Fundamentals of Transportation

Understanding transportation
Transportation is a very visible element of logistics. Consumers are accustomed to seeing
trucks and trains transporting product or parked at business facilities. Few consumers fully
understand just how dependent our economic system is upon economical and dependable
transportation. This section provides a foundation by reviewing transportation functionality and
the underlying principles of transport operation.

Effective transportation system plays a greater role in overall business progress. These importance
of effective transportation system are:

• Reduced costs
• Greater competition
• Economies of Scale.

Types of transport
The freight transportation structure consists of the rights-of-way, vehicles, and carriers that
operate within five basic transportation modes. A mode identifies a basic transportation method or
form. The five basic transportation modes are rail, highway, water, pipeline, and air.

Rail: Historically, railroads have handled the largest number of freights in the world. A ton-mile
is a standard measure of freight activity that combines weight and distance. As a result of early
development of a comprehensive rail network connecting almost all cities and towns, railroads
dominated intercity freight tonnage until after World War 11. This early superiority resulted from
the capability to transport large shipments economically and to offer frequent service, which gave
railroads a somewhat monopolistic position.

Highways: 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.

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 deep water and navigable inland water transport. The main advantage of water transport
is the capacity to transport extremely large shipments. Water transport employs two types of
vessels for movement: Deepwater vessels are generally designed for coastal, ocean, and Great
Lakes transport; diesel towed barges generally operate on rivers and canals and have considerably
more flexibility.

Pipeline: Pipeline transport is the long-distance transportation of a liquid or gas through a system
of pipes—a pipeline—typically to a market area for consumption. Pipeline, line of pipe equipped
with pumps and valves and other control devices for moving liquids, gases, and slurries (fine
particles suspended in liquid). Pipeline sizes vary from the 2-inch- (5-centimetre-) diameter lines
used in oil-well gathering systems to lines 30 feet (9 meters) across in high-volume water and
sewage networks.

Agencies and small shipment services

Freight Forwarders: Freight forwarders are for-profit businesses that consolidate small
shipments from various customers into bulk shipment and then utilize a common surface or air
carrier for transport. At destination, the freight forwarder splits the bulk shipment into the original
smaller shipments. Local delivery may or may not be arranged by the forwarder.

Shipper Association/Cooperatives and Agents: Shipper associations are operationally similar to

freight forwarders in that they consolidate small shipments into large movements to gain cost
economies. Shipper associations are voluntary nonprofit entities where members, operating in a
specific industry, collaborate to gain economies related to small-shipment purchases. Typically,
members purchase product from common sources or from sources of supply located in one area.

Brokers: Brokers are intermediaries who coordinate transportation arrangements for shippers,
consignees, and carriers. They also arrange shipments for exempt carriers and owner operators.
Brokers typically operate on a commission basis.

Transport cost characteristics

Transport costs are the costs internally assumed by the providers of transport services. They
come as fixed (infrastructure) and variable (operating) costs, depending on various conditions
related to geography, infrastructure, administrative barriers, energy, and how passengers and
freight are carried.
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. In general, the

discussion sequence reflects the relative importance of each factor from the shipper's perspective.
Keep in mind that the precise impact of each factor varies based on specific product characteristics.

Distance: Distance is a major influence on transportation cost since it directly contributes to

variable expense, such as labor, fuel, and maintenance.

Volume: The second factor is load volume. Like many other logistics activities, transportation
scale economies exist for most transportation movements. This indicates that transport cost per
unit of weight decreases as load volume increases. This occurs because the fixed costs of pickup,
delivery, and administration can be spread over incremental volume.

Density: A third factor is product density. Density is a combination of weight and volume. Weight
and volume are important since transportation cost for any movement is usually quoted in dollars
per unit of weight.

Stowability: Stowability refers to how product case dimensions fit into transportation equipment.
Odd package sizes and shapes, as well as excessive weight or length, may not fit well in
transportation equipment; this results in wasted cubic capacity. Although density and stowability
are similar, it is possible to have items with similar densities that stow very differently.

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.

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. Shippers can reduce their risk, and ultimately transportation cost, by
improved packaging or reducing susceptibility to loss or damage.

Market: Finally, market factors such as lane volume and balance influence transportation cost. A
transport lane refers to movements between origin and destination points. Since transportation
vehicles and drivers must return to their origin, either they must find a back-huul load or the vehicle
is returned or deadheaded empty. When empty return movements occur, labor, fuel and
maintenance costs must be charged against the original front-haul movement. Thus, the ideal
situation is to achieve two-way or balanced movement where volume is equal in both directions.

Types of transport 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. The variable category includes
direct carrier cost associated with movement of each load. These expenses are generally measured
as a cost per mile or per unit of weight. Typical variable cost components include labor, fuel, and
maintenance.

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. For transportation firms, fixed components include
vehicles, terminals, rights-of-way, information systems, and support equipment. In the short term,
expenses associated with fixed assets must be covered by contribution above variable costs on a
per shipment basis.

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. Thus, legal title to ownership is occurring at the time the
transport service is performed.

The bill of lading is the basic document utilized in purchasing transport services. It serves as a
receipt and documents products and quantities shipped. For this reason, accurate product
description and count are essential. In case of loss, damage, or delay, the bill of lading is the basis
for damage claims. The designated individual or buyer on a bill of lading is the only bona fide
recipient of goods. A camer is responsible for proper delivery according to instructions contained
in the document. In effect, title is transferred with completion of delivery.
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. A prepaid bill means that transport cost must be paid prior to performance, whereas a
collect shipment shifts payment responsibility to the consignee.

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.