TRANSPORTATION ECONOMICS

Transportation economics are driven by seven factors. While not direct components of transport tariffs,

each factor influences rates. The factors are: (1) distance, (2) weight, (3) density, (4) stowability, (5)

handling, (6) liability, and (7) market. The following discusses the relative importance of each factor

from a shipper’s perspective. Keep in mind that the precise impact of each factor varies, depending on

specific market and product characteristics.

Distance

Distance is a major influence on transportation cost since it directly contributes to variable expense,

such as labor, fuel, and maintenance. Figure 9.1 illustrates the general relationship between distance

and transportation cost. Two important points are illustrated. First, the cost curve does not begin at

zero because there are fixed costs associated with shipment pickup and delivery regardless of

distance. Second, the cost curve increases at a decreasing rate as a function of distance. This

characteristic is known as the tapering principle.

Weight

The second factor is load weight. As with other logistics activities, scale economies exist for most

transportation movements. This relationship, illustrated in Figure 9.2 , indicates that transport cost per

unit of weight decreases as load size increases. This occurs because the fixed costs of pickup, delivery,

and administration are spread over incremental weight. This relationship is limited by the size of the

transportation vehicle. Once the vehicle is full, the relationship begins again with each additional

vehicle. The managerial implication is that small loads should be consolidated into larger loads to

maximize scale economies.

Density

A third factor is product density. Density is the combination of weight and volume. Weight and volume

are important since transportation cost for any movement is usually quoted in dollars per unit of

weight. Transport charges are commonly quoted per hundredweight (CWT). In terms of weight and

volume, vehicles are typically more constrained by cubic capacity than by weight. Since actual vehicle,

labor, and fuel expenses are not dramatically influenced by weight, higher-density products allow fixed

transport cost to be spread across more weight. As a result, higher density products are typically

assessed lower transport cost per unit of weight. Figure 9.3 illustrates the relationship of declining

transportation cost per unit of weight as product density increases. In general, traffic managers seek to

improve product density so that trailer cubic capacity can be fully utilized.

Stowability

Stowability refers to how product dimensions fit into transportation equipment. Odd package sizes and

shapes, as well as excessive size or length, may not fit well in transportation equipment, resulting in

wasted cubic capacity. Although density and stowability are similar, it is possible to have items with

similar densities that stow very differently. Items having rectangular shapes are much easier to stow

than odd-shaped items. For example, while steel blocks and rods may have the same physical density,

rods are more difficult to stow than blocks because of their length and shape. Stowability is also

influenced by other aspects of size, since large numbers of items may be nested in shipments

whereas they may be difficult to stow in small quantities. For example, it is possible to accomplish

significant nesting for a truckload of trash cans while a single can is difficult to stow.

Handling

Special handling equipment may be required to load and unload trucks, railcars, or ships. In addition to

special handling equipment, the manner in which products are physically grouped together in boxes or

on pallets for transport and storage will impact handling cost.

Liability

Liability includes product characteristics that can result in damage. Carriers must either have

insurance to protect against potential damage or accept financial responsibility. Shippers can reduce

their risk, and ultimately transportation cost, by improved packaging or reducing susceptibility to loss

or damage.

Market

Finally, market factors such as lane volume and balance influence transportation cost. A transport

lane refers to movements between origin and destination points. Since transportation vehicles and

drivers typically return to their origin, either they must find a back- haul load or the vehicle is

returned or deadheaded empty. When empty return movements occur, labor, fuel, and maintenance

costs must be charged against the original front-haul movement. Thus, the ideal situation is to achieve

two-way or balanced movement of loads. However, this is rarely the case because of demand

imbalances in manufacturing and consumption locations. For example, many goods are manufactured

and processed in the eastern United States and then shipped to consumer markets in the western

portion of the country. This results in an imbalance in volume moving between the two geographical

areas. Such imbalance causes rates to be generally lower for eastbound moves. Movement balance is

also influenced by seasonality, such as the movement of fruits and vegetables to coincide with growing

seasons. Demand location and seasonality result in transport rates that change with direction and

season. Logistics system design must take such factors into account to achieve back-haul economies

whenever possible.

TRANSPORTATION COSTING

The second dimension of transport economics and pricing concerns the criteria used to allocate cost.

Cost allocation is primarily a carrier concern, but since cost structure influences negotiating ability, the

shipper’s perspective is important as well. Transportation costs are classified into a number of

categories.

Variable

Costs that change in a predictable, direct manner in relation to some level of activity are labeled

variable costs. Variable costs in transportation can be avoided only by not operating the vehicle. Aside

from exceptional circumstances, transport rates must at least cover variable cost. The variable

category includes direct carrier cost associated with movement of each load. These expenses are

generally measured as a cost per mile or per unit of weight. Typical variable cost components include

labor, fuel, and maintenance. The variable cost of operations represents the minimum amount a

carrier must charge to pay daily expenses. It is not possible for any carrier to charge customers a rate

below its variable cost and expect to remain in business long.

Fixed

Expenses that do not change in the short run and must be paid even when a company is not operating,

such as during a holiday or a strike, are fixed costs. The fixed category includes costs not directly

influenced by shipment volume. For transportation firms, fixed components include vehicles, terminals,

rights-of-way, information systems, and support equipment. In the short term, expenses associated

with fixed assets must be covered by contribution above variable costs on a per shipment basis.

Joint

Expenses created by the decision to provide a particular service are called joint costs. 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 to point A. Either the joint cost must be covered by the original

shipper from A to B or a back-haul shipper must be found. Joint costs have significant impact on

transportation charges because carrier quotations must include implied joint costs based on

assessment of back-haul recovery.

Common

This category includes carrier costs that are incurred on behalf of all or selected shippers. Common

costs, such as terminal or management expenses, are characterized as overhead. These are often

allocated to a shipper according to a level of activity like the number of shipments or delivery

appointments handled. However, allocating overhead in this manner may incorrectly assign costs. For

example, a shipper may be charged for delivery appointments when not actually using the service.

CARRIER PRICING STRATEGY

When setting rates, carriers typically follow one or a combination of two strategies. Although it is

possible to employ a single strategy, the combination approach considers trade-offs between cost of

service incurred by the carrier and value of service to the shipper.

Cost-of-Service

The cost-of-service strategy is a buildup approach where the carrier establishes a rate based on the

cost of providing the service plus a profit margin. For example, if the cost of providing a transportation

service is $200 and the profit markup is 10 percent, the carrier would charge the shipper $220. The

cost-of-service approach, which represents the base or minimum for transportation charges, is most

commonly used as a pricing approach for low-value goods or in highly competitive situations.

Value-of-Service

An alternative strategy that charges a price based on value as perceived by the shipper rather than

the carrier cost of actually providing the service is called value-of-service. For example, a shipper

perceives transporting 1000 pounds of electronics equipment as more critical or valuable than 1000

pounds of coal, since electronics are worth substantially more than the coal. Therefore, a shipper is

probably willing to pay more for transportation. Carriers tend to utilize value-of-service pricing for high-

value goods or when limited competition exists.

Value-of-service pricing is illustrated in the premium overnight freight market. When FedEx first

introduced overnight delivery, there were few competitors that could provide comparable service, so it

was perceived by shippers as a high-value alternative. They were willing to pay a premium for

overnight delivery of a single package. Once competitors such as UPS, and the United States Postal

Service entered the market, overnight rates were discounted to levels reflecting the value and cost of

this service.

Combination

A combination pricing strategy establishes the transport price at an intermediate level between the

cost-of-service minimum and the value-of-service maximum. In practice, most transportation firms use

managerially determined midrange pricing. Logistics managers must understand the range of prices

and the alternative strategies so they can negotiate appropriately.

Net-Rate

By taking advantage of regulatory freedom generated by the Trucking Industry Regulatory Reform

Act (TIRRA) of 1994 and the reduced applicability of the filed rate doctrine, a number of common

carriers are experimenting with a simplified pricing format termed net-rate pricing. Since TIRRA

eliminated tariff filing requirements for motor carriers that set rates individually with customers,

carriers are now, in effect, able to simplify pricing to fit an individual customer’s circumstance and

need. Specifically, carriers can replace individual discount sheets and class tariffs with a simplified

price sheet. The net-rate pricing approach does away with the complex and administratively

burdensome discount pricing structures that became common practice following initial deregulation.

Established discounts and accessorial charges are built into net rates. In other words, the net rate is

an all-inclusive price. The goal is to drastically reduce a carrier’s administrative cost and directly

respond to customer demand to simplify the pricing process. Shippers are attracted to such

simplification because it promotes billing accuracy and provides a clear understanding of how to

generate savings in transportation.

TRANSPORTATION RATES

The previous discussion introduced key strategies used by carriers to set prices. This section presents

the traditional pricing mechanics used by carriers. This discussion applies specifically to common

carriers, although contract carriers follow a similar approach.

Class Rates

In transportation terminology, the price in dollars and cents per hundredweight to move a specific

product between two locations is referred to as the rate. The rate is listed on pricing sheets or on

computer files known as tariffs. The term class rate evolved from the fact that all products

transported by common carriers are classified for pricing purposes. Any product legally transported in

interstate commerce can be shipped via class rates.

Determination of common carrier class rates is a two-step process. The first step is to determine

the classification or grouping of the product being transported. The second step is the determination

of the precise rate or price based on the classification of the product, weight, and the

origin/destination points of the shipment.

Classification

All products transported are typically grouped together into uniform classifications. The classification

takes into consideration the characteristics of a product or commodity that will influence the cost of

handling or transport. Products with similar density, stowability, handling, liability, and value

characteristics are grouped together into a class, thereby reducing the need to deal with each product

on an individual basis. The particular class that a given product or commodity is assigned is

its rating, which is used to determine the freight rate. It is important to understand that the

classification does not identify the price or rate charged for movement of a product. Rating refers to a

product’s transportation characteristics in comparison to other commodities.

Truck and rail carriers each have independent classification systems. The trucking system uses the

National Motor Freight Classification, while rail classifications are published in the Uniform Freight

Classification. The truck classification system has 18 classes of freight, and the rail system has 31. In

local or regional areas, individual groups of carriers may publish additional classification lists.

In May 2007, the Surface Transportation Board (STB) issued a ruling that abolished the antitrust

immunity of the National Motor Freight Traffic Association (NMFTA) effective December 2007. The

NMFTA is a nonprofit organization comprised of more than 1000 motor carriers that collaborate to

publish the Nation Motor Freight Classification (NMFC). This ruling reversed immunity from legal

action, which had prevailed since passage of the Reed-Bulwinkle Act in 1948. Many industry officials

and observers feel this administrative ruling represents an effort to encourage simplification of the

traditional freight classification practice.

Classification of individual products is based on a relative index of 100. Class 100 is considered the

class of an average product, while other classes run as high as 500 and as low as 35. Each product is

assigned an item number for listing purposes and then given a classification rating. As a general rule,

the higher a class rating, the higher the transportation cost for the product. Historically, a product

classified as 200 would be approximately twice as expensive to transport as a product rated 100.

While the actual current multiple may not be two, a class 200 rating will still result in substantially

higher freight costs than a class 100 rating. Products are also assigned classifications on the basis of

the quantity shipped. Less-than-truckload (LTL) shipments of identical products will have higher

ratings than truckload (TL) shipments.

Table 9.1 illustrates a page from the National Motor Freight Classification. It contains general product

grouping 86750, which is glass, leaded. Notice that the leaded glass category is further subdivided

into specific types of glass such as glass, microscopical slide or cover, in boxes (item 86770). For LTL

shipments, item 86770 is assigned a 70 rating. TL shipments of leaded glass are assigned a class 40

rating, provided a minimum of 360 hundredweight is shipped.

Products are also assigned different ratings on the basis of packaging. Glass may be rated differently

when shipped loose, in crates, or in boxes than when shipped in wrapped protective packing. It should

be noted that packaging differences influence product density, stowability, and damage, illustrating

that cost factors discussed earlier enter into the rate-determined process. Thus, a number of different

classifications may apply to the same product depending on shipment size, transport mode, and

product packaging.

One of the major responsibilities of transportation managers is to obtain the best possible rating for all

goods shipped, so it is useful for members of a traffic department to have a thorough understanding of

the classification systems. Although there are differences in rail and truck classifications, each system

is guided by similar rules.

It is possible to have a product reclassified by written application to the appropriate classification

board. The classification board reviews proposals for change or additions with respect to minimum

weights, commodity descriptions, packaging requirements, and general rules and regulations. An alert

traffic department will take an active role in classification. Significant savings may be realized by

finding the correct classification for a product or by recommending a change in packaging or shipment

quantity that will reduce a product’s rating.

Rate Determination

Once a classification rating is obtained for a product, the rate must be determined. The rate per

hundredweight is usually based on the shipment origin and destination, although the actual price

charged for a particular shipment is normally subject to a minimum charge and may also be subject to

surcharges. Historically, the origin and destination rates were manually maintained in notebooks that

had to be updated and revised regularly. Then rates were provided on diskettes by carriers. Today,

options for selecting carriers range from Internet software that examines carrier Web sites and

determines the best rates to participation in online auctions.

Origin and destination rates are organized by zip codes. Table 9.2 illustrates rates for all freight classes

from Atlanta, Georgia (zip 303), to Lansing, Michigan (zip 489). The table lists rates for shipments

ranging in size from the smallest LTL (less than 500 pounds; listed as L5C) to the largest TL (greater

than 40,000 pounds; listed as M40M). The rate is quoted in cents per hundredweight. Assuming a

shipment of 10,000 pounds, the rate for class 85 between Atlanta and Lansing, using this example

tariff, is $12.92 per hundredweight.

Historically, the published rate had to be charged for all shipments of a specific class and

origin/destination combination. This required frequent review and maintenance to keep rates current.

Following deregulation, carriers offered more flexibility through rate discounts. Now instead of

developing an individual rate table to meet the needs of customer segments, carriers apply a discount

from class rates for specific customers. The discount, generally in the range of 30 to 50 percent,

depends on the shipper’s volume and market competition.

An alternative to the per hundredweight charge is a per mile charge, which is common in TL

shipments. As discussed previously, TL shipments are designed to reduce handling and transfer costs.

Since the entire vehicle is used in a TL movement and there is no requirement to transfer the shipment

at a terminal, a per mile basis offers a more appropriate pricing approach. For a one-way move,

charges may range from $1.50 to over $3.00 per mile, depending on the market, the equipment, and

the product involved. Although it is negotiable, this charge typically includes loading, unloading, and

liability.

In addition to the variable shipment charge applied on either a per hundredweight or per mile basis,

two additional charges are common for transportation: minimum charges and surcharges. The

minimum charge represents the amount a shipper must pay to make a shipment, regardless of weight.

To illustrate, assume that the applicable class rate is $50/CWT and the shipper wants to transport 100

pounds to a specific location. If no minimum charge exists, the shipper would pay $50. However, if the

minimum charge were $250 per shipment, the shipper would be required to pay the minimum.

Minimum charges cover fixed costs associated with a shipment.

A surcharge represents an additional charge designed to cover specific carrier costs. Surcharges are

used to protect carriers from situations not anticipated when publishing a general rate. The surcharge

may be assessed as a flat charge, a percentage, or a sliding scale based on shipment size. A common

use of surcharges is to compensate carriers for dramatic changes in fuel cost. The surcharge approach

provides a means of immediate relief for the carrier to recover unexpected costs while not including

such costs in the long- term rate structure.

Class rates, minimum charges, arbitrary charges, and surcharges form a pricing structure that, in

various combinations, is applicable within the continental United States. The tariff indicates the class

rate for any rating group between specified origins and destinations. In combination, the classification

framework and class rate structure form a generalized pricing mechanism for all participating carriers.

Each mode has specific characteristics applicable to its tariffs. In water, specific tariff provisions are

made for cargo location within the ship or on the deck. In addition, provisions are made to charter

entire vessels. Similar specialized provisions are found in air cargo and pipeline tariffs. Non-operating

intermediaries and package services also publish tariffs specialized to their service.

Cube Rates

Considerable attention has recently focused on development of a simplified method of transportation

pricing. Typically called cube or density rates, the new approach replaces the 18 traditional freight

classifications of the NMFC with five cube groupings. Under the cube concept, shippers complete a

cube shipping document (CSD), which replaces the traditional Bill of Lading. To further identify freight

characteristics, shippers provide the total weight of both stackable (ST) and non-

stackable (NST) freight included in the shipment. Rates are then determined for the weight contained

in each category of freight. The CSD offers five weight break groups. Four are weight breaks for

shipments under 500 pounds. Rates for shipments over 500 pounds are based on multiples of 500

pounds with no shipment weight limit. While still in development, cube-based rates and the associated

cube shipping document offer a promising approach to reducing the complexity of traditional

transportation pricing.

Commodity Rates

When a large quantity of a product moves between two locations on a regular basis, it is common

practice for carriers to publish a commodity rate. Commodity rates are special or specific rates

published without regard to classification. The terms and conditions of a commodity rate are usually

indicated in a contract between the carrier and shipper. Commodity rates are published on a point-to-

point basis and apply only on specified products. Today, most rail freight moves under commodity

rates. They are less prevalent in motor carriage. Whenever a commodity rate exists, it supersedes the

corresponding class or exception rate.

Exception Rates

Special rates published to provide prices lower than the prevailing class rates are called exception

rates. The original purpose of the exception rate was to provide a special rate for a specific area,

origin/destination, or commodity when justified by either competitive or high-volume movements.

Rather than publish a new tariff, an exception to the classification or class rate was established.

Just as the name implies, when an exception rate is published, the classification that normally applies

to the product is changed. Such changes may involve assignment of a new class or may be based on a

percentage of the original class. Technically, exceptions may be higher or lower, although most are

less than original class rates. Unless otherwise noted, all services provided under the class rate remain

under an exception rate.

Since deregulation, several new types of exception rates have gained popularity. For example,

an aggregate tender rate is utilized when a shipper agrees to provide multiple shipments to a carrier

in exchange for a discount or exception from the prevailing class rate. The primary objective is to

reduce carrier cost by permitting multiple shipment pickup during one stop at a shipper’s facility or to

reduce the rate for the shipper because of the carrier’s reduced cost. To illustrate, UPS offers

customers that tender multiple small package shipments at one time a discount based on aggregate

weight and/or cubic volume. Since deregulation, numerous pricing innovations have been introduced

by common carriers, based on various aggregation principles.

A limited service rate is utilized when a shipper agrees to perform selected services typically

performed by the carrier, such as trailer loading, in exchange for a discount. A common example is

a shipper load and count rate, where the shipper takes responsibility for loading and counting the

cases. Not only does this remove the responsibility for loading the shipment from the carrier, but it

also implies that the carrier, once the trailer is sealed, is not responsible for guaranteeing case count.

Another example of limited service is a released value rate, which limits carrier liability in case of

loss or damage. Normally, the carrier is responsible for full product value if loss or damage occurs in

transit. The quoted rate must include adequate insurance to cover the risk. Often it is more effective

for manufacturers of high-value product to self-insure to realize the lowest possible rate. Limited

service is used when shippers have confidence in the carrier’s capability. Cost can be reduced by

eliminating duplication of effort or responsibility.

Under aggregate tender and limited service rates, as well as other innovative exception rates, the

basic economic justification is the reduction of carrier cost and subsequent sharing of benefits based

on shipper/carrier cooperation.

Special Rates and Services

A number of special rates and services provided by carriers are available for use in logistical

operations. Several common examples are discussed.

As indicated earlier, freight-all-kind (FAK) rates are important to logistics operations. Under FAK

rates, a mixture of different products is transported under a negotiated rating. Rather than determine

the classification and applicable freight rate of individual products, an average rating is applied for the

total shipment. In essence, FAK rates are line-haul rates since they replace class, exception, or

commodity rates. Their purpose is to simplify the paperwork associated with the movement of mixed

commodities.

Numerous special rates exist that may offer transportation savings on specific freight movements.

When a commodity moves under the tariff of a single carrier, it is referred to as a local rate or single-

line rate. If more than one carrier is involved in the freight movement, a joint rate may be applicable

even though multiple carriers are involved in the actual transportation process. Because some motor

and rail carriers operate in restricted territory, it may be necessary to utilize the services of more than

one carrier to complete a shipment. Utilization of a joint rate can offer substantial savings over the use

of two or more local rates.

Special price incentives to utilize a published tariff that applies to only part of the desired route are

called proportional rates. Proportional provisions of a tariff are most often applicable to origin or

destination points outside the normal geographical area of a single-line tariff. If a joint rate does not

exist and proportional provisions do, the strategy of moving a shipment under proportional rates

provides a discount on the single-line part of the movement, thereby resulting in a lower overall freight

charge.

Transit services permit a shipment to be stopped at an intermediate point between initial origin and

destination for unloading, storage, and/or processing. The shipment is then reloaded for delivery to the

destination. Typical examples of transit services are milling for grain products and processing for sugar

beets. When transit privileges exist, the shipment is charged a through rate from origin to destination

plus a transit privilege charge.

For a variety of reasons, a shipper or consignee may desire to change routing, destination, or even the

consignee after a shipment is in transit. This process is called diversion and reconsignment. This

flexibility can be extremely important, particularly with regard to food and other perishable products

where market demand can quickly change. It is a normal practice among certain types of marketing

intermediaries to purchase commodities with the full intention of selling them while they are in

transit. Diversion consists of changing the destination of a shipment prior to its arrival at the original

destination. Reconsignment is a change in consignee prior to delivery. Both services are provided by

railroads and truck carriers for a specified charge.

A split delivery is desired when portions of a shipment need to be delivered to different destinations.

Under specified tariff conditions, delivery can involve multiple destinations. The payment is typically

structured to reflect a rate as if the shipment were going to the most distant destination. In addition,

there typically is a charge for each delivery.

Demurrage and detention are charges assessed for retaining freight cars or truck trailers beyond

specified loading or unloading time. The term demurrage is used by railroads for holding a railcar

beyond 48 hours before unloading the shipment. Trucks use the term detention to cover similar

delays. In the case of motor carriers, the permitted time is specified in the tariff and is normally limited

to a few hours.

In addition to basic transportation, truck and rail carriers offer a wide variety of

special or accessorial services. Table 9.3 provides a list of frequently utilized ancillary services.

Carriers may also offer environmental services and special equipment. Environmental services refer

to special control of freight while in transit, such as refrigeration, ventilation, and heating. For

example, in the summer, Hershey typically transports chocolate confectionery products in refrigerated

trailers to protect them from high temperature levels. Special equipment charges refer to the use

of equipment that the carrier has purchased for a shipper’s convenience. For example, specialized

sanitation equipment is necessary to clean and prepare trailers for food storage and transit if the

trailer has been previously utilized for nonfood products or commodities.

Although the brief coverage of special services is not all-inclusive, it does offer several examples of the

range and type of services carriers offer. A carrier’s role in a logistical system is most often far greater

than providing line-haul transportation.

TRANSPORTATION OPERATIONAL MANAGEMENT

The fundamental responsibility of a traffic department is to oversee day-to-day Transportation

Operations. In large-scale organizations, traffic management involves a wide variety of administrative

responsibilities. Firms are increasingly implementing Transportation Management Systems (TMS) as

integral parts of their integration information technology strategies.  

In general, a TMS must proactively identify and evaluate alternative transportation strategies and

tactics to determine the best methods to move product within the existing constraints. As shown in

Table 9.4 , this includes capabilities to select modes, plan loads, consolidate loads with other shippers,

take advantage of current unbalances in traffic movement, route vehicles, and optimize use of

transportation equipment. The principal deliverables of TMS are cost savings and increased

functionality to provide credible delivery times.

From an operational perspective, key elements of transportation management are equipment

scheduling and yard management, load planning, routing, and carrier administration.

Equipment Scheduling and Yard Management

One major responsibility of the traffic department is equipment scheduling and yard management.

Scheduling is an important process in both common carrier and private transportation. A serious and

costly operational bottleneck can result from transportation equipment waiting to be loaded or

unloaded. Proper yard management requires careful load planning, equipment utilization, and driver

scheduling. Additionally, equipment preventive maintenance must be planned, coordinated, and

monitored. Finally, any specialized equipment requirements must be planned and implemented.

Closely related to equipment scheduling is the arrangement of delivery and pickup appointments. To

avoid extensive waiting time and improve equipment utilization, it is important to preschedule dock

positions or slots. It is becoming common practice to establish standing appointments for regular

shipments to facilitate loading and unloading. Some firms are implementing the practice of

establishing advanced appointments at the time of order commitment. Increasingly, the effective

scheduling of equipment is key to implementing time-based logistical arrangements. For example,

cross-dock arrangements are totally dependent on precise scheduling of equipment arrival and

departure.

Load Planning

How loads are planned directly impacts transportation efficiency. In the case of trucks, capacity is

limited in terms of weight and cube. Planning the load sequence of a trailer must consider product

physical characteristics and the size of individual shipments, as well as delivery sequence if multiple

shipments are loaded on a single trailer. As noted earlier, TMS software is available to help facilitate

load planning.

How effectively load planning is performed will directly impact overall logistical efficiency. For

example, the load plan drives the work sequence at warehouses. Transportation equipment must be

available to maintain an orderly flow of product and material from warehouse or factory to shipment

destination.

Routing and Advanced Shipment Notification (ASN)

An important part of achieving transportation efficiency is shipment routing. Routing predetermines

the geographical path a vehicle will travel. Once again, routing software is an integral part of TMS.

From an administrative viewpoint, the traffic department is responsible for assuring that routing is

performed in an efficient manner while meeting key customer service requirements. It is common

practice for shippers to electronically provide consignees advanced shipment notification (ASN). While

the specifics of ASN documents vary, their primary purpose is to allow adequate time to plan arrival,

arrange delivery appointments, and plan to redeploy the shipment’s content. How deliveries are

planned must take into consideration special requirements of customers in terms of time, location, and

special unloading services.

Movement Administration

Traffic managers have the basic responsibility of administering the performance of for-hire and private

transportation. Effective administration requires continuous carrier performance measurement and

evaluation. Until recently, efforts to measure actual carrier service were sporadic and unreliable. A

traditional procedure was to include postcards with shipments requesting consignees to record time

and condition of arrival. The development of information technology has significantly improved

shipment information reliability. The fact that most shippers have reduced their carrier base has

greatly simplified administration. Effective administration requires carrier selection, integration, and

evaluation.

A basic responsibility of the traffic department is to select carriers to perform for-hire transport. To

some degree all firms use the services of for-hire carriers. Even those with commitment to private

fleets regularly require the supplemented services of common, contract, and specialized carriers to

complete transportation requirements. Most firms that use for-hire transportation have implemented

a core carrier strategy.

The concept of a core carrier is to build a working relationship with a small number of transportation

providers. Historically, shippers followed the practice of spreading their transportation purchases

across a wide variety of carriers to assure competitive rates and adequate equipment supply. During

the regulated era, few differences in price existed between carriers. As a result, shippers often

conducted business with hundreds of different carriers. The concentration of volume in a few core

carriers creates a business relationship that standardizes operational and administrative processes.

Mutual planning and acknowledged dependency between a shipper and carrier result in dependable

equipment supply, customized services, improved scheduling, and more efficient overall

administration.

In a number of situations, the core carrier relationships are directly between the shipper and the

transportation provider. A recent development is the use of integrated service providers (ISPs) to

establish and maintain business relationships with core carriers. In such situations, the ISP facilitates

administration and consolidates freight across a wide variety of shippers.

The range of relationship models is ever-changing as service providers devise new and better methods

of identifying and integrating transportation requirements. However, at the end of the day, it remains a

fundamental responsibility of transportation management to assure a firm is supported by reliable and

economical transportation. This fundamental responsibility cannot be delegated.

BILL OF LADING

The bill of lading is the basic document utilized in purchasing transport services. It serves as a

receipt and documents products and quantities shipped. For this reason, accurate product description

and count are essential. In case of loss, damage, or delay, the bill of lading is the basis for damage

claims. The designated individual or buyer on a bill of lading is the only bona fide recipient of goods. A

carrier is responsible for proper delivery according to instructions contained in the document. The

information contained on the bill of lading determines all responsibilities related to timing and

ownership.

The bill of lading specifies terms and conditions of carrier liability and documents responsibilities for all

possible causes of loss or damage except those defined as acts of God. Figure 9.4 provides an

example of a Uniform Straight Bill of Lading. Government regulations permit uniform bills of lading to

be computerized and electronically transmitted between shippers and carriers. `

In addition to the uniform bill of lading, other commonly used types areorder-notified,

export, and government. It is important to select the correct bill of lading for a specific shipment.

An order-notified or negotiable bill of lading is a credit instrument. It provides that delivery not be

made unless the original bill of lading is surrendered to the carrier. The usual procedure is for the

seller to send the order-notified bill of lading to a third party, usually a bank or credit institution. Upon

customer payment for the product the credit institution releases the bill of lading. The buyer then

presents it to the common carrier, which in turn releases the goods. This facilitates international

transport where cross-border payment for goods may be a major consideration. An export bill of lading

permits a shipper to use export rates, which may be lower than domestic rates. Export rates may

reduce total cost when applied to domestic origin or destination line-haul transport. Government bills

of lading may be used when the product is owned by the U.S. government.

FREIGHT BILL

The Freight Bill represents a carrier’s method of charging for transportation services performed. It is

developed by using information contained in the bill of lading. The freight bill may be

either prepaid or collect. A prepaid bill means that transport cost is paid by the shipper prior to

performance, whereas a collect shipment shifts payment responsibility to the consignee.

Considerable administration is involved in preparing bills of lading and freight bills. There has been

significant effort to automate freight bills and bills of lading through EDI or Internet transactions. Some

firms elect to pay their freight bills at the time the bill of lading is created, thereby combining the two

documents. Such arrangements are based upon the financial benefits of reduced paperwork cost, and

as noted earlier shift the audit responsibility to the carrier.

SHIPMENT MANIFEST

The Shipment Manifest lists individual stops or consignees when multiple shipments are placed on a

single vehicle. Each shipment requires a bill of lading. The manifest lists the stop, bill of lading, weight,

and case count for each shipment. The objective of the manifest is to provide a single document that

defines the overall contents of the load without requiring review of individual bills of lading. For single-

stop shipments, the manifest is the same as the bill of lading.

TRANSPORTATION PRICING FUNDAMENTALS

Pricing decisions directly determine which party in the transaction is responsible for performing

logistics activities, passage of title, and liability. F.O.B. origin and delivered pricing are the two most

common methods.

F.O.B. Pricing

The term F.O.B. technically means free on board or freight on board. A number of variations of FOB

pricing are used in practice. F.O.B. origin is the simplest way to quote price. Under F.O.B. origin the

seller indicates the price at point of origin and agrees to tender a shipment for transportation loading,

but assumes no further responsibility. The buyer selects the mode of transportation, chooses a carrier,

pays transportation charges, and takes risk of in-transit loss and/or damage. In F.O.B. destination

pricing, title does not pass to the buyer until delivery is completed. Under F.O.B. destination pricing,

the seller arranges for transportation and the charges are added to the sales invoice.

The range of terms and corresponding responsibilities for pricing are illustrated in Figure 9.5. Review of

the various sales terms makes it clear that the firm paying the freight bill does not necessarily assume

responsibility for ownership of goods in transit, for the freight burden, or for filing of freight claims.

These are issues of negotiation that are critical to supply chain collaboration.

Delivered Pricing

The primary difference between F.O.B. and delivered pricing is that in delivered pricing the seller

establishes a price that includes transportation. In other words, the transportation cost is not specified

as a separate item. There are several variations of delivered pricing. Under single-zone delivered

pricing, buyers pay a single price regardless of where they are located. Delivered prices typically

reflect the seller’s average transportation cost. In actual practice, some customers pay more than their

fair share for transportation while others are subsidized. The United States Postal Service uses a

single-zone pricing policy throughout the United States for first-class letters. The same fee or postage

rate is charged for a given size and weight regardless of distance traveled to the destination.

Single-zone delivered pricing is typically used when transportation costs are a relatively small

percentage of selling price. The main advantage to the seller is the high degree of logistical control.

For the buyer, despite being based on averages, such pricing systems have the advantage of

simplicity.

The practice of multiple-zone pricing establishes different prices for specific geographic areas. The

underlying idea is that logistics cost differentials can be more fairly assigned when two or more zones

—typically based on distance—are used to quote delivered pricing. Parcel carriers such as United

Parcel Service use multiple-zone pricing. The most complicated and controversial form of delivered

pricing is the use of a base- point pricing system in which the final delivered price is determined by

the product’s list price plus transportation cost from a designated base point, usually the

manufacturing location. This designated point is used for computing the delivered price whether or not

the shipment actually originates from the base location. Base-point pricing is common in shipping

assembled automobiles from manufacturing plants to dealers.

Figure 9.6 illustrates how a base-point pricing system typically generates different net returns to a

seller. The customer is quoted a delivered price of $100 per unit. Plant A is the base point. Actual

transportation cost from plant A to the customer is $25 per unit. Plant A’s base product price is $85 per

unit. Transportation costs from plants B and C are $20 and $35 per unit, respectively.

When shipments are made from plant A, the company’s net return is $75 per unit, the $100 delivered

price minus the $25 transportation cost. The net return to the company varies if shipments are made

from plant B or C. With a delivered price of $100, plant B collects $5 in phantom freight on

shipments to a customer. Phantom freight occurs when a buyer pays transportation costs greater than

those actually incurred to move the shipment. If plant C is the shipment origin, the company must

absorb $10 of the transportation costs.Freight absorption occurs when a seller pays all or a portion

of the actual transportation cost and does not recover the full expenditure from the buyer. In other

words, the seller decides to absorb transportation cost to be competitive.

Base-point pricing simplifies price quotations but can have a negative impact on customers and supply

chain collaboration. For example, dissatisfaction may result if customers discover they are being

charged more for transportation than actual freight costs. Such pricing practices may also result in a

large amount of freight absorption for sellers.