Chapter 5: Transportation

1. Chapter 5: Transportation Overview of the transportation function and it’s importance to logistics. Efficient transporting system are the hallmark of industrialized societies.

2. PART 1: Introduction Transportation Provides Value-Added through Place and Time Utility Place Utility: The value added to the product when product is moved from they are produced to where they are needed Time Utility: Determines how fast and how consistently a product moves from one point to another

3. PART 1: Introduction • Transportation is the Largest Logistics Cost • Transportation is one of the largest logistics costs • The efficient management of transportation becomes more important to a firm as inbound and outbound transportation’s share of product cost increases

4. PART 1: Introduction • Factors Influencing Transportation Costs and Pricing • Can be grouped into 2 major categories: Product Related Factors Market Related Factors

5. PART 1: Introduction • Product-related factors • Density • refers to a product’s weight-to-volume ratio • Items such as steel, canned food, building product and bulk paper have high weight-to-volume ratios • Electronics, clothing, luggage and toys have low weight-to-volume ratios • Low density product (low weight-to-volume ratios) tend to cost more to transport on a per pound (kilo) basis than high-density product

6. PART 1: Introduction • Stowability • Degree to which a product can fill the available space in a transport vehicle • Example; grain, ore and petroleum product in bulk have excellent stow-ability because they can completely fill the container • Automobiles and machinery do not have good stow-ability or cube utilization • A product’s stow-ability depends on its size, shape, fragility and other physical characteristics

7. PART 1: Introduction • Ease or Difficulty of Handling • Difficult to handle items are more costly to transport • Product that are uniform in their physical characteristics that can be manipulated with material handling equipment require less handling expense and are therefore less costly to transport

8. PART 1: Introduction • Liability • Product that have high value-to-weight ratios are easily damaged and are subject to higher rates of theft or pilferage, cost more to transport

9. PART 1: Introduction • Market-Related Factors • Location of markets which determines the distance goods must be transported • Nature and extent of government regulation of transport carriers • Balance or imbalance of freight traffic into and out of a market • Seasonality of product movements • Whether the product is transported domestically and internationally

10. Part 2: Carrier Characteristics and Services 5 transportation modes may be selected to transport products Motor Rail Air Small Package Carrier Third Party Water Pipeline Intermodal Services

11. Part 2: Carrier Characteristics and Services • Motor • Motor carriage offer fast, reliable service with little damage or loss in transit. Most consumer goods are transported by motor carrier. • Domestically, motor carriers compete with air for small shipments (pickup & delivery operation~point to point services) for 500miles or less and rail for large shipments • Compete with railroads for truckload (TL) shipment that are transported 500 miles or more

12. Part 2: Carrier Characteristics and Services • Motor carriers are very flexible and versatile • Flexible  can offer point-to-point service between almost any origin-destination combination (network of over 4million miles of roads) • Versatile  motor can transport products of varying sizes and weights over any distance

13. Part 2: Carrier Characteristics and Services • Rail • Rail transport costs less than air motor carriage • Lacks the versatility and flexibility of motor carriers because it is limited to fixed track facilities • Provide terminal-to-terminal service rather than point-to-point service unless companies have a rail siding at their facility

14. Part 2: Carrier Characteristics and Services • Disadvantages in terms of transit time and frequency of service if compared to motor carriers • Some of this rail disadvantages may be overcome through the use of trailer-on-flatcar (TOFC) or container-on-flatcar (COFC) service (rail or water movements combined with the flexibility of trucking) • Trailer-on-flatcar (TOFC) or container-on-flatcar (COFC) service offer the economy of rail and water movements combined with the flexibility of trucking • Refer as piggyback services that would a benefit to logistics transportation

15. Part 2: Carrier Characteristics and Services • Air • Most view as a premium service because of its higher cost • Offers the quickest time-in-transit of any transport mode • Air carriers generally handle high-value products • usually cannot be cost-justified for low-value items, because the high price of air freight would represent too large a percentage of the product cost • Air transport provides reliable service and rapid time-in-transit, but terminal and delivery delays and congestion may appreciably reduce some of this advantage.

16. Part 2: Carrier Characteristics and Services • Water • can be broken down into several distinct categories: • inland water way, such as rivers and canals • lakes • coastal and intercostals ocean • international deep sea

17. Part 2: Carrier Characteristics and Services • Water (cont’d) • limited in their movement by the availability of lakes, rivers, canals, or intercostals waterways • Generally, water is the dominant mode in international shipping • the most inexpensive method of shipping high-bulk, low-value commodities • The development of very large crude carriers (VLCCs), or supertankers, has enabled marine shipping to assume a vital role in the transport of petroleum between oil-producing and oil-consuming countries

18. Part 2: Carrier Characteristics and Services • Pipeline • transport only a limited number of product, including natural gas, crude oil, petroleum products, water, chemicals, and slurry products • Pipeline offer the shipper an extremely high level of service dependability at a relatively low cost

19. Part 2: Carrier Characteristics and Services • Pipeline (cont’d) • Pipelines are able to deliver their product on time because of the following factors; • The flows of products within the pipeline are monitored and controlled by computer • Losses and damages due to pipeline leaks or breaks are extremely rare • Climatic conditions have minimal effects on product moving in pipeline • Pipelines are not labor-intensive; Therefore, strikes or employee absences have little effect on their operation

20. Part 2: Carrier Characteristics and Services • Third Parties • Third parties are companies that provide linkages between shippers and carriers • There are several type of third parties, including; • transportation brokers • freight forwarders (domestic and foreign) • shippers’ associations • inter-modal marketing companies (shippers’ agents) • third-party logistics service providers.

21. Part 2: Carrier Characteristics and Services • Transportation Brokers • companies that provide service to both shippers and carriers and arranging and coordinating the transportation of products • Freight forwarders • Purchase transport services from various carriers, although in some instances they own the equipment themselves • Consolidate small shipments from a number of shippers into large shipments moving into a certain region at a lower rates

22. Part 2: Carrier Characteristics and Services • Differences between a freight forwarder and a transportation • broker

23. Part 2: Carrier Characteristics and Services • Shipper’s Association • Can be defined as a nonprofit cooperative that consolidates small shipments into truckload freight for member companies • Primarily utilize motor and rail carriers for transport • Because small shipment are much more expensive to transport (on a per pound or per unit basis) than large shipments, companies band together to lower their transportation cost through consolidation of many small shipment into one or more larger shipments

24. Part 2: Carrier Characteristics and Services • Inter-modal Marketing Companies (or Shipper’s Agents) • Act much like shippers and are important intermodal link between shippers and carriers • Specialize in providing piggyback services to shippers

25. Part 2: Carrier Characteristics and Services • Small-Package Carriers • Parcel Post • provides both surface and air parcel post services • to companies shipping small packages • The advantages of parcel post; • low cost • wide geographical coverage, both domestically and internationally

26. Part 2: Carrier Characteristics and Services • Small-Package Carriers • Parcel Post • Disadvantages include • specific size and weight limitations, • variability in transit time • higher loss and damage ratios than other forms of shipment • inconvenience because packages must be prepaid and deposited at a postal facility

27. Part 2: Carrier Characteristics and Services • Air Express Companies • to transport product quickly and with very high levels of consistency • the air express industry is able to offer overnight (or second day) delivery of small parcels to many locations throughout the world • Example: FedEx, UPS, TNT worldwide, Airborne Express, and DHL Airways

28. Part 2: Carrier Characteristics and Services • Inter-modal Services • Piggyback (TOFC/COFC) • a motor carrier trailer or a container is placed on a rail flatcar and transported from one terminal to another • Axles can be placed under the containers, so they can be delivered by a truck • At the terminal facilities, motor carriers perform the pickup and delivery functions • Piggyback service thus combines the low cost of long-haul rail movement with the flexibility and convenience of truck movement

29. Part 2: Carrier Characteristics and Services • Roadrailers • combined motor and rail transport in a single piece of equipment • the trailer has both rubber truck tires and steel rails wheels • Over highways, tractor power units transport the trailers in the normal way, but instead of placing the trailer on a flatcar for rail movement, • the wheels of the trailer are retracted • and the trailer rides directly on the • rail tracks

30. Part 2: Carrier Characteristics and Services • The advantages : • rail flatcars are not required • the switching time to change wheels on the trailer is less than loading and unloading the trailer from the flatcar • The disadvantages : • the added weight of the rail wheels reduces fuel efficiency • higher movement costs in addition to the higher cost of equipment • The disadvantages have tended to outweight the advantages, resulting in very low usage of this intermodal option

31. Part 3: Global Issues • International freight transportation must aware • of the services, costs and availability of transport mode. • Factors that nee/d to be identified for global • transportation is: • 1) taxes and subsidies • 2) regulations and government ownership • of carriers • 3) geography and availability • Global transportation costs will definitely cost more domestics due to longer distances, administrative requirements and related paperwork.

32. Part 3: Global Issues • There are 3 basic forms of international intermodal distribution: • Landbridge • It is a service in which foreign cargo crosses a country en route to another country • For example, European cargo en route to Japan may be shipped by ocean to the East coast of the United States, then moved by rail to the west Coast, and from there shipped by ocean to Japan

33. Part 3: Global Issues • There are 3 basic forms of international intermodal distribution: • Landbridge

34. Part 3: Global Issues • There are 3 basic forms of international intermodal distribution: • Minilandbridge (MLB) • It is a special case of landbridge, where foreign cargo originates or terminates at a point within the same country

35. Part 3: Global Issues • There are 3 basic forms of international intermodal distribution: • Minilandbridge (MLB)

36. Part 3: Global Issues • Microbridge • In contrast with minibridge, this service provides door-to-door rather than port-to-port transportation • The big advantage of microbridge is that it provides a combined rate, including rail and ocean transportation, in single tariff that is lower than the sum of the separate rates

37. Part 3: Global Issues • Microbridge

38. Part 4: Carrier Pricing and Related Issues • Rates and Rate Determination • Categories of Rates • Line-Haul rates • which are charged for the movement of goods between 2 points that are not in the same local pickup and delivery area • Accessorial charges • which cover all other payment made to carriers for transporting, handling or servicing a shipment

39. Part 4: Carrier Pricing and Related Issues • Rates and Rate Determination • Line-Haul rates • Class rates • Reduce the number of transportation rates required by grouping product into classes for pricing purposes • A basic rate would be Class 100, higher number =more expensive rate and lower number= less expensive rate

40. Part 4: Carrier Pricing and Related Issues • Line-Haul rates • Exception rates • Provide the rate lower than the published class rate • This type of rate was introduce in order to provide a special rate for a specific area, origin-destination or commodity when competition or volume justified the lower rate

41. Part 4: Carrier Pricing and Related Issues • Line-Haul rates • Commodity rates • Apply when a large quantity of a product is shipped between two locations on a regular basis • These rate are published on a point-to-point basis without regard to product classification

42. Part 4: Carrier Pricing and Related Issues • Line-Haul rates • Contract rates • Rate that apply in special circumstances • Example: contract rates are those negotiated between a shipper and carrier. • Formalized through a written contractual agreement

43. Part 4: Carrier Pricing and Related Issues • Line-Haul rates • Freight-all-kinds • The product shipped can be any type • The carrier provides the shipper with the rate per shipment based on the weight of the product being shipped • Popular with companies such as the wholesalers and manufacturers

44. Part 4: Carrier Pricing and Related Issues • FOB Pricing (Free On Board) • If a seller quotes a delivered price to the buyer’s retail store location, the total price includes not only the cost of the product, but the cost of moving the product to retail store • FOB specifies which party (buyer or seller) pays for which shipment and loading costs, and/or where responsibility for the goods is transferred

45. Part 4: Carrier Pricing and Related Issues • FOB Pricing (Free On Board) • Term of sale and responsibilities of FOB: • Freight collect point- Buyers pay, bear charges, own & file claims • Freight allowed point -Seller pay, bear charges, Buyers own & file claims • Freight prepaid & charged back- Seller pay, bear charges, buyer own & file claims • Freight collect destination -buyer pay, bear charges, seller own & file claims • Freight prepaid destination- Seller pay, bear charges, own & file claims • Freight collect & allowed -Buyer pay, Seller bear charges, own & file claims

46. Part 4: Carrier Pricing and Related Issues • Why FOB terms are important? • The buyer knows the final delivered price prior to the purchase • The buyer does not have to manage the transportation activity involved in getting the product from the seller’s location to the buyer’s. • The buyer typically will not control the transportation decision, so it is possible that a mode or carrier could be selected by the seller that might be disadvantages to the buyer (e.g., due to poor service levels provided by the mode/carrier)

47. Part 4: Carrier Pricing and Related Issues • Delivered Pricing • Zone Pricing • A method that categorizes geographic areas into zones • Each zone will have particular delivery cost associated with it • The closer the zone to the seller  the lower the delivery cost • The farther away  the higher the delivery charge

48. Part 4: Carrier Pricing and Related Issues • Basing-Point Pricing • The seller selects one or more locations that serve as point of origin • The buyer will pay delivery costs from that point to the buyer’s location • The seller often use a manufacturing plant, distribution center, port, free trade zone as a basing point

49. Part 4: Carrier Pricing and Related Issues • Quantity Discount • Cumulative • Provide price reductions to the buyer based on the amount of purchases over some prescribed period of time • Non-cumulative quantity discount • Are applied to each order and do not accumulate over a time period

50. Part 4: Carrier Pricing and Related Issues • Allowances • Seller will provide price reductions to buyer that perform some of the delivery function • If buyer is willing to assume some of the delivery functions, the seller will often provide some allowances/ price reduction to buyer • The most common allowances are provided for customer pickup of the product or unloading of the carrier vehicle upon delivery at the customer’s location