Transportation

Chapter 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

Introduction

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

Introduction

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

Introduction

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

Introduction

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

Introduction

• Market-Related Factors

Location of markets which determines the distance goods must be transported

Nature and extent of government regulation of transport carriers

Seasonality of product movements Whether the product is transported

domestically and internationally

Chapter 2: Carrier Characteristics and Services

5 transportation modes may be selected to transport products

Air

PipelineWater

Motor Rail

Third PartySmall

Package

Carrier

Intermodal Services

1. Motor

• Motor carriage offer fast, reliable service with little damage or loss in transit

• Domestically, motor carriers compete with air for small shipments 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)

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 and 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 frequent and 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 service from various

carriers, although in some instances they own the equipment themselves

can be classified as domestics or international, depending on whether they specialize in shipments within a country or between countries

Chapter 2: Carrier Characteristics and Services

Differences between a freight forwarder and a transportation broker

FREIGHT FORWARDER TRANSPORTATION BROKERis 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)

Specialize in providing piggyback services to shippers

They purchase large quantities of TOFC/COFC services at discount and resell them in smaller quantities

7. Small-Package Carriers

• Parcel Post

• provides both surface and air parcel post services to companies shipping small packages

• The advantages of parcel post are low cost and wide geographical coverage, both domestically and internationally

• Disadvantage include specific size and weight limitations, variability in transit time, higher loss and damage ratios than other forms of shipment, and 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

• Because some firms need to transport certain products quickly, 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 retracted and the trailer rides directly on the rail tracks

• The advantages of this intermodal form of transport are that rail flatcars are not required and that the switching time to change wheels on the trailer is less than loading and unloading the trailer from the flatcar

• The disadvantages of roadrailes are the added weight of the rail wheels, which reduces fuel efficiency and results in higher movement costs in addition to the higher cost of equipment

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

Chapter 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

Chapter 3: Global Issues

There are 3 basic forms of international intermodal distribution:

• Minilandbridge (MLB)

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

• 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

Chapter 4: Carrier Pricing and Related Issues

• 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

• 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 The carrier provides the shipper with the

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

• FOB Pricing

• 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

• 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

• 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

• 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