Business Logistics and Transportation Ch. 8 (McLaury)

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.

Transport Participants

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

Truck (i.e., Motor Carrier)

-Most flexible mode of transportation -Touches > 80% of U.S. freight volume 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 Key benefits of motor carriers include: -Speed of transit -Ability to operate door-to-door

Transportation Administrative Activities

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

Transportation Security - Recent Concern

-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.

Rail

-Slowest mode of transportation -Least flexible, but has the most capability -Lowest cost mode of transportation Competes for transportation volume when the: -distance is long -shipments are heavy or bulky Rail has high fixed costs and low variable costs. Rail is the leading form of transportation for shipments of 750 to 2,000 miles. New technologies include: -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 -Unit Trains: a train transporting a single commodity -Double-stack Cars: a form of transport where intermodal containers are stacked two high on railroad cars The most obvious advantage of rail over trucking is being less harmful to the environment. Rail transportation experienced a business downtime starting in the 1980s, but it seems like rail is making a major comeback. Railroads don't face many of the risks common to other industries: -no foreign competition -lack of domestic rivals due to huge cost of laying and maintaining tracks -little threat from new technology -neither product cycles that lead to sharp earnings volatility nor retail-oriented brand names that are vulnerable to shifting consumer sentiment According to the Association of American Railroads, the rate of accidents on railroads decreased by 23% since 1980. 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.

Shippers often choose air freight as their transportation method for a couple of key reasons:

-Speed -Reliability -Lower inventory carrying costs -Opportunity to capture market share

Air freight is typically handled by three different categories of aircraft:

1. Cargo Aircraft 2. Commercial Aircraft 3. Air Charter Services

Four Transportation Company Classifications

1. Contract Carriers 2. Common Carriers 3. Private Carriers 4. Exempt Carriers

Economic Drivers Influence Rates

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

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

Two Fundamental Transport Principles

1. Economies of Scale 2. Economies of Distance

Three factors determine the Base Rate:

1. How much are you shipping? -TL -LTL 2. What are you shipping? -Determines freight class 3. How far are you shipping from origin to destination? -Determines rate table

Two Elements of Transportation Functionality

1. Product Movement 2. Product Storage

Inland Waterways

1. Rivers 2. Lakes 3. Canals 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. 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.

Three Objectives of Transportation

1. To maximize the value of the company through price negotiations 2. To make sure service is provided effectively 3. To satisfy customers' needs

Transportation Structure

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)

Net-Rate Pricing Strategy

A simplified pricing format made possible by deregulation. Established discounts and accessorial charges are rolled into one all-inclusive price.

Parcel

Accounts for approximately 10% of total US freight spend. Parcel Shipments are usually packages that weigh < 150 lbs. Examples: -FedEx -UPS

FTL Advantages/Disadvantages

Advantages: -Best way to transport large shipments -Ideal for high-risk or delicate freight shipments -Considerably faster than LTL Disadvantages: -Costs more than LTL -Fewer options available

LTL Advantages/Disadvantages

Advantages: -Can be cost-effective -There are more available carrier options -Ideal for small businesses Disadvantages: -Increased risk of theft or damage -Increased shopping times and delays

Electronic Logging Devices (ELDs)

An ELD is technology that automatically records a driver's driving time and other aspects of the hours-of-service (HOS) records.

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. Owner operator: Person who owns his/her own tractor and is responsible for the maintenance and upkeep of his/her tractor. Non-asset based: 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.

Auditing and Claims Administration

Auditing and claims administration is needed when services are not performed as promised. Auditing: Checking freight bills to ensure accuracy. Claims can be: -Loss and damage resulting from poor performance -Overcharge/undercharge when amount billed is different from expected

Value-of-Service Strategy

Based on value as perceived by the shipper rather than the carrier.

Commercial Aircraft

Because freight is traveling with passengers, additional restrictions apply.

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.

Documentation

Bill of Lading (BOL): The basic document utilized in purchasing transport services. Freight Bill: Represents a carrier's method of charging for transportation services rendered. Shipment Manifest: Lists the individual stops or consignees when multiple shipments are placed on a single vehicle.

Cargo Aircraft

Cargo planes are specifically designed to move freight.

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

Rates and Rating Mechanics

Classification: The grouping of similar products into uniform classes that are assigned a rating. Class Rates: The price in dollars and cents per hundredweight to move a specific product (i.e., class) between two locations. Rate Determination: 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: For a large quantity of product which moves between two locations on a regular basis. Exception Rates: Special rates to provide prices lower than the prevailing class rates. Special Rates and Services: Include FAK rates, Joint rates, Transity services, Split delivery, etc.

Consolidation

Consolidation is combining LTL or parcel shipments moving to a general location. Two groups of techniques: 1. Reactive: Does not attempt to influence composition and timing of transportation movements, but reacts to shipments as they come. 2. Proactive: Includes preorder planning of quantity and timing with the shipper to facilitate consolidated freight movement.

Weight

Cost per pound decreases as weight increases until the carrier vehicle is full.

Interstate Commerce Act of 1887

Created the Interstate Commerce Commission (ICC).

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. Multiple Zone Pricing: Seller charges different prices for different geographic areas. Base Point Pricing: Final delivered price is determined by the product's list price plus transportation cost from a designated base point.

Density

Density is the combination of weight and volume. Cost per unit of weight declines as product density increases.

The transfer of inventory consumes time, money, and environmental resources. How is freight time-sensitive?

Examples: fresh food 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.

Air Charter Services

Exclusive use of a plane with direct service to the destination.

Air Freight Delivery Options - International

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.

Pricing Fundamentals of F.O.B. 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. The seller assumes the risk for in-transit loss or damage.

Fixed Costs

Fixed costs must be paid even when the carrier is not operating its equipment. Fixed costs are not influenced by shipment volume.

Non-Operating Intermediaries

Freight Forwarders: Companies that arrange storage and shipping of merchandise on behalf of their customers. Shipping Association: Groups of shippers who employ an agent to consolidate purchases and shipments for them. 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.

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.

Motor Carrier Types

General Freight Carriers: A trucking company which handles a wide variety of commodities in standard trailers. Freight is generally palletized. 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.

Air

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.

Handling

Handling some products may require special equipment.

Common Costs

Incurred on behalf of all or a select group of shippers.

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. Benefits include: -Lower costs -Environmentally friendly -Reliability, capacity, and safety advantages Strongest growth of all modes in the US. Driven by cost reductions, road congestion, and "green" initiatives. 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).

Water

It is inexpensive and economical. Ranks between rail and truck in fixed cost. 90% of the world's commodities are carried by cargo ships. Containerships are among the "greenest" forms of transportation available, putting out fewer emissions than trucks and airplanes. Traversing the oceans of the world to move cargo can take weeks. Very slow and inflexible. 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.

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. Diversion (and re-consignment): Allows changing the destination and/or consignee prior to arrival at the original destination. Split delivery: 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

Joint Costs

Joint costs are unavoidably created by the decision to provide a particular service. 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.

Operational Management

Key elements: -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)

Liability

Liability includes product characteristics that can result in damage. Carriers must pay for liability insurance or accept financial responsibility.

Pipeline

Line of pipe equipped with pumps and valves and other control devices for moving liquids, gases, and slurries (fine particles suspended in liquid). Most reliable form of transportation. Little maintenance needed once the pipeline is running. Lowest per unit cost for transportation. Pipelines generally run very slow. Non flexible. Materials must be liquid, gas, or slurry.

Market Factors

Market factors such as lane volume and balance influence transportation cost.

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. 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.

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

Air Freight Shipments

Paired with trucks for door-to-door delivery.

Exempt Carriers

Person or company specializing in services or transporting commodities exempt from regulation by the Interstate Commerce Act.

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.

Contract Carriers

Person or company who transports freight under contract to one or a limited number of suppliers.

Regulation Pros/Cons

Pros: -Tends to assure adequate transportation service throughout the country. -Protects consumers from monopoly pricing, safety, and liability. Cons: -Discourages competition. -Does not allow prices to adjust based on demand or by negotiation.

Distance

Rate of cost decreases and distance increases. This is called the tapering principle.

Regulation vs. Deregulation

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.

Control

Responsibilities include: -Tracing: Procedure to locate lost or late shipments. -Expediting: Involves the shipper notifying carrier that it needs a specific shipment to move quickly and with no delays. -Tracking: Drives Hours of Service (HOS) to comply with federal regulations.

Air Freight Delivery Options - Domestic

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

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).

Economic Regulation

Seeks to make transportation equally accessible and economical to all without discrimination.

Combination Strategy

Set at a value between cost-of-service minimum and value-of-service maximum.

Stowability

Stowability is how product dimensions fit into transportation equipment. Odd package shapes and sizes can waste cubic capacity.

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.

Social Regulation

Takes measures to protect public safety and the environment.

Forms of Ocean Transportation

Tankers: specially designed to carry oil, petrol and such other liquids and have a large capacity. Tramps: ships which have no fixed routes, and no set rules or rate schedule. Usually, they do not sail till they have full cargo. More suitable to carry seasonal and bulky goods. Liners: ships which have regular fixed routes, time and charges.

ICC Termination Act of 1995

The Interstate Commerce Commission (ICC) was eliminated.

Cost-of-Service Strategy

The carrier estimates the cost of providing the service and then adds on a percent profit margin.

Economies of Distance

The cost per unit decreases as distance increases. Also known as the tapering principle.

Economies of Scale

The cost per unit decreases as the size of the shipment increases. Economic Density is used to describe benefits to carriers of having certain heavily used routes that are full, or dense, with traffic.

What is Transportation?

The function of planning, scheduling, and controlling activities related to the mode, carrier, and movement of inventories into and out of an organization.

Truck Driver Shortage

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.

Product Movement

The transfer of inventory to specified destinations. Two important aspects to consider during the transfer of inventory are: 1. Restrictive element - in-transit inventory is "captive", meaning that it is typically inaccessible during transportation. 2. Flexible element - inventory can be diverted during shipment, to a new destination if necessary. The term used to describe when a shipment destination is changed after a product is already in route is called a Diversion.

Full-Truckload (FTL)

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. -Rate structure - can be flat rate or cost per mile

Less-Than-Truckload (LTL)

The transportation of relatively small freight which does not require the space of an entire truck. LTL carriers operate on the basis of sharing the trailers' capacity among multiple shippers.

LTL Freight Class and Rates

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: 1. Density: Space in relation to its weight 2. Stowing: Ability to load other freight in the same trailer 3. Handling: How difficult it is to actually handle the freight 4. Liability (value and risk): Potential claims for damage or loss

Pricing Practices

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.

Costing Elements

Transportation costs are both Fixed and Variable. 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.

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.

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.