Chapter 5: Transportation

Chapter 5: Transportation

Overview of the transportation function and it’s importance to logistics. Efficient transporting system are

the hallmark of industrialized societies.

PART 1: Introduction

Transportation Provides Value-Added through Place and Time Utility

Place Utility: The value added to the product when product is moved from they are produced to where they are needed

Time Utility: Determines how fast and how consistently a product moves from one point to another

Transportation is the Largest Logistics Cost

• Transportation is one of the largest logistics costs

• The efficient management of transportation becomes more important to a firm as inbound and outbound transportation’s share of product cost increases


Factors Influencing Transportation Costs and Pricing

Can be grouped into 2 major categories:

Product Related Factors Market Related Factors


• Product-related factors

1. Density refers to a product’s weight-to-volume

ratio Items such as steel, canned food, building

product and bulk paper have high weight-to-volume ratios

Electronics, clothing, luggage and toys have low weight-to-volume ratios

Low density product (low weight-to-volume ratios) tend to cost more to transport on a per pound (kilo) basis than high-density product


2. Stowability

Degree to which a product can fill the available space in a transport vehicle

Example; grain, ore and petroleum product in bulk have excellent stow-ability because they can completely fill the container

Automobiles and machinery do not have good stow-ability or cube utilization

A product’s stow-ability depends on its size, shape, fragility and other physical characteristics


3. Ease or Difficulty of Handling

Difficult to handle items are more costly to transport

Product that are uniform in their physical characteristics that can be manipulated with material handling equipment require less handling expense and are therefore less costly to transport


4. Liability

Product that have high value-to-weight ratios are easily damaged and are subject to higher rates of theft or pilferage, cost more to transport


• Market-Related Factors

Location of markets which determines the distance goods must be transported

Nature and extent of government regulation of transport carriers

Balance or imbalance of freight traffic into and out of a market

Seasonality of product movements Whether the product is transported

domestically and internationally


Part 2: Carrier Characteristics and Services

Air

PipelineWater

Motor Rail

Third Party

Small Packag

e Carrier

Intermodal Services

5 transportation modes may be selected to transport products

1. Motor

• Motor carriage offer fast, reliable service with little damage or loss in transit. Most consumer goods are transported by motor carrier.

• Domestically, motor carriers compete with air for small shipments (pickup & delivery operation~point to point services) for 500miles or less and rail for large shipments

• Compete with railroads for truckload (TL) shipment that are transported 500 miles or more


• Motor carriers are very flexible and versatile

Flexible can offer point-to-point service between almost any origin-destination combination (network of over 4million miles of roads)

Versatile motor can transport products of varying sizes and weights over any distance


2. Rail

• Rail transport costs less than air motor carriage

• Lacks the versatility and flexibility of motor carriers because it is limited to fixed track facilities

• Provide terminal-to-terminal service rather than point-to-point service unless companies have a rail siding at their facility


• Disadvantages in terms of transit time and frequency of service if compared to motor carriers

• Some of this rail disadvantages may be overcome through the use of trailer-on-flatcar (TOFC) or container-on-flatcar (COFC) service (rail or water movements combined with the flexibility of trucking)

• Trailer-on-flatcar (TOFC) or container-on-flatcar (COFC) service offer the economy of rail and water movements combined with the flexibility of trucking

• Refer as piggyback services that would a benefit to logistics transportation


3. Air• Most view as a premium service because of

its higher cost• Offers the quickest time-in-transit of any

transport mode• Air carriers generally handle high-value

products • usually cannot be cost-justified for low-value

items, because the high price of air freight would represent too large a percentage of the product cost

• Air transport provides reliable service and rapid time-in-transit, but terminal and delivery delays and congestion may appreciably reduce some of this advantage.


4. Water

• can be broken down into several distinct categories:

1) inland water way, such as rivers and canals

2) lakes3) coastal and intercostals ocean 4) international deep sea


4. Water (cont’d)

• limited in their movement by the availability of lakes, rivers, canals, or intercostals waterways

• Generally, water is the dominant mode in international shipping

• the most inexpensive method of shipping high-bulk, low-value commodities

• The development of very large crude carriers (VLCCs), or supertankers, has enabled marine shipping to assume a vital role in the transport of petroleum between oil-producing and oil-consuming countries


5. Pipeline

• transport only a limited number of product, including natural gas, crude oil, petroleum products, water, chemicals, and slurry products

• Pipeline offer the shipper an extremely high level of service dependability at a relatively low cost


5. Pipeline (cont’d)

• Pipelines are able to deliver their product on time because of the following factors;1. The flows of products within the pipeline

are monitored and controlled by computer2. Losses and damages due to pipeline leaks

or breaks are extremely rare3. Climatic conditions have minimal effects

on product moving in pipeline4. Pipelines are not labor-intensive;

Therefore, strikes or employee absences have little effect on their operation


6. Third Parties

• Third parties are companies that provide linkages between shippers and carriers

• There are several type of third parties, including; transportation brokers freight forwarders (domestic and foreign) shippers’ associations inter-modal marketing companies

(shippers’ agents) third-party logistics service providers.


• Transportation Brokers companies that provide service to both

shippers and carriers and arranging and coordinating the transportation of products

• Freight forwarders Purchase transport services from various

carriers, although in some instances they own the equipment themselves

Consolidate small shipments from a number of shippers into large shipments moving into a certain region at a lower rates


Differences between a freight forwarder and a transportation broker

FREIGHT FORWARDER TRANSPORTATION BROKER

is the shipper to a carrier and the carrier to shipper

an intermediary between the two

Can arrange for transportation of freight by any mode

only by motor carrier

exempt from federal government oversight

must be licensed by the surface transportation board

primarily liable to a shipper for cargo loss and damage

is not usually liable for cargo loss and damage


• Shipper’s Association

Can be defined as a nonprofit cooperative that consolidates small shipments into truckload freight for member companies

Primarily utilize motor and rail carriers for transport

Because small shipment are much more expensive to transport (on a per pound or per unit basis) than large shipments, companies band together to lower their transportation cost through consolidation of many small shipment into one or more larger shipments


• Inter-modal Marketing Companies (or Shipper’s Agents)

Act much like shippers and are important intermodal link between shippers and carriers

Specialize in providing piggyback services to shippers


7. Small-Package Carriers

• Parcel Post

• provides both surface and air parcel post services

• to companies shipping small packages • The advantages of parcel post;

low cost wide geographical coverage, both

domestically and internationally


7. Small-Package Carriers

• Parcel Post

• Disadvantages include specific size and weight limitations, variability in transit time higher loss and damage ratios than

other forms of shipment inconvenience because packages must

be prepaid and deposited at a postal facility


• Air Express Companies

to transport product quickly and with very high levels of consistency

the air express industry is able to offer overnight (or second day) delivery of small parcels to many locations throughout the world

Example: FedEx, UPS, TNT worldwide, Airborne Express, and DHL Airways


8. Inter-modal Services

• Piggyback (TOFC/COFC) a motor carrier trailer or a container is

placed on a rail flatcar and transported from one terminal to another

Axles can be placed under the containers, so they can be delivered by a truck

At the terminal facilities, motor carriers perform the pickup and delivery functions

Piggyback service thus combines the low cost of long-haul rail movement with the flexibility and convenience of truck movement


• Roadrailers

combined motor and rail transport in a single piece of equipment

the trailer has both rubber truck tires and steel rails wheels

Over highways, tractor power units transport the trailers in the normal way, but instead of placing the trailer on a flatcar for rail movement,the wheels of the trailer are retractedand the trailer rides directly on the

rail tracks


• The advantages : a) rail flatcars are not requiredb) the switching time to change wheels

on the trailer is less than loading and unloading the trailer from the flatcar

• The disadvantages : a) the added weight of the rail wheels

reduces fuel efficiencyb) higher movement costs in addition to

the higher cost of equipment

• The disadvantages have tended to outweight the advantages, resulting in very low usage of this intermodal option


• International freight transportation must aware of the services, costs and availability of

transport mode.

• Factors that nee/d to be identified for global transportation is:

1) taxes and subsidies2) regulations and government ownership

of carriers 3) geography and availability

• Global transportation costs will definitely cost more domestics due to longer distances, administrative requirements and related paperwork.

Part 3: Global Issues

There are 3 basic forms of international intermodal distribution:

•Landbridge

• It is a service in which foreign cargo crosses a country en route to another country

• For example, European cargo en route to Japan may be shipped by ocean to the East coast of the United States, then moved by rail to the west Coast, and from there shipped by ocean to Japan



•Landbridge



• Minilandbridge (MLB)

• It is a special case of landbridge, where foreign cargo originates or terminates at a point within the same country



• Minilandbridge (MLB)


• Microbridge

• In contrast with minibridge, this service provides door-to-door rather than port-to-port transportation

• The big advantage of microbridge is that it provides a combined rate, including rail and ocean transportation, in single tariff that is lower than the sum of the separate rates


• Microbridge


• Rates and Rate Determination

• Categories of Rates

Line-Haul rates which are charged for the movement of

goods between 2 points that are not in the same local pickup and delivery area

Accessorial charges which cover all other payment made to

carriers for transporting, handling or servicing a shipment

Part 4: Carrier Pricing and Related Issues

• Rates and Rate Determination

• Line-Haul rates

Class rates

Reduce the number of transportation rates required by grouping product into classes for pricing purposes

A basic rate would be Class 100, higher number =more expensive rate and lower number= less expensive rate


• Line-Haul rates

Exception rates

Provide the rate lower than the published class rate

This type of rate was introduce in order to provide a special rate for a specific area, origin-destination or commodity when competition or volume justified the lower rate


• Line-Haul rates

Commodity rates

Apply when a large quantity of a product is shipped between two locations on a regular basis

These rate are published on a point-to-point basis without regard to product classification


• Line-Haul rates

Contract rates

Rate that apply in special circumstances Example: contract rates are those

negotiated between a shipper and carrier. Formalized through a written contractual

agreement


• Line-Haul rates

Freight-all-kinds

The product shipped can be any type The carrier provides the shipper with the

rate per shipment based on the weight of the product being shipped

Popular with companies such as the wholesalers and manufacturers


• FOB Pricing (Free On Board)

If a seller quotes a delivered price to the buyer’s retail store location, the total price includes not only the cost of the product, but the cost of moving the product to retail store

FOB specifies which party (buyer or seller) pays for which shipment and loading costs, and/or where responsibility for the goods is transferred


• FOB Pricing (Free On Board)

Term of sale and responsibilities of FOB:1)Freight collect point- Buyers pay, bear charges, own & file claims

2)Freight allowed point -Seller pay, bear charges, Buyers own & file claims

3)Freight prepaid & charged back- Seller pay, bear charges, buyer own & file claims

4)Freight collect destination -buyer pay, bear charges, seller own & file claims

5)Freight prepaid destination- Seller pay, bear charges, own & file claims

6)Freight collect & allowed -Buyer pay, Seller bear charges, own & file claims


• Why FOB terms are important?

The buyer knows the final delivered price prior to the purchase

The buyer does not have to manage the transportation activity involved in getting the product from the seller’s location to the buyer’s.

The buyer typically will not control the transportation decision, so it is possible that a mode or carrier could be selected by the seller that might be disadvantages to the buyer (e.g., due to poor service levels provided by the mode/carrier)


• Delivered Pricing

1) Zone Pricing

A method that categorizes geographic areas into zones

Each zone will have particular delivery cost associated with it

The closer the zone to the seller the lower the delivery cost

The farther away the higher the delivery charge


2) Basing-Point Pricing

The seller selects one or more locations that serve as point of origin

The buyer will pay delivery costs from that point to the buyer’s location

The seller often use a manufacturing plant, distribution center, port, free trade zone as a basing point


• Quantity Discount

Cumulative• Provide price reductions to the buyer based

on the amount of purchases over some prescribed period of time

Non-cumulative quantity discount• Are applied to each order and do not

accumulate over a time period


• Allowances

Seller will provide price reductions to buyer that perform some of the delivery function

If buyer is willing to assume some of the delivery functions, the seller will often provide some allowances/ price reduction to buyer

The most common allowances are provided for customer pickup of the product or unloading of the carrier vehicle upon delivery at the customer’s location


• Pricing and Negotiation

The goal of the negotiation process is to develop an agreement that is mutual beneficial, recognizes the needs of the parties involved and motivates them to perform

Because most negotiation are based on cost-of-service pricing, carriers should have precise measures of their costs

Only when all costs are considered can carriers and shippers work together to reduce the carriers cost base


Efficient transportation systems are the hallmark of industrialized society that moves product arrive on time, undamaged and in the quantities required.

a)Describe in your own words the function of transportation in logistics system.(3 marks)

b)Briefly discuss the two factors that can influence transportation cost and pricing(9 marks)

c) From your opinion, which type of carrier services would you prefer for your organization? State your reason.(3 marks)

Question 1

Transportation moves products to markets that are geographically separated and provides added value to customers when the products arrive, creating place utility and contributing time utility.

a)Briefly explain in detail the 5 transportation characteristics and provide example to support your explanation (7 marks)

b)Describe in your own words the concept, advantages and disadvantages of roadrailers (5 marks)

c) From your opinion, which third parties services would you prefer for your organization for a single mode large shipment transportation? State your reason. (3 marks)

Question 2

The most important transportation characteristics affecting customer service levels are dependability, time-in-transit, market coverage, flexibility and loss/damage performance.

a)Discuss the carrier services that may be selected to transport products.(9 marks)

b)Describe the advantages of pipeline carrier characteristics. (3 marks)

c) Selangor Bangi Company is a company in Bangi producing A4 paper for office usage. As a logistics advisor which is the best transportation method to deliver the A4 paper to domestics market (3 marks)

Question 3

International freight transportation costs represent a much higher fraction of merchandise value than domestic transportation cost due to longer distances involved, administrative requirement and all related paperwork.

a)Briefly discuss the basic forms of international intermodal distribution. (6 marks)

b)Describe in your own words the variations of delivery pricing system. (6 marks)

c) From your opinion, what are the factors need to be identified for global transportation? State your reason. (3 marks)

Question 4

Transportation pricing involves how rates are developed in general and how specific rates are determined by a carrier to transport a shipment between an origin and destination point.

a)Briefly discuss the Line-Haul rate categories that can be assessed by carriers. (9 marks)

b)Describe in your own words the concept of quantity discount and allowances to identify the differences. (3 marks)

c) From your opinion, which inter-modal services would you prefer for your organization? State your reason. (3 marks)

Question 5

Chapter 5: Transportation

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Transcript of Chapter 5: Transportation