Transportation Management
Operations Management
Transportation Management
Transportation is critical to logistical performance. Traffic departments commit and manage nearly 60% of a typical firm’s logistics expenditures.
A fundamental responsibility is to determine whether transportation services should be performed using private capacity or for-hire specialists.
Transportations managers are responsible for arranging for inventory to be moved in a timely and economical manner.
Transportation Economics and Pricing
Transportation economics and pricing are concerns with factors and characteristics that drive cost.
To develop effective logistics strategy, it is necessary to understand such factors and characteristics:
Transportation Economics and Pricing
Economic drivers
Transportation costs are driven by seven factors:
Transportation Economics and Pricing
Economic Driver | Description |
| Distance is a major influence on transportation cost since it directly contributes to variable expense, such as labor, fuel, and maintenance. |
| Like many other logistics activities, transportation scale economies exist for most transportation movements. The transport cost per unit of weight decreases as load volume increases. |
| Density is a combination of weight and volume. Transport charges are commonly quoted as amount per hundredweight (CWT). In terms of weight and volume, vehicles are constrained more by cubic capacity than weight. |
| Refers to how product case dimensions fit into transportation equipment. Odd package sizes and shapes, as well as excessive weight or length, may not fit well in transportation equipment, this results in wasted cubic capacity. |
Transportation Economics and Pricing
Distance Volume Density
Economic Drivers
Transportation Economics and Pricing
Economic Driver | Description |
| Special handling equipment may be required to load and unload trucks, railcars, or ships. In addition to special handling equipment, the manner in which products are physically grouped together in boxes or on pallets for transport and storage will impact handling cost. |
| Includes product characteristics that can result in damage and potential claims. Carriers must either have insurance to protect against possible claims or accept financial responsibility for damage. |
| Market factors such as lane volume and balance influence transportation cost. A transportation lane refers to movements between origin and destination points. Since transportation vehicles and drivers must return to their origin, either they must find a back-haul load, or the vehicle is returned or deadheaded empty. |
Transportation Economics and Pricing
Cost Structure
The second dimension of transport economic and pricing concerns the criteria used to allocate cost. Cost allocation is primarily the carrier’s concern, but since cost structure influences negotiating ability, the shipper’s perspective is important as well.
Transportation Economics and Pricing
Cost Structure | Description |
| Variable costs change in a predictable, direct manner in relation to some level of activity. Variable costs can only be avoided by not operating the vehicle. These expenses are generally measured as cost per mile or per unit of weight. |
| Fixed costs are expenses that do not change in the short run and must be serviced even when a company is not operating, such as during a holiday or a strike. The fixed category includes costs not directly influenced by shipment volume. |
| Joint costs are expenses unavoidably created by the decision to provide a particular service. When a carrier elects to haul a truckload from point A to point B, there is an implicit decision to incur a joint cost for the back-haul from point B to point A. Either the joint cost must be covered by the original shipper from A to B or a back-haul shipper must be found. |
| This category 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. |
Transportation Economics and Pricing
Carrier Pricing Strategies
When setting rate to charge shippers, carrier typically follow one or a combination of two strategies.
Cost-of-service
The cost-of-service strategy is a build up approach where the carrier establishes a rate based on the cost of providing the service plus a profit margin.
This strategy is commonly used as a pricing approach for low-value goods or in highly competitive situations.
Value-of-Service
Value-of-service is an alternative strategy that charges a price based on value as perceived by the shipper rather than the carrier’s cost of actually providing the service.
Transportation Economics and Pricing
Although it is possible to employ a single strategy, the combination approach considers trade-offs between cost of service incurred by the carrier and value of service to the shipper.
A number of common carriers are experimenting with a simplified pricing format termed net-rate pricing, it can be considered as an all-inclusive price.
Combination Pricing
The combination pricing strategy establishes the transport price at an intermediate level between the cost-of-service minimum and the value-of-service maximum. In practice, most transportations firms use such a middle value.
Transportation Economics and Pricing
Rates and Rating
The pricing mechanics used by carriers:
Transportation Economics and Pricing
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 computer files known as tariffs.
Determination of common carrier class rate is a two steps process:
Transportation Economics and Pricing
Classifications
All products transported are typically grouped together into uniform classifications. The classification takes into consideration the characteristics of a product or commodity that will influence the cost of handling or transport.
The particular class that a given product or commodity receives is its rating, which is used to determine the freight rate.
Transportation Economics and Pricing
Motor carriers and rail carriers each have independent classification systems.
Motor carriers: National Motor Freight Classification. (23 classes)
Rail carriers: Uniform Freight Classification. (31 classes)
Products are also assigned classifications on the basis of the quantity shipped. Less-than-truckload (LTL) shipments of identical products will have higher ratings than carload (CL) or truckload (TL) shipments.
Transportation Economics and Pricing
Example of the National Motor Freight Classification
Transportation Economics and Pricing
Rate Administration
Once a classification rating is obtained for a product, rate must be determined. The rate per hundredweight is usually based on the shipment origin and destination, although the actual price charged for a particular shipment is normally subject to a minimum charge and may also be subject to surcharge assessments.
Transportation Economics and Pricing
Transportation Economics and Pricing
In addition to the variable shipment charge applied on either a per hundredweight o per mile basis, two additional charges are common for transportation:
Transportation Economics and Pricing
Documentation
Documentation
Well-defined documentation is required to perform a transportation service. With the exception of private transfer within the confines of a singles firm, products are typically being sold between the shipper and the consignee.
The primary purpose of transportation documentation is to protect the interest of all parties involved in the performance of the transaction.
Documentation
Three primary types of transport documentation are:
Documentation | Description |
Bill of landing | Is the basic document utilized in purchasing transport services. It serves as a receipt and documents products and quantities shipped. The bill of landing specifies terms and conditions of carrier liability and documents responsibilities for all possible causes of loss or damage except those defined as acts of God. |
Freight Bill | The Freight bill represents a carrier’s method of charging for transportation services performed. It is developed using information contained in the bill of landing. The freight bill may be either prepaid or collect. |
Shipment Manifest | The shipment manifest lists individual stops or consignees when multiple shipments are placed on a single vehicle. Each shipments requires a bill of landing. |