Lection 2 “Transportation” • 1. Time and place utility. • 2. Factors influencing transportation costs and pricing. • 3. Carrier characteristics. • 4. Third parties • 5. Intermodal services • 6. Global issues • 7. Carrier Pricing and Related Issues
1. Time and place utility. • Transportation Provides Value-Added through Place and Time Utility – Place Utility: The value added to the product when product is moved from they are produced to where they are needed – Time Utility: Determines how fast and how consistently a product moves from one point to another
– Transportation is one of the largest logistics costs – The efficient management of transportation becomes more important to a firm as inbound and outbound transportation’s share of product cost increases
• 2. Factors Influencing Transportation Costs and Pricing • Can be grouped into 2 major categories: Product Related Factors Market Related Factors
– Product-related factors • Density – refers to a product’s weight-to-volume ratio – Items such as steel, canned food, building product and bulk paper have high weight-tovolume ratios – Electronics, clothing, luggage and toys have low weight-to-volume ratios – Low density product (low weight-to-volume ratios) tend to cost more to transport on a per pound (kilo) basis than high-density product
• Stowability – Degree to which a product can fill the available space in a transport vehicle – Example; grain, ore and petroleum product in bulk have excellent stow-ability because they can completely fill the container – Automobiles and machinery do not have good stow-ability or cube utilization – A product’s stow-ability depends on its size, shape, fragility and other physical characteristics
• Ease or Difficulty of Handling – Difficult to handle items are more costly to transport – Product that are uniform in their physical characteristics that can be manipulated with material handling equipment require less handling expense and are therefore less costly to transport
• Liability – Product that have high value-to-weight ratios are easily damaged and are subject to higher rates of theft or pilferage, cost more to transport
– Market-Related Factors – Location of markets which determines the distance goods must be transported – Nature and extent of government regulation of transport carriers – Seasonality of product movements – Whether the product is transported domestically and internationally
3. Carrier Characteristics – Motor • Motor carriage offer fast, reliable service with little damage or loss in transit • Domestically, motor carriers compete with air for small shipments and rail for large shipments • Compete with railroads for truckload (TL) shipment that are transported 500 miles or more
• Motor carriers are very flexible and versatile – Flexible can offer point-to-point service between almost any origin-destination combination (network of over 4 million miles of roads) – Versatile motor can transport products of varying sizes and weights over any distance
– Rail • • • Rail transport costs less than air motor carriage Lacks the versatility and flexibility of motor carriers because it is limited to fixed track facilities Provide terminal-to-terminal service rather than point-to-point service unless companies have a rail siding at their facility
• Disadvantages in terms of transit time and frequency of service if compared to motor carriers • Some of this rail disadvantages may be overcome through the use of trailer-on-flatcar (TOFC) or container-on-flatcar (COFC) service – (rail or water movements combined with the flexibility of trucking)
– Air • Most view as a premium service because of its higher cost • Offers the quickest time-in-transit of any transport mode • Air carriers generally handle high-value products and usually cannot be cost-justified for low-value items, because the high price of air freight would represent too large a percentage of the product cost • Air transport provides frequent and reliable service and rapid time-in-transit, but terminal and delivery delays and congestion may appreciably reduce some of this advantage.
– Water • can be broken down into several distinct categories: – – inland water way, such as rivers and canals lakes coastal and intercostals ocean international deep sea
– Water (cont’d) • • limited in their movement by the availability of lakes, rivers, canals, or intercostals waterways Generally, water is the dominant mode in international shipping the most inexpensive method of shipping highbulk, low-value commodities The development of very large crude carriers (VLCCs), or supertankers, has enabled marine shipping to assume a vital role in the transport of petroleum between oil-producing and oilconsuming countries
– Pipeline • • transport only a limited number of product, including natural gas, crude oil, petroleum products, water, chemicals, and slurry products Pipeline offer the shipper an extremely high level of service dependability at a relatively low cost
– Pipeline (cont’d) • Pipelines are able to deliver their product on time because of the following factors; – The flows of products within the pipeline are monitored and controlled by computer – Losses and damages due to pipeline leaks or breaks are extremely rare – Climatic conditions have minimal effects on product moving in pipeline – Pipelines are not labor-intensive; Therefore, strikes or employee absences have little effect on their operation
4. Third Parties • • Third parties are companies that provide linkages between shippers and carriers There are several type of third parties, including; – – – transportation brokers freight forwarders (domestic and foreign) shippers’ associations inter-modal marketing companies (shippers’ agents) third-party logistics service providers.
• Transportation Brokers – companies that provide service to both shippers and carriers and arranging and coordinating the transportation of products • Freight forwarders – purchase transport service from various carriers, although in some instances they own the equipment themselves – can be classified as domestics or international, depending on whether they specialize in shipments within a country or between countries
• Shipper’s Association – Can be defined as a nonprofit cooperative that consolidates small shipments into truckload freight for member companies – Primarily utilize motor and rail carriers for transport – Because small shipment are much more expensive to transport (on a per pound or per unit basis) than large shipments, companies band together to lower their transportation cost through consolidation of many small shipment into one or more larger shipments
• Inter-modal Marketing Companies (or Shipper’s Agents) – Specialize in providing piggyback services to shippers – They purchase large quantities of TOFC/COFC services at discount and resell them in smaller quantities
– Small-Package Carriers • Parcel Post – provides both surface and air parcel post services to companies shipping small packages – The advantages of parcel post are low cost and wide geographical coverage, both domestically and internationally – Disadvantage include specific size and weight limitations, variability in transit time, higher loss and damage ratios than other forms of shipment, and inconvenience because packages must be prepaid and deposited at a postal facility
• Air Express Companies – to transport product quickly and with very high levels of consistency – Because some firms need to transport certain products quickly, the air express industry is able to offer overnight (or second day) delivery of small parcels to many locations throughout the world – Example: Fed. Ex, UPS, TNT worldwide, Airborne Express, and DHL Airways
5. Inter-modal Services • Piggyback (TOFC/COFC) – a motor carrier trailer or a container is placed on a rail flatcar and transported from one terminal to another – Axles can be placed under the containers, so they can be delivered by a truck – At the terminal facilities, motor carriers perform the pickup and delivery functions – Piggyback service thus combines the low cost of long-haul rail movement with the flexibility and convenience of truck movement
• Roadrailers – combined motor and rail transport in a single piece of equipment – the trailer has both rubber truck tires and steel rails wheels – Over highways, tractor power units transport the trailers in the normal way, but instead of placing the trailer on a flatcar for rail movement, the wheels of the trailer are retracted and the trailer rides directly on the rail tracks
– The advantages of this intermodal form of transport are that rail flatcars are not required and that the switching time to change wheels on the trailer is less than loading and unloading the trailer from the flatcar – The disadvantages of roadrailes are the added weight of the rail wheels, which reduces fuel efficiency and results in higher movement costs in addition to the higher cost of equipment – The disadvantages have tended to outweigh the advantages, resulting in very low usage of this intermodal option
• 6. Global Issues – There are 3 basic forms of international intermodal distribution: – 1) Landbridge • It is a service in which foreign cargo crosses a country en route to another country • For example, European cargo en route to Japan may be shipped by ocean to the East coast of the United States, then moved by rail to the west Coast, and from there shipped by ocean to Japan
– 2) Minilandbridge (MLB) • It is a special case of landbridge, where foreign cargo originates or terminates at a point within the United States – 3) Microbridge • In contrast with minibridge, this service provides door-to-door rather than port-to-port transportation • The big advantage of microbridge is that it provides a combined rate, including rail and ocean transportation, in single tariff that is lower than the sum of the separates
• 7. Carrier Pricing and Related Issues • Rates and Rate Determination – Categories of Rates • 1) Line-Haul rates which are charged for the movement of goods between 2 points that are not in the same local pickup and delivery area • 2) Accessorial charges which cover all other payment made to carriers for transporting, handling or servicing a shipment
1) Line-Haul rates • a) Class rates – Reduce the number of transportation rates required by grouping product into classes for pricing purposes – A basic rate would be Class 100, higher number =more expensive rate and lower number= less expensive rate
• b) Exception rates – Provide the rate lower than the published class rate – This type of rate was introduce in order to provide a special rate for a specific area, origin-destination or commodity when competition or volume justified the lower rate
• c) Commodity rates – Apply when a large quantity of a product is shipped between two locations on a regular basis – These rate are published on a point-to-point basis without regard to product classification
• d) Contract rates – Rate that apply in special circumstances – Example: contract rates are those negotiated between a shipper and carrier. – Formalized through a written contractual agreement
• e) Freight-all-kinds – The product shipped can be any – The carrier provides the shipper with the rate per shipment based on the weight of the product being shipped
• 2) FOB Pricing – If a seller quotes a delivered price to the buyer’s retail store location, the total price includes not only the cost of the product, but the cost of moving the product to retail store
– Why FOB terms are important? • The buyer knows the final delivered price prior to the purchase • The buyer does not have to manage the transportation activity involved in getting the product from the seller’s location to the buyer’s. • The buyer typically will not control the transportation decision, so it is possible that a mode or carrier could be selected by the seller that might be disadvantages to the buyer (e. g. , due to poor service levels provided by the mode/carrier)
• 3) Delivered Pricing – Zone Pricing • A method that categorizes geographic areas into zones • Each zone will have particular delivery cost associated with it • The closer the zone to the seller the lower the delivery cost • The farther away the higher the delivery charge
– Basing-Point Pricing • The seller selects one or more locations that serve as point of origin • The buyer will pay delivery costs from that point to the buyer’s location • The seller often use a manufacturing plant, distribution center, port, free trade zone as a basing point
• 4) Quantity Discount – Cumulative • Provide price reductions to the buyer based on the amount of purchases over some prescribed period of time – Non-cumulative quantity discount • Are applied to each order and do not accumulate over a time period