1. Transportation Operations Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

2. 9-2 Transportation operations involves the following major topics Transportation economics and pricing Transportation administration Documentation Pricing 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

3. 9-3 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

4. 9-4 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

5. 9-5 Economic drivers influence rates Distance Weight Density Stowability Handling Liability Market

6. 9-6 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 9.1 Generalized Relationship between Distance and Transportation Cost

7. 9-7 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 9.2 Generalized Relationship between Weight and Transportation Cost/Pound

8. 9-8 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 9.3 Generalized Relationship between Density and Transportation Cost/Pound

9. 9-9 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

10. 9-10 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

11. 9-11 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

12. 9-12 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

13. 9-13 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-mile

14. 9-14 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

15. 9-15 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

16. 9-16 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

17. 9-17 Carrier pricing strategies for setting rates follows one or two of the following approaches Cost-of-service strategyValue-of-service strategyCombination pricing strategyNet-rate pricing strategy

18. 9-18 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

19. 9-19 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

20. 9-20 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

21. 9-21 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?”

22. 9-22 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.

23. 9-23 Three factors determine the base rate Truckload (TL) or Less than truckload (LTL) How much are you shipping? Determines freight class What are you shipping? Determines rate table How far are you shipping from origin to destination?

24. 9-24 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

25. 9-25 Transportation administration activities include Operational Management Consolidation Negotiation Control Auditing and claims administration Logistical integration

26. 9-26 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

27. 9-27 Consolidation Consolidation is combining LTL or parcel shipments moving to a general location Shift to “response- based” logistics has made the industry rethink consolidation 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 Two groups of technique s

28. 9-28 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)

29. 9-29 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

30. 9-30 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

31. 9-31 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

32. 9-32 Primary purpose of documentation is to protect all parties involved in the transaction Serves as a receipt and documents products and quantities shipped Specifies terms and conditions of carrier liability Bill of lading is the basic document utilized in purchasing transport services Can be prepaid or collect Freight bill represents a carrier’s method of charging for transportation services rendered Shipment manifest lists the individual stops or consignees when multiple shipments are placed on a single vehicle

33. 9-33 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

34. 9-34 Pricing fundamentals of F.O.B. 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 F.O.B (free or freight on board) pricing

35. 9-35 Three different payment options for each F.O.B. price Figure 9.5 Terms of Sales and Responsibilities

36. 9-36 Pricing fundamentals of delivered pricing 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 Delivered pricing—the seller includes transportation in the product price

37. 9-37 Illustration of different net returns using a base-point pricing system Figure 9.6 Base-Point Pricing

38. 9-38 Pricing issues Sellers have to be careful about Federal price discrimination laws Potential discrimination —Zone pricing may be discriminatory because some buyers pay more than the actual transportation cost while others pay less Quantity discounts —may be discriminatory against smaller buyers Pickup allowances —discounts given if buyer picks up the shipment themselves EveryDay Low Pricing (EDLP) is a collaborative pricing framework developed by Wal-Mart Promotional prices —special prices given for large sales promotions

39. 9-39 Menu pricing system consists of three components Must establish the basic service platform to be offered all customers Platform service price is expected to be paid by all customers, whether or not they require or desire the specified services E.g. for customized unit loading such as configuring retail-ready unit loads Value-added service costs are specific upcharges for performing customer requested value-added services Efficiency incentives encourage customers to comply with specified practices that reduce logistics costs