Chapter Four

Transport Pricing and Documentations

4.1 Transport Pricing

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: The factors that drive transport costs,
the cost structures or classifications, carrier pricing strategy, and transportation rates and ratings.

3.1 Economic Factors the Drive Transportation Cost

Transportation economics are driven by seven factors. While not direct components of transport
tariffs, each factor influences rates. The factors are: Distance, Volume, Density, Stowability,
Handling, Liability, and Market. The following part discusses the relative importance of each factor
from a shipper’s perspective. Keep in mind that the precise impact of each factor varies, depending
on specific market and product characteristics.

(1) Distance: Distance is a major influence on transportation cost since it directly contributes to
variable expense, such as labor, fuel, and maintenance. Figure 4.1 illustrates the general
relationship between distance and transportation cost. Two important points are illustrated. First,
the cost curve does not begin at zero because there are fixed costs associated with shipment
pickup and delivery regardless of distance. Second, the cost curve increases at a decreasing rate
as a function of distance. This characteristic is known as the tapering principle.

Figure 4.1

(2) Volume: The second factor is load volume. Like many other logistics activities, transportation
scale economies exist for most transportation movements. This relationship, illustrated in Figure
 4-2, 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. This relationship is limited by the size of the transportation vehicle. Once
the vehicle is full, the relationship begins again for each additional vehicle. The management
implication is that small loads should be consolidated into larger loads to maximize scale
economies.

Cost

Volume of load Figure 4-2

(3) Density: A third factor is product density. Density is the 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. Transport charges are commonly quoted per hundredweight (CWT).
In terms of weight and volume, vehicles are typically more constrained by cubic capacity than by
weight. Since actual vehicle, labor, and fuel expenses are not dramatically influenced by weight,
higher-density products allow fixed transport cost to be spread across more weight. As a result,
higher density products are typically assessed lower transport cost per unit of weight. Figure 4.3
illustrates the relationship of declining transportation cost per unit of weight as product density
increases. In general, traffic managers seek to improve product density so that trailer cubic
capacity can be fully utilized.

Figure 4.3

(4) Stowability: Stowability refers to how product dimensions fit into transportation equipment. Odd
package sizes and shapes, as well as excessive size or length, may not fit well in transportation
equipment, resulting in wasted cubic capacity. Although density and stowability are similar, it is
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 possible to have items with similar densities that stow very differently. Items having rectangular
shapes are much easier to stow than odd-shaped items. For example, while steel blocks and rods
may have the same physical density, rods are more difficult to stow than blocks because of their
length and shape. 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. For
example, it is possible to accomplish significant nesting for a truckload of trash cans while a
single can is difficult to stow.
(5) 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.
(6) Liability: Liability includes product characteristics that can result in damage. Carriers must
either have insurance to protect against potential damage or accept financial responsibility.
Shippers can reduce their risk, and ultimately transportation cost, by improved packaging or
reducing susceptibility to loss or damage.
(7) 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 typically return to their origin, either they must find a back-
haul 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 of loads.
However, this is rarely the case because of demand imbalances in manufacturing and
consumption locations. Movement balance is may be influenced by seasonality, such as the
movement of fruits and vegetables to coincide with growing seasons. Demand location and
seasonality result in transport rates that change with direction and season. Logistics system
design must take such factors into account to achieve back-haul economies whenever possible.

3.2 Transportation Costing

The second dimension of transport economics and pricing concerns the criteria used to allocate cost.
Cost allocation is primarily a carrier 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.

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a) Variable: Costs that change in a predictable, direct manner in relation to some level of activity
are labeled variable costs. Variable costs in transportation can be avoided only 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. The variable cost of operations represents
the minimum amount a carrier must charge to pay daily expenses. It is not possible for any
carrier to charge customers a rate below its variable cost and expect to remain in business long.
b) Fixed: Expenses that do not change in the short run and must be paid even when a company is
not operating, such as during a holiday or a strike, are fixed costs. 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.
c) Joint: Expenses created by the decision to provide a particular service are called joint costs. For
example, when a carrier elects to haul a truckload from point A to point B, there is an implicit
decision to incur a joint cost for the back-haul from point B to point A. Either the joint cost must
be covered by the original shipper from A to B or a back-haul shipper must be found. Joint costs
have significant impact on transportation charges because carrier quotations must include implied
joint costs based on assessment of back-haul recovery.
d) Common: This category includes carrier costs that are incurred on behalf of all or selected
shippers. 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. For example, a shipper may be charged for delivery appointments
when not actually using the service.

3.3 Carrier Pricing Strategy

When setting rates, 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.

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a. Cost-of-Service: The cost-of-service strategy is a buildup approach where the carrier establishes
a rate based on the cost of providing the service plus a profit margin. For example, if the cost of
providing a transportation service is $200 and the profit markup is 10 percent, the carrier would
charge the shipper $220. The cost-of-service approach, which represents the base or minimum
for transportation charges, is most commonly used as a pricing approach for low-value goods or
in highly competitive situations.
b. Value-of-Service: An alternative strategy that charges a price based on value as perceived by the
shipper rather than the carrier cost of actually providing the service is called value-of-
service. For example, a shipper perceives transporting 1000 pounds of electronics equipment as
more critical or valuable than 1000 pounds of coal, since electronics are worth substantially more
than the coal. Therefore, a shipper is probably willing to pay more for transportation. Carriers
tend to utilize value-of-service pricing for high-value goods or when limited competition exists.
Value-of-service pricing is illustrated in the premium overnight freight market. When FedEx first
introduced overnight delivery, there were few competitors that could provide comparable service,
so it was perceived by shippers as a high-value alternative. They were willing to pay a premium
for overnight delivery of a single package. Once competitors such as UPS, and the United States
Postal Service entered the market, overnight rates were discounted to levels reflecting the value
and cost of this service.
c. Combination: A combination pricing strategy establishes the transport price at an intermediate
level between the cost-of-service minimum and the value-of-service maximum. In practice, most
transportation firms use managerially determined midrange pricing. Logistics managers must
understand the range of prices and the alternative strategies so they can negotiate appropriately.
d. Net-Rate: By taking advantage of regulatory freedom and the reduced applicability of the filed
rate doctrine, a number of common carriers are experimenting with a simplified pricing format
termed net-rate pricing. The net-rate pricing approach does away with the complex and
administratively burdensome discount pricing structures that became common practice following
initial deregulation. Established discounts and accessorial charges are built into net rates. In
other words, the net rate is an all-inclusive price. The goal is to drastically reduce a carrier’s
administrative cost and directly respond to customer demand to simplify the pricing process.
Shippers are attracted to such simplification because it promotes billing accuracy and provides a
clear understanding of how to generate savings in transportation.

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 3.4 Transportation Rates

The previous discussion introduced key strategies used by carriers to set prices. This section presents
the traditional pricing mechanics used by carriers. This discussion applies specifically to common
carriers, although contract carriers follow a similar approach.

i. Class Rates: In transportation terminology, the price in dollars and cents per hundredweight to
move a specific product between two locations is referred to as the rate. The rate is listed on
pricing sheets or on computer files known as tariffs. The term class rate evolved from the fact
that all products transported by common carriers are classified for pricing purposes. Any product
legally transported in interstate commerce can be shipped via class rates. Determination of
common carrier class rates is a two-step process. The first step is to determine
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, weight, and
the origin/destination points of the shipment.
 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. Products with similar density,
stowability, and handling, liability, and value characteristics are grouped together into a class,
thereby reducing the need to deal with each product on an individual basis. The particular
class that a given product or commodity is assigned is its rating, which is used to determine
the freight rate. It is important to understand that the classification does not identify the price
or rate charged for movement of a product. Rating refers to a product’s transportation
characteristics in comparison to other commodities. Truck and rail carriers each have
independent classification systems. For instance in US context the trucking system uses the
National Motor Freight Classification, while rail classifications are published in the Uniform
Freight Classification. As a general rule, the higher a class rating, the higher the
transportation cost for the product. Less-than-truckload (LTL) shipments of identical
products will have higher ratings than truckload (TL) shipments. One of the major
responsibilities of transportation managers is to obtain the best possible rating for all goods
shipped, so it is useful for members of a traffic department to have a thorough understanding
of the classification systems. Although there are differences in rail and truck classifications,
each system is guided by similar rules. It is possible to have a product reclassified by written

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 application to the appropriate classification board. The classification board reviews proposals
for change or additions with respect to minimum weights, commodity descriptions,
packaging requirements, and general rules and regulations. An alert traffic department will
take an active role in classification. Significant savings may be realized by finding the correct
classification for a product or by recommending a change in packaging or shipment quantity
that will reduce a product’s rating.
 Rate Determination: Once a classification rating is obtained for a product, the 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 surcharges. Historically, the origin and
destination rates were manually maintained in notebooks that had to be updated and revised
regularly. Then rates were provided on diskettes by carriers. Today, options for selecting
carriers range from Internet software that examines carrier Web sites and determines the best
rates to participation in online auctions. Historically, the published rate had to be charged for
all shipments of a specific class and origin/destination combination. This required frequent
review and maintenance to keep rates current. Following deregulation, carriers offered more
flexibility through rate discounts. Now instead of developing an individual rate table to meet
the needs of customer segments, carriers apply a discount from class rates for specific
customers. In addition to the variable shipment charge applied on either a per hundredweight
or per mile basis, two additional charges are common for transportation:

Minimum charges: The minimum charge represents the amount a shipper must pay to make a
shipment, regardless of weight.

Surcharges: A surcharge represents an additional charge designed to cover specific carrier costs.
Surcharges are used to protect carriers from situations not anticipated when publishing a general rate.
The surcharge may be assessed as a flat charge, a percentage, or a sliding scale based on shipment
size. A common use of surcharges is to compensate carriers for dramatic changes in fuel cost. The
tariff indicates the class rate for any rating group between specified origins and destinations. In
combination, the classification framework and class rate structure form a generalized pricing
mechanism for all participating carriers. Each mode has specific characteristics applicable to its
tariffs. In water, specific tariff provisions are made for cargo location within the ship or on the deck.
In addition, provisions are made to charter entire vessels. Similar specialized provisions are found in

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 air cargo and pipeline tariffs. Non-operating intermediaries and package services also publish tariffs
specialized to their service.

ii. 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 published on a point-to-point basis and apply only on specified products. They are less
prevalent in motor carriage. Whenever a commodity rate exists, it supersedes the corresponding
class or exception rate.
iii. Exception Rates: Special rates published to provide prices lower than the prevailing class
rates. The original purpose of the exception rate was to provide a special rate for a specific area,
origin/destination, or commodity when justified by either competitive or high-volume
movements. Rather than publish a new tariff, an exception to the classification or class rate was
established. Just as the name implies, when an exception rate is published, the classification that
normally applies to the product is changed. Such changes may involve assignment of a new class
or may be based on a percentage of the original class. Technically, exceptions may be higher or
lower, although most are less than original class rates.
iv. Special Rates and Services: A number of special rates and services provided by carriers are
available for use in logistical operations. Several common examples are discussed below.
- Freight-all-kind (FAK) rates are important to logistics operations. Under this rate, a mixture of
different products is transported under a negotiated rating. Rather than determine the
classification and applicable freight rate of individual products, an average rating is applied for
the total shipment. In essence, FAK rates are line-haul rates since they replace class, exception,
or commodity rates. Their purpose is to simplify the paperwork associated with the movement of
mixed commodities. Numerous special rates exist that may offer transportation savings on
specific freight movements. When a commodity moves under the tariff of a single carrier, it is
referred to as a local rate or single-line rate. If more than one carrier is involved in the freight
movement, a joint rate may be applicable even though multiple carriers are involved in the
actual transportation process. Because some motor and rail carriers operate in restricted territory,
it may be necessary to utilize the services of more than one carrier to complete a shipment.
Utilization of a joint rate can offer substantial savings over the use of two or more local rates.

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- Transit services permit a shipment to be stopped at an intermediate point between initial origin
and destination for unloading, storage, and/or processing. The shipment is then reloaded for
delivery to the destination. Typical examples of transit services are milling for grain products and
processing for sugar beets. When transit privileges exist, the shipment is charged a through rate
from origin to destination plus a transit privilege charge.
- Diversion and re-consignment: For a variety of reasons, a shipper or consignee may desire to
change routing, destination, or even the consignee after a shipment is in transit. This process is
called diversion and reconsignment. This flexibility can be extremely important, particularly
with regard to food and other perishable products where market demand can quickly change. It is
a normal practice among certain types of marketing intermediaries to purchase commodities with
the full intention of selling them while they are in transit. Diversion consists of changing the
destination of a shipment prior to its arrival at the original destination. Reconsignment is a
change in consignee prior to delivery. Both services are provided by railroads and truck carriers
for a specified charge.
- A split delivery is desired when portions of a shipment need to be delivered to different
destinations. Under specified tariff conditions, delivery can involve multiple destinations. The
payment is typically structured to reflect a rate as if the shipment were going to the most distant
destination. In addition, there typically is a charge for each delivery.
- Demurrage and Detention are charges assessed for retaining freight cars or truck trailers
beyond specified loading or unloading time. The term demurrage is used by railroads for
holding a railcar beyond 48 hours before unloading the shipment. Trucks use the
term detention to cover similar delays. In the case of motor carriers, the permitted time is
specified in the tariff and is normally limited to a few hours.

Carriers may also offer environmental services and special equipment. Environmental
services refer to special control of freight while in transit, such as refrigeration, ventilation, and
heating.

3.5 Documentation in Freight Transport

The transport document is issued by the “Carrier” whether a shipping line, airline, trucking company
or railroad. They come in various forms and each serves several, but not necessarily all of the
following functions:

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 a) Receipt for the goods, evidencing loading, dispatch, or taking in charge and indicating the
general condition of the goods received.
b) A contract for carriage between the shipper and the carrier
c) An invoice from the carrier for charges.
d) A negotiable document exchangeable for money, allowing goods to be sold in transit.
e) A document of title representing ownership of the goods, which will only be released by the
shipping company against presentation of a signed original document.
The three most common basic types of documents in domestic transportation of freight are the bill of
lading, the freight bill and the freight claim. International transport has these and many more.
1.Bill of Lading
It is a legal contract between the shipper and the carrier for the movement of the designated freight
with reasonable dispatch to specified destination and without damage.
The Bill of Lading is ought to contain the name of the consignor (shipper); the name of the consignee
(receiver); the name of the master of the ship; the name of the ship and the voyage number; the place
of departure (Port of loading) and destination (Port of discharge); the price of the freight; the date of
loading; the marks and numbers of the things shipped.
Bill of lading of two characteristics that is negotiable & non-negotiable bill of lading these are:
a) Straight bill of lading: is a nonnegotiable legal document. Under straight bill of lading, the
goods are consigned only to the specific person noted in the document this bill cannot be traded
or sold.
b) Order bill of lading, the goods are consigned to the order of a person. This instrument may be
traded or sold by endorsing the order to another person other than the one specified in the
original bill. Being able to change the title allows the shipper to obtain payments for the goods
before they reach their destination by endorsing the order bill of lading over the bank and
receiving payment. The bank in turn, passes the document on to consignee’s bank, the consignee,
and finally the carrier. Most Bills of Lading is negotiable since it can serve as a document of
ownership that allows ownership to the goods to be transferred by endorsement and delivery of
the bill of lading. The Ethiopian Shipping Lines issues 3 (three) original set of Bill of Lading and
the bearer of all the three Bills is understood to be the owner of the cargo mentioned in the bills
 Clean Bill of Lading: It declares that the goods have been received in an appropriate
condition, without the presence of defects and is issued by the product carrier. In Ethiopia,

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 one of the conditions stipulated in the letter of credit is that the Bill of Lading has to be clean
to release the payment to the shipper – Clean on Board Bill of Lading.
 Unclean Bill of Lading: It is a bill containing reservations as to the good order and condition
of the goods or the packaging or both. Examples: "bags torn," "drums leaking,'' and "one case
damaged".
2. Freight Bill
The bill of lading ordinarily does not contain information about the freight charges, though some
altered forms do include these charges. More frequently, the charges appear on a separate document,
called freight bill. The fright bill (an invoice of carrier charges) contains, in addition to freight
charges, much of the same information as a bill of lading, such as shipment origin and destination,
quantity shipped, product, and the persons involved. The fright charge may prepay by the shipper or
billed collect from the consignee.
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.

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