Republic of the Philippines

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

QUEZON CITY BRANCH
Don Fabian St. Commonwealth, Quezon City

WRITTEN REPORT
In
LOGISTICS MANAGEMENT

CHAPTER 5:
TRANSPORTATION

MEMBERS:
FAMINDALAN, Nerissa
SALUBA, Janica
VILLAS, Rose Ann

BSBA Human Resource Management

2-1N

PROFESSOR NOEL FLORES FABELLA

Submitted to:
reporter: Saluba, Janica

TRANSPORTATION

Transportation is the largest expenditure in logistics. Its manager is responsible for moving
inventory throughout a firm's supply chain to customers. Many traffic managers elect to use a
combination of private and purchased transportation services. In addition to transportation, many
providers also offer a wide variety of value-added services such as product sorting, sequencing,
modification, and just in-tune or guaranteed delivery. Precise product delivery helps a firm
reduce inventory, storage, and materials handling. Unless transportation is managed in an
effective and efficient manner, procurement, manufacturing and customer relationship
management will not meet expectations.

TRANSPORT FUNCTIONALITY AND PARTICIPANTS

Functionality

Transportation provides two major logistical services: product movement and product
storage. Two significant logistical services are provided by transport: product movement and
product storage.

Product Movement

Whether in the form of products, components, work-in process or finished products, the
fundamental value of transport is to transfer inventory across the supply chain to specific
locations. Transportation efficiency is essential for the management of procurement, production
and client relations. Transport also plays a key role in reverse logistics efficiency. Most business
activity could not work without reliable transportation. Transportation consumes resources in
terms of time, money and the environment. Transportation has a restrictive component because
inventory is usually inaccessible throughout the transportation process. Inventory captive in the
transportation system is called in-transit inventory. Naturally, executives strive to minimize in-
transit inventory when designing logistical systems. Advances in IT have considerably enhanced
access to in-transit inventory and shipment arrival status by giving appropriate place and delivery
times.
Transportation utilizes economic resources as well. Transportation costs are the result of driver
labor, fuel, vehicle maintenance, machinery capital, and administration. Furthermore, loss and
harm to the product can result in important expenses.

Transportation has a direct and indirect impact on the environmental resources. Transportation is
one of the biggest gas and oil consumers in the U.S. economy in direct terms. Although as a
consequence of more fuel-efficient cars, the amount of fuel and oil consumption has increased,
overall consumption remains high. Indirectly, transportation impacts the environment through
congestion, air pollution, and noise pollution.

Product Storage

Provision of product storage is a less visible aspect of transportation. When a product is

in a transportation vehicle, it is being stored.

Transport vehicles may also be used at the origin or destination of the shipment for temporary
product storage. If the inventory involved is scheduled to be shipped within a couple of days, the
cost of unloading, storing and reloading the product may exceed the temporary cost of using a
vehicle for storage.

Another transportation service with consequences for storage is diversion. Diversion happens
when the location of the initial delivery is altered after shipping a item. For example, when
shipping from Chicago to Los Angeles, the destination of the product may be changed to Seattle
during transit. Although costly, when charging or unloading expenses, capability limitations and
the ability to stretch lead times are taken into account, item retention in rail cars may be justified
from a complete price or efficiency viewpoint.

PARTICIPANTS

Transportation decisions are influenced by six parties: (1) shipper, sometimes referred to
as consignor; (2) destination party, commonly called the consignee; (3) carriers and agents; (4)
government; (5) Internet; (6) the public. Figure 8.1 illustrates the relationship among the parties.
To understand the complexity of the transportation environment it is useful to review the role
and perspective of each party.
Shipper and Consignee

Shipper and consignee have a common interest in finishing a sale or purchase

transactions. Successful operations involve that products be moved from source to target at the
smallest price within a given moment. Pick-up and shipping time, travel time, loss and harm,
invoicing and precise prompt exchange of data are issues related to transportation that needs to
be resolved.

Carrier and Agents

The carrier is a transportation service carrier. As a service business, to achieve efficient

operations, carriers want to charge their customer for a group of shippers. Brokers and freight
forwarders are agents of transport facilitating carriers and customer matching.

Government

The government has a vested interest in transportation because of the critical importance
or reliable service to economic and social well-being. Government desires a stable and efficient
transportation environment to support economic growth.

Internet

A latest transportation industry growth is a broad range of Internet-based facilities. The

main benefit of Internet-based communication is the capacity of operators to exchange data with
clients and suppliers in real-time. Web-based enterprises typically provide two-types of
marketplaces. The first is a marketplace to exchange data with accessible deliveries to match
carrier freight ability. The exchange of information gives suppliers the chance to aggregate their
purchases and recognize possibilities across a broad spectrum of prospective suppliers.

Public

The final transportation system participant, the public, is concerned with availability, cost
and efficiency of education as well as preservation of the environment, safety and security. By
buying products, the public indirectly generates demand for transport. While it is essential for
customers to minimize travel costs, issues also include effect on the environment and safety. Air
pollution and oil spillage are important social issues related to transportation. Consumers
eventually pay the price of environmental effect and security. Transportation policy formation is
complex because of interaction between these six participants. This complexity often leads to
conflicts between shippers, consignees and carriers. Protecting the public interest was the historic
basis for the involvement of government in economic and social regulation.

From Regulation to a Free Market System

Because transportation has a major impact on both domestic and international commerce,
government has historically taken a special interest in both controlling and promoting transport
development. Following the passage of the Act to Regulate Interstate Commerce on February 4,
1887, the federal government became active in protecting the public interest. The act established
the Interstate Commerce Commission (ICC) which had broad regulatory power regarding
transportation. For almost 100 years the federal and state governments determined who could
provide transportation services and price they could charge for their services. Widespread desire
for deregulation in trucking and railroads became official with the passage of the Motor Carrier
Act of 1980 (MC 80) and the Staggers Rail Act. While the ICC retained the right to protect the
public against discriminatory practices and predatory pricing, individual carriers were given the
right to price their services.

On October 14, 1980, the railroad industry was deregulated by enactment of the Stagers Rail Act.
The dominant philosophy of the act was to provide railroad management with the freedom
necessary to revitalize the industry. In that respect, the most significant provision of the Staggers
Act was increased pricing freedom. In addition to price flexibility, railroad management was
given liberalized authority to proceed with abandonment of unprofitable rail service. The act also
provided the framework for a liberalized attitude toward mergers and increased the ability of
railroads to be involved in motor carrier service.

The authority of the ICC to regulate transportation was further modified by the passage of the
Trucking Industry Regulatory Reform Act of 1994. This act eliminated the need for motor
carriers to file rates with the ICC. Effective January 1 1996, the ICC was abolished by the
passage of the ICC Termination Act of 1995. This act further deregulated transportation and
established a three-person Surface Transportation Board (STB) within the Department of
Transportation (DOT) to administer remaining economic regulation issues across the industry.

The arrival of the new millennium delivered some significant changes to transportation industry.
The Electronic Signatures in Global and National Commerce Act of 2,000 gave Electronic
documents signed by digital signature the same legal status as paper documents. The most
significant changes were in response to terrorism and the heightened transportation security of
the United States following 9/11. The USA PATRIOT Act increased inspection at ports,
regulated airport screening, and heightened security at land-based border crossings. This act
resulted in widespread implementation of voluntary initiatives between U.S. CUSTOMS and
private industry known as Customs-Trade Partnership against Terrorism (C-TPAT).

Other legislation in the new millennium has been the result of globalization. The continued
Dumping and Subsidy Act of 2,000, known as Byrd Amendment, was passed in response to
artificial underpricing and dumping of foreign goods in U.S. markets.

Another example of the impact of globalization on regulation is recent efforts to reframe the
Jones Act. The Jones Act mandates that only United States built-ships operating under a U.S.
flag and with a U.S. crew can ship goods directly from a U.S. port to another U.S. port.
Opponents of this law argued that the Jones Act unfairly limited global competition in U.S.
domestic shipping. Since passage of the Staggers Act, matters related to rail regulation have been
administered by the United States Surface Transportation Board.

In the motor carrier industry, the Department of Justice recently ruled that the “Reliance
Network”, which consists of seven regional less-than-truckload carriers who in combination
offer nationwide service, could collaborate in establishing a network-wide rate for all-less-than-
truckload (LTL) shipments and could collaborate in the solicitation of freight shipments.

reporter: Famindalan, Nerissa

TRANSPORTATION MODAL STRUCTURE

The freight transportation structure consists of the rights-of-way, vehicles, and carriers
that operate within five basic transportation models. A mode identifies a basic transportation
method or form. The relative importance of each transportation mode in the united states is
measured in terms of system mileage, traffic volume, revenue and nature of freight transported.

TABLE 8.1 The Nation’s Freight Bill ($ Billions)

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 9.0 10.0
Air 0.4 1.2 4.0 13.7 27.0 29.0
Other
0.4 0.4 1.1 4.0 10.0 28.0
carriers
Other
1.3 14 2.4 3.7 5.0 9.0
shipper costs
Grand total 47.8 83.9 213.7 350.8 594.0 697.0
GNP
0.5 1,046 2,831 5,832 9,960 14,256
(trillions)
Grand total
9.00% 8.09% 7.55% 6.02% 5.92% 4.89%
of GNP

TABLE 8.2 Domestic Shipments by Mode and Volume

Mode and Freight Volumes Percent
Mode Share %
Volume (Millions of tons) change
2009-
2009 2015 2021 2009 2015 2021
2015
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
139 193 253 1.1% 1.3% 1.6% 82.6%
intermodal
Air 12 15 18 0.1% 0.1% 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

TABLE 8.3 Domestic Shipments by Mode and Revenue

Mode and Freight Volumes Percent

Mode Share %
Revenue (Billions of Dollars) Change
2009-
2009 2015 2021 2009 2015 2021
2015
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
9 16 24 1.4% 1.7% 2.1% 151.6%
Intermodal
Air 20 29 40 3.0% 3.2% 3.6% 99.5%
Water 10 13 15 1.5% 1.5% 1.3% 51.5%
Pipeline 41 46 51 6.2% 5.1% 4.5% 24.6%
Total 665 903 1,123
 These data confirm that the truck share of the domestic freight market far exceeds that of
all other modes combined. While all transport modes are vital to a sound national transportation
structure, it is clear that the U.S economy, current and projected, depends on the trucks.

RAIL

Historically, railroads have handled the largest number of ton-miles within the
continental United States. A ton-mile is a standard measure of freight activity that combines
weight and distance. It is once ranked first among all modes in terms of the number of miles in
service. Railroad operations have high-fixed costs because of expensive equipment, right-of-way
and tracks, switching yards, and terminals. It became more responsive to specific customer needs
by emphasizing bulk industries and heavy manufacturing, as contrasted to traditional freight
boxcar service.

To provide improved service to major customers, progressive railroads have concentrated

on the development of specialized equipment, such as enclosed trilevel automotive railcars,
cushioned appliance railcars, unit trains, articulated cars, and double-stack container flatcars.
Railroads currently perform a highly focused and important role in the transportation structure as
the intermodal leaders of the 21st century. To a large extent the future of railroads rests on
adoption of high-speed train technology.

TRUCK

Highway transportation has expanded rapidly since the end of World war ll. To a
significant degree the rapid growth of the motor carrier industry has resulted from speed coupled
with the flexibility of door-to-door operations. In comparison to railroads, trucks have a
relatively small fixed investment in terminal facilities and operate on publicly financed and
maintained roads. The trucking industry is not without problems. The primary difficulties relate
to increasing cost to replace equipment, maintenance, safety, driver-hours-of-service regulations,
dock, wages and fuel cost.

An alternative to for-hire truck service is shipper-owned trucks or trucks operated by

integrated logistics service providers (ISPs) that are under contract to perform transport services
for specific shippers. An ISP may perform services for multiple shippers and thus gain both
economies of scale and distance. Since 1980, deregulation has dramatically changed the nature
of for-hire trucking. The industry segments, which have become more defined since
deregulation, include truckload (TL), less than-trucked (LTL), and specialty.

The TL segments includes loads over 15,000 pounds that generally do not require
intermediate stops between origin and destination. The LTL segment involves shipments less
than 15,000 pounds that generally must be consolidated to fully utilize trailer capacity. While,
the specialty carriers include bulk and package haulers such as Waste Management and United
Parcel Service (UPS).

WATER

Water is the oldest mode of transport. The original sailing vessels were replaced by
steam-powered boats in the early 1800s and by diesel in the 1920s. A distinction is generally
made between deepwater and navigable inland water transport. The percentage of river and canal
ton-miles has increased, while the Great lakes ton-miles have decreased. This reflects both a shift
of bulk product transportation from rail and highway to lower-cost water movements on rivers
and coastal canals as well as a shift from lakeside shipping to motor carrier transport.

The main advantage of water transport is the capacity to transport extremely large
shipments. Water transport employs two types of vessels for movement: deepwater vessels are
generally designed for coastal, ocean, and Great lakes transport; diesel-towed barges generally
operate on rivers and canals and have considerably more flexibility. The main disadvantages of
water transport are the limited operation and slow speed. Unless the origin and destination of the
movement are adjacent to waterway, supplemental product movement by rail or truck is
required.

Water transport will continue to be a viable transportation option in future supply chain
logistics. The slow transit time of river transport provides a form of product storage in transit that
can benefit logistics system operations.

PIPELINE

Pipelines accounted for approximately 67.8% of all crude and petroleum ton-mile
movements. In addition to petroleum products, the other important product transported by
pipeline is natural gas. Like petroleum pipelines, natural gas pipelines in the United States are
privately owned and operated, and many gas companies act as both gas distribution and contract
transportation providers.

Pipelines operates on 24-hours basis, 7 days per week, and are limited only by
commodity changeover and maintenance. Pipelines have the highest fixed cost and lowest
variable cost among transport modes. Since pipelines are not labor-intenstive, the variable
operating cost is extremely low once the pipeline has been constructed. An obvious disadvantage
is that pipelines are not flexible and are limited with the respect to commodities that can be
transported, as only products in the forms of gas, liquid, or slurry can be handled.

AIR

The newest but least utilized mode of transportation is airfreight. The significant
advantage of airfreight lies in speed. A coast-to-coast shipment via air requires only hours
contrasted to days with other modes of transport. While costly, the speed of air transport
potential allows other aspects of logistics such as warehousing and inventory to be reduced or
eliminated. Air transport, despite its high profile, still remains more of a potential than a reality.
Its capability is limited by load size, weight lift capacity, and aircraft availability.

However, the advent of premium air carriers such as Federal Express and United Parcel
Air introduced scheduled global airfreight service. While such premium service was originally
targeted at high-priority documents, it has expanded to include package freight. The fixed cost of
air transport is. Low compared to rail, water, and pipeline. In fact, air ranks second only to truck
with respect to low fixed cost.

On the other hand, airfreight variable cost is extremely high as a result of fuel, user fees,
maintenance, and the labor intensity of both in-flight and ground crews. No particular
commodity dominates the traffic carried by airfreight operations. Perhaps the best distinction is
that most freight has high value and priority.

MODAL COMPARATIVE CHARACTERISTICS AND CAPABILITIES

 Speed – refers to elapsed movement time. Airfreight is the fastest of all modes.
  Availability – refers to the ability of a mode to service any given pair of locations.
Highway carriers have the greatest availability since they can drive directly to origin and
destination points.
 Dependability – refers to potential variance from expected or published delivery
schedules. Pipelines, because of their continuous service and limited interference due to
weather and congestion, it is rank highest in dependability.
 Capability – is the ability of a mode to handle any transport requirement such as load
size. Water transport is the most capable.
 Frequency – relates to the quantity of scheduled movements. Pipelines again because of
their continuous service between two points, lead all modes in frequency.

INFRASTRUCTURE IN CRISIS

Following World War II the United States embarked on an aggressive development

program that resulted in construction of 46,837 miles of interstate highways. However, by 2010,
this highway system was in need of expansion and widespread repair to sustain the safe
movement of commercial and private transportation.

TABLE 8.4 Cost structure for each mode

Rail. High fixed cost in equipment, terminals, tracks, etc. Low variable cost.
Truck. Low fixed cost (highways in place and provided by public support). Medium variable
cost (fuel, maintenance, etc.).
Water. Medium fixed cost (ships and equipment). Low variable cost (capability to transport the
large amount of tonnage).
Pipeline. Highest fixed cost (rights-of-way, construction, requirements for control stations, and
pumping capacity). Lowest variable cost (no labor cost of any significance).
Air. Low fixed cost (aircraft and handling and cargo systems). High variable cost (fuel, labor,
maintenance, etc.)

TABLE 8.5 Modal operating Characteristics

Opening
Rail Truck Water Pipeline Air
Characteristic
Speed 3 2 4 5 1
Availability 2 1 4 5 3
Dependability 3 2 4 1 5
Capability 2 3 1 5 4
Frequency 4 2 5 1 3
Composite
14 10 18 17 16
Score

SPECIALIZED TRANSPORTATION SERVICE

Transportation service can be improved by combining modes. Prior to deregulation,

government policy limited carriers to operating in a single mode. Such relative ownership sought
to promote competition between modes and limit the potential for monopoly practices.

PACKAGE SERVICE

Package services represent an important part of logistics, and the influence of carriers in
this segment is in increasing because of their size and intermodal capabilities. While package
service are expanding, the services required do not fall neatly into the traditional modal
classification scheme. Packages are regularly transported by using the line-haul services of rail,
motor, and air. Package service provides both regular and premium services.

The most recognizable carriers are Federal Express (FedEx), United Parcel Service
(UPS), and the United States Postal Service (USPS).

The first widely recognized premium air package services was initiated by Federal
Express in 1973. FedEx provided nationwide overnight service utilizing a fleet of dedicated
cargo aircraft. The original service offered by UPS was contract delivery of local shipments for
department stores. In fact, UPS has expanded its scope of overall operating authority by shipping
packages that conform to specialized size and weight restrictions nationwide and globally for
consumers and business enterprises.

TABLE 8.6 Examples of Expanded Parcel Carrier Services

In 2010, the USPS introduced a new service called “If it fits it ships.” This service offers
one flat rate for any shipment between two U.S. domestic locations if it fits into any of the five
different box sizes. These rates are guaranteed regardless of package weight. The importance of
parcel service to the logistical system cannot be overemphasized. Firms that specialize in
consumer fulfillment are one of the fastest growing forms of logistics service providers.
INTERMODAL

Intermodal transportation combines two or more modes to take advantage of the inherent
economies of each and thus provide an integrated service at lower total costs. Intermodal
offerings began to develop more successfully during the 1950’s with the advent of integrated rail
and motor service commonly termed piggyback service. The popularity of such offerings has
increased significantly as a means to achieve more efficient and effective transportation.
Intermodal transportation could be arranged among all basic codes.

TOFC/COFC

The best known and most widely used intermodal systems are the trailer on a flatcar
(TOFC) and container on a flatcar (COFC). Containers are the boxes utilized for intermodal
product storage and movement between motor freight, railroads, and water transportation.

A trailer or container is placed on a railroad flatcar for some portion of the intercity line-
haul and pulled by a truck at origin and to the final destination. While the TOFC concept
facilitates direct transfer between rai and motor carriage, it also has several technical limitations.
The placement of a trailer with highway wheels attached, transferred to a railcar, can lead to
wind resistance, damage, and weight problems. The use of containers reduces these potential
problems, as they can be double stacked and are easily transferred to water carriers. They require
special equipment for over-the-road delivery or pickup.

CONTAINERSHIP

Fishyback, trainship, and containership are examples of the oldest form of intermodal
transport. They utilize waterways, which are one of the latest expensive models for line-haul
movement. The fishyback, trainship, and containership concept loads a truck trailer, railcar, or
container onto a barge or ship for the line-haul movement on inland navigable waterways. Such
services are provides in coastal waters between Atlantic and Gulf ports, and between the Great
Lakes and coastal points.
NONOPERATING INTERMEDIARIES

The overall transportation industry also includes several businesses that do not own or
operate equipment. These non operating intermediaries broker services of other firms. A
transportation broker is somewhat similar to a wholesaler in a marketing channel. Nonoperating
intermediaries find economic justification by offering shippers lower rates for movement
between two locations that would be possible by direct shipment via common carrier.

The primary intermediaries are freight forwarders, shipper, associations, and brokers.

 Freight forwarders are for profit businesses that consolidate small shipments from various
customers into a bulk shipment and then utilize a common surface or air carrier for
transport.
 Shipper associations are operationally similar to freight forwarders in that they
consolidate small shipments into large movements to gain cost in economies. Shipper
associations are voluntary non profit entities where members, operating in a specific
industry, collaborate to gain economies related to small-shipment purchases.
 Brokers are intermediaries that coordinate transportation arrangements for shippers,
consignees, and carriers. They also arrange shipments for exempt carriers and owner
operators. Brokers typically operate on a commission basis. It provides extensive services
such as shipments matching, rate negotiation, billing and tracing.

TRANSPORTATION ECONOMICS AND PRICING

Transportation economics and pricing are driven by multiple factors that influence rates.
Primary factors are distance, weight and density.
ECONOMY OF DISTANCE

Distance is a major influence on transportation cost since it directly contributes to

variable expense such as labor, fuel, and maintenance.

FIGURE 8.2 Generalized relationship between distance

and transportation cost

ECONOMY OF WEIGHT

A second factor is shipment weight. Similar to other logistics activities, sale economies
exist for most transportation movements.

FIGURE 8.3 Impact of weight on Transportation cost FIGURE 8.4 Impact of density on

transportation cost

ECONOMY OF DENSITY

Density is the combination of weight and volume. Weight and volume are important
since transportation cost for any movement is usually quoted in dollars per unit of weight. As a
result, higher density products are typically assessed lower transport cost per unit of weight.
OTHER PRICING FACTORS

Several other factors have importance to transportation economics. Four of the more
important factors are discussed. Stowability refers to how product dimensions fit into
transportation equipment. Odd package sizes and shapes, as well as excessive size or length, may
not fit well in transportation equipment, resulted in waste cubic capacity. Although density and
stowability are similar, it is possible to have items with similar densities that stow very
differently.

HANDLING. Special handling equipment may be required to load and unload trucks, railcars,
or ships.

LIABILITY. It includes product characteristics that can result in damage. Carriers must either
have insurance to protect against potential damage or accept financial responsibility. Shippers
can reduce their risk, and ultimately transportation cost, by improved packaging or reducing
susceptibility to loss or damage.

MARKET. Market factors such as lane volume and balance influence transportation cost. A
transport lane refers to movements between origin and destination points. Since transportation
vehicles and drivers typically return to their origin, either they must find a back-haul load or the
vehicle is returned or deadheaded empty. When empty return movements occur, labor, fuel, and
maintenance cost must be changed against the original front-haul movement.

COSTING FREIGHT. The second dimension of transport economics and pricing concerns the
criteria used to allocate cost. Cost allocation is primarily a carrier concern, but since cost
structure influences negotiating ability, the shipper’s perspective is important as well.

VARIABLE. Costs that change in a predictable, direct manner in relation to some level of
activity are labeled variable costs. Variable costs include direct carrier costs associated with
movement of each load. These expenses are generally measured as a cost per mile or per unit of
weight.
. Expenses that do not change in the short run and must be paid even when a company is not
operating, such as during a holiday or a strike, are fixed costs. The fixed category includes costs
not directly influenced by shipment volume.

JOINT. Expenses created by the decision to provide a particular service are called joint costs. It
have significant impact on transportation charges because carrier quotations must include
implied joint costs based on assessment of back-haul recovery.

COMMON. This includes carrier costs that are incurred on behalf of all or selected shippers.
Common costs, such as terminal or management expenses, are characterized as overhead. These
are often allocated to a shipper according to a level of activity like the number of shipments or
delivery appointments handled.

PRICING FREIGHT

This section presents the traditional pricing mechanics used by carriers. This discussion applies
specifically to common carriers, although contract carriers follow a similar approach.

CLASS RATES. In transportation terminology, the price in dollars and cents per hundredweight
to move a specific product between two locations is referred to as the rate. The rate is listed on
pricing sheets or on computer files known as tariffs. The term class rate evolved from the fact
that all products transported by common carriers are classified for pricing purposes.
Determination of common carrier class rates is two-step process. The first step is to determine
the classification or grouping for the product being transported. The second step is determining
the rate or price based on the freight classification of the product, weight, and shipment
origin/destination points.

FREIGHT CLASSIFICATION. All products transported are grouped together into uniform
classification. The classification takes into consideration the characteristics of a product or
commodity that influence the cost of handling or transport. Products with similar density,
stowability handling, liability, and value characteristics are grouped together into a class, thereby
reducing the need to deal with each product on an individual basis. The particular class that a
given product or commodity is assigned is referred to as its rating. A products rating is used to
determine the freight rate.

Products are also assigned classifications on the basis of the weight being shipped. Less-
than-truckload (LTL) shipments of identical products will have higher ratings than truckload
(TL) shipments. Products are also assigned different ratings on the basis of packaging.

TABLE 8.7 National Motor freight Classification 100-S

TABLE 8.8. Example of Rates from Atlanta, Georgia (zip 303), to Lansing, Michigan (zip 489)

RATE DETERMINATION. Once a classification rating is obtained for a product, the rate must
be determined. The rate per hundredweight is usually based on the shipment origin and
destination, although the actual charged for a particular shipment is normally subject to a
minimum charge and may also be subject to surcharges. In addition to the variable shipment
charge applied on either a per hundredweight or per mile basis, two additional charged are
common for transportation: minimum charges and surcharges.

CUBE RATES. When a large quantity of a product moves between two locations on a regular
basis, it is common practice for carriers to publish a commodity rate. The terms and conditions of
a commodity rate are usually indicated in a contract between the carrier and shipper.

EXCEPTION RATES. Special rates published to provide prices lower than the prevailing class
rates are called exception rates. The original purpose of the exception rate was to provide a
special rate for a specific area, origin/destination, or commodity when justified by either
competitive or high-volume movements. A limited service rate is utilized when a shipper agrees
to perform selected services typically performed by the carrier, such as trailer loading, in
exchange for a discount.

SPECIAL RATES AND SERVICES. A number special rates and services provided by carriers
are available for use in logistical operations. Several common examples are discussed.

 Freight-all-kind (FAK) rates. Under this, a mixture od different products is transported

under a negotiated rating. Rather than determine the classification and applicable freight
rate of individual products, an average rating is applied for the total shipment. When a
commodity moves under the tariff of a single carrier it is referred to as a local rate or
 single-line rate. If more than one carrier is involved in the freight movement, a joint rate
may be applicable because multiple carriers are involved in the actual transportation
process.
 Transit services permit. A shipment to be stopped at an intermediate point between
initial origin and destination for unloading, storage and/or processing. The shipment is
then reloaded for delivery to the destination. For variety of reasons, a shipper or
consignee may desire to change routing destination, or even the consignee after a
shipment is in transmit. This process is called diversion and reconsignment. This
flexibility can be extremely important, particularly with regard to food and other
perishable products where market demand can quickly change. Diversion consist of
changing the destination of a shipment prior to its arrival at the original destination.
Reconsignment is a change in consignee prior to delivery. Both service are provided by
railroads and truck carriers for a specific charge.
A split delivery is desired when portions of shipment need to be delivered to different
destinations. Under specified tariff conditions, delivery can involve multiple destinations.
The payment is typically structured to reflect a rate as if the shipment were going to the
most distant destination. In addition, there is typically a charge for each delivery.
Demurrage and detention are change assessed for retaining freight cars or truck trailers
beyond specified loading or 48 hours before unloading the shipment. Trucks use the term
detention to cover similar delays. In the case of motor carriers. The permitted time is
specified in the tariff and is normally limited to a few hours.
reporter: Saluba, Janica

TRANSPORTATION MANAGEMENT

Transportation management includes a broad range of duties in planning, implementation

and administration. As an essential aspect of their information technology approach, companies
are increasingly implementing Transportation Management Systems (TMS). A TMS generally
defines and evaluates transport policies and tactics proactively to determine the best method for
shipping products. As illustrated in table 8.10, this includes the capability to select transport
models, plan loads, consolidate shipments, route vehicles, and efficiently use transportation
capacity. The fundamental deliverables of a TMS are reduced cost and the increased ability to
provide on-time delivery.

The generalized functionality of a TMS can be described in terms of five capabilities: (1)
operational management, (2) consolidation, (3) negotiation, (4) control, and (5) auditing and
claims administration.

Operational Management

Key components of a TMS from an operational view are machinery scheduling and yard
management, load planning, routing and advanced shipment notification (ASN), and movement
administration.

Equipment Scheduling and Yard Management

One major responsibility of the traffic department is equipment scheduling and yard
management. A serious and costly operational bottleneck can result from transportation
equipment waiting to be loaded or unloaded. Proper yard management requires careful load
planning, equipment utilization, and driver scheduling.

Closely related to equipment scheduling is the arrangement of delivery and pickup appointments.
To avoid extensive waiting time and improve equipment utilization, it is important to
preschedule dock positions or slots. Increasingly, the effective scheduling of equipment is the
key to implementing time-based logistical arrangements. For example, cross-dock arrangements
are totally dependent on precise scheduling of equipment arrival and departure.
Load Planning

How loads are planned directly impacts transportation efficiency. In the case of trucks,
weight and cube capacity are limited. If multiple shipments are loaded on a single trailer, the
planning of a trailer's load sequence must consider the physical characteristics of the product and
the size of individual shipments as well as the delivery sequence.

Routing and Advanced Shipment Notification (ASN)

An important part of achieving transportation efficiency is shipment routing. From an

administrative viewpoint, the traffic department is responsible for assuring that routing is
performed in an efficient manner while meeting key customer service requirements. While the
specifics of ASN documents vary, their primary purpose is to allow adequate time to plan arrival,
arrange delivery appointments, and plan to redeploy the shipment’s content. How deliveries are
planned must take into consideration special requirements of customers in terms of time,
location, and special unloading services.

Movement Administration

Traffic managers have the basic responsibility of administering the performance of for-
hire and private transportation. Effective administration requires continuous carrier performance
measurement and evaluation. Effective administration requires carrier selection, integration, and
evaluation.

A basic responsibility of the traffic department is to select carriers to perform for-hire transport.
Even those with commitment to private fleets regularly require the supplemented services of
common, contract, and specialized carriers to complete transportation requirements.

Consolidation

At several different points throughout this text the importance of freight consolidation is
discussed. The fact that freight costs are directly related to size of shipment and length of haul
places a premium upon a freight consolidation. In terms made famous by the late President
Truman, the buck stops here, meaning traffic management is the business function responsible
for achieving freight consolidation.
The traditional approach to freight consolidation was to combine LTL or parcel shipment
moving to a general location. The transportation savings in moving a single consolidated
shipment versus multiple individual, small shipments were typically sufficient to pay for
necessary handling and local delivery while achieving significant total cost reduction.

The shift to response-based logistics has introduced new challenges regarding consolidation. Not
only does the increase in small shipments result in higher transportation cost, it also translates to
more handling and dock congestion.

To control transportation cost when a time-based strategy is used, managerial attention must be
directed to the development of ingenious ways to achieve of transportation consolidation. To
plan freight consolidation, it is necessary to have reliable information concerning inventory
status. From an operational viewpoint, freight consolidation techniques are grouped as reactive
and proactive. Each type of consolidation is important to achieving transportation efficiency.

Reactive Consolidation

A reactive approach to consolidation does not attempt to influence the composition and
timing of transportation movements. The consolidation effort reacts to shipments as they come
and seeks to combine individual orders into larger shipments for line-haul movement. Perhaps
the most visible example of effective reactive line-haul is United Parcel Service’s nightly
sortation and consolidation of package freight for intercity movement.

From an operational viewpoint, there are three ways to achieve effective reactive consolidation:
(1) market area, (2) scheduled delivery, and (3) pooled delivery.

The most basic method of consolidation is to combine small shipments going to different
customers within a geographical market area. Rather, the overall quantity of shipments to a
market area provides the consolidation basis. Second, firms may elect to hold consolidated
shipments for scheduled delivery on specific days to given destination markets. Third,
consolidation of small shipments may be achieved by utilizing services of third-party logistics
firm to pool delivery.

A strategy of holding shipments to specific markets for delivery on selected days each week is
referred to as scheduled area delivery. The scheduled delivery plan is normally communicated to
customers in a way that highlights the mutual benefits of consolidation. The shipping firm
commits to the customer that all orders received prior to a specified cutoff time will be
guaranteed for delivery on the scheduled day.

Participation in pooled delivery typically means that a freight forwarder, public warehouse, or
transportation company arranges consolidation for multiple shipper’s serving the same
geographical market area. Integrated service providers that arrange pooled consolidation services
typically have standing delivery appointments at high-volume delivery destinations. It is
common, under such arrangements, for the consolidation company to also perform value-added
service such as sorting, sequencing, or segregation of inbound freight to accommodate customer
requirements.

Proactive Consolidation

While reactive efforts to develop transportation consolidations have been successful, two
forces are driving a more proactive approach. First, the impact of response-based logistical
systems is creating a larger number of small shipments. Second, proactive consolidation reflects
the desire for shippers, carriers, and consignees, to participate in consolidation savings.

An important step toward achieving proactive consolidation is preorder planning of quantity and
timing to facilitate consolidated freight movement. Buyer participation in order creation can
greatly facilitate proactive freight consolidation.

Significant freight consolidation opportunities also may exist if nonrelated firms can be
coordinated. Commonly referred to as multivendor consolidation, the general idea of grouping
different shippers’ freight has always been integral to line-haul operations of LTL carriers. The
new initiative is jointly planning warehousing and order processing across different companies to
facilitate such consolidation. Creating such multivendor consolidation is a value added service
offered by a growing number of ISPs.

reported: Villas, Rose Ann

Negotiation
The key to effective negotiation is to seek win-win agreements where in both carriers and
shippers share productivity gains. As indicated several times throughout this text, the lowest
possible cost for transportation may not be the lowest total cost of logistics. The traffic
department must seek the lowest rate consistent with service standards.

Control

Other important responsibilities under the control of transportation management are tracing,
expediting and driver hours administration.

 Tracing is a procedure to locate lost or late shipments. The tracing action must be
initiated by the shipper’s traffic department, but once initiated, it is the carrier’s
responsibility to provide the desired information.
 Expediting involves the shippers notifying a carrier that it needs to have a specific
shipment move through the carrier’s system as quickly as possible and with no delays.
 Driver fatigue concerns prompted the Department of Transportation’s Federal Motors
Carrier Safety Administration (FMCSA) in 2005 to alter the hours of service (HOS) that
interstate truck drivers could operate. The changes were developed to ensure drivers were
getting sufficient off-duty time to rest while at the same time increasing daily driving
time for trucking companies. Under the new rules all breaks were counted as on-duty
time. Although total driving hours were extended, the impact of new regulation was to
reduce the productive workday and reduce the effectiveness of driver teams. The new
rules reduced the time a driver could rest during team movements.

Auditing and Claim Administration

When transportation service or charges are not performed as promised, shippers can
make claims for restitution. Claims are typically classified as loss and damage or
overcharge/undercharge. Loss and damage claims occur when a shipper demands the carrier
pay for partial or total financial loss resulting from poor performance.

Agreements stipulate the proper procedure for filling claims and help define which
parties are responsible. Two factors regarding claim administration are of primary
importance. First, detailed attention should be given to claim administration because
 recoveries are achieved only by aggressive audit programs. Second, large volumes of claims
are indicative of carriers that are not performing their service obligations.

Auditing freight bills is an important responsibility of the traffic department. The purpose of
auditing is to ensure freight bill accuracy. Transport rate complexity results in a higher error
probability than in most other purchasing decisions. There are two types of freight audits. A
preaudit determines proper charges prior to payment of a freight bill. A postaudit makes the
same determination after payment has been made. Auditing may be either external or internal. If
internal, specialized freight-auditing companies are employed, utilizing personnel who are
experts in specific commodity groupings. Payment for external audit is usually based on a
percentage of recovered overcharges. It is crucial that a highly ethical firm be employed for this
purpose, because valuable marketing and customer information is contained in the freight bill
and corporate activities may be adversely affected if sensitive information is not held in
confidence.

DOCUMENTATION

Detailed documentation is required to perform a transportation service. With the

exception of private transfer within the confines of a single firm, products are typically being
sold when being transported. Thus, a change of ownership occurs during the time the transport
service is performed. When for-hire carriers, are used to perform the transportation, the
transaction must establish clear legal responsibility of all parties involved. The primary purpose
of transportation documentation is to protect all involved parties.

Three primary types of transport documentation are bills of lading, freight bills, and shipment
manifest.

1. Bill of Lading
The bill of lading is the basic document utilized in purchasing transport services.
It services as a receipt and documents products and quantities shipped. For this
reason, accurate product description and count are essential. In case of loss, damage,
or delay, the bill of lading is the basis for damage claims. The designated individual
or buyer on a bill of lading is the only bona fide recipient of goods. A carrier is
 responsible for proper delivery according to instructions contained in the document.
The information contained on the bill of lading determines all responsibilities related
to timing and ownership. In addition to the uniform bill of lading, other commonly
used types are order-notified, export, and government. It is important to select the
correct bill of lading for specific shipment.

2. Freight Bill
 The freight bill represents a carrier’s method of charging for transportation
services performed. It is developed by using information contained in the bill of
lading. The freight bill may be either prepaid or collect. A prepaid bill means that
transport cost is paid by the shipper prior to performance, whereas a collect shipment
shifts payment responsibility to the consignee.
Considerable administration is involved in preparing bills of lading and freight
bills. There has been significant effort to automate freight bills and bills of lading
through EDI or Internet transactions. Some firms elect to pay their freight bills at the
time bill of lading is created, thereby combining the two documents. Such
arrangements are based upon the financial benefits of reduced paperwork cost, and as
noted earlier shift the audit responsibility to the carrier.
3. Shipment Manifest
The shipment manifest lists individual stops or consignees when multiple
shipments are placed on a single vehicle. Each shipment requires a bill of lading.
The manifest lists the stop, bill of lading, weight, and case count for each
shipment. The objective of the manifest is to provide a single document that
defines the overall contents of the load without requiring review of individual
bills of lading. For single-stop shipments, the manifest is the same as the bill of
lading.

PRODUCT PRICING AND TRANSPORTATION

A major trend in price strategy has been to debundle the price of products and materials
so that services such as transportation, which were traditionally included in a delivered price,
become separate and visible items. Pricing practices have a direct impact on the timing and
stability of logistical operations. In this section, basis pricing structures are briefly reviewed,
followed by a discussion of pricing impact areas. The focus is on the relationship between
pricing, logistical operations, and transportation decisions. Pricing decisions directly determine
which party in the transaction is responsible for performing logistics activities, passage of title
and liability. FOB origin and delivered pricing are the two most common methods.

FOB Pricing
 The term FOB technically means free on board or freight on board. A number of various
for FOB pricing are used in practice. FOB origin is the simplest way to quote price. In FOB
destination pricing, product ownership title does not pass to the buyer until delivery is
completed. Under FOB destination pricing, the seller arranges for transportation and the charges
are added to the sales invoice. The firm paying the freight bill does not necessarily assume
responsibility for ownership of goods in transit, for the freight cost, or for filing of freight claims.
These are issues of negotiation that are critical to supply chain collaboration.

Delivered Pricing

The primary difference between FOB and delivered pricing is that in delivered pricing
the seller establishes a price that includes transportation. In other words, the transportation cost is
not specified as a separate item. There are several variations of delivered pricing.

 Single-zone delivered pricing, buyers pay a single price regardless of where they are
located. Delivered prices typically reflect the seller’s average transportation cost. In
actual practice, some customers pay more than their fair share for transportation cost
others are subsidized.
 The practice of multiple-zone pricing establishes different prices for specific geographic
areas. The underlying idea is that logistics cost differentials can be more fairly assigned
when two or more zones “typically based on distance” are used to quote delivered
pricing.
 Base-point pricing system the most complicated and controversial form of delivered
pricing, which the final delivered price is determined by the product’s list price plus
transportation cost from the designated base point, usually the manufacturing location.
The designated point is used for computing the delivered price whether or not the
shipment actually originates from the base location.
 Delivered price $100 Freight cost
$25

Plant A
Customer

Freight cost
$20
Freight cost
$35

Plant B
Plant C
This illustrates how a base-point pricing typically generates different net return to a
seller. The customer is quoted a delivered price of $100 per unit. Plant A is the base point.
Actual transportation cost from plant A to the customer is $25 per unit. Plant A’s base product
price is $85 per unit. Transportation costs from plant B and C are $20 and 35 per unit,
respectively.
When shipments are made from plant A, the company’s net return is $75 per unit, the
$100 delivered price minus the $25 transportation cost. The net return to the company varies if
shipments are made from plant B or C. With a delivered price $100, plant B collects $5 in
phantom freight on shipments to a customer. Phantom freight occurs when a buyer pays
transportation costs greater than those actually incurred to move the shipment. If plant C is the
shipment origin, the company must absorb $10 of the transportation costs. Freight absorption
occurs when a seller pays all or portion of the actual transportation cost and does not recover the
full expenditure from the buyers. In other words, the seller decides to absorb transportation cost
to be competitive.

Pickup Allowances
Pickup allowance is equivalent to purchasing merchandise on an FOB origin basis.
Buyers are given a reduction from the standard delivered price if they or a representative pickup
shipment at the seller’s location and perform transportation. A buyer may also use a for-hire
carrier or an integrated service provider (ISP) to perform merchandise pickup. In the food and
grocery industry, which traditionally practiced delivered pricing. Pickup allowances offer
potential benefits for both the seller and the buyers. Shippers are required to deal with fewer
small shipments, thereby reducing the need for extensive outbound freight consolidation. Buyers
gain control over the merchandise earlier and are in a position to achieve greater utilization of
transportation equipment and drivers.