1. Purchasing Transportation Services
Chapter Fourteen
Purchasing Transportation Services
McGraw-Hill/Irwin
Copyright ©2007 The McGraw-Hill Companies, All Rights Reserved

2. Learning Objective
To understand how to purchase transportation services.
To understand the changes in the transportation sector.
To identify the advantages and disadvantages of various transportation modes.
To understand how to select and evaluate the most appropriate transportation mode for specific products.

3. Learning Objective
To understand how to determine the appropriate price determination strategy for alternative transportation modes.
To understand how “third-party relationships” work.
To understand the terms and conditions of transportation of merchandise.
To understand what F.O.B. means.

4. Transportation Purchasing
_____________________________________________________________________________________________.
As illustrated in the purchasing transportation network of a typical manufacturing firm shown in the Figure below ,the systems flows are impressive.
In traditional systems, inventory management is a manufacturing activity.

5. Transportation Revenue
Many Fortune 500 firms have moved to just-in-time manufacturing, ________________________________________________________________________________.
In 2002, transportation revenues were approximately $848 billion. Over-the-road transportation accounted for approximately 83 percent of the total transportation costs.
In other words, a large share of the expenditures was associated with moving products from the manufacturing facility to the ultimate consumer. _______________________________________.

6. TRANSPORTATION’S ROLE IN PURCHASING
Transportation is often the most costly and time-consuming component of purchasing management.
Its planning is also critical in meeting manufacturing and customer delivery scheduling requirements.
Transportation ________________________________________________________________________________________________________________________________.

7. Transportation Modes
The initial decision requires the buying firm to select the appropriate shipment mode.
Each of the modes has specific operating and cost characteristics and the buying professional must weigh them in selecting the most appropriate transportation mode.
______________________________________________________________________________________.
_______________________________________________________________________________________________________.

8. Mode Selection
In many cases, __________________________________________________________________________________.
The “model split” is usually determined by time pressures, ______________________________________________________________________________________________________________________
The most recent statistical data for modal freight activity in the United States is presented in Figure 14.2.

10. TABLE 14.2

11. Rail
___________________________________________________________________________________________________________________________________________________________________
As can be seen in Figure 14.2, the rail mode ranks second in terms of ton miles. The rail service also includes more than 23,000 locomotives and 1.2 million freight cars.

12. Rail
The Class I railroads are systems that generated more than $320 billion in total revenues in 2002.
The Class I freight systems are shown in Table 14.2.
________________________________________________________________________________________________________________________.
There are also more than 520 regional and local railroads.
________________________________________________________________________________________________________________

13. Rail
The Class I railroads in the United States also account for approximately __________________________________________________________________________________________.
Deregulation ________________________________________________________________________________________.
CSX–Sea Land Corporation, Union Pacific–Overnite (trucking), and Norfolk Southern–North American Van Lines (trucking) are the most significant intermodal firms.

14. Rail
The rail mode has the largest share of the ton-miles in the United States. Most bulk commodities are initially shipped by rail and later shifted to motor carriers.
Rail transportation is generally less expensive than air and truck modes. ________________________________________________________________________________________________.
The primary products shipped via rail are __________________________________________________________________________________.

15. Truck _________________________________________________________.
The industry is composed of a large number of for-hire and private carriers. _________________________________.
_____________________________________________________________________________________________.
__________________________________________________________________________________.
The products carried by trucks are different from those carried by other modes.

16. Truck
Approximately 85 percent of the tonnage originated by Class I motor carriers are manufactured goods.
Class I carriers are those that generate annual operating revenues ________________; motor carriers generating between_____________ million in annual operating revenue are considered Class II carriers; and those with annual operating revenues of less _______________ are categorized as Class III carriers.

17. Truck
_________________________________________________________________________________.
There are approximately 850 Class I carriers. United Parcel Service is currently the largest Class I carrier with revenues in excess of $150 billion.
A carrier must have ICC authority to handle traffic covered by 16 commodity categories.
_________________________________________________________________________________________________________________________________________.

18. The Carriers
General commodity carriers usually specialize in either truckload (TL) or less-than-truckload (LTL) operations. Truckload shipments are defined by the ICC as loads in excess of 10,000 pounds. _________________________________________.
___________________________________________.
The three largest carriers in this industry sector are Schneider National, J.B. Hunt Transport, and Werner Enterprises. ____________________________________________________________________________________.

19. The Economics of the Truck Mode
Another special ICC category is the parcel delivery service and limited shipment size category. UPS is the largest carrier in this sector.
____________________________________________________.
In 2004, UPS delivered more than 2.94 billion parcels and documents.
______________________________________________________________________________________.

20. The Economics of the Truck Mode
The truck mode is used to transport a variety of perishable consumer goods, ____________________________________________________________________________.
The primary advantages of this mode are flexibility and versatility.
__________________________________________.
The competition in the trucking industry is fierce ________________________________.

21. Motor Carrier Rates and Price Competition
The average revenue per intercity ton-mile realized by Class I motor carriers was 16.2 cents for TL and cents for LTL service in 2005.
The average rail revenue was 2.67 cents per ton-mile.
These average prices are misleading when selecting one mode over another.
_____________________________________________________________________________________________________________________________________________________________________________________________________________________.

22. Motor Carrier Rates and Price Competition
In contrast, in long-haul volume movements of bulk commodities, _________________________________________.
_______________________________________________________________________________________________________________________.
The various levels of competition between owner-operators clearly show that they do not understand their cost structure. Irrational owner-operators will eventually go bankrupt.

23. Motor Carrier Services
Realizing that most shippers are interested in more than transportation, some carriers have formed third-party logistics enterprises. UPS, Yellow Freight, and Roadway Express have expanded into this market.
Just-in-time manufacturing also has resulted in a significant operating change in the general commodity carriers.
_______________________________________________________________________________________________________________________________.
In addition, ___________________________________________.

24. The Air Mode
The domestic air cargo market in 2002 was approximately $279.5 billion, based on 3.9 billion tons carried over 66.9 billion miles.
_________________________________________________________________________________________________________.
Integrated air cargo companies have air service–related support and handle air cargo from origin to destination.

25. The Air Mode
Companies with a significant presence in the market are Federal Express, UPS, Airborne, DHL, and the U.S. Postal Service.
As can be seen in Table 14.3, Federal Express accounts for more than 43.3 percent of this market and UPS more than 25 percent.
__________________________________________________________________________________.

27. Air Cargo Rates and Competition
With the movement toward high customer service, air cargo has become an integral strategic weapon ___________________________________________________________________________.
The average revenues per ton-mile of air cargo carriers in 2002 were cents versus cents for trucking and 2.67 cents for rail.

28. Air Cargo Rates and Competition
________________________________________________________________________________________________________________________________________.
The revenues per ton-mile for Federal Express and UPS are approximately $1.12. For the most part, the competition in this mode is between UPS and Federal Express.

29. Water Carriers
Water carriers are classified into several categories: _________________________________________________________________________________________________________________________________________________________.
American water carriers compete directly with rail and pipelines. In 2002, water carriers accounted for approximately $90.9 billion in revenues.

30. Water Carriers
The majority of commodities shipped via water carriers are semiprocessed materials, _________________________________________________________________________________.
Water carriers are an excellent transportation shipping mode for low-valued bulk commodities in large quantities. ______________________________________.

31. Pipelines
Pipelines are used ______________________________________________________________________________________.
In 2002, pipelines accounted for $116.9 billion in revenues.
A comparison of each of the transportation modes is shown in Figure 14.2.

32. Relative Prices for Transportation Goods and Services
The United States had relatively lower prices for transportation goods and services in 1999 than did 15 out of 25 Organization for Economic Cooperation and Development (OECD) countries.
However, the nation’s top two overall merchandise trade partners, Canada and Mexico, had lower relative prices in 1999 than did the United States.

33. Carrier Selection
The choice of transportation mode is the most important element in distribution management.
Selecting the incorrect transportation mode can easily jeopardize a firm’s operational efficiency because it may lead to higher costs and lower service levels.
Total supply chain costs _________________________________________________________________________________________________________________.

34. Carrier Selection
The most important criteria to consider for carrier selection are competitive rates, customer service, transit time reliability, pick-up and delivery service, availability of equipment, loss and damage claims, electronic data interchange (EDI), geographic coverage, problem resolution, insurance coverage, and billing accuracy.
_____________________________________________________________.
The shipper gains a competitive ______________________________________________________________________________________________.

35. Carrier Selection
Using multiple shippers is perhaps better than using a single shipper.
By diversifying the shipments, you achieve better prices and higher service quality. When more than one carrier is used, evaluation of the carrier is easier.
_______________________________________________________________________________.
Some of the performance measures __________________________________________________________________________________________.

36. Carrier Evaluation
Remember, the primary objective of the buying/shipping firm is to provide for cost-effective continuous operation of the business by ensuring the availability of goods and services.
___________________________________________________________________________________________.
The general consensus is that ____________________________________________________________________.

37. Rate Determination
The pricing of transportation services is determined in two ways, depending on whether federal regulation applies:
Rate making in non-regulated transportation markets.
Railroad movements of fresh fruits and vegetables, piggyback traffic, box cars, frozen food, and various building products are no longer regulated by the ICC.
Air cargo rates were deregulated between 1977 and In these cases, carriers can change whatever they like with no advanced warning.
Rate making in regulated transportation markets.
There are still many transportation sectors that a reregulated by the ICC. The rates for common carrier service that are filed must be either offered to all customers or offered only to the customer for which the carrier has negotiated with the federal government, which has been involved in the ratemaking business since the Interstate Commerce Act in 1887.
The original purpose of federal government involvement was to protect both the customer and the carrier from unhealthy competition. In today’s business environment, this involvement is criticized.

38. The Rate Quotation Process
Submitting rate quotations to shippers involves a complex process.
The complexity is the result of the millions of different commodities that are shipped, _____________________________________________________________________________________________________________________________________.

39. Factors Considered in Rating Freight
There are numerous factors that are included in rate
determination for a particular commodity. These
factors include the following:
1. _____________________.
2. __________________.
3. Perishability.
4. ___________________________________.
5. Liability for spontaneous combustion or explosion.
6. ________________________________.
7. _____________________________________.

40. Factors Considered in Rating Freight
8. ____________________________________.
9. Excessive weight.
10. Excessive length.
11. ____________________________________.
12. Trade conditions.
13. _____________.
14. __________________________________.
15. Quantity offered as a single consignment.

41. Factors Considered in Rating Freight
This list of the factors is compounded by the specific commodity that is being shipped. The basic steps involved in the determination of the applicable rates are as follows:
Use the classification to look up the commodity being shipped and determine its rating
____________________________________________________________________________________
Cross-reference ________________________________________________________________________________________.

42. Rate Negotiation
Deregulation has given carriers more pricing freedom; negotiating skills have become very important for both carriers and shippers.
______________________________________________________________________.
_____________________________________.
____________________________________________________.

43. Rate Negotiation
In many instances, the negotiation process in transportation has become more formalized.
_______________________________________________________________________.
_______________________________________________________________________________________________________.

44. Rate Negotiation
Negotiation is a management process that involves planning, analysis, and reviewing.
Negotiation activities are influenced __________________________________________________________________________.
The environment factors include competition, technology, and legislation.
_________________________________________________________________________________.

45. The Negotiations Process
The business climate between shippers and carriers offers an a priori assessment of the power dependence relationship.
Bargaining activities __________________________________________.
___________________________________________________________________________________.
A day should be set aside to handle _____________________________________.

46. Rate Negotiation Negotiate at the buying organizations facilities.
________________________________________________________________________________________________________________.
Technology also influences the transportation negotiation process.
Computer technology offers shippers real-time information related to shipment tracking, _______________________________________________________________________________________________.

47. Legal Constraints and Restrictions
Shippers and carriers _____________________________________________________________________________.
They must consider the implications of legal constraints on each movement under the final contractual agreement.
_________________________________________________________________________________________________________________.

48. Third-Party Relationships
There are several challenges that buyers face in order to transfer logistics activities to a third party.
__________________________________________________________________________________.
In some cases, the third-party logistics decision is made in the finance department and not at the operations and logistics level in the shippers’ firm.
_____________________________________________________________________________________.

49. Negotiations Strategy with Third Party
In developing a negotiation strategy, __________________________________________________________________________________.
As with any other buying situation, the shipper must establish a set of desires (costs) and demand (services) expected from the carrier.
The first step ______________________________________________________________________________________________________________________________________.
Only those third parties that can meet certain minimum service levels will be offered an opportunity to negotiate.

50. Third-Party Relationships
If the shipper only requires standard third-party service but desires a longer-term relationship, the bidding process is appropriate.
The shipper ___________________________________________________________________________________________________________________________________________________.

51. Third-Party Relationships
Once a relationship between a shipper and a third party is established, ___________________________________________________________________.
The scope of the operation section of the contract must be detailed and specific.
Activities such as vehicle spotting, __________________________________________________________________________________.
The performance measures should be part of the agreement.

52. Third-Party Relationships
Specific performance measures are __________________________________________________________________.
Many firms require certain indemnification clauses to be included with any third-party agreement with suppliers.
__________________________________________________________________________________________________________________________.

53. Freight Consolidation
____________________________________.
To take advantage of these rate economies, the shipper should attempt to consolidate shipments.

54. Documentation/Tracing/Claims
_____________________________________________________________________________________.
This serves as the basic contract between the carrier and shipper and specifies the commodities and quantities shipped, routing, rates, and carrier liability.
___________________________________________.
________________________________________________________________________________.

55. Terms and Conditions of Transportation Purchasing

56. Freight Terms
______________________________________________________________________________________________________.
Freight terms outline the responsibilities of the shipper and carrier.
The following definitions must be understood before entering into an agreement:
Prepaid _____________________________.
Collect_____________________________.

57. Freight Terms
Prepaid/collect beyond ___________________________________________________________________________________________________.
Third-party _________________________________________________________________.
The legal payment function may or may not belong to the third party.

58. Freight Terms
The obligation is determined from the parties indicated on the bill of lading contract.
_____________________________________________________________________________________________________________________________.
Prepay and add ___________________________________________________________________________________________________________________________.

59. Terms of Sale/Purchase
The terms of sale or purchase are used to identify the passage of title and are usually expressed by an F.O.B. designation: F.O.B. origin or F.O.B. destination.
F.O.B. origin means ____________________________________________________.
F.O.B. destination _______________________________________________________________________.

60. Bills of Lading Bills of lading convey the freight terms and
act both as a contract for carriage and a
receipt for delivery.
1.Order notify bills of lading ___________________________________________________________.
2.Sales/purchase orders ____________________________________________________________.

61. THREE TRANSPORTATION PURCHASING EXAMPLES

62. Ross Laboratories Background
Ross Product Division was founded in 1903 by Harry Moores and Stanley Ross under the name of Moores and Ross Milk Company in Columbus, Ohio. They were the first to operate the old stand-and-drive milk truck.
They were also the first to deliver milk in glass bottles to homes. In 1924 the partners made an innovative move by producing and marketing milk-based infant formula, and in 1959 the company introduced Similac with Iron infant formula.

63. Ross Labs Selection Criteria
The core carriers for Ross’s transportation needs are KLLM, Martin, ROCOR, FWC, Gasel, Consolidated Freightways, UPS, and Federal Express. Ross’s carrier selection criteria consist of the following:
____________
Equipment base
______________
Cost containment and reduction programs
___________________
Nature of client base
_________________________
________________________
Rates
Accessories
__________________________

64. The Ross Pricing Process
The executive in charge of purchasing transportation services stated that in order for Ross to negotiate effectively, they must understand the cost drivers associated with each potential transportation mode.
_____________________________________________________________________________.
He also stated that the competitive bidding process is used exclusively for third-party carrier relationships.

65. Consolidated Stores Background
Consolidated Stores is the nation’s largest broadline closeout retailer with annual sales over $3 billion and more than 1,300 stores nationwide.
In 2004, all of the store names were changed to Big Lots, Inc. The company has more than 45,000 employees.

66. Consolidated Stores
Annual sales have increased by at least 11 percent since The company opened 83 new stores and 105 new furniture departments.
The company has stores in 46 states; distribution centers are located in Columbus, Ohio; Montgomery, Alabama; Rancho Cucamonga, California; and Tremont, Pennsylvania.

67. Transportation Purchasing at Consolidated Stores
The core carriers for the distribution centers’ needs are UPS, BNSF, CSX, NS, and KCS rail lines along with stack train operators such as Mitsui, Pacer, and K-line. The stack train operators utilize the railroad tracks, ramps, and trains.
The core trucking companies are J. B. Hunt and Warner. The core drayage carriers are Total Express, BTT, We R Drayage, Golden Eagle, and Pacer Cartage.
Finally, the core steamship carriers are Trailer Bridge, Crowley, Navieras, Sea Star, CSX Lines, Maesk Seal, Mitsui, Yang Ming, Hanjin, Hyundai, and P&O Nedloyd.

68. Consolidated Stores Selection Criteria
According to the executive in charge of purchasing transportation services, Consolidated’s carrier selection criteria consist of the following:
1.____________________________.
2.________________________________.
3._______________________________
4.______________________________.
5.__________________________.

69. The Consolidated Pricing Process
Both electronic and conventional competitive systems are used at Consolidated.
_______________________________________________________________________________.
The bidders are required to fill in a standard spreadsheet and it to Consolidated before the deadline.
According to the executive in charge of purchasing transportation services, __________________________________________________________.

70. Copeland Inc. Background
Copeland was founded in 1921 by Edmund Copeland in Detroit, Michigan. Copeland manufactures scroll compressors for commercial air conditioning.
The company has more than 8,000 employees and gross sales of $15.5 billion. Copeland manufactures its products in 11 countries throughout North America, Europe, and Asia.
Copeland currently maintains contracts with four major steamship lines, 18 LTL motor carriers, four truckload carriers, and three multimode carriers.

71. Copeland Inc. Selection Criteria
According to the executive in charge of purchasing transportation services, Copeland’s carrier selection criteria consist of the following priorities:
_______________
Experience
______________
Financial stability
__________________

72. Copeland Inc.
The basic contract is the same for both LTL and truckload carriers. However, the specific negotiating techniques are different.
In the case of truckload traffic, price is negotiated on lines for which the carrier is strongest. The result is usually lower cost and higher service.
On the other hand, LTL traffic is negotiated based on frequency and size of shipment organized locally or regionally.

73. Copeland Inc. Quoting Process
The competitive quoting process at
Copeland is as follows:
____________________________________.
Prequalify eligible bidders.
________________________________________.
Set the rules of engagement.
____________________________.
Select the best service provider.
_______________________.
Implement program.