 1995 - The Interstate Commerce Commission (ICC) was eliminated ▪ Ocean Shipping Reform Act of 1998 - Requirement for ocean carriers to file rates ended

Commercial Aircraft

▪ Small shipments can be moved more economically in the cargo area of a passenger plane on pallets or in containers. ▪ Because freight is traveling with passengers, additional restrictions apply. ▪ There are also size and weight limits based on the type of plane, the airline, and whether the goods are shipping locally or internationally.

Intermodal Transportation (continued)

▪ Strongest growth of all modes in the US. Driven by cost reductions, road congestion, and "green" initiatives. ─ Transit times are becoming more competitive with truckload ─ Rate Structure: Flat (door to door) ▪ Common forms of intermodal transport: - Rail and Motor Carriers (i.e., trucks) - Rail and Water Carriers - Roll-on/Roll-off Ships

Rail (continued)

▪ There are over 140,000 miles of railroad track in the US (the equivalent of 5.6 trips around the earth) ▪ Rail has high fixed costs and low variable costs ▪ Aging infrastructure and equipment are an issue. ▪ Rail companies use each other's rail cars. ✓ Keeping track of rail cars and getting them where needed can be problematic. ▪ Rail is paired with trucks for door-to-door delivery. ✓ As a result, rail carriers have begun purchasing motor carriers and can now offer point-to-point pickup and delivery service.

Truck (i.e., Motor Carrier)

▪ Truck transportation accounts for 29% of the total ton-miles (a unit of measurement where one ton of freight moves one mile) ▪ And 65% of total transportation spend - Because trucks tend to haul higher-value consumer goods ▪ Most flexible mode of transportation ▪ Touches > 80% of U.S. freight volume - Because of interaction with other transportation modes to and from ports and warehouses. ▪ Carries nearly anything from packaged household goods, to building materials, to liquid petroleum, etc. up to 45,000 lbs max.

Truck (i.e., Motor Carrier) (continued)

▪ Trucks excel in time-sensitive delivery over short distances and compete with Rail and Air for short-to-medium hauls. - Short Haul = 0 - 200 miles from the driver's home terminal - Long Haul = over 200 miles from the driver's home terminal ▪ There are approximately 15.7 million trucks operating in the US. ▪ A truck's engine is six times bigger than a car engine and, can go up to one million miles. ▪ Truckers use up to 50 billion gallons of gas each year, which accounts for about 13% of the nation's fuel consumption. ▪ The trucking industry is heavily impacted by both the truck driver shortage and the Hour-of-Service rules

Water

▪ Water is the oldest form of transportation in the US ▪ Accounts for approximately 4% of US freight by ton-mile, and approximately 5% of total transportation spend. ▪ Includes ocean as well as inland waterways, but only those that are navigable. ▪ It is inexpensive and economical. Ranks between rail and truck in fixed cost. ▪ Water transport competes with rail and pipeline for some cargo shipments. ▪ However, because transport by water is so cheap almost any item may be shipped by water including: automobiles, produce, containerized cargo, etc. ▪ Paired with trucks for door-to-door delivery.