CHAPTER 8: Transportation

Overview of transportation Transport functionality and participants From regulation to a free market system Transportation modal structure Specialized transportation service Transportation economics and pricing Transportation pricing Documentation Product pricing and transportation

Transport functionality primarily consists of product movement services Product movement is the movement of inventory to specified destinations Restrictive element—in-transit inventory is “captive”, usually inaccessible during transportation Flexible element—inventory can be diverted during shipment to a new destination Transportation consumes time, financial, and environmental resources Transportation is more than 60% of the cost of logistics One of largest consumers of oil and gas in US Impacts traffic congestion, noise and air pollution

Transport also functions as storage services for products while in a vehicle In-transit inventory is captive in the transport system Managers strive to reduce in-transit inventory to a minimum Product can also be stored in vehicles at origin or destination (trailers, trucks, railcars, etc) Usually more expensive than traditional warehousing Must pay rental or demurrage charges on vehicles used for storage Diversion occurs when a shipment destination is changed after a product is in transit

Two fundamental transport principles Economy of scale is the cost per unit weight decreases as the size of the shipment increases At least until you totally fill the carrying vehicle! Cost decreases because the fixed cost of the carrier is allocated over a larger weight of shipment Economy of distance is the cost per unit weight decreases as distance increases Often called the tapering principle Longer distances allow fixed cost of the carrier to be spread over more miles, lowering the per mile charge Goal is to maximize the size of the load and distance shipped while still meeting service expectations

Transport participants Shipper Consignee (Receiver) Carrier and Agents Government Internet Public

Major relationships among transportation participants Figure 8.1 Relationship Among Transportation Participants

Transportation infrastructure supports the flow of our nations economy Table 8.1 The Nations’ Freight Bill ($ billions)

Role and perspective of participants Shipper and consignee have a common interest in moving goods from origin to destination within a given time at the lowest cost Carriers desire to maximize their revenue for movement while minimizing associated costs Agents (brokers and freight forwarders) facilitate carrier and customer matching Government desires a stable and efficient transportation environment to support economic growth Public is concerned with transportation accessibility, expense, and standards for security, safety and the environment

Role of the Internet in transportation The Internet now provides the vital communications links between the transactional participants (shipper-carrier-consignee) Replacing phone and fax technologies Web-based enterprises provide information marketplaces Freight matching Fuel, equipment, parts and supplies purchases

Transportation regulation by the government focuses on Economic regulation seeking to make transportation equally accessible and economical to all without discrimination Government created infrastructure (roads, canals, ports) Intended to prevent carriers from taking advantage of suppliers while ensuring long-term financial stability for carriers Social regulation which takes measures to protect public safety and environment Department of Transportation (DOT) (1966) has active role in hazardous material safety and driver safety Hazardous Materials Transportation Uniform Safety Act (1990) took precedence over state and local regulations

History of transportation regulation In 1800’s, rise of steamships and railroads created immense wealth and monopolies (e.g. Commodore Vanderbilt and the railroad “barons” ) Interstate Commerce Commission (ICC) created in 1887 to oversee regulation of interstate transportation To stop the railroad monopolies Other regulatory acts passed from 1906 to 1973 placed motor carriers, shipping, air transport and pipeline transport under ICC oversight By 1970, ICC had oversight on 100% of rail and air, 80% of pipeline, 43% of trucking and 6% of water carrier operations

Transportation deregulation (1980) Motor Carrier Act of 1980 deregulated the motor carrier industries Entry restrictions for new businesses were relaxed Restrictions for types of freight and range of services were abolished Individual carriers were given the right to price their services Trucking industry’s collective rate-making practices were abolished Staggers Rail Act of 1980 deregulated the rail industry Provide railroad management with freedom necessary to revitalize the industry Rail carriers were authorized to use selective pricing to meet competition and cover operating costs Carriers given increased flexibility with respect to surcharges Contract rate agreements between individual shippers and carriers were legalized Rail management given liberal authority to proceed with abandonment of poorly performing rail service

Transportation regulation in the new millennium is stimulated by technology and global issues Electronic Signatures in Global & National Commerce Act of 2000 Gave digital signatures legal status Patriot Act of 2001 Increased inspections at ports, airport security, and increased security at border crossings Continued Dumping and Subsidy Act Fines for artificial underpricing and “dumping” of foreign goods in U.S. markets Jones Act Only U.S.-built ships operating under a U.S. flag with U.S. crews can ship goods directly from a U.S. port to another U.S. port

Transportation structure Consists of rights-of-way, vehicles, and carriers operating within five basic modes A mode identifies basic transportation method or form Rail Highway Water Pipeline Air

Table 8.1 Nation’s freight bill   1960 1970 1980 1990 2000 2009 Truck 32.3 62.5 155.3 270.1 481.0 542.0 Railroad 9.0 11.9 27.9 30.0 36.0 50.0 Water 3.4 5.3 15.3 20.1 26.0 29.0 Pipeline 0.9 1.4 7.6 8.3 10.0 Air 0.4 1.2 4.0 13.7 27.0 Other Carriers 1.1 28.0 Other shipper costs 1.3 2.4 3.7 5.0 Grand Total 47.8 83.9 213.7 350.8 594.0 697.0 GNP (Trillions) 0.5 1,046 2,831 5,832 9,960 14,256 Grand Total of GNP 9.00% 8.03% 7.55% 6.02% 5.92% 4.89% Source: U.S. Freight Transportation Forecasts to 2021, American Trucking Association, Inc., 2010, p. 25.

Table 8.2 Domestic shipments by mode and volume Freight Volumes (Millions of Tons)   Mode Share % Percent Change 2009 2015 2021 2009 - 2015 Truck 8,849 10,515 11,498 68.0% 69.8% 70.7% 29.9% Rail 1,773 1,957 2,033 13.6% 13.0% 12.5% 14.6% Rail Intermodal 139 193 253 1.1% 1.3% 1.6% 82.6% Air 12 15 18 0.1% 57.3% Water 829 929 964 6.4% 6.2% 5.9% 16.4% Pipeline 1,417 1,453 1,502 10.9% 9.6% 9.2% 6.0% Total 13,018 15,061 16,269 Source: U.S. Freight Transportation Forecasts to 2021, American Trucking Association, Inc., 2010, p. 25.

Table 8.3 Domestic shipments by mode and revenue Freight Volumes (Billions of Dollars)   Mode Share % Percent Change 2009 2015 2021 2009 - 2015 Truck 544 748 933 81.9% 82.8% 83.0% 71.4% Rail 40 51 61 6.0% 5.7% 5.4% 51.6% Rail Intermodal 9 16 24 1.4% 1.7% 2.1% 151.1% Air 20 29 3.0% 3.2% 3.6% 99.5% Water 10 13 15 1.5% 1.3% 51.5% Pipeline 41 46 6.2% 5.1% 4.5% 24.6% Total 665 903 1,123 Source: U.S. Freight Transportation Forecasts to 2021, American Trucking Association, Inc., 2010, p. 25.

Rail mode has historically handled the largest number of ton-miles within continental US Track mileage has declined by over half since 1970 Traffic shifted from broad range of commodities to hauling specific freight in traffic segments Carload Intermodal Container New technologies include articulated cars, unit trains and double-stack cars

Truck mode has expanded rapidly since the end of World War II Nearly 1 million miles of highways in U.S. Key benefits include Speed of transit Ability to operate door-to-door More efficient than rail for small shipments over short distances Dominate freight moves under 500 miles and from manufacturing to wholesalers to retailers Many companies run their own truck fleets as well (e.g. WalMart)

Water mode is the oldest form of US transport dating back to the birth of our nation Percentage of ton-miles has stayed between 19 and 30% since 1960’s Ranks between rail and truck in fixed cost Right of way (canals and rivers) maintained by Federal government

Pipeline mode accounts for about 68 percent of all crude and petroleum ton-mile movements in US Have the highest fixed cost and lowest variable cost of all modes Unique transportation mode Can operate 24 hours a day, 7 days a week No emissions No empty container or vehicle to return Not flexible, and limited to liquids and gases

Air mode is the newest and least utilized transport mode for freight Accounts for only 1% of intercity ton-miles Fastest of all the modes Fixed cost is 2nd lowest but variable costs are extremely high Most products air-shipped have high value, high priority or extreme perishability

Comparison of fixed and variable cost structure of each transport mode Table 8.4 Cost Structure For Each Model

Operating characteristics used to classify transport modes Speed is the elapsed movement time from origin to destination Availability is ability of a mode to service any given pair of locations Dependability is the potential variance from expected delivery schedule Capability is the ability to handle any load size or configuration Frequency is the quantity of scheduled movements a mode can handle

Highway transport is appealing partly due to its relative ranking across characteristics Table 8.5 Relative Operating Characteristics by Mode Lowest rank is best Note: Lower is better

Infrastructure in crisis – US needs a National Transportation Plan United States aggressively invested in highway construction after World War II However, this highway system is in need of widespread repair to sustain the safe movement of over 26 million trucks August 1, 2007 a major bridge span of interstate I-35 over the Mississippi River collapses Watch video of aftermath by selecting this link (slideshow mode) Roughly 12 percent (or 79,000) of public road bridges on the National Bridge Inventory are classified as structurally deficient http://www.metacafe.com/watch/1659007/i_35_bridge_collapse/

Transportation service is achieved by combining modes Traditional carriers are firms that provide service using only one of the five basic transport modes E.g. trucking firm or an airline Package service uses intermodal transportation (ground and air) to handle small shipments or parcel deliveries E.g. USPS, FedEx, or UPS Intermodal transportation combines two or more modes to take advantage of the inherent economies of each and provide an integrated service at a lower total cost E.g. piggyback service integrating rail and motor service Nonoperating intermediaries include several business types that do not own or operate equipment Act to broker services by other firms

Package service provides both regular and premium service Package service is growing rapidly with the rise in e-Commerce and Internet consumer sales Ground package service offers regular delivery within metropolitan areas and between cities United Parcel Service (UPS), Federal Express Ground and United States Postal Service (USPS) Air package service is a premium service to deliver certain packages door-to-door by next-day or second-day Integrates truck and air modes seamlessly

Examples of expanded parcel carrier services (Freight services) Same day air Next day delivery Second day delivery 3 day select Ground Worldwide express Standard to/from Canada World ease

Examples of expanded parcel carrier services (Optional value-added services) Collect on delivery (COD) Delivery confirmation Hazardous materials Hold for pickup Saturday pickup/delivery 10KG and 20KG boxes Hundredweight service Returns Excess value insurance

Piggyback is an intermodal transport that integrates rail and motor service Most widely used systems are Trailer on a flatcar (TOFC) Container on a flatcar (COFC) Trailer or container is hauled by truck at origin and destination Railcar hauls for portion of intercity travel A variety of coordinated service plans have been developed

Containerships are oldest form of intermodal transport Loads a truck trailer, railcar or container onto barge or ship for the line-haul movement on inland waterways Land bridge concept moves containers in a combination of sea and rail transport Common for containers moving from Europe to Pacific Rim Transfer of freight between modes often requires handling containers and imposition of duties Function of ports is to make this seamless and fast Port throughput is big concern for supply chain managers

Coordinated air-truck is commonly used to provide premium package services Many smaller cities lack airfreight services Costs can leveraged with delivery time by linking the modes

Non-operating intermediaries do not own their own equipment Freight forwarders—businesses that consolidate small shipments from various customers into bulk shipment for a common carrier for transport Shipper associations and agents—groups of shippers who employ an agent to consolidate purchases and shipments for them E.g. garment industry in New York Brokers—intermediaries that coordinate transportation arrangements for shipper, consignees and carriers, operating on a commission basis Sampling of Non-operating Intermediaries

Transportation operations involves the following major topics Video on Ethics and future of Transportation (9:00 min.) http://www.youtube.com/watch?v=T_SXW7v97tQ Video on future of shipping (2:54 min.) http://www.youtube.com/watch?v=sigYFTP6YFg

Transportation operations seeks an optimal balance between low cost and high service Transportation is single largest element of logistics cost Rising fuel costs Environmental cost of carbon footprint Transportation managers are responsible for inventory to be positioned in a timely and economical manner

Transportation economics and pricing are concerned with factors that drive cost An effective logistics strategy must understand four interrelated topics Economic drivers that influence rates Costing methods to allocate costs Carrier pricing strategy used to set rates Rates and rating mechanics used by carriers

Economic drivers influence rates Distance Weight Density Stowability Handling Liability Market

Distance is a major influence on cost Directly contributes to variable expenses Labor, fuel, and maintenance Cost curve starts above zero because of fixed costs associated with pickup and delivery regardless of distance However, rate of cost decreases as distance increases This is called the tapering principle Figure 8.2 Generalized Relationship between Distance and Transportation Cost

Weight is the second major factor for most transportation costs Cost per pound decreases as weight increases until the carrier vehicle is full Relationship starts again for the next vehicle load Small loads should be consolidated into larger loads to maximize scale economies Figure 8.3 Generalized Relationship between Weight and Transportation Cost/Pound

Density is the combination of weight and volume Volume is important because vehicles are typically constrained more by cubic capacity than by weight loaded Cost per unit of weight declines as product density increases Higher density products allowed fixed transport costs to be spread over more weight Figure 8.4 Generalized Relationship between Density and Transportation Cost/Pound

Stowability is how product dimensions fit into transportation equipment Odd package shapes and sizes can waste cubic capacity Items with rectangular shapes are easier to stow Nesting refers to ability of product to be placed in itself or collapsed for better stowability

Handling some products may require special equipment Special equipment may be needed to load and unload trucks, railcars, or ships How products are grouped together in boxes or pallets will also impact handling cost

Liability includes product characteristics that can result in damage Carriers must pay for liability insurance or accept financial responsibility Shippers can reduce their risk by Improved packaging and loading For example - pneumatic dunnage Reducing susceptibility to loss or damage

Market factors such as lane volume and balance influence transportation cost Transport lane refers to movements between origin and destination points Carriers must find a backhaul load or vehicle is returned empty Imbalances in volume between shipping points can result in higher transport costs

Variable costs change in a predictable, direct manner in relation to some level of activity Variable costs in transportation are only incurred if you operate the vehicle Transport rates must cover these at the very least! Generally measured per mile or unit weight or both E.g. per ton-miles

Fixed costs must be paid even when the company is not operating Fixed costs are not influenced by shipment volume Includes vehicles, terminals, rights-of-way, information systems, and support equipment Must be covered by contribution above variable costs on a per shipment basis

Joint costs are created by the decision to provide a particular service Typical example is the implicit decision to incur a joint cost for a backhaul from a destination E.g. Big and Little Enos in Smokey and the Bandit Significant impact on charges Carrier quotations must include implied joint costs based on assessment of back-haul recovery

Common costs are incurred on behalf of all or a select group of shippers Terminal or management expenses are typical examples Usually allocated to shippers based on level of activity for that customer E.g. number of shipments

Carrier pricing strategies for setting rates follows one or two of the following approaches Cost-of-service strategy Value-of-service strategy Combination pricing strategy Net-rate pricing strategy

Carrier pricing cost-of-service strategy Cost-of-service is similar to cost-plus pricing strategy for manufacturing Carrier estimates cost of providing service then adds on a percent profit margin Commonly used for pricing transport of low value goods or in highly competitive situations

Carrier pricing value-of-service strategy Value-of-service price is based on value as perceived by the shipper rather than the carrier Higher margins than cost-of-service pricing Depends on the value of the goods being shipped Used for high value goods or when no competition exists E.g. 1980’s FedEx overnight delivery

Carrier pricing combination strategy Combination price is set at a value between cost-of-service minimum and value-of-service maximum Most carriers use some form of combination pricing Common in highly volatile markets and changing competitive situations

Carrier pricing net-rate strategy Net-rate is a simplified pricing format made possible by deregulation Established discounts and accessorial charges are rolled into one all-inclusive price Pricing is tailored to the individual customer’s needs UPS commercial: “What can Brown do for you?”

Rates and rating mechanics used by common carriers Class rates are the price in dollars and cents per hundredweight to move a specific product between two locations Classification is the grouping of similar products into uniform classes that are assigned a rating Rate determination is based on the classification rating, shipment origin, and destination Cube rates replace the 18 traditional freight classifications of the NMFC with five cube groupings Still in development Commodity rates are for a large quantity of product which moves between two locations on a regular basis Typical for most rail freight today Exception rates are special rates to provide prices lower than the prevailing class rates Special rates and services include FAK rates, Joint rates, Transit services, Split delivery, etc.

Three factors determine the base rate How much are you shipping? Truckload (TL) or Less than truckload (LTL) What are you shipping? Determines freight class How far are you shipping from origin to destination? Determines rate table

Special rates and services Freight-all-kind (FAK) rates allow a mixture of different products to be transported under a negotiated rating Joint rates can be negotiated if shipper needs to use a combination of carriers Transit services permit shipments to be stopped at an intermediate point between origin and destination for special processing Diversion and reconsignment allows changing the destination and/or consignee prior to arrival at the original destination Split delivery is delivering portions of a shipment to multiple destinations Product storage services Demurrage (rail) charge for holding a railcar for more than 48 hours before unloading Detention (motor) charge for holding a truck for more than a few hours before unloading

Transportation administration activities include Operational Management Consolidation Negotiation Control Auditing and claims administration Logistical integration

Key elements of operational management Equipment scheduling and yard management Load planning Routing and advance shipment notification (ASN) Movement administration Transportation Management System (TMS) An integral information technology solution to help oversee day-to-day activities

Consolidation Consolidation is combining LTL or parcel shipments moving to a general location Shift to “response-based” logistics has made the industry rethink consolidation Two groups of techniques Reactive approach does not attempt to influence composition and timing of transportation movements, but reacts to shipments as they come Example is UPS nightly sorting of package freight for intercity movement Proactive approach includes preorder planning of quantity and timing with the shipper to facilitate consolidated freight movement

Negotiation Seeking win-win agreements where both shippers and carriers share transportation consolidation and productivity gains Both parties seek the lowest total logistical cost consistent with the shipper’s needed service level (i.e. delivery time)

Control responsibilities include tracing, expediting and driver hours administration Tracing is procedure to locate lost or late shipments i.e. tracking with RFID and GPS systems Expediting involves the shipper notifying carrier that it needs a specific shipment to move quickly and with no delays Tracking driver hours of service (HOS) to comply with federal regulations

Auditing and claims administration is needed when services are not performed as promised Auditing is checking freight bills to ensure accuracy Preaudit determines proper charges prior to payment Postaudit does the same after payment Claims can be Loss and damage resulting from poor performance Overcharge/undercharge when amount billed is different from expected

Logistical integration is the primary role of the traffic manager Integration is finding the best combination of packaging, selection of carrier, mode and consolidation for lowest total logistical cost consistent with the shipper’s service needs

Transportation management Operational management Equipment scheduling and yard management Load planning Routing and advanced shipment notification (ASN) Movement administration Consolidation Reactive consolidation Proactive consolidation Negotiation Control Audit and claim administration

Primary purpose of documentation is to protect all parties involved in the transaction Bill of lading is the basic document utilized in purchasing transport services Serves as a receipt and documents products and quantities shipped Specifies terms and conditions of carrier liability Freight bill represents a carrier’s method of charging for transportation services rendered Can be prepaid or collect Shipment manifest lists the individual stops or consignees when multiple shipments are placed on a single vehicle

Pricing practices have a direct impact on logistical operations Traditionally, logistics pricing was “bundled” into the price for a product or service Trend has been to debundle these charges so they become separate and visible to the customer Focus is still on delivering value to the customer

Pricing fundamentals of F.O.B. pricing F.O.B (freight on board) pricing F.O.B. origin—seller states price at point of origin, and agrees to load a carrier, but assumes no further responsibility. Buyer selects carrier and mode, pays transportation and assumes the risk for in-transit loss or damage F.O.B. destination—seller arranges for transportation and adds charges to the sales invoice. Title does not pass to the buyer until delivery is completed

Three different payment options for each F.O.B. price Figure 9.5 Terms of Sales and Responsibilities

Pricing fundamentals of delivered pricing Delivered pricing—the seller includes transportation in the product price Single zone delivered pricing Buyer pays a single price regardless of where they are located Example, USPS First class letters Multiple zone pricing Seller charges different prices for different geographic areas Parcel carriers use this. Base point pricing Final delivered price is determined by the product’s list price plus transportation cost from a designated base point

Figure 8.6 Base-Point Pricing Illustration of different net returns using a base-point pricing system Figure 8.6 Base-Point Pricing

Pricing issues Potential discrimination—Zone pricing may be discriminatory because some buyers pay more than the actual transportation cost while others pay less Sellers have to be careful about Federal price discrimination laws Quantity discounts—may be discriminatory against smaller buyers Pickup allowances—discounts given if buyer picks up the shipment themselves Promotional prices—special prices given for large sales promotions EveryDay Low Pricing (EDLP) is a collaborative pricing framework developed by Wal-Mart

Menu pricing system consists of three components Platform service price is expected to be paid by all customers, whether or not they require or desire the specified services Must establish the basic service platform to be offered all customers Value-added service costs are specific upcharges for performing customer requested value-added services E.g. for customized unit loading such as configuring retail-ready unit loads Efficiency incentives encourage customers to comply with specified practices that reduce logistics costs