Chapter 9 in Bowersoxs

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Transcript Chapter 9 in Bowersoxs

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Transportation operations involves the
following major topics
Transportation economics and pricing
Transportation administration
Video on Ethics and future of Transportation (9:00 min.)
Video on future of shipping (2:54 min.)
Transportation operations seeks an optimal
balance between low cost and high service
• Transportation is single
largest element of logistics
– Rising fuel costs
– Environmental cost of
carbon footprint
• Transportation managers
are responsible for
inventory to be positioned
in a timely and economical
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 is a major influence on cost
• Directly contributes to variable
– 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
– This is called the tapering
Figure 9.1 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
Figure 9.2 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 9.3 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
• 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
• Special equipment may
be needed to load and
unload trucks, railcars, or
• 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
• For example - pneumatic
– 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
• 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
– Includes vehicles,
terminals, rights-of-way,
information systems, and
support equipment
• Must be covered by
contribution above variable
costs on a per shipment
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
– 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
• 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
• 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
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
• 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-ofservice minimum and valueof-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 allinclusive price
• Pricing is tailored to the
individual customer’s
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
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
– 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
Auditing and claims administration
Logistical integration
Key elements of operational management
• Equipment scheduling and yard
• Load planning
• Routing and advance shipment
notification (ASN)
• Movement administration
• Transportation Management System
– An integral information technology
solution to help oversee day-to-day
• 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
• Seeking win-win agreements
where both shippers and
carriers share transportation
consolidation and productivity
• 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
• Expediting involves the
shipper notifying carrier that it
needs a specific shipment to
move quickly and with no
• 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
• Claims can be
– Loss and damage resulting from
poor performance
– Overcharge/undercharge when
amount billed is different from
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
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
– 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
– 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
Illustration of different net returns using a
base-point pricing system
Figure 9.6 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
• 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
• 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
• 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