III.

Transportation
Management
Transportation Functions and Principles
Transport Functionality
Transportation provides two major functions:
1. Product Movement
o The primary function of transportation is movement of products
up and down the supply chain
o Since transportation utilizes temporal, financial, and
environmental resources, it is important that items be moved
only when it truly enhances product value
 It uses temporal resources since the product is inaccessible
while being transported (referred to as in-transit inventory
has gained importance since the adoption of time based
logistics)
 Financial resources are used because internal expenditures
are necessary for private fleets or external expenditures are
required for commercial or public transportation
 Transportation uses environmental resources both directly
(is a major consumer of energy) and indirectly (causes air and
noise pollution as well as congestion)
2. Temporary Product Storage
o A less common (because of the
high cost involved) transportation
function is temporary storage
o Transportation facilities can be
used as a storage facility if:
 There is a temporary shortage of
storage space
 The in-transit product requires storage
but will be moved again shortly (e.g.,
in a few days), and the cost of
unloading and reloading the product
in/from a warehouse exceeds the total
Transportation Principles
There are two fundamental principles that
guide transportation management and
operation
1. Economies of Scale
o It refers to the characteristics that transportation
cost per unit of weight decreases when the size
of the shipment increases; so
 Truckload (TL) shipments cost less per pound than
less-than-truckload (LTL) shipments.
 Larger capacity transportation vehicles such as rail or
water are less expensive per unit of weight than
smaller capacity vehicles such as motor or air.
o Transportation economies of scale exist because fixed
expenses associated with moving a load can be
spread over the load’s weight
 The fixed expenses include administrative costs of
taking the transportation order, time to position the
 2. Economies of Distance (the Tapering Principle)
o It refers to the characteristic that transportation cost per
unit of distance decreases as distance increases.
 A shipment of 800 miles will cost less than two shipments (of the
same weight) of 400 miles
o There are two major reasons for this principle:
 Like economies of scale, the relatively fixed expense incurred to load
and unload the vehicle must be spread over the variable expense
per unit of distance and longer distances allow the fixed expense to
be spread over more miles, resulting in lower overall per mile
charges
 As distance increases, the proportion of inter-city miles increases
compared with inner city miles. (Vehicles cost less to cover a given
distance when they are being driven outside city boundaries where
there is less traffic congestion and less frequent stops)
 These principles are important considerations when
evaluating alternative transportation strategies or
operating practices.
 The objective is to maximize the size of the load and the
distance that it is shipped while still meeting customer
service expectations
Participants in Transportation Decisions

Unlike most commercial buying and selling that

involves only the buyer and the seller,
transportation transactions are often influenced
by five parties: the shipper, the consignee, the
carrier, the government and the public
Public
Information
Flow
Goods
Government
Flow

Carrier Consignee
Shipper

Figure: Relationship between the shipper, the

consignee, and the public
Shippers, Consignees, and Carriers
 These represent the direct participants in most transportation
transactions
 One party can play all three roles as when a particular companysends
its products to its regional branches using its own transportation
vehicles
 The shipper and consignee have the common objective of moving
goods from origin to destination within a prescribed time at the
lowest cost
 Service requirements include:
Specified pickup and delivery times,
Predictable transit time,
Zero loss and damage,
Accurate and timely exchange of information and invoicing
 Carriers desire to maximize their revenue associated with the
transaction while minimizing the costs necessary to complete the
transaction
 Their expectations include:
Charging the highest rate that the shipper (or consignee) will accept and
minimize the labor, fuel, and vehicle costs required to move the goods
Flexibility in pickup and delivery times to allow individual loads to be
consolidated into economic moves
The Government
The government maintains a high interest level
in the transaction because of transportation’s
impact on the economy
The government desires a stable and efficient
transportation environment to sustain economic
growth
Many governments are more involved with
carrier activities and practices than with other
commercial enterprises.
Their involvement may take one of the following
three forms:
1. Regulation Governments regulate carriers by restricting
the markets they can service or by setting the prices they
charge. Government regulations can be either economic
or safety related.
2. Promotion Governments promote carriers by supporting
The Public
The public is concerned with
Transportation accessibility
Expense and effectiveness of transportation
Environmental and safety standards in transportation
The public ultimately determines the need for
transportation by demanding goods from around
the world at reasonable prices
While minimizing transportation cost is important
to consumers, trade-offs associated with
environmental and safety standards also require
consideration
 The transportation relationship is complex
because of the interaction between the parties
and frequent conflicts can arise between those
with micro interests as well as those with macro
Basic Transport Economics & Pricing

To develop an effective logistics strategy

and to successfully negotiate transport
agreements, it is necessary to understand
the economics of the transportation
industry
Three topics will be covered in this regard:
1. Factors that affect transportation costs
and rates
2. The cost structure of the transportation
industry
3. The pricing strategies adopted by the
transportation industry
Economic Factors that Affect Transportation
Costs and Rates
1. Distance
 This is a major influence on transportation cost
since it directly contributes to variable costs
such as labor, fuel, and maintenance
 The following figure shows the general
Fig: The Tapering
relationship between distance and
Total Transportation

Principle
transportation cost:
cost

Total Distance
Transported
2. Shipment Volume
 Transportation cost per unit of weight
decreases as load volume increases
 This occurs because the fixed costs of pickup and
delivery as well as administrative costs can be
spread over additional volume.
 The management implication is that small loads
should be consolidated into larger loads to take
advantage of scale economies.
Freight rate

Fig: Transportation Scale Economies

per cwt

Total Shipment Weight

3. Density
It incorporates weight and space considerations
 In terms of weight and space, an individual
vehicle is constrained more by space than by
weight:
Once a vehicle is full (cubes out), it is not possible to
increase the amount carried even if the product is light
(and the vehicle has not weighed out)
Since actual vehicle labor and fuel expenses are not
dramatically influenced by weight, higher density products
allow relatively fixed transport costs to be spread across
additional weight
In general, logistics managers attempt to increase product
Cost per

Fig: The
density so that more relationship
can be loaded in a trailer to better
utilize capacity. between density and
cwt

transportation cost

Shipment
Density
4. Stowability
 It refers to how well a shipment fits in the
transportation vehicle
 Like density it affects space utilization
 Products that have the same density may stow
differently based on their shape and size
 Steel blocks and rods may have the same density but steel
blocks are more stowable
 Shipments that have more regular shapes stow better
 Products disassembled may stow better than the assembled
ones and vice versa
5. Handling
 It refers to the ease with which the shipment can be
handled when loading and unloading:
 Special handling equipment may be required for loading or
unloading trucks, railcars, or ships
 The manner in which products are physically grouped together
(i.e., taped, boxed, or palletized) for transport and storage also
affects handling cost
6. Liability
 This includes product characteristics that primarily affect risk
of damage and the resulting incidence of claims
 Specific product considerations are:
 Susceptibility to damage
 Perishability
 Susceptibility to theft
 Susceptibility to spontaneous combustion or explosion
 Shippers can reduce risk, and ultimately the transportation cost, by
improved protective packaging or by reducing susceptibility to loss
or damage.
7. Market Factors
 It relates to factors such as lane volume and balance
 A transport lane refers to movements between origin and
destination points.
 Since transportation vehicles and drivers must return to their origin, either
they must find a load to bring back (“back-haul”) or the vehicle is returned
empty (‘deadhead”).
 When deadhead movements occur, labor, fuel, and maintenance costs must
be charged against the original “front-haul” move.
 The ideal situation is for “balanced” moves where volume is equal in both
directions.
Transportation Cost Structures
Cost allocation is primarily the
carrier’s concern, but since cost
structure influences negotiating
ability, the shipper’s perspective
is important as well
 Transportation costs are
classified into a combination of
categories
1. Variable Costs
2. Fixed Costs
1. Variable Costs
 These are those costs that change in a
predictable, direct manner in relation to some
level of activity during a time period
 Variable costs can be avoided only by not
operating the vehicle
 Aside from exceptional circumstances,
transport rates must at least cover variable
costs
 The variable category includes direct carrier
costs associated with movement of each load
 These expenses are generally measured as a cost
per mile or per unit of weight.
 Typical cost components in this category include
labor, fuel, and maintenance
2. Fixed Costs
 These are those costs that do not change in the
short run and must be covered even if the
company is closed down (e.g., during a holiday or
a strike)
 The fixed category includes carrier costs not directly
influenced by shipment volume or distance
 For transportation firms, fixed components include
terminals, right-of-way, information systems, and vehicles.
 In the short term, expenses associated with fixed assets
must be covered by contributions above variable cost on a
per shipment basis
 In the long term, the fixed cost burden can be reduced
somewhat by the sale of fixed assets; however, it is often
very difficult to sell rights-of-way or technologies
 The benefit of economies of scale is high for modes of
transport that have high fixed costs (like rail and pipelines).
3. Joint Costs
 These are expenses unavoidably
created by the decision to provide a
particular service.
 A joint cost occurs when the
production of one product or service
requires or offers the production of
another product or service.
 For example, when a carrier elects to haul a
truckload from point A to point B, either the
joint cost must be covered by the original
shipper from A to B, or a back-haul shipper
must be found.
 Joint costs have significant impact on
transportation charges because carrier quotations
4. Common Costs
 This category includes carrier costs
that are incurred on behalf of all
shippers or a segment of shippers.
 Common costs can not be directly
associated with a product or activity
 Common costs, such as terminal or
management expenses, are
characterized as overhead.
 It is usually challenging how to
allocate the common costs to
individual shipments, trips, or
shippers
Pricing Strategies
In addition to cost structures and the factors that
influence the transportation costs, the transportation
rate charged by the carrier is affected by the specific
pricing strategy it adopts
Generally there are three alternative pricing strategies
1. Cost-of-Service Strategy is a “buildup”
approach where the carrier establishes a rate
based on the cost of providing the service plus a
profit margin.
 For example, if the cost of providing a transportation
service is Br. 200 and the profit markup is 10 percent,
the carrier would charge the shipper Br. 220.
 The cost-of-service approach, which represents the
base or minimum transportation charge, is a pricing
approach for low-value goods or in highly competitive
situations.
2. Value-of-Service Strategy is an
alternative strategy that charges a
rate based on perceived shipper
value rather than the cost of actually
providing the service.
 For example, a shipper perceives
transporting 1,000 Birr of electronic
equipment as more critical or valuable
than 1,000 Br. of coal since the
equipment is worth substantially more
than the coal. As such, a shipper is
probably willing to pay more to transport
it.
 Carriers tend to utilize value-of-service
3. Combination Strategy
establishes the transport price at
some intermediate level between
the cost-of-service minimum and
value-of-service maximum.
 In standard practice, most
transportation firms use such a middle
value.
 Logistics managers must understand
the range of prices and alternative
strategies so that they can negotiate
appropriately.
Transport Documentation

Several documents are

required to perform each
transport movement.
The three primary types are
bills of lading, freight bills, and
shipping manifests.
1. Bill of Lading
 Sometimes referred to as BOL or B/L, it is a document issued by
a carrier to a shipper, acknowledging that specified goods have
been received on board as cargo for conveyance to a named
place for delivery to the consignee who usually is identified
 As the basic document utilized in purchasing transport
services, it serves as a receipt and documents commodities
and quantities shipped.
 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 bill of lading has the following three purposes:
It serves as a receipt for goods.
It serves as a contract of carriage and identifies the contracting parties and
prescribes the terms and conditions of the agreement.
It serves as documentary evidence of title.
 In addition to the uniform bill of lading, the order-notified bill can also
be used.
2. Freight Bill
 This represents a carrier’s method of charging for
transportation services performed.
 It is developed using information contained in the bill of
lading.
 The freight bill may be either prepaid or collect
 A prepaid bill means that transport cost must be paid prior to
performance
 A collect shipment shifts payment responsibility to the consignee.
Since considerable administration cost is involved in
preparing bills of lading and freight bills, there has been
considerable effort to automate freight bills and bills of
lading through electronic data interchange (EDI)
transactions.
 Some firms now elect to pay their freight bills at the time the bill
of lading is created, thereby combining the two documents.
 Many attempts are also under way to produce all transport
documents simultaneously
3. Shipping Manifest
 This lists individual stops or consignees when
multiple shipments are placed on a single
vehicle.
 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 describes the contents of the total
load without requiring a review of individual bills of
lading.
 For single-stop shipments, the manifest is the
same as the bill of lading.
EDI is identified as intercompany computer-to-
computer exchange of business documents in
standard formats.
EDI describes both the capability and practice of
Transport Decision Making

Traffic Department Responsibilities

In most organizations, the traffic department
has the responsibility for managing all freight-
related transportation activities.
 The traffic department influences over 50
percent of the average firm’s logistics cost,
so the department can make a significant
operational and strategic impact.
 In addition to rating freight, the traffic
department responsibilities include: auditing
and claim administration, equipment
scheduling, rate negotiation, research, and
tracing and expediting.
1. Auditing and Claim Administration
 When transportation services or charges do
not meet predetermined standards; shippers
can make claims for restitution.
 These claims include:
 Loss and damage claims that occur when a shipper
demands that the carrier pay for partial or total financial
loss resulting from poor performance or when the shipper
breaks a transportation agreement.
 Overcharge-undercharge claims that result when
charges are different from those published in tariffs.
 These claims are typically resolved through
freight bill audit procedures.
 An important function of the traffic department,
the purpose of auditing is to ensure billing
accuracy
2. Equipment Scheduling
 It is concerned with making sure that the right type of
transportation equipment is available at the right time and place:
 A serious operational bottleneck can result from carrier equipment
waiting to be loaded or unloaded at a shipper’s dock
 Proper scheduling requires:
 Careful load planning, equipment utilization, driver scheduling;
 Planning, coordinating and monitoring necessary equipment maintenance;
 Assessing and carrying out specialized equipment requirements.
3. Rate Negotiation
 For any given shipment, it is the responsibility of the traffic
department to obtain the lowest possible rate consistent with the
service requirement.
 The key to effective negotiation is to seek “win-win” agreements
wherein both carriers and shippers share productivity gains.
 Since 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.
 For example, if a two-day delivery is required, the traffic department seeks to
select the method of transport that will meet this standard at the lowest
possible cost.
4. Research
 Beyond administration, the traffic department maintains responsibility for
research.
 Traffic managers should always be on the lookout for information that improves
carrier service or obtains lower freight rates.
 This means that an aggressive performance measurement program should be a
continuous activity for transportation research.
5. Tracing and Expediting
 Tracing is a procedure to locate lost or late deliveries.
 Most large carriers maintain a tracing department and computerized service to
aid in locating a shipment.
 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 occurs when the shipper notifies a carrier that it needs to have
a specific shipment move through the carrier’s system as quickly as
possible and with no delays.
 Tracing and expediting are greatly facilitated through the use of information
technologies:
 Bar coding provides quick error-free transfer of information that facilitates
shipment tracking at intermediate points.
 On-line freight information systems allow shippers or consignees to dial
directly into the carrier’s computer to determine the status of a particular delivery
 Satellite tracking systems provide carriers with the ability to monitor vehicle
movement throughout the country.
Transportation Management Decisions
The 3 strategic decisions that managers must
make in transportation are:
1. What mode of transportation will the firm use?
2. What carriers in each mode will the firm use?
3. Will the firm operate their own fleet or hire
outside carries for transportation services?
Mode of Transportation
Factors to consider include:
Nature of the goods to be transported
Access to carriers
Price
Transit time
The five major modes of transportation (air,
water, air, motor, and pipeline) differ along the
following variables:
Speed
Capacity
Cost
Capability
Flexibility
Reliability
 Cost Structure for Each
Mode
1. Rail. High fixed cost in equipment, terminals,
tracks, etc. Low variable cost
2. Highway. Low fixed cost (highways in place and
provided by public support). Medium variable cost
(fuel. maintenance, etc.).
3. Water. Medium fixed cost (ships and equipment).
Low variable cost (capability to transport large
amount of tonnage).
4. Pipeline. Highest fixed cost (rights-of-way,
construction, requirements for control stations,
and pumping capacity). Lowest variable cost (no labor
cost of any significance).
5. Air. Low fixed cost (aircraft and handling and
cargo systems). High variable cost (fuel, labor.
maintenance, etc.).
Carrier Choice
Types include:
1. For-hire Carriers
1. Common Carriers
2. Contract Carriers
2. Private Carriers
Factors to Consider include:
1. Price
2. Accessibility
3. Responsiveness
4. Claims record
5. Reliability