1. Global Supply Chain Management

2. Transportation Management Issues
Chapter #6
Transportation Management Issues

3. The Logistics System
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4. Overview We will examine shipper/carrier relationships in general
We will note the important issues for each party
We will look at transportation pricing and price negotiation in some detail
We will briefly review private transportation as an alternative to contract transport
We will close with a review of outside influences affecting transportation services and costs
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5. Introduction
Transportation is the single most visible part of a logistics systems
There are a huge number of variables involved in making the transportation selection decision for the logistics system
Deregulation made pricing a principal consideration for many years
The complex nature of the global supply chain has forced us to change our transportation strategy from basically lowest price to one of lowest total cost at a given level of customer service
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6. Win/Win Relationships
Business has begun a transformation from a focus on local cost minimization to system or total cost minimization or profit maximization
In general, this has led to new strategy based on “partnering” with our suppliers/providers to
ensure the “best” outcome for our customers
while allowing us all to make a reasonable profit
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7. Win/Win Relationships
Such partnerships are based on total cost rather than minimum cost of any particular segment and are aimed at maximizing the overall benefit for our customers, our partners and ourselves.
Before deregulation, such relationships were meaningless
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8. Win/Win Relationships
Immediately after deregulation, transportation was a price competitive industry and most users encouraged the price-based competition by focusing on that single piece of the logistics cost
To compete on more than price requires the carrier to know and understand their costs in detail…just as we must in order to deliver specific levels of customer service and remain competitive and profitable.
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9. Win/Win Relationships
Carriers are evolving as our logistics partners
Moving away from competitive bidding for transportation opportunities and developing long term win/win relationships, allows the carrier to minimize their own cost while providing us with increased levels of customer service
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10. Win/Win Relationships
For the carrier this has resulted in
Computerized routing, scheduling and tracking
Improved equipment utilization
Expansion of services including warehousing, inventory and traffic management, etc.
For the shippers, the win/win comes in the form of better service and lower total costs
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11. Win/Win Relationships
By partnering and selecting on more than price, shippers have been able to get real consistency of service with respect to
Delivery time
Damage rate
Problem solving, etc.
With guaranteed levels of shipping, the shipper gets lower rates and the carrier gets the ability to better plan for utilization, productivity and cost minimization
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12. Win/Win Relationships
Developing a win/win strategy on a global level is more challenging
Not all countries have deregulated or even privatized their transportation industries
Few carriers are capable of providing single company point-to-point service
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13. Win/Win Relationships
Our transportation partners are more likely to find themselves competing in different areas of the world
As the shipping chain gets longer, it is harder to insure that all members share equally in the benefits of the relationship…but it can be done!
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14. Transportation Pricing
Pricing is a function of:
Makret structure
Shipper demand
Carrier costing
Pricing varies by commodity over a single route
Pricing varies for a single commodity over different routes
Pricing is, for practical purposes, unique for every product-route pair
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15. Transportation Pricing
Four basic market structure models
Pure Competition is characterized by a market including a large number of both buyers and sellers none of whom are large enough to exert significant influence on the market
Road transportation in most countries
A Monopoly results when a single seller of a product or service dominates a market in which there is no substitute or competitor
Railroads and airlines in some countries
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16. Transportation Pricing
An Oligopoly is a market in which there is competition between a few large suppliers or producers of very similar products or services forcing each to consider the others’ pricing in setting their own
Airline in free markets and ocean transport
Governments regulate collaboration -- “price fixing”
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17. Transportation Pricing
Monopolistic competition is characterized by a market consisting of many small sellers with limited product differentiation
Road transport in the US and Great Britain
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18. Transportation Pricing
No generalization of the transportation market structure is possible
Determining a price in transportation means describing the situation for
A single commodity
Between two specific points
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19. Transportation Pricing
For any origin-destination pair and a specific product, the market could be characterized differently
Food
Gillette razors
Gas turbine generators
Automobiles, etc.
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20. Transportation Pricing
Shipper’s demand for service is a big determinate in pricing
Demand is most often a function of the commodity being shipped
Service cost between two points, A & B, varies by commodity because of
Demand
Loss
Speed, etc
Service for the same commodity between A & B and A & D also varies by demand, loss, etc.
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21. Transportation Pricing
Value-of-service pricing occurs when the shipper charges what the buyer is willing to pay
Can result in different prices for the same service for different customers
Seller must be able to segment buyers by elasticity's of demand
Seller must be able to control resale of lower priced service
Air transport industry is very good at value-of-service pricing
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22. Transportation Pricing
Total costs of providing transport service is subdivided into fixed and variable costs
Fixed costs are the infrastructure, equipment, facilities, etc.
Obviously much higher for railroads, pipelines and power companies than for other forms of transport
Variable costs include day to day operations cost
Generally higher for road, air and ocean transport
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23. Transportation Pricing
Whether buying or selling transport services, it is important to understand the marginal (incremental) cost for a given
Commodity
Route
Method
Cost-of-Service pricing requires that we fully understand our cost relevant to the particular product/service we are selling
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24. Pricing in Practice
Value-of-service pricing generally sets the upper limit while cost-of-service pricing sets the lower limit
Actual price is probably in between the two in a free market
In some markets, rates are still set by decree
In others, the rates may be set by carrier groups working under government mandates to monitor fairness
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25. Pricing in Practice
Increasingly, however, transportation pricing is becoming more competitive
Shippers and carriers are negotiating rates rather than relying on preset schedules
Generally, shipper guarantees a level of freight over a specific route and for a given period
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26. Pricing in Practice
Carrier than guarantees a rate for that freight, route and period
This allows the shipper to lower cost by, for example, purchasing all services at once
Allows the carrier to lower their cost through advanced planning
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27. Carrier’s Perspective
Carriers want the highest rate they can get
To successfully negotiate a profitable agreement the carrier must
Know their cost
Understand their marginal cost
Focus on profitability rather than cash flow
Be knowledgeable of their customers’ needs
Be aware of their competitors’ cost and abilities
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28. Carrier’s Perspective
As in any business, carriers must know when to say “no” to business that will not contribute positively to profit…know how each service contributes to cost/profit
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29. Shipper’s Perspective
Shippers want to negotiate the lowest rate they can…while meeting some specified level of service
Must be willing to pay for increases in service level
Should be informed of carrier’s basic cost structure and financial condition
Must be aware of competitive alternatives
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30. Shipper’s Perspective
Above all, as in all aspects of business, if you wish to partner with another entity, you must remember that both of you must make a profit is the partnership is to endure and succeed
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31. Private Transportation
Some companies run their own transportation operations because they:
Cannot get service required from for-hire carriers
Need specialized equipment (Boeing)
Have unique scheduling requirements
Realize lower transportation…maybe
Want better control of transport function
Desire visibility in the market place (Wal-Mart)
Problems occur when management unfairly maintains operational cost
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32. Private Transportation
Running a fleet requires
Vehicle acquisition
Hiring and training operators
Additional MIS systems
Scheduling, tracking, etc
In fact, a whole business organization that is not connected directly to the focus of the company!
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33. Private Transportation
And once we have a fleet…our needs are likely to change
Outsourcing may be the answer, but should only be considered after management understands the full cost impacts
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34. Other Issues Affecting Cost
There are many other factors affecting the cost of transportation that are beyond the control of the logistics manager
Infrastructure availability and condition can have a significant impact on cost, timeliness and, ultimately, our ability to fulfill our customer service promises
Non-direct costs that are hard to quantify
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35. Other Issues Affecting Cost
Infrastructure availability, cost and condition require us to consider such factors as:
Congested ports, airports and roads
Ports without modern container handling equipment
Adequacy of road and/or rail service in volume, time, quality, etc.
Areas of the world our “normal” carriers cannot reach
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36. Other Issues Affecting Cost
Environmental and quality of life issues
Air pollution
Road and air transport are the primary offenders
Noise pollution
As population density increases so does concern over the noise resulting from freight and passenger operations
Aesthetic Pollution
Public is becoming more sensitive to “landscape disfiguration” forcing many governments to look for a balance between economic progress and protection of public interest
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37. Other Issues Affecting Cost
Traffic Congestion
We all see it on the roads
But also a problem in our ports and airports
Without major investments in railroads and pipelines, road based transport will continue to increase in both developed and developing countries…again Boeing and the City of Seattle
Water and rail are the two most environmentally friendly forms of transport, unfortunately, neither has the coverage today or road and air transport
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38. Other Issues Affecting Cost
While deregulation in many countries has made the logistics manager’s job easier, there are still significant government imposed challenges to be faced in the global environment
Customs clearance can be a daunting process in many countries
Trucks can spend two days waiting for clearance from Germany to Poland
Security concerns have risen since 9-11
In addition to a country’s internal security issues, some shippers and carriers continue to deal with piracy as an issue
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39. Other Issues Affecting Cost
Carrier safety is a continuing issue with government oversight in most of the world
Safety often deteriorates with increased pressure to reduce price and thus cost
More carriers providing more service without an equivalent growth in inspectors
Pressure to reduce cost by reducing maintenance
Increased danger to the environment and public through unsafe operations
NAFTA
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