Chapter 14

1. Chapter 14 Shipper/Carrier Network Strategies

2. Introduction • Both shippers and carriers utilize strategies to manage their respective networks. • The shipper strategy is focused on purchasing and managing transportation services to meet the needs of their external and internal customers. • Carrier strategy is focused on the efficient use of resources to provide the economical and efficient service the shipping public desires.

3. Shipper Transportation Strategy • The transportation function is one element of the total logistics function. The strategies and operating decisions used in transportation management must support the strategies and objectives of the logistics function and those of the company. • Current management strategy focuses on optimization between the various elements within the logistics sector.

4. Shipper Transportation Strategy • Transportation is often one of the largest cost elements, and decisions in this area can favorably or negatively impact the total distribution performance. • For example, slow but low cost transportation can have an adverse impact on customer service and inventory levels. Although such methods may minimize transport cost, inventory levels may need to be much higher to accommodate longer transit times. These higher stocking levels, with the resultant increase in inventory carrying cost, may more than offset any saving in freight charges.

5. Shipper Transportation Strategy • Figure 14.1(P.435), transportation strategy is concerned with the purchase and control of transportation services. • Transportation purchasing decisions include modal selection, consolidation, private trucking, intermediaries, and contracting. The resources, organization, and trade terms decisions are concerned with controlling transportation.

6. General Strategy • Proactive management • Improve information • Limit Carriers used • Contracts for service • Negotiate • Review private trucking • Strategic Decisions • Modal selection • Consolidation • Private trucking • Intermediaries • Trade terms • Contracting • Resources • Organization • Small Shipments • Consolidate • Use drop-off carriers • Pooling services • Avoid private trucking • Bulk Shipments • Contracts • Balanced loads for carrier • Partnership

7. Proactive Management • The transportation manager relies on basic management techniques to seek innovative transportation systems that will provide the company with a competitive price or service advantage in the marketplace. • Today the transportation manager must rely on his or her ability and creativity to design a transportation system that permits product differentiation and a competitive advantage.

8. Proactive Management • The current competitive environment requires that the transportation manager focus on customer service and competitive strategies. • Successful logistics strategies are seen as a true competitive advantage, requiring transport support that can respond to ever increasing demands for smaller inventory levels combined with immediate delivery.

9. Improve Information • To effectively manage the transportation function, reliable and current information is a necessity. Without information, the manager in unable to plan and control the transportation activities on make sound decisions. • Transportation costs, shipment volume, and carrier performance are the typical data collected. These data are essential to carrier negotiation, freight consolidation, contracting, and private trucking decisions.

10. Improve Information • A major source of transportation information is the bill of lading. The bill of lading indicates the customer or vendor, the shipment volume, origin and destination, date, and carrier. • The carrier’s freight bill (invoice) provides similar data as well as the transportation cost for the shipment. • Other sources include the purchase order, order entry system, invoice, and internal studies. Some companies use a third-party provider, such as a bank or freight payment company, to pay freight bills, and most of these freight payment firms have the computer capabilities to provide transportation data reports in the format required by management.

11. Carrier Negotiation • Negotiating with for-hire carriers is standard operating procedure today. • Market power determines the shipper’s ability to negotiate acceptable rates and services. To increase market power, shippers use the strategy of limiting the number of carriers, thereby concentrating more of its economic power with a carrier and increasing the carrier’s dependence on the shipper.

12. Carrier Negotiation • A shipper’s market power and negotiating strength also are determined by the characteristics of its freight. Freight that has low density, is hard to handle, is easily damaged, and moves in small volumes irregularly is undesirable freight for the carrier. • Conversely, products that have high density and high value, are difficult to damage, and move in large volumes regularly are more economical for the carrier to move.

13. Contracting • The contracts allow the shipper to realize the lower rates and necessary service levels that are not attainable from a regulated carrier. • During the term of the contract, the shipper is guaranteed the contracted rate and service. If properly written, the provisions of the contract take precedence over the bill of lading and transportation regulations. • The transportation manager must take precautions to ensure that the contract provides desired terms such as rates, services, equipment, and liability.

14. Small Shipment Strategy • The strategic thrust for small shipments is to reduce the inherently high transportation costs associated with small-sized shipments. • By increasing the size of the shipments, the shipper can take advantage of the carrier’s low rates for heavier shipments. Rate discounts from 30 percent to 50 percent or more are possible for heavier loads.

15. Small Shipment Strategy • A shipper consolidates its freight by using its order entry system. As customer orders arrive, a computer uses a three-digit zip code to match shipments going to the same general area. • As discussed above, the need for information is critical to any freight consolidation program. The transportation manager must know the shipments that are shipped to a given area on a given date as well as delivery requirements.

16. Small Shipment Strategy • If the consolidated load consists of many shipments going to different consignees in a general area, the shipper may use the pooling service offered by for-hire carriers. • The pooling service charges the shipper the lower volume rate from one origin to one destination. Because the consolidated load contains shipments for many consignees at different destinations, a warehouse or drayage firm is used to separate and deliver the individual shipment, and an added cost is incurred for this additional break-bulk and delivery service.

17. Small Shipment Strategy • Another small shipment strategy is the use of stopping-in-transit (SIT) service provided by motor carriers. • SIT permits the shipper to load a number of shipments on a vehicle and stop along the way to unload the individual shipments. • Conversely, SIT can be used for inbound shipments by having the carrier stop along the way to load additional shipments and deliver a consolidated row material shipment to the plant, warehouse, or retail store.

18. Bulk Shipment Strategy • The primary strategy used in the transportation of bulk commodities is contracting. Most bulk raw materials are moved under long-term contracts with rail, water, and motor carriers. • The large volume of product moved gives the shipper the requisite negotiating and market power to realize lower rates and guaranteed service levels.

19. Bulk Shipment Strategy • The sheer volume of transportation involved has caused both shippers and carriers to realize their mutual dependency. • If the carrier ceases operation, the shipper experiences serious disruptions in service, higher costs, and possibly a short-run closing of production because alternative transportation is not available. • Likewise, the carrier is aware of the large percentage of its business that is accounted for by one shipper.

20. Bulk Shipment Strategy • Given this mutual dependency, a shipper attempts to provide the carrier with a balanced load, that is, a load into the facility and one out of the facility. • A balanced load eliminates the empty backhaul costs that the carrier must account for in the initial loaded move and enables the carrier to spread this round-trip cost over two commodity moves instead of one.

21. Bulk Shipment Strategy • To accomplish the balanced load strategy, cooperation is required between outbound and inbound (purchasing) transportation and may necessitate resourcing material purchases from areas where the carrier experiences empty backhauls. • Recently, a major manufacturer contacted other shippers in an attempt to generate freight for its contract carrier to haul over an otherwise empty backhaul. This can be difficult if the commodity being transported required dedicated or specialized trailers.

22. Traffic Management • Traffic management is the traditional term for the task of obtaining and controlling transportation services for shippers or consignees or both. • In many firms, traffic management is the core of business logistics department. Transportation in the firm exists in close trade-off relationships with purchasing, warehousing, inventory control, packaging, production scheduling, and marketing.

23. Traffic Management as a Procurement Function • Traffic management is a special form of procurement and purchasing. Procurement is a term that applies to a wide range of activities that basically consists of obtaining goods and services for the firm. • Procurement includes analysis and activities in the following areas: (See next page) • All of these factors provide the firm with a system to obtain the physical goods and special services it requires.

24. Quality Pricing Specifications Supply source Negotiations Inspection and assurance of quality 7. Timing 8. Conducting value analysis of alternative methods and sources 9. Capital analysis Make or buy decisions Legal and regulatory constraints General management Traffic Management as a Procurement Function

25. Line and Staff Functions • Originally, traffic management was a clerical activity devoted to shipping or receiving the firm’s goods. Today it entails a range of line functions that often are specialized and require communications and data systems. • Traffic managers must observe field trends, evaluate potential procedural and system changes, plan for the implementation of appropriate changes, and propose some of these changes to top management.

26. Carrier Selection Process • The traffic manager’s decisions have a direct impact upon the company’s total logistics costs and quality of service provided to the customer. • The transport selection decision is a two-part decision. The initial decision involves the selection of the mode and the second division relates to the selection of the specific carrier within the mode.

27. Carrier Selection Process • That is, the traffic manager examines the cost and service characteristics of the different modes, including the combination of two or more modes, and selects the mode that matches the company’s cost and service goals. • Next, the traffic manager examines the cost and service characteristics of the individual carriers within the selected mode and selects the specific carrier to provide the desired transport service.

28. Carrier Selection Process • The relevant carrier selection factors include transport cost, transit time, transit time reliability, accessibility, capability, and security. • These factors impact the total logistics costs of movement and storage and are used in both the selection of the mode and specific carrier.

29. Transport Cost • The transport cost factor includes the rate charged by the potential carrier. In addition, this factor examines the charges assessed by the carrier for ancillary services such as residential delivery, controlled-temperature vehicles, and stops in transit. • The transport cost varies from mode to mode because of the different cost structures of the modes, whereas the cost variation among carriers within a mode is less because the carriers have similar cost structures.

30. Transit Time and Transit Time Reliability • The total-cost implication of the carrier selection decision considers not only the direct transportation cost incurred but also the indirect costs associated with the quality of the service provided. • Transit time and reliability of transit time are two transport service qualities that affect inventory costs and stockout costs.

31. Transit Time and Transit Time Reliability • Transit time impacts the level of inventory held and the consequent inventory carrying costs. The longer the transit time, the higher the inventory levels and the higher the inventory carrying costs. • Therefore, the total cost impact of using a carrier (mode) with a longer transit time is higher inventory carrying costs.

32. Transit Time and Transit Time Reliability • Likewise, the reliability of transit time affects the level of inventory required. Unreliable transit time requires an increase in the level of inventory to guard against stockout conditions and the resultant cost of lost profit or lost productivity associated with not having the product available to meet the demand. • Viewed from a marketing perspective, reliable transit time affords the buyer the opportunity to reduce or control both inventory and stockout costs. Thus, using a carrier that provides reliable transit time provides the seller with a marketplace advantage.

33. Accessibility • The accessibility factor considers the ability of the carrier to provide the transport service between a specific origin and destination. • The modes differ in their ability to provide direct service to specific locations. Physical limitations associated with roadways and terminals prohibit certain modes from providing direct services to a specific site. • To overcome the accessibility of a mode, the services of another more accessible mode must be purchased. The addition expense to surmount a mode’s inability to service a particular location is the accessibility cost.

34. Capability • The capability factor refers to the ability of the carrier (mode) to provide the unique transport services and equipment required by the user. The traffic manager will use the carrier that has the ability to provide the unique services or equipment required. • Controlled-temperature vehicles for the movement of frozen foods • High cube capacity vehicles for the movement of low-density products(plastic bottles, for example) • Tank vehicles for the movement of bulk liquids.

35. Security • Considers the indirect transport service cost if the shipment is damaged or lost in transit. • A damaged shipment has the same impact on inventory costs and stockout costs as unreliable transit time. • A product damaged or lost in transit is not available for use when demanded and the user incurs the cost of processing a damage claim or legal action against the carrier to secure reimbursement, incurs the loss if reimbursement is not received from the carrier, or pays for insurance to provide protection against the in-transit damage.

36. Although the management of individual traffic officers may vary, the typical traffic management process is as follows: Shipment planning Carrier selection Ordering service Expediting/tracing Preauditing/rating Auditing/paying the freight bill Detection/demurrage processes Claims, if nay Other – private car or truck fleet management, transportation budget management Line Aspects of Traffic management

37. Shipment Planning • Traffic management continually monitors inbound and outbound shipping schedules, which should be coordinated with purchasing and distribution or production. • A continuous flow of product should be maintained, unhindered by the unavailability of transportation (no equipment or service). • Further, physical loading and unloading must be planned according to the efficient use of docks and labor. • Management must ensure that transportation is not scheduled too early or in excess of actual needs because dock and track congestion and equipment detention and demurrage charges will result.

38. Carrier Selection • In rail contexts this might be largely confined to the carrier that has a siding into the plant. But even here, the traffic manager may have some latitude in route selection through use of intermediate or alternative route carriers. • In connection with motor carriers, traffic managers often will give shipment preference to the firm’s own private carriage vehicles or use a contract carrier before considering common carriers.

39. Ordering Service • Electronic methods are becoming more common and the use of the Internet is accelerating this trend. • In other cases, long-term arrangements for equipment supply include trailer pools and scheduled rotation. • The traffic manager needs to inform the carrier personnel of the shipper’s name and pickup point, weight, commodity, destination, and sometimes the cube measurement of the shipment. • Upon vehicle arrival, the equipment is loaded according to plans established in the first step (shipment planning). They include crew assignment, loading arrangement, bracing, dunnage, documentation, and any other special need.

40. The traffic manager keeps track of shipment progress and alerts the carrier of any en-route changes that might be necessary. Some shippers have direct computer links with carrier shipment systems. These provide daily position reports of all the shipper’s railcars or shipments. Some carriers provide tracing services via the Internet. Other carriers place information in a secure Web site that only particular shipper can access. This information is updated on a scheduled basis. Expediting/tracing is a valuable control tool for the shipper and consignee because they can plan production and assembly around shipment progress or problems. Expediting/Tracing

41. Preauditing/Rating • Preauditing is the process of determining what the proper freight charges for a shipment should be. • Often shippers pre-audit shipments before billing by the carrier so that freight bill overcharges and undercharges can be reduced or avoided. • Computer rating systems have greatly assisted with this task.

42. Auditing entails checking the accuracy of the freight bill after it is presented by the carrier or after it has been paid. Some firms do this in-house, whereas others hire outside consultants to perform this job after the bill has actually been paid. Contract rates and services, the diminished importance of rate bureaus and their complex tariffs, and the growth of computers enable preauditing and postauditing to take place with fewer resources than in the past. Many carriers offer their rates often computer floppy disks or will update a shipper’s file via an EDI link automatically. Auditing/Paying the Freight Bill

43. Detention is a charge assessed by a motor carrier against a shipper or consignee for keeping equipment for loading or unloading beyond a specified period. Demurrage is the same concept in the rail industry. The traffic manager is usually responsible for monitoring, managing, and paying for detention and demurrage obligations. The manager must trade off the loading, unloading, and personnel costs against the cost of holding carrier equipment. Detention/Demurrage Processes

44. Claims • Loss and damage sometimes occur to shipments while in the possession of carriers. • Traffic managers will then file claims to recoup part or all of these damaged amounts. • They also handle overcharges on the freight bills.

45. Claims • Exceptions: • An act of God, an unavoidable catastrophe • An act of a public enemy, armed aggression against our country • An act of public authority, through due process of law, a government agency causes damage, loss, or delay • An act of the shipper, actions by the shipper contribute to the damage, such as improper packaging • The inherent nature of the goods, natural deterioration

46. Private Car and Truck Fleet Management • In some firms, the traffic manager is also responsible for private railcar and truck fleet management. • This entails coordination and control tasks with the goal of minimizing fleet costs and providing quality service.

47. Transportation Budget Management • The transportation budget is the major overriding financial control in all these tasks. • The traffic manager must keep track of current and future activities and expenditures and relate them to the original plan. • Cost escalators, such as fuel and insurance, have crated major problems for most traffic managers who attempt to operate within planned budgets. • Escalation will no doubt continue to be a complicating cost and budget problem in the future.

48. Staff and Administrative Aspects of Traffic Management • Traffic management has grown over the years to become more than a mere line activity. • Many planning tasks or staff activities have developed as support functions. • These other activities increase the cost efficiency or customer service capability of the line activities.

49. Mode Selection • The traffic manager selects the mode for specific classes of shipments or products, market areas, or each plant or warehouse. • Each mode offers specific inherent service and cost advantages. • Usually, the selection is made infrequently so that routing and carrier selection personnel can operate within the modal choice.

50. Monitoring Service Quality • If the traffic manager can get the products to the customer in a timely, consistent, and undamaged basis, the buyer’s inventory and stockout costs are lowered, making it advantageous for the buyer to do business with the seller. • The key to monitoring transportation service quality is information. The traffic manager must have information regarding the customer’s demands for transportation service and the service level provided by current carriers.