Transportation
Operations
McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
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
9-2
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
9-3
Transportation economics and pricing are
concerned with factors that drive cost
• An effective logistics strategy must understand four
interrelated topics
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–
–
–
Economic drivers that influence rates
Costing methods to allocate costs
Carrier pricing strategy used to set rates
Rates and rating mechanics used by carriers
9-4
Economic drivers influence rates
•
•
•
•
•
•
•
Distance
Weight
Density
Stowability
Handling
Liability
Market
9-5
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
9-6
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
9-7
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
9-8
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
9-9
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
9-10
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
9-11
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
9-12
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-miles
9-13
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
9-14
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
9-15
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
9-16
Carrier pricing strategies for setting rates follows
one or two of the following approaches
•
•
•
•
Cost-of-service strategy
Value-of-service strategy
Combination pricing strategy
Net-rate pricing strategy
9-17
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
9-18
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
9-19
Carrier pricing combination strategy
• Combination price is set at
a value between cost-ofservice minimum and valueof-service maximum
• Most carriers use some form
of combination pricing
– Common in highly volatile
markets and changing
competitive situations
9-20
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 allinclusive price
• Pricing is tailored to the
individual customer’s
needs
UPS commercial:
“What can Brown do
for you?”
9-21
Rates and rating mechanics used by
common carriers
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•
•
•
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.
9-22
Three factors determine the base rate
• How much are you shipping?
– Truckload (TL) or
– Less than truckload (LTL)
• What are you shipping?
– Determines freight class
• How far are you shipping from origin to destination?
– Determines rate table
9-23
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
9-24
Transportation administration activities include
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•
•
•
•
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Operational Management
Consolidation
Negotiation
Control
Auditing and claims administration
Logistical integration
9-25
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
9-26
Consolidation
• Consolidation is combining LTL or parcel shipments
moving to a general location
• Shift to “response-based” logistics has made the industry
rethink consolidation
• Two groups of techniques
– Reactive approach does not attempt to influence composition and
timing of transportation movements, but reacts to shipments as
they come
• Example is UPS nightly sorting of package freight for intercity movement
– Proactive approach includes preorder planning of quantity and
timing with the shipper to facilitate consolidated freight movement
9-27
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)
9-28
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
9-29
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
9-30
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
9-31
Primary purpose of documentation is to protect all
parties involved in the transaction
• Bill of lading is the basic document utilized in purchasing
transport services
– Serves as a receipt and documents products and quantities
shipped
– Specifies terms and conditions of carrier liability
• Freight bill represents a carrier’s method of charging for
transportation services rendered
– Can be prepaid or collect
• Shipment manifest lists the individual stops or consignees
when multiple shipments are placed on a single vehicle
9-32
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
9-33
Pricing fundamentals of F.O.B. pricing
• F.O.B (freight on board) pricing
– F.O.B. origin—seller states price at point of origin, and
agrees to load a carrier, but assumes no further
responsibility. Buyer selects carrier and mode, pays
transportation and assumes the risk for in-transit loss or
damage
– F.O.B. destination—seller arranges for transportation
and adds charges to the sales invoice. Title does not
pass to the buyer until delivery is completed
9-34
Three different payment options for each
F.O.B. price
Figure 9.5 Terms of Sales and Responsibilities
9-35
Pricing fundamentals of delivered pricing
• Delivered pricing—the seller includes transportation in the
product price
– Single zone delivered pricing
• Buyer pays a single price regardless of where they are located
– Example, USPS First class letters
– Multiple zone pricing
• Seller charges different prices for different geographic areas
– Parcel carriers use this.
– Base point pricing
• Final delivered price is determined by the product’s list price plus
transportation cost from a designated base point
9-36
Illustration of different net returns using a
base-point pricing system
Figure 9.6 Base-Point Pricing
9-37
Pricing issues
• Potential discrimination—Zone pricing may be discriminatory
because some buyers pay more than the actual transportation cost
while others pay less
– Sellers have to be careful about Federal price discrimination laws
• Quantity discounts—may be discriminatory against smaller buyers
• Pickup allowances—discounts given if buyer picks up the shipment
themselves
• Promotional prices—special prices given for large sales promotions
– EveryDay Low Pricing (EDLP) is a collaborative pricing framework developed
by Wal-Mart
9-38
Menu pricing system consists of three
components
• Platform service price is expected to be paid by all
customers, whether or not they require or desire the
specified services
– Must establish the basic service platform to be offered all
customers
• Value-added service costs are specific upcharges for
performing customer requested value-added services
– E.g. for customized unit loading such as configuring retail-ready
unit loads
• Efficiency incentives encourage customers to comply with
specified practices that reduce logistics costs
9-39