1. CHAPTER 8: Transportation

2. 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

3. 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

4. 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

5. 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

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

7. Major relationships among transportation participants
Figure 8.1 Relationship Among Transportation Participants

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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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.

17. Table 8.2 Domestic shipments by mode and volume
Freight Volumes (Millions of Tons)
Mode Share %
Percent Change
2009
2015
2021
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.

18. Table 8.3 Domestic shipments by mode and revenue
Freight Volumes (Billions of Dollars)
Mode Share %
Percent Change
2009
2015
2021
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.

19. 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

20. 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)

21. 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

22. 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

23. 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

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

25. 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

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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

32. 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

33. 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

34. 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

35. 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

36. Transportation operations involves the following major topics
Video on Ethics and future of Transportation (9:00 min.)
Video on future of shipping (2:54 min.)

37. 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

38. 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

39. Economic drivers influence rates
Distance
Weight
Density
Stowability
Handling
Liability
Market

40. 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

41. 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

42. 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

43. 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

44. 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

45. 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

46. 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

47. 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

48. 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

49. 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

50. 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

51. 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

52. 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

53. 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

54. 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

55. 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?”

56. 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.

57. 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

58. 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

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

60. 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

61. 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

62. 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)

63. 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

64. 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

65. 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

66. 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

67. 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

68. 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

69. 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

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

71. 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

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

73. 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

74. 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