TransportationOperations

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

McGraw-Hill/Irwin

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Transportation operations involves the following major topics

• Transportation economics and pricing• Transportation administration• Documentation• Pricing

Video on Ethics and future of Transportation (9:00 min.)http://www.youtube.com/watch?v=T_SXW7v97tQ

Video on future of shipping (2:54 min.)http://www.youtube.com/watch?v=sigYFTP6YFg

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Transportation operations seeks an optimal balance between low cost and high service

• Transportation is single largest element of logistics cost– Rising fuel costs– Environmental cost of

carbon footprint• Transportation managers

are responsible for inventory to be positioned in a timely and economical manner

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Transportation economics and pricing are concerned with factors that drive cost

• An effective logistics strategy must understand four interrelated topics– Economic drivers that influence rates– Costing methods to allocate costs– Carrier pricing strategy used to set rates– Rates and rating mechanics used by carriers

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Economic drivers influence rates

• Distance• Weight• Density• Stowability• Handling• Liability• Market

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Distance is a major influence on cost

• Directly contributes to variable expenses– Labor, fuel, and maintenance

• Cost curve starts above zero because of fixed costs associated with pickup and delivery regardless of distance

• However, rate of cost decreases as distance increases– This is called the tapering

principle

Figure 9.1 Generalized Relationship between Distance and Transportation Cost

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Weight is the second major factor for most transportation costs

• Cost per pound decreases as weight increases until the carrier vehicle is full– Relationship starts again

for the next vehicle load• Small loads should be

consolidated into larger loads to maximize scale economies

Figure 9.2 Generalized Relationship between Weight and Transportation Cost/Pound

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Density is the combination of weight and volume

• Volume is important because vehicles are typically constrained more by cubic capacity than by weight loaded

• Cost per unit of weight declines as product density increases– Higher density products

allowed fixed transport costs to be spread over more weight

Figure 9.3 Generalized Relationship between Density and Transportation Cost/Pound

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Stowability is how product dimensions fit into transportation equipment

• Odd package shapes and sizes can waste cubic capacity

• Items with rectangular shapes are easier to stow

• Nesting refers to ability of product to be placed in itself or collapsed for better stowability

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Handling some products may require special equipment

• Special equipment may be needed to load and unload trucks, railcars, or ships

• How products are grouped together in boxes or pallets will also impact handling cost

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Liability includes product characteristics that can result in damage

• Carriers must pay for liability insurance or accept financial responsibility

• Shippers can reduce their risk by – Improved packaging and

loading• For example - pneumatic

dunnage

– Reducing susceptibility to loss or damage

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Market factors such as lane volume and balance influence transportation cost

• Transport lane refers to movements between origin and destination points– Carriers must find a

backhaul load or vehicle is returned empty

• Imbalances in volume between shipping points can result in higher transport costs

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Variable costs change in a predictable, direct manner in relation to some level of activity

• Variable costs in transportation are only incurred if you operate the vehicle

• Transport rates must cover these at the very least!

• Generally measured per mile or unit weight or both– E.g. per ton-mile

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Fixed costs must be paid even when the company is not operating

• Fixed costs are not influenced by shipment volume– Includes vehicles,

terminals, rights-of-way, information systems, and support equipment

• Must be covered by contribution above variable costs on a per shipment basis

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

• Typical example is the implicit decision to incur a joint cost for a backhaul from a destination– E.g. Big and Little Enos in

Smokey and the Bandit

• Significant impact on charges– Carrier quotations must

include implied joint costs based on assessment of back-haul recovery

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Common costs are incurred on behalf of all or a select group of shippers

• Terminal or management expenses are typical examples

• Usually allocated to shippers based on level of activity for that customer– E.g. number of shipments

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Carrier pricing strategies for setting rates follows one or two of the following approaches

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Carrier pricing cost-of-service strategy

• Cost-of-service is similar to cost-plus pricing strategy for manufacturing

• Carrier estimates cost of providing service then adds on a percent profit margin

• Commonly used for pricing transport of low value goods or in highly competitive situations

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Carrier pricing value-of-service strategy

• Value-of-service price is based on value as perceived by the shipper rather than the carrier

• Higher margins than cost-of-service pricing

• Depends on the value of the goods being shipped

• Used for high value goods or when no competition exists– E.g. 1980’s FedEx overnight delivery

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Carrier pricing combination strategy

• Combination price is set at a value between cost-of-service minimum and value-of-service maximum

• Most carriers use some form of combination pricing– Common in highly volatile

markets and changing competitive situations

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Carrier pricing net-rate strategy

• Net-rate is a simplified pricing format made possible by deregulation

• Established discounts and accessorial charges are rolled into one all-inclusive price

• Pricing is tailored to the individual customer’s needs

UPS commercial: “What can Brown do

for you?”

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Rates and rating mechanics used by common carriers

• Class rates are the price in dollars and cents per hundredweight to move a specific product between two locations

• Classification is the grouping of similar products into uniform classes that are assigned a rating

• Rate determination is based on the classification rating, shipment origin, and destination

• Cube rates replace the 18 traditional freight classifications of the NMFC with five cube groupings

– Still in development

• Commodity rates are for a large quantity of product which moves between two locations on a regular basis

– Typical for most rail freight today

• Exception rates are special rates to provide prices lower than the prevailing class rates

• Special rates and services include– FAK rates, Joint rates, Transit

services, Split delivery, etc.

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Three factors determine the base rate

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Special rates and services

• Freight-all-kind (FAK) rates allow a mixture of different products to be transported under a negotiated rating

• Joint rates can be negotiated if 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

• Diversion and reconsignment allows changing the destination and/or consignee prior to arrival at the original destination

• Split delivery is delivering portions of a shipment to multiple destinations

• 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

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Transportation administration activities include

• Operational Management• Consolidation• Negotiation• Control• Auditing and claims

administration• Logistical integration

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Key elements of operational management

• Equipment scheduling and yard management

• Load planning• Routing and advance shipment

notification (ASN)• Movement administration• Transportation Management

System (TMS)– An integral information technology

solution to help oversee day-to-day activities

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Consolidation

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Negotiation

• Seeking win-win agreements where both shippers and carriers share transportation consolidation and productivity gains

• Both parties seek the lowest total logistical cost consistent with the shipper’s needed service level (i.e. delivery time)

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Control responsibilities include tracing, expediting and driver hours administration

• Tracing is procedure to locate lost or late shipments– i.e. tracking with RFID and GPS

systems• Expediting involves the

shipper notifying carrier that it needs a specific shipment to move quickly and with no delays

• Tracking driver hours of service (HOS) to comply with federal regulations

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Auditing and claims administration is needed when services are not performed as promised

• Auditing is checking freight bills to ensure accuracy– Preaudit determines proper charges

prior to payment– Postaudit does the same after

payment

• Claims can be– Loss and damage resulting from

poor performance– Overcharge/undercharge when

amount billed is different from expected

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Logistical integration is the primary role of the traffic manager

• Integration is finding the best combination of packaging, selection of carrier, mode and consolidation for lowest total logistical cost consistent with the shipper’s service needs

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Primary purpose of documentation is to protect all parties involved in the transaction

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Pricing practices have a direct impact on logistical operations

• Traditionally, logistics pricing was “bundled” into the price for a product or service

• Trend has been to debundle these charges so they become separate and visible to the customer

• Focus is still on delivering value to the customer

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Pricing fundamentals of F.O.B. pricing

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Three different payment options for each F.O.B. price

Figure 9.5 Terms of Sales and Responsibilities

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Pricing fundamentals of delivered pricing

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Illustration of different net returns using a base-point pricing system

Figure 9.6 Base-Point Pricing

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Pricing issues

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Menu pricing system consists of three components