Chapter 10:

1. Chapter 10: Transportation Management

2. Learning Objectives - After reading this chapter, you should be able to do the following: • Define proactive transportation management. • Discuss the five transportation management strategies: • reducing the number of carriers • negotiating with carriers • contracting with carriers • consolidating shipments • monitoring service quality Management of Business Logistics, 7th Ed.

3. Learning Objectives • Explain the economic regulation (deregulation) of transportation. • Distinguish among the transportation documents: bill of lading, freight bill, and freight claims. Management of Business Logistics, 7th Ed.

4. Learning Objectives • Compare the domestic terms of sale with international Incoterms • Explain cost of service and value of service ratemaking and the effect of shipment weight and distance on freight rates. • Discuss terminal and line-haul services offered by carriers. Management of Business Logistics, 7th Ed.

5. Logistics Profile: Mastering the Art of Advance Planning • Intense advance planning ensured the success of the Sydney 2000 Summer Olympics. • Thousands of items had to be shipped to Sydney and removed from the country within a few months. • Each item to be exported after the Games had to match an import document. • Items had to have transport space booked months in advance to arrive at their next venue on time. Management of Business Logistics, 7th Ed.

6. Management Strategy: Six Factors • Proactive Management Approach • Reducing the Number of Carriers • Negotiating with Carriers • Contracting with Carriers • Consolidating Shipments • Monitoring Service Quality Management of Business Logistics, 7th Ed.

7. Management Strategy: Proactive Management Approach • Absence of the regulatory safety net encourages logistics mangers to take a proactive management approach to identify and solve transportation problems. • Creativity in problem solving no longer restricted by fixed regulations. • Positive attitudes result in using transportation to solve company problems in many functional areas. Management of Business Logistics, 7th Ed.

8. Management Strategy: Reducing the Number of Carriers • Consolidation of freight increases the shippers leverage with the remaining carriers. • Being one of a carrier’s largest customers gives the shipper increased negotiating power. • Shippers become more important to the carriers as they funnel larger volumes to fewer carriers. Management of Business Logistics, 7th Ed.

9. Management Strategy: Reducing the Number of Carriers • One shipper went from 131 to 14 carriers. • Improved service from the remaining carriers decreased its inventory by $30 million. • Supply chain strategic alliances are also created through consolidation. • However, risk of increased dependency on fewer carriers must be balanced against the benefits. Management of Business Logistics, 7th Ed.

10. Management Strategy: Negotiating with Carriers • With rate negotiation a common outcome of deregulation, consolidation provides the leverage to successfully negotiate more favorable terms of carriage. • Elevating the carrier to partnership status in the supply chain philosophy assists in assuring a win-win arrangement between the partners. Management of Business Logistics, 7th Ed.

11. Management Strategy: Contracting with Carriers • Both the Motor Carrier Act of 1980, the Staggers Act of 1980, and the ICC Termination Act of 1995 increased the ability of motor carriers to contract with shippers. • As in any contract, special and/or custom services such as JIT can be negotiated. • Contracting widely adopted by rail; rates, types of equipment, service levels and minimum quantities are subject to contract terms. Management of Business Logistics, 7th Ed.

12. Management Strategy: Consolidating Shipments • Another benefit of carrier consolidation is that shippers are often rewarded with lower rates as the amount shipped increases. • Contracts may be written with minimum shipment size per shipment or for annual cumulative shipment size. • Quantity discounts are real savings that the carriers pass on to shippers. Management of Business Logistics, 7th Ed.

13. Management Strategy: Monitoring Service Quality • Product movements that are consistent, timely, and undamaged can be a competitive advantage for a customer. • Trade-offs between speed and cost of service must be analyzed to provide the service customers need without paying for speed that might not be required. • Examine the Carrier Evaluation Report in Figure 10-1. Management of Business Logistics, 7th Ed.

14. Figure 10-1 Carrier Evaluation Report Management of Business Logistics, 7th Ed.

15. Federal Regulation: An Overview • Federal regulation has been with the transportation industry since the Act to Regulate Commerce in 1887. • The genesis of regulation lies in the concept that a transportation system functions in the public interest, similar to a public utility. • Individual states were not and still are not permitted to control interstate commerce. Management of Business Logistics, 7th Ed.

16. Federal Regulation: An Overview • In the United States, private industry rather than government provides the transportation services, thus a perceived need for regulation of rates, routes and safety issues empowered federal officials to act in the name of the public good. • Reasonable rates, absence of discrimination, and the need to serve all formed the core of the federal regulations. Management of Business Logistics, 7th Ed.

17. Federal Regulation: An Overview • The ICC was formed as a result of the 1887 law and grew in stature until it controlled economic and safety issues for rail, domestic water, freight forwarders, and motor carriers. • Air cargo was controlled by the CAB; pipelines by the Federal Energy Regulatory Commission and ocean carriage by the Federal Maritime Commission. Management of Business Logistics, 7th Ed.

18. Federal Regulation: Deregulation • Beginning in 1977, the political and economic climate encouraged economic deregulation, and began with air transportation. • The Staggers Act of 1980 reduced regulation for rail and motor transportation. • Virtual deregulation occurred with the ICC Termination Act of 1995. • Transportation carriers became able to negotiate rates and services with shippers rather than adhere to published rates and services. Management of Business Logistics, 7th Ed.

19. Federal Regulation: Deregulation • Motor and Water Carriers • Rate and tariff-filing regulations eliminated except for household and noncontiguous trade. • Common carriage concept is eliminated. • All carriers may contract with shippers. • Antitrust immunity for collective ratemaking. Management of Business Logistics, 7th Ed.

20. Federal Regulation: Deregulation • Air Carriers • In 1977, economic regulation of air carriers eliminated. • Safety regulation remains in force. • Rail Carriers • Remains the most regulated of the transportation modes. • Complete deregulation over certain types of traffic, piggyback and fresh fruits, for example. Management of Business Logistics, 7th Ed.

21. Federal Regulation: Deregulation • Freight Forwarders and Brokers • Both are required to register with the Surface Transportation Board (STB). • Brokers must also post a $10,000 bond to ensure payment to the carriers. • No economic rate or service controls. • Freight Forwarder is considered a carrier and is thus liable for freight damages. Management of Business Logistics, 7th Ed.

22. Documentation: Domestic • Bill of Lading • Freight Bill • Claims • F.O.B. Terms of Sale Management of Business Logistics, 7th Ed.

23. Figure 10-2 Bill of Lading Management of Business Logistics, 7th Ed.

24. Documentation: Domestic Bills of Lading • Shows title to the goods, name and address of the consignor and consignee. • Summarizes the goods in transit and their class rates. • Electronic bills now appearing where the carrier and shipper have an established strategic alliance. Management of Business Logistics, 7th Ed.

25. Documentation: Domestic Bills of Lading • Straight Bill • Non-negotiable • Contains terms of the sale including the time/place of title transfer. • Order Bill • Negotiable • Consignor retains original until bill is paid. Management of Business Logistics, 7th Ed.

26. Documentation: Domestic Bills of Lading • Contract terms on the Bill of Lading: • Common carrier liable for all losses, damage, or delays in shipment. • Exceptions include Acts of God, public enemy, shipper, public authority and inherent nature of the goods. • Reasonable dispatch • Cooperage and baling • Freight not accepted stored at owner’s cost. Management of Business Logistics, 7th Ed.

27. Documentation: Domestic Bills of Lading • Articles of extraordinary value must be in tariff or carrier can refuse carriage. • Explosives require written notice. • No recourse on freight bills to the shipper. • Substitute bill of lading same terms as original. • Water carriers liable for loading and seaworthiness of vessel. • Alterations to bills must be initialed by carrier. Management of Business Logistics, 7th Ed.

28. Documentation:Domestic Freight Bills • Carrier’s invoice for charges for a given shipment. • Credit terms are stipulated by the carrier and can vary extensively. • Credit may be denied if the charges are worth more than the freight. • Bills may also be either prepaid or collect. • Freight bills are typically audited internally or externally. Management of Business Logistics, 7th Ed.

29. Documentation: Domestic Claims • A document filed with the carrier to recover monetary losses due to losses, damage, delay or overcharges by the carrier. • Typically, claims are filed within 9 months, claimant in notified by receipt within 30 days, and settlement or refusal within 120 days. • Claims terms can be stipulated in the contract of carriage agreement and may be atypical. Management of Business Logistics, 7th Ed.

30. Documentation:Domestic F.O.B. Terms of Sale • Determines which party is to pay the freight bill, which party has title to the goods, and which party controls the movement of the goods. • F.O.B. origin - buyer pays freight, owns goods once loaded, controls movement of the goods • F.O.B. destination - seller pays freight, owns goods until delivered, controls movement of the goods Management of Business Logistics, 7th Ed.

31. Documentation: International • Documentation for international transportation is far more complex than required for domestic transportation. • Types of documents vary widely by country. • Sales Documents • Terms of Sale • Transportation Documents Management of Business Logistics, 7th Ed.

32. Documentation: International Sales Documents • Sales contract is the initial document. • Letter of Credit may also accompany shipment (guarantees payment). • May also use cash and other means of demonstrating an ability to pay for the goods. Management of Business Logistics, 7th Ed.

33. AKA “Incoterms”--- international credit terms Terms may include: Export packing costs Inland transportation Export clearance Vehicle loading Transportation costs Insurance Duties Insurances Documentation:International Terms of Sale Management of Business Logistics, 7th Ed.

34. Documentation:International Terms of Sale • E Terms(1) - departure contract • Seller makes shipment available at plant. • Buyer takes title at point of origin and arranges for transportation. • F Terms(3) • Seller only obligated to present the goods to buyer’s carrier; buyer pays for all other costs. • FCA Free delivery to the carrier • FAS (Water only) Free Alongside Ship • FOB (Water only) Free On Board Management of Business Logistics, 7th Ed.

35. Documentation:International Terms of Sale • C Terms (4) - seller pays main carriage and insurance costs. • CFR - cost and freight - seller pays main carriage & insurance (water only). • CPT - carriage paid to - same as CFR but no insurance, but used by modes other than water. • CIF - cost, insurance, freight costs, water only • CIP - carriage and insurance paid to, not water Management of Business Logistics, 7th Ed.

36. Documentation:International Terms of Sale • D Terms (5) - seller incurs all costs relayed to delivery to destination. • DAF - Delivered At Frontier - seller is accountable to a particular point; buyer thereafter to final delivery. • DES - Delivered Ex Ship - seller pays to port; responsible until goods are made available to buyer onboard ship. Management of Business Logistics, 7th Ed.

37. Documentation:International Terms of Sale • D Terms - continued • DEQ - Delivered Ex Quay - seller pays to port; responsible until goods are unloaded onto dock (quay) and duties paid. • DDU - Delivered Duty Unpaid - seller incurs all costs except customs duties. • DDP - Delivered Duty Paid - seller incurs all costs including duties. Management of Business Logistics, 7th Ed.

38. Table 10-1 Summary of Incoterms Cost Obligations Management of Business Logistics, 7th Ed.

39. Figure 10-3 Shipper’s Export Declaration Management of Business Logistics, 7th Ed.

40. Documentation: International Transportation Documents • Export Declaration - describes the goods • Export License - allows export of goods • General license allows export of most goods w/out any special requirements • Validation export license for export of controlled items • Commercial invoice - determines value • Carnet - seals shipment at origin Management of Business Logistics, 7th Ed.

41. Documentation: International Transportation Documents • Bill of Lading - initiating document for all shipments • Export B.O.L. - can govern foreign domestic, intercountry, and domestic movements of the goods. • Ocean B.O.L. - sets terms, lists origin and destination ports, quantities and weight, rates, special handling needs for the ocean movement. Management of Business Logistics, 7th Ed.

42. Documentation: International Transportation Documents • Order B.O.L - negotiable • Clean B.O.L. - issued by carrier when goods arrive in port; damages and other exceptions should be noted • Ocean carrier held liable for losses due to negligence only. • Other losses responsibility of the shipper. • Certificate of insurance may be required. • Dock receipt provided to domestic carrier. Management of Business Logistics, 7th Ed.

43. Documentation: Improving International Documentation • Streamlining of paper-laden processes on the horizon. • Examples of over 100 potential international documents requiring multiple copies demonstrate need to ultimately go paperless. • EDI and Internet use becoming more common. • Harmonized Commodity Description and Coding System will assign an internationally accepted identification number. Management of Business Logistics, 7th Ed.

44. Bases for Rates • Cost of Service • Value of Service • Distance • Weight of Shipment Management of Business Logistics, 7th Ed.

45. Bases for Rates: Cost of Service • In economic terms, basing rates on cost of service is defined as supply side pricing. • The cost of supplying the service establishes the minimum rate. • Historically, deciding what carrier costs to include in setting the minimum rate is problematic. • Examine Figure 10-4. Management of Business Logistics, 7th Ed.

46. Figure 10-4 Limits on Rates Management of Business Logistics, 7th Ed.

47. Bases for Rates: Value of Service • In economic terms, basing rates on value of service is defined as demand side pricing. • The value of supplying the service establishes the maximum rate. • Historically, deciding what ‘the traffic will bear’ in setting the maximum rate is also problematic. • Generally, higher-valued goods can more easily absorb higher rates and vice-versa. Management of Business Logistics, 7th Ed.

48. Figure 10-5Example of Value of Service Pricing Management of Business Logistics, 7th Ed.

49. Table 10-2 Transportation Rates and Commodity Value Management of Business Logistics, 7th Ed.

50. Bases for Rates: Distance • Rates also vary directly with distance; the longer the haul, the higher the rate. • This relates to the carrier’s higher costs of moving the product longer distances. • Two exceptions to the the distance principle are: • Blanket Rates - fixed rates within blanket area • Tapering Rates - rates rise with increased distances, but at a decreasing rate. Management of Business Logistics, 7th Ed.