Chapter Five Transportation Management

I. Learning objectives and requirements

1. to know well transportation modes 2. to understand such factors and economics that drive cost to develop effective logistics strategy 3. to know how to manage transportation effectively and efficiently 43. to know three primary types of transport documentation including bills of lading, freight bills, and shipment manifests

II. Learning contents Section I. Transportation Modes and Economics

1. Main contents Transportation modes include: 1) Rail Historically, railroads have handled the largest number of ton-miles within the continental United States. 2) Motor Highway transportation has expanded rapidly since the end of World War 11. To a significant degree the rapid growth of the motor carrier industry has resulted from speed and ability to operate door-to-door. 3) Water Water is the oldest mode of transport. The original sailing vessels were replaced by steam-powered boats in the early 1800s and by diesel in the 1920s. A distinction is generally made between deepwater and navigable inland water transport. 4) Pipeline Pipelines are a significant part of the U.S. transportation system. 5) Air The newest but least utilized mode of transportation is airfreight. The significant advantage of airfreight lies in the speed with which a shipment can be transported. 6) Modal Classification Table 11-5 ranks modal operating characteristics with respect to speed, availability, dependability, capability, and frequency. (i)Speed Speed refers to elapsed movement time. (ii)Availability Availability refers to the ability of a mode to service any given pair of locations. (iii)Dependability Dependability refers to potential variance from expected or published delivery schedules. (iiii)Capability Capability is the ability of a mode to handle any transport requirement, such as load size. (iiiii)Frequency The final classification is frequency, which relates to the quantity of scheduled movements. Transportation economics and pricing are concerned with factors and characteristics that drive cost. To develop effective logistics strategy, it is necessary to understand such factors and characteristics. Successful negotiation requires a full understanding of transportation economics. An

overview of transportation economics and pricing builds upon four topics: (1) the factors that drive transport costs, (2) the cost structures or classifications, (3) carrier pricing strategy, and (4) transportation rates and ratings. 1) Economic Drivers Transportation costs are driven by seven factors. While not direct components of transport tariffs, each factor influences rates. The factors are: (I) distance, (2) volume, (3) density, (4) stowability, (5) handling,(6) liability, and (7) market. a) Distance Distance is a major influence on transportation cost since it directly contributes to variable expense, such as labor, fuel, and maintenance. b) Weight The second factor is load volume. Like many other logistics activities, transportation scale economies exist for most transportation movements. The management implication is that small loads should be consolidated into larger loads to maximize scale economies. c) Density A third factor is product density. Density is a combination of weight and volume. In general, traffic managers seek to improve product density so that trailer cubic capacity can be fully utilized. d) Stowability Stowability refers to how product case dimensions fit into transportation equipment. Although density and stowability are similar, it is possible to have items with similar densities that stow very differently. Stowability is also influenced by other aspects of size, since large numbers of items may be nested in shipments whereas they may be difficult to stow in small quantities. e) Handling Special handling equipment may be required to load and unload trucks, railcars, or ships. In addition to special handling equipment, the manner in which products are physically grouped together in boxes or on pallets for transport and storage will impact handling cost. f) Liability Liability includes product characteristics that can result in damage and potential claims. Carriers must either have insurance to protect against possible claims or accept financial responsibility for damage. g) Market, Finally, market factors such as lane volume and balance influence transportation cost. 2) Cost Structure The second dimension of transport economic and pricing concerns the criteria used to allocate cost. Cost allocation is primarily the carrier's concern, but since cost structure influences negotiating ability, the shipper's perspective is important as well. Transportation costs are classified into a number of categories. a) Variable Costs Variable costs change in a predictable, direct manner in relation to some level of activity. Variable costs can only be avoided by not operating the vehicle. Aside from exceptional circumstances, transport rates must at least cover variable cost. b) Fixed Costs Fixed costs are expenses that do not change in the short run and must be serviced even when a company is not operating, such as during a holiday or a strike. The fixed category includes costs not directly influenced by shipment volume. c) Joint Costs

Joint costs are expenses unavoidably created by the decision to provide a particular service. Joint costs have significant impact on transportation charges because carrier quotations must include implied joint costs based on considerations regarding an appropriate back-haul shipper and/or back-haul charges against the original shipper. d) Common Costs Common costs, such as terminal or management expenses, are characterized as overhead. These are often allocated to a shipper according to a level of activity like the number of shipments or delivery appointments handled. However, allocating overhead in this manner may incorrectly assign costs. 3) Carrier Pricing Strategies When setting rates to charge shippers, carriers typically follow one or a combination of two strategies. Although it is possible to employ a single strategy, the combination approach considers trade-offs between cost of service incurred by the carrier and value of service to the shipper. a) Cost-of-Service Strategy The cost-of-service strategy is a build up approach where the carrier establishes a rate based on the cost of providing the service plus a profit margin. b) Value-of-Service Pricing Value-of-service is an alternative strategy that charges a price based on value as perceived by the shipper rather than the carrier's cost of actually providing the service. c) Combination pricing strategy The combination pricing strategy establishes the transport price at an intermediate level between the cost-of-service minimum and the value-of-service maximum. d) Net-Rate pricing The net-rate pricing approach does away with the complex and administratively burdensome discount pricing structure that has become common practice since deregulation. Established discounts and accessorial charges are built into the net rates. In other words, the net rate is an all-inclusive price. The goal is to drastically reduce carriers' administrative cost and directly respond to customer demand to simplify the rate-making process. Shippers are attracted to such simplification because it promotes billing accuracy and provides a clear understanding of how to generate savings in transportation. 4) Rates and Rating a) Class Rate Determination of common carrier class rates is a two-step process. The first step is the classification or grouping of the product being transported. The second step is the determination of the precise rate or price based on the classification of the product and the origin/destination points of the shipment. b) Classification All products transported are typically grouped together into uniform classifications. The classification takes into consideration the characteristics of a product or commodity that will influence the cost of handling or transport. c) Rate Determination Once a classification rating is obtained for a product, rate must be determined. The rate per hundredweight is usually based on the shipment origin and destination, although the actual price charged for a particular shipment is normally subject to a minimum charge and may also be subject to surcharge assessments. d) Commodity Rates When a large quantity of a product moves between two locations on a regular basis, it is common practice for carriers to publish a commodity rate. Commodity rates are special or specific

rates published without regard to classification. The terms and conditions of a commodity rate are usually indicated in a contract between the carrier and shipper. Commodity rates are usually published on a point-to-point basis and apply only on specified products. e) Exception Rates Exception rates, or exceptions to the classification, are special rates published to provide shippers lower rates than the prevailing class rate. The original purpose of the exception rate was to provide a special rate for a specific area, origin/destination, or commodity when either competitive or high-volume movements justified it. Rather than publish a new tariff, an exception to the classification or class rate was established. f) Special Rates and Services A number of special rates and services provided by for-hire carriers are available for logistical operations. 2. Key concepts and points Economic Drivers, Distance, Tapering Principle, Weight, Density, Stowability, Handling, Liability, Market, Transport Lane, Backhaul Load, Deadheaded empty, Cost Structure, Variable Costs, Fixed Costs , Joint Costs , Common Costs, Carrier Pricing Strategies, Cost-of-Service Strategy, Value-of-Service Pricing , Combination pricing strategy, Net-Rate pricing, Rates and Rating, Class Rate, Tariffs, Classification, Rate Determination, Commodity Rates, Exception Rates, Aggregate Tender Rate, Limited Service Rate, Shipper Load and Count Rate, Released Value Rate, Special Rates and Services, Freight-All-Kind(FAK) Rates, Local Rate, Single-Line Rate, Joint Rate, Proportional Rates, Transit Service, Diversion and Re-consignment, Split Delivery, Demurrage, Detention, Special/Accessorial Service, Environmental Services, Special Equipment Charges 3. Issues of application Students shall be able to describe the five modes of transportation, identifying the most significant characteristic of each after learned this section. Further, they shall be able to figure out why motor carrier freight transportation is the most preferred method of product shipment. Transportation economics and pricing are concerned with factors and characteristics that drive cost. To develop effective logistics strategy, it is necessary to understand such factors and economics.

Section II. Traffic Department Administration

While traffic managers administer many different activities, they are fundamentally responsible for: (1) operations management, (2) freight consolidation, (3) rate negotiation, (4) freight control, (5) auditing and claims, and (6) logistical integration. 1. Main contents 1) Operations Management In large-scale organizations, traffic operations management involves a wide variety of administrative responsibilities. From an operational perspective, key elements of transportation management are equipment scheduling, load planning, routing, and carrier administration. 2) Freight Consolidation At several different points throughout this text the importance of freight consolidation is discussed. The fact that freight costs are directly related to size of shipment and length of haul places a premium upon freight consolidation. From an operational viewpoint, freight consolidation techniques can be grouped as reactive and proactive. Each type of consolidation is important to achieving transportation efficiency. 3) Rate Negotiation For any given shipment it is the responsibility of the traffic department to obtain the lowest

possible rate consistent with service requirements. The prevailing price for each transport alternative-rail, air, motor, pipeline, water, and so on-is found by reference to tariffs. 4) Freight Control Other important responsibilities of transportation management are tracing and expediting. Tracing is a procedure to locate lost or late shipments. Expediting involves the shipper notifying a carrier that it needs to have a specific shipment move through the carrier's system as quickly as possible and with no delays. 5) Auditing and Claim Administration When transportation service or charges are not performed as promised, shippers can make claims for restitution. Claims are typically classified as loss and damage or overcharge/undercharge. Auditing freight bills is an important function of the traffic department. The purpose of auditing is to ensure billing accuracy. 6) Logistical Integration For any given operating period, traffic management is expected to provide the required transportation services at budgeted cost. It is also traffic management's responsibility to search for alternative ways to deploy transportation to reduce total logistics cost. 2. Key concepts and points Operations Management, Transportation Management Systems (TMS), Equipment Scheduling, Yard Management, Load Planning, Routing, Advanced Shipment Notification (ASN), Movement Administration, Core Carrier Strategy, Consolidation 3. Issues of application As operational expectations become more precise, order-to-delivery performance cycles more compact, and margins for error reduced near zero, successful firms have come to realize that there is no such thing as cheap transportation. Unless transportation is managed in an effective and efficient manner, procurement, manufacturing, and customer accommodation performance will not meet expectations.

Section III. Documentation

Well-defined documentation is required to perform a transportation service. With the exception of private transfer within the confines of a single firm, products are typically being sold between the shipper and the consignee. Three primary types of transport documentation are bills of lading, freight bills, and shipment manifests. 1. Main contents 1) Bill of Lading The bill of lading is the basic document utilized in purchasing transport services. It serves as a receipt and documents products and quantities shipped. The bill of lading specifies terms and conditions of carrier liability and documents responsibilities for all possible causes of loss or damage except those defined as acts of God. 2) Freight Bill The freight bill represents a carrier's method of charging for transportation services performed. It is developed using information contained in the bill of lading. The freight bill may be either prepaid or collect. 3) Shipment Manifest The shipment manifest lists individual stops or consignees when multiple shipments are placed on a single vehicle. Each shipment requires a bill of lading. The manifest lists the stop, bill of lading, weight, and case count for each shipment. The objective of the manifest is to provide a single

document that defines the overall contents of the load without requiring review of individual bills of lading. For single-stop shipments, the manifest is the same as the bill of lading. 2. Key concepts and points Bill of Lading, Order-Notified, Export, Government, Freight Bill, Prepaid, Collect, Shipment Manifest 3. Issues of application Well-defined documentation is required to perform a transportation service. With the exception of private transfer with in the confines of a single firm, products are typically being sold when being transported. Thus, legal title to ownership occurs during the time the transport service is performed. When for-hire carriers are engaged to perform the transportation, the transaction must establish clear legal responsibility for all parties involved. Students shall keep it in mind that the primary purpose of transportation documentation is to protect all parties involved in the performance of the transaction.

III. Review Questions

1. Seven economic drivers that influence transportation cost were presented. Select a specific product and discuss how each factor will impact determination of a freight rate. 2. Compare and contrast cost-of-service with value-of-service as alternative rate making strategies. 3. What is the purpose of freight classification: Does the concept of classification have relevancy given deregulation of transportation? 4. Describe the difference between a rate and a rating. How do they relate to classification? 5. What is the role of the freight bill and the bill of lading in a transportation transaction? 6. Compare and contrast variable, fixed and joint costs. 7. What is the basic concept of multi-vendor consolidation? How do integrated service providers help achieve such consolidation? 8. Compare and contrast reactive and proactive consolidation. Provide of example of each.

IV. Teaching approaches

1. Lecture; 2.Case Study; 3.Group Discussion 4.CAI (Computer-aided instruction); 5. Network-Aided Teaching; 6.Bilingual Teaching Approach