Chapter 9 – Delivery
Role of Logistics in the Economy
 Vital part of the economy
 In 2008, Logistics costs in US reduced from $1.4 trillion to $1.34 trillion
 GDP dropped to 9.4 percent from 10.1 percent in 2007, and from a high of 16.2 percent
in 1981
 Factors involved in reduction:
o Deregulation of transportation sector
o Technology advances and e-commerce
o Greater emphasis in organizations on improving supply chain processes and
practice
o Global recession
Logistics
 “part of supply chain management that plans, implements, and controls the efficient,
effective forward and reverse flow and storage of goods, services, and related information
between the point of origin to the point of consumption in order to meet customers’
requirements”
 Logistics costs:
o Inventory carrying costs
o Administrative costs
o Transportation
Transportation
 Accounts for most logistics costs- approx. 62%
 Highest cost item in logistics (40%) particularly if it is of relatively low value, bulky, and
heavy such as agricultural commodities or construction materials
 But in the case of very-high-value low weight and low-bulk electronics goods, transport
costs may be less than 1 percent of total purchase costs.
 Cost minimization is NOT the only factor! Think scheduling!
 Just in Time (JIT) purchasing systems
o Must be on time, no damages
 Global sourcing and outsourcing
o “Deliveries must be on time, with no damage to the items in transit, because
minimal inventories are maintained”
 DHL, FedEx, AM transport
Outsourcing to Third-Part Logistics (3PL)
 Focus on core competencies and seek partnerships or alliances with key suppliers
Transportation Regulation and Deregulation
 Economic and safety/environmental
 100+ of regulations!
 Regulations were controlled at the federal, state, and provincial levels
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Today the U.S. and Canadian transportation sectors are essentially deregulated
o Open negotiations rates, terms, services, routes etc.
o However – safety and environmental concerns are still a top concern!
o Post 9/11 polices
o Ex. International Ship and Port Facility Code set new standards for ship
verification, certification, and control to ensure that appropriate security measures
are implemented
Transportation Modes and Carriers
 What mode of transportation is most appropriate for a specific order?
o People
o Freight
o Information gain
 These may be via rail, road, pipeline, water, air, radio frequency (RF)
 What carrier is the best?
 Which supplier offers the best value?
Types of Carriers
 Contract carrier
o For hire carrier that provides service to a limited number of shippers and operates
under specific contractual arrangements that specific rates and services.
o Rates generally lower than common carriers- volumes are typically higher with
individual shippers and scheduling is more predictable.
 Exempt carrier
o For-hire carriers, exempt from regulation of rates and services.
o Under deregulation, most carriers can be considered exempt from rate restrictions.
 Private carrier
o Provides transportation for its company’s own products and the company owns
(or leases) all related equipment and facilities.
o In a regulated environment, private carriers had the advantages of not being
restricted by regulations and the flexibility that this status offered.
Transportation Service Providers
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Freight forwarders – Buy dedicated space on scheduled carriers.
o Benefits are lower rates than the shipper might otherwise receive and one point of
contact for shipments that may span two or more modes and carriers.
o Can specialize as domestic or international, or by mode, such as airfreight or
surface transportation.
o eBay- buy space
Brokers – Charge shippers a fee for arranging transportation services with a carrier.
o Act as the shipper’s agent in negotiating rates and service arrangements.
Customs house brokers – Used for importing products.
o Ensure that documentation is accurate and complete and can provide a variety of
other services, such as providing estimated of landed costs, payments to offshore
suppliers, and insurance options available to shipper’s
Specialized Service Options
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Expedited transportation – Any shipment that requires pickup service and includes a
specific delivery guarantee.
o In the U.S typically less than five days
Small-shipment services
o Under deregulation, competition has become intense
Same-day service
o Developed by express carriers such as DHL, UPS, Federal Express
Selection of Mode and Supplier
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Best Value Delivery Decision
o Shippers are most concerned that the carrier meet its delivery promises without
damaging the goods and at a competitive cost
o Each common carrier transportation has its own advantages for shippers in respect
to speed, available capacity, flexibility, and cost.
Key selection criteria
o Required delivery time – If two-day delivery, air is the most viable.
o Reliability and service quality.
o Available services – Warehousing and inventory management in addition to
transportation services.
o Type of item being shipped – Temperature control, etc.
o Shipment size – Larger shipments probably can be moved more economically by
rail or truck.
o Possibility of damage
o Cost of the transport service – Safe movement of the goods, within the required
time, at the lowest total transport cost.
o Carrier financial situation – Avoid carriers that are on the margin financially.
o Fleet – Does not offer service to the public. Many companies have elected to
contract for exclusive use of equipment; some have established their own trucking
fleet with either company-owned or leased tractors and vans.
o How to handle claims – Inevitably, some damage claims will arise the shipment
of quantities of merch. Prompt and efficient investigation and settlement of claims
is another key factor.
FOB Terms
 Free on board, meaning that goods are delivered to a specified point with all transport
charges paid
 The selection of the FOB point is important to the purchaser because it determines:
o Who pays the carrier
o When legal title to goods being shipped passes to the buyer
o Who is responsible for preparing and pursuing claims with the carrier in the event
goods are lost or damaged during shipment
o Who routes the freight
Rates and Pricing
 Line Haul – Are per-mile truckload pricing charged for moving products to a nonlocal
destination.
o Class rates
o Exception rates
o Commodity rates
o Misc.
 Accessorial rates – Charges for services not included in the negotiated line haul rate.
o Rates not included in the negotiated haul rate
o Fuel surcharge
o Sunday pick-up or delivery
o Loading and unloading
Four Basic Types of Rate Discounts
1. Aggregate Tender Rates – Provide a discount if the shipper will group multiple small
shipments for pickup or delivery at one point.
2. Flat Percentage Discounts – Discount to the shipper if specified total minimum weight
of less-than-truckload shipments is moved per month, encouraging the shipper to group
volume with one carrier.
3. Increased volume-increased discount percentage – Applied if a firm increases its
volume of LTL shipments by a certain amount over the previous periods volume.
4. Specific Origin and Destination Points – Provide a specified discount if volume from a
specified point to a specified delivery point reaches a given level.
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Demurrage Charges (Detention Charges)
o Incurred by shippers or receivers of merchandise
o Daily penalty charge for a rail car or a motor van that is tied up beyond the
normal time for loading or unloading.
Expediting and Tracing Shipments
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Expediting
o Applying pressure to supplier – faster than normal delivery service.
Tracing
o Attempts to determine that status of items that have been shipped but have not yet
been received and thus somewhere within the transportation system.
o GPS ad internet-based communication help
Transportation and Logistics Strategy
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Value analysis of alternatives – A service requirement value analysis may turn up totally
adequate lower-cost transportation arrangements.
Price analysis – Rates vary substantially, and decisions should be made only after
consideration of all possibilities. Negotiation and competitive quotes.
Consolidation of freight – Volume discounts may reduce transport costs substantially.
Reassessment of the possibilities of using different transport modes – Private trucking,
intermodal transportation, often substantially cheaper.
Development of a closer relationship with selected carriers – Knowledge sharing of both
buyer and carrier.
Cost analysis/reductions – Long-term contracts; partnerships; third-party involvement;
freight consolidation; demurrage; packaging; and service, quality, and delivery
requirements offer opportunities for price reduction.
Outsourcing, third-party logistics, contracting out
Safety considerations – Safety of employees to meet unrealistic delivery times should be
considered.
Environmental concerns