Chapter Two

Transportation Management
• Transportation is critical to logistical performance.
• Today a wide range of transportation alternatives are
available to support product or raw material logistics.
• 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.
 Transport Functionality

• Transportation enterprises provide two major services: product

movement and product storage.
1. Product Movement:
• Whether in the form of materials, components, work-in-
process, or finished goods, the basic value provided by
transportation is to move inventory to the next stage of the
business process.
• The primary transportation value proposition is product
movement up and down in the supply chain.
• The performance of transportation is vital to procurement,
manufacturing, and market distribution.
• Transportation also plays a key role in the performance of
reverse logistics.
• Transportation consumes time, financial, and environmental
resources.
• Transportation uses time resources because product is
generally inaccessible during the transportation process.
• Product captive to the transport system is referred to as in-
transit inventory.
• Naturally, when designing logistical systems, managers strive
to reduce in-transit inventory to a minimum.
• Transportation also uses financial resources.
• Transportation cost results from driver labor, vehicle
operation, capital invested in equipment, and administration.
• In addition, cost results from product loss and damage.
• Transportation uses environmental resources both directly
and indirectly.
• In direct terms, transportation represents one of the largest
consumers of fuel and oil.
• Indirectly, transportation impacts the environment through
congestion, air pollution, and noise pollution.
 2. Product Storage

• A less visible aspect of transportation is product storage.

• While a product is in a transportation vehicle, it is being

stored.

• Transport vehicles can also be used for product storage at

shipment origin or destination, but they are comparatively
expensive storage facilities.
 Transportation Economics and 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: (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: (1) 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.
• The management implication is that small loads should be
consolidated into larger loads to maximize scale economies.
 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.
• Transport charges are commonly quoted as amount per
hundredweight (CWT).
• In terms of weight and volume, vehicles are constrained more
by cubic capacity than by weight.
 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/put very
differently.
• Items having rectangular shapes are much easier to stow/pack
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 due to their length and shape.
 Handling
• Special handling equipment may be required to load and
unload trucks, railcars, or ships.
• In addition to special handling equipment, the 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 backhaul 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.
 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

 Variable
• 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
• 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.
 Joint
• Joint costs are expenses unavoidably created by the decision
to provide a particular service.
• 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 considerations regarding an appropriate back-haul
shipper and/or back-haul charges against the original
shipper.
 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 it doesn't actually use the service.
 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.
 Cost-of-Service
• 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.

• 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.

• represents the base or minimum for transportation charges

• most commonly used as a pricing approach for low-value

goods or in highly competitive situations.
 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.

• 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.

• As such, 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 $22.50 for overnight delivery of a

single package.

• Once competitors such as UPS and the United States Postal

Service entered the market, rates dropped to current
discounted levels of $5 to $10 per package.
 Combination Pricing

• 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 such a middle value.

• Logistics managers must understand the prices and the

alternative strategies so they can negotiate appropriately.
 4. Rates and Rating

• The previous discussion reviewed key strategies used by

carriers to set prices.

• Building on this foundation, this section presents the pricing

mechanics used by carriers.

• This discussion applies specifically to common carriers,

although contract carriers utilize a similar approach.
 Class Rates
• 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.

class rate= evolved all products transported by common carriers

are classified for pricing purposes.

• All product legally transported in interstate commerce can be

shipped via class rates.
• Determination of common carrier class rates is a two-step
process.

1. the classification or grouping of the product being

transported.

2. the determination of the precise rate or price based on:

a. the classification of the product and
b. 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, 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
receives is its rating, which is used to determine the freight
rate.
• It is important to understand that the classification does not
identify the price charged for movement of a product.

• It refers to a product's transportation characteristics in

comparison to other commodities.
• Motor carriers and rail carriers each have independent
classification systems.

• Products are also assigned different ratings on the basis of

packaging.
 Rate Administration
• 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.
• Historically, the origin and destination rates were manually
maintained in notebooks that had to be updated and revised
regularly.
• Today, rates are provided in diskette form by carriers and the
administration process is typically computerized.
 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.
• Today, most rail freight moves under commodity rates.
 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:
 specific area, original 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.

• Unless otherwise noted, all services provided under the class

rate remain under an exception rate.
 Chapter three
Traffic Management
• Traffic management is a key branch within logistics.

• It concerns the planning, control and purchasing of transport

services needed to physically move vehicles (for example
aircraft, road vehicles, rolling stock and watercraft) and
freight.
• Traffic management is implemented by people working with
different job titles in different branches:
 Within freight and cargo logistics: traffic manager,
assessment of hazardous and awkward materials, carrier
choice and fees, documentation, freight consolidation,
insurance, and tracking
 Within air traffic management: air traffic controller
 Within rail traffic management: rail traffic controller,
train dispatcher or signalman
 Within road traffic management: traffic controller
 What Is Carrier Selection?
• Carrier selection is an idea made up of two simple words.

• You need to have multiple carrier options available for

selection to keep the price point and shipping cost of your
products down.

• Your transportation costs are roughly equivalent to 5 percent

of your total sales, so unless you want to willingly pay 5
percent, you need more options.

• Fortunately, a broad carrier selection gives you these options.

 Why Do You Need a Variety of Carriers to
Choose From?
• There are multiple benefits to working with a variety of
carriers.

• More importantly, you do not have to worry about not getting

hold of one carrier for all your needs.

• Instead, multiple options naturally lead to better service levels

and cost savings throughout your business
• some of the additional reasons for expanding your carrier
selection include the following:
 Consumers Demand More Choices and Options
• Consumers are not satisfied with standard shipping anymore.
• They want it today, and they want shipping costs to be ZERO.
If you can’t meet those demands or be very close to them, they
will find what they need from other.
E-Commerce Order Sizes and Delivery Requirements May
Vary
• E-commerce varies heavily in size. Although many packages
are small parcels, some may be huge.
• Think of the difference between shipping a 65-inch TV and a
lot of apples.
• Both may be bulky, but the dimensions can vary dramatically.
As a result, you need to have access to multiple types of
shipping.
 Different Carriers May Offer Different
Service Levels
• Next-day air service is great, but what if a product takes longer
by air than by truck?
• Different service levels must be available to ensure the fastest
mode of transit possible.
Carriers May Not Provide Open-Ended Services.
• Open-ended services are provided by carriers who work
exclusively with other businesses and logistics service
providers.
• In other words, some carriers may not even be available to you
without a third-party logistics provider.
 More Carriers Equals More Competitive
Rates
• Carriers have a vested interest in getting your business, so
having more carriers will give you access to more rates to
choose from.
Interlining Is Essential to Globalization of E-Commerce
• Carriers are not necessarily capable of working globally, and
some shipments may need to be transferred to another carrier
for final or international delivery, otherwise known as
interlining.
• This is critical to making sure you can reach your e-commerce
customers from around the globe.
• Plus, this transfer increases rates, and as mentioned previously,
more rates are better.