Purchasing and Supply Management
by W. C. Benton
Chapter Fourteen
Purchasing Transportation
Services
McGraw-Hill/Irwin
Copyright ©2007 The McGraw-Hill Companies, All Rights Reserved
Learning Objective
1.
To understand how to purchase transportation
services.
2.
To understand the changes in the transportation
sector.
3.
To identify the advantages and disadvantages of
various transportation modes.
4.
To understand how to select and evaluate the most
appropriate transportation mode for specific products.
14-2
Learning Objective
5.
To understand how to determine the appropriate price
determination strategy for alternative transportation
modes.
6.
To understand how “third-party relationships” work.
7.
To understand the terms and conditions of
transportation of merchandise.
8.
To understand what F.O.B. means.
14-3
Transportation Purchasing
 _____________________________________
_____________________________________
___________________.
 As illustrated in the purchasing transportation
network of a typical manufacturing firm shown
in the Figure below ,the systems flows are
impressive.
 In traditional systems, inventory management
is a manufacturing activity.
14-4
Transportation Revenue
 Many Fortune 500 firms have moved to just-in-time
manufacturing,
_____________________________________________
___________________________________.
 In 2002, transportation revenues were approximately
$848 billion. Over-the-road transportation accounted for
approximately 83 percent of the total transportation
costs.
 In other words, a large share of the expenditures was
associated with moving products from the manufacturing
facility to the ultimate consumer.
_______________________________________.
14-5
TRANSPORTATION’S ROLE IN PURCHASING
 Transportation is often the
most costly and timeconsuming component of
purchasing management.
 Its planning is also critical in
meeting manufacturing and
customer delivery scheduling
requirements.
 Transportation
___________________________
___________________________
___________________________
___________________________
____________________.
14-6
Transportation Modes
 The initial decision requires the buying firm to select the
appropriate shipment mode.
 Each of the modes has specific operating and cost
characteristics and the buying professional must weigh
them in selecting the most appropriate transportation
mode.
 _____________________________________________
_________________________________________.
 _____________________________________________
_____________________________________________
_____________.
14-7
Mode Selection
 In many cases,
__________________________________________
________________________________________.
 The “model split” is usually determined by time
pressures,
__________________________________________
__________________________________________
__________________________________
 The most recent statistical data for modal freight
activity in the United States is presented in Figure
14.2.
14-8
14-9
TABLE 14.2
14-10
Rail
 ___________________________________
___________________________________
___________________________________
___________________________________
_______________________
 As can be seen in Figure 14.2, the rail mode
ranks second in terms of ton miles. The rail
service also includes more than 23,000
locomotives and 1.2 million freight cars.
14-11
Rail
 The Class I railroads are systems that generated more than
$320 billion in total revenues in 2002.
– The Class I freight systems are shown in Table 14.2.
 _________________________________________________
_________________________________________________
______________________.
 There are also more than 520 regional and local railroads.
________________________________________________________
________________________________________________________
14-12
Rail
 The Class I railroads in the United States also account for
approximately
_______________________________________________
___________________________________________.
 Deregulation
_______________________________________________
_________________________________________.
 CSX–Sea Land Corporation, Union Pacific–Overnite
(trucking), and Norfolk Southern–North American Van Lines
(trucking) are the most significant intermodal firms.
14-13
Rail
 The rail mode has the largest share of the ton-miles
in the United States. Most bulk commodities are
initially shipped by rail and later shifted to motor
carriers.
 Rail transportation is generally less expensive than
air and truck modes.
__________________________________________
__________________________________________
____________.
 The primary products shipped via rail are
__________________________________________
________________________________________.
14-14
Truck
 ________________________________________________
_________.
 The industry is composed of a large number of for-hire and
private carriers. _________________________________.
 ________________________________________________
_____________________________________________.
 ________________________________________________
__________________________________.
 The products carried by trucks are different from those
carried by other modes.
14-15
Truck
 Approximately 85 percent of the tonnage originated
by Class I motor carriers are manufactured goods.
 Class I carriers are those that generate annual
operating revenues ________________; motor
carriers generating between_____________ million
in annual operating revenue are considered Class II
carriers; and those with annual operating revenues
of less _______________ are categorized as Class
III carriers.
14-16
Truck
 __________________________________________
_______________________________________.
 There are approximately 850 Class I carriers. United
Parcel Service is currently the largest Class I carrier
with revenues in excess of $150 billion.
 A carrier must have ICC authority to handle traffic
covered by 16 commodity categories.
– ______________________________________________
______________________________________________
_____________________________________________.
14-17
The Carriers
 General commodity carriers usually specialize in either
truckload (TL) or less-than-truckload (LTL) operations.
Truckload shipments are defined by the ICC as loads in
excess of 10,000 pounds.
_________________________________________.
 ___________________________________________.
 The three largest carriers in this industry sector are
Schneider National, J.B. Hunt Transport, and Werner
Enterprises.
______________________________________________
______________________________________.
14-18
The Economics of the Truck Mode
 Another special ICC category is the parcel delivery
service and limited shipment size category. UPS is
the largest carrier in this sector.
______________________________________________
______.
 In 2004, UPS delivered more than 2.94 billion
parcels and documents.
______________________________________________
________________________________________.
14-19
The Economics of the Truck Mode
 The truck mode is used to transport a variety of
perishable consumer goods,
__________________________________________
__________________________________.
 The primary advantages of this mode are flexibility
and versatility.
– __________________________________________.
 The competition in the trucking industry is fierce
________________________________.
14-20
Motor Carrier Rates and Price Competition
 The average revenue per intercity ton-mile
realized by Class I motor carriers was 16.2 cents
for TL and 49.76 cents for LTL service in 2005.
– The average rail revenue was 2.67 cents per ton-mile.
 These average prices are misleading when
selecting one mode over another.
____________________________________________
____________________________________________
____________________________________________
____________________________________________
_____________________________________.
14-21
Motor Carrier Rates and Price Competition
 In contrast, in long-haul volume movements of bulk
commodities,
_________________________________________.
 ________________________________________________
________________________________________________
_______________________.
 The various levels of competition between owner-operators
clearly show that they do not understand their cost structure.
Irrational owner-operators will eventually go bankrupt.
14-22
Motor Carrier Services
 Realizing that most shippers are interested in more than
transportation, some carriers have formed third-party logistics
enterprises. UPS, Yellow Freight, and Roadway Express have
expanded into this market.
 Just-in-time manufacturing also has resulted in a significant
operating change in the general commodity carriers.
___________________________________________________
___________________________________________________
_________________________.
 In addition, ___________________________________________.
14-23
The Air Mode
 The domestic air cargo market in 2002 was
approximately $279.5 billion, based on 3.9 billion
tons carried over 66.9 billion miles.
 __________________________________________
__________________________________________
_____________________.
 Integrated air cargo companies have air service–
related support and handle air cargo from origin to
destination.
14-24
The Air Mode
 Companies with a significant presence in the market
are Federal Express, UPS, Airborne, DHL, and the
U.S. Postal Service.
 As can be seen in Table 14.3, Federal Express
accounts for more than 43.3 percent of this market
and UPS more than 25 percent.
 __________________________________________
________________________________________.
14-25
14-26
Air Cargo Rates and Competition
 With the movement toward high customer service,
air cargo has become an integral strategic weapon
________________________________________
___________________________________.
 The average revenues per ton-mile of air cargo
carriers in 2002 were 44.45 cents versus 25.82
cents for trucking and 2.67 cents for rail.
14-27
Air Cargo Rates and Competition
 _____________________________________
_____________________________________
_____________________________________
_________________________.
 The revenues per ton-mile for Federal
Express and UPS are approximately $1.12.
For the most part, the competition in this mode
is between UPS and Federal Express.
14-28
Water Carriers
 Water carriers are classified into several
categories:
_______________________________________
_______________________________________
_______________________________________
____________________________________.
 American water carriers compete directly with rail
and pipelines. In 2002, water carriers accounted
for approximately $90.9 billion in revenues.
14-29
Water Carriers
 The majority of commodities shipped via water
carriers are semiprocessed materials,
__________________________________________
_______________________________________.
 Water carriers are an excellent transportation
shipping mode for low-valued bulk commodities in
large quantities.
______________________________________.
14-30
Pipelines
 Pipelines are used
__________________________________________
__________________________________________
__.
 In 2002, pipelines accounted for $116.9 billion in
revenues.
 A comparison of each of the transportation modes is
shown in Figure 14.2.
14-31
Relative Prices for Transportation
Goods and Services
 The United States had
relatively lower prices for
transportation goods and
services in 1999 than did 15
out of 25 Organization for
Economic Cooperation and
Development (OECD)
countries.
 However, the nation’s top two
overall merchandise trade
partners, Canada and Mexico,
had lower relative prices in
1999 than did the United
States.
14-32
Carrier Selection
 The choice of transportation mode is the most
important element in distribution management.
 Selecting the incorrect transportation mode can
easily jeopardize a firm’s operational efficiency
because it may lead to higher costs and lower
service levels.
 Total supply chain costs
_________________________________________
_________________________________________
_______________________________.
14-33
Carrier Selection
 The most important criteria to consider for carrier selection
are competitive rates, customer service, transit time reliability,
pick-up and delivery service, availability of equipment, loss
and damage claims, electronic data interchange (EDI),
geographic coverage, problem resolution, insurance
coverage, and billing accuracy.
 ________________________________________________
_____________.
 The shipper gains a competitive
________________________________________________
______________________________________________.
14-34
Carrier Selection
 Using multiple shippers is perhaps better than using
a single shipper.
– By diversifying the shipments, you achieve better prices
and higher service quality. When more than one carrier is
used, evaluation of the carrier is easier.
 __________________________________________
_____________________________________.
 Some of the performance measures
__________________________________________
__________________________________________
______.
14-35
Carrier Evaluation
 Remember, the primary objective of the
buying/shipping firm is to provide for cost-effective
continuous operation of the business by ensuring the
availability of goods and services.
 __________________________________________
__________________________________________
_______.
 The general consensus is that
__________________________________________
__________________________.
14-36
Rate Determination
The pricing of transportation services is determined in
two ways, depending on whether federal regulation
applies:



Rate making in nonregulated transportation
markets.
Railroad movements of
fresh fruits and vegetables,
piggyback traffic, box cars,
frozen food, and various
building products are no
longer regulated by the
ICC.
Air cargo rates were
deregulated between 1977
and 1979. In these cases,
carriers can change
whatever they like with no
advanced warning.



Rate making in regulated transportation
markets.
There are still many transportation sectors
that a reregulated by the ICC. The rates
for common carrier service that are filed
must be either offered to all customers or
offered only to the customer for which the
carrier has negotiated with the federal
government, which has been involved in
the ratemaking business since the
Interstate Commerce Act in 1887.
The original purpose of federal
government involvement was to protect
both the customer and the carrier from
unhealthy competition. In today’s
business environment, this involvement is
criticized.
14-37
The Rate Quotation Process
 Submitting rate quotations to shippers
involves a complex process.
 The complexity is the result of the millions
of different commodities that are shipped,
__________________________________
__________________________________
__________________________________
_______________________________.
14-38
Factors Considered in Rating Freight
There are numerous factors that are included in rate
determination for a particular commodity. These
factors include the following:
1.
2.
3.
4.
5.
6.
7.
_____________________.
__________________.
Perishability.
___________________________________.
Liability for spontaneous combustion or explosion.
________________________________.
_____________________________________.
14-39
Factors Considered in Rating Freight
8. ____________________________________.
9. Excessive weight.
10. Excessive length.
11. ____________________________________.
12. Trade conditions.
13. _____________.
14. __________________________________.
15. Quantity offered as a single consignment.
14-40
Factors Considered in Rating Freight

This list of the factors is compounded by the specific
commodity that is being shipped. The basic steps involved
in the determination of the applicable rates are as follows:
1.
Use the classification to look up the commodity being
shipped and determine its rating
2.
______________________________________________
______________________________________
3.
Cross-reference
______________________________________________
__________________________________________.
14-41
Rate Negotiation
 Deregulation has given carriers more pricing freedom;
negotiating skills have become very important for both
carriers and shippers.
 ______________________________________________
________________________.
 _____________________________________.

______________________________________________
______.
14-42
Rate Negotiation
 In many instances, the negotiation process in
transportation has become more formalized.
 _____________________________________
__________________________________.
 _____________________________________
_____________________________________
_____________________________.
14-43
Rate Negotiation
 Negotiation is a management process that involves
planning, analysis, and reviewing.
 Negotiation activities are influenced
__________________________________________
________________________________.
 The environment factors include competition,
technology, and legislation.
 __________________________________________
_______________________________________.
14-44
The Negotiations Process
 The business climate between shippers and carriers
offers an a priori assessment of the power dependence
relationship.
 Bargaining activities
__________________________________________.
 ____________________________________________
_______________________________________.
 A day should be set aside to handle
_____________________________________.
14-45
Rate Negotiation
 Negotiate at the buying organizations facilities.
– ________________________________________
________________________________________
________________________________.
 Technology also influences the transportation
negotiation process.
– Computer technology offers shippers real-time
information related to shipment tracking,
________________________________________
________________________________________
_______________.
14-46
Legal Constraints and Restrictions
 Shippers and carriers
_____________________________________________
________________________________.
 They must consider the implications of legal constraints
on each movement under the final contractual
agreement.

_____________________________________________
_____________________________________________
_______________________.
14-47
Third-Party Relationships
 There are several challenges that buyers face in order
to transfer logistics activities to a third party.
 ___________________________________________
_______________________________________.
 In some cases, the third-party logistics decision is
made in the finance department and not at the
operations and logistics level in the shippers’ firm.
 ___________________________________________
__________________________________________.
14-48
Negotiations Strategy with Third Party
 In developing a negotiation strategy,
_____________________________________________
_____________________________________.
 As with any other buying situation, the shipper must
establish a set of desires (costs) and demand (services)
expected from the carrier.
 The first step
_____________________________________________
_____________________________________________
____________________________________________.
– Only those third parties that can meet certain minimum service
levels will be offered an opportunity to negotiate.
14-49
Third-Party Relationships
 If the shipper only requires standard third-party
service but desires a longer-term relationship, the
bidding process is appropriate.
 The shipper
_________________________________________
_________________________________________
_________________________________________
________________________.
14-50
Third-Party Relationships
 Once a relationship between a shipper and a third
party is established,
__________________________________________
_________________________.
 The scope of the operation section of the contract
must be detailed and specific.
 Activities such as vehicle spotting,
__________________________________________
________________________________________.
– The performance measures should be part of the
agreement.
14-51
Third-Party Relationships
 Specific performance measures are
__________________________________________
________________________.
 Many firms require certain indemnification clauses to
be included with any third-party agreement with
suppliers.
 __________________________________________
__________________________________________
______________________________________.
14-52
Freight Consolidation
 ____________________________________.
 To take advantage of these rate economies,
the shipper should attempt to consolidate
shipments.
 ____________________________________.
14-53
Documentation/Tracing/Claims
 ____________________________________________
_________________________________________.
 This serves as the basic contract between the carrier
and shipper and specifies the commodities and
quantities shipped, routing, rates, and carrier liability.
 ___________________________________________.
 ____________________________________________
____________________________________.
14-54
Terms and Conditions of
Transportation Purchasing
14-55
Freight Terms
 _______________________________________
_______________________________________
________________________.
 Freight terms outline the responsibilities of the
shipper and carrier.
 The following definitions must be understood
before entering into an agreement:
– Prepaid _____________________________.
– Collect_____________________________.
14-56
Freight Terms
 Prepaid/collect beyond
____________________________________
____________________________________
___________________________.
 Third-party
____________________________________
_____________________________.
– The legal payment function may or may not
belong to the third party.
14-57
Freight Terms
 The obligation is determined from the parties
indicated on the bill of lading contract.
– ______________________________________________
______________________________________________
_________________________________.
 Prepay and add
__________________________________________
__________________________________________
_______________________________________.
14-58
Terms of Sale/Purchase
 The terms of sale or purchase are used to
identify the passage of title and are usually
expressed by an F.O.B. designation: F.O.B.
origin or F.O.B. destination.
– F.O.B. origin means
_____________________________________
_______________.
– F.O.B. destination
_____________________________________
__________________________________.
14-59
Bills of Lading
Bills of lading convey the freight terms and
act both as a contract for carriage and a
receipt for delivery.
1.Order notify bills of lading
_____________________________________
______________________.
2.Sales/purchase orders
_____________________________________
_______________________.
14-60
THREE TRANSPORTATION
PURCHASING EXAMPLES
14-61
Ross Laboratories
Background
 Ross Product Division was founded in 1903 by
Harry Moores and Stanley Ross under the name of
Moores and Ross Milk Company in Columbus,
Ohio. They were the first to operate the old standand-drive milk truck.
 They were also the first to deliver milk in glass
bottles to homes. In 1924 the partners made an
innovative move by producing and marketing milkbased infant formula, and in 1959 the company
introduced Similac with Iron infant formula.
14-62
Ross Labs Selection Criteria
The core carriers for Ross’s transportation needs are KLLM, Martin,
ROCOR, FWC, Gasel, Consolidated Freightways, UPS, and Federal
Express. Ross’s carrier selection criteria consist of the following:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
____________
Equipment base
______________
Cost containment and reduction programs
___________________
Nature of client base
_________________________
________________________
Rates
Accessories
__________________________
_________________________
14-63
The Ross Pricing Process
 The executive in charge of purchasing transportation
services stated that in order for Ross to negotiate
effectively, they must understand the cost drivers
associated with each potential transportation mode.
 ____________________________________________
_________________________________.
 He also stated that the competitive bidding process is
used exclusively for third-party carrier relationships.
14-64
Consolidated Stores
Background
 Consolidated Stores is the nation’s largest
broadline closeout retailer with annual sales over
$3 billion and more than 1,300 stores nationwide.
 In 2004, all of the store names were changed to Big
Lots, Inc. The company has more than 45,000
employees.
14-65
Consolidated Stores
 Annual sales have increased by at least 11 percent
since 1991. The company opened 83 new stores and
105 new furniture departments.
 The company has stores in 46 states; distribution
centers are located in Columbus, Ohio; Montgomery,
Alabama; Rancho Cucamonga, California; and
Tremont, Pennsylvania.
14-66
Transportation Purchasing
at Consolidated Stores
 The core carriers for the distribution centers’ needs are
UPS, BNSF, CSX, NS, and KCS rail lines along with stack
train operators such as Mitsui, Pacer, and K-line. The stack
train operators utilize the railroad tracks, ramps, and trains.
 The core trucking companies are J. B. Hunt and Warner.
The core drayage carriers are Total Express, BTT, We R
Drayage, Golden Eagle, and Pacer Cartage.
 Finally, the core steamship carriers are Trailer Bridge,
Crowley, Navieras, Sea Star, CSX Lines, Maesk Seal,
Mitsui, Yang Ming, Hanjin, Hyundai, and P&O Nedloyd.
14-67
Consolidated Stores Selection Criteria
According to the executive in charge of
purchasing transportation services,
Consolidated’s carrier selection criteria
consist of the following:
1.____________________________.
2.________________________________.
3._______________________________
4.______________________________.
5.__________________________.
14-68
The Consolidated Pricing Process
 Both electronic and conventional competitive
systems are used at Consolidated.
 _________________________________________
______________________________________.
 The bidders are required to fill in a standard
spreadsheet and e-mail it to Consolidated before
the deadline.
 According to the executive in charge of purchasing
transportation services,
_________________________________________
_________________.
14-69
Copeland Inc.
Background
 Copeland was founded in 1921 by Edmund Copeland in
Detroit, Michigan. Copeland manufactures scroll
compressors for commercial air conditioning.
 The company has more than 8,000 employees and gross
sales of $15.5 billion. Copeland manufactures its products in
11 countries throughout North America, Europe, and Asia.
 Copeland currently maintains contracts with four major
steamship lines, 18 LTL motor carriers, four truckload
carriers, and three multimode carriers.
14-70
Copeland Inc. Selection Criteria
According to the executive in charge of purchasing
transportation services, Copeland’s carrier
selection criteria consist of the following priorities:
1.
2.
3.
4.
5.
6.
7.
_______________
_______________
Experience
______________
Financial stability
______________
__________________
14-71
Copeland Inc.
 The basic contract is the same for both LTL and
truckload carriers. However, the specific negotiating
techniques are different.
 In the case of truckload traffic, price is negotiated on
lines for which the carrier is strongest. The result is
usually lower cost and higher service.
 On the other hand, LTL traffic is negotiated based on
frequency and size of shipment organized locally or
regionally.
14-72
Copeland Inc. Quoting Process
The competitive quoting process at
Copeland is as follows:
1.
2.
3.
4.
5.
6.
7.
____________________________________.
Prequalify eligible bidders.
________________________________________.
Set the rules of engagement.
____________________________.
Select the best service provider.
_______________________.
8. Implement program.
14-73