International Operations Management

1. International Operations Management MGMT 6367 Lecture 07 Instructor: Yan Qin

2. Outline • Transportation Fundamentals • Transport modes • Line-Haul Rates • Special Services • Documentation

3. Freight transportation • Transportation usually absorbs one-third to two-thirds of total logistics costs. • An efficient transportation system usually contributes to • Greater competition in the marketplace • An improved transportation system encourages both direct and indirect competition. • Greater economies of scale in production

4. Market Penetration • In both cases, sales are increased through market penetration that would be unavailable under a poor transportation system.

5. Service choices • Five basic transport modes: • Water • Rail • Truck • Air • Pipeline • A company can use a single or a combination of modes. The variety can be almost limitless.

6. Service choices (Cont.) • Quality Vs. Cost • A transportation option can be viewed in terms of characteristics that are basic to all options: • Price • Average transit time • Transit time variability • Loss and damage

7. Service choices – Price • When outsourced, Price of transport service = line-haul rate for transporting + any accessorial or terminal charges for additional services

8. Service choices – Price (Cont.) • When transportation is done in-house, the price is an allocation of the relevant costs to a particular shipment. • The relevant costs may include: • Fuel • Labor • Maintenance • Depreciation of equipment, and • Administrative costs

9. Service choices – Transit time and variability • Transit time • For distances of over 600 miles, airfreight < truck < rail; • For distances of less than 600 miles, air and truck are comparable. • For distances of less than 50 miles, the transit time is influenced more by the pickup and delivery operations than the line-haul transit time. • Transit time variability • Water has the highest variability, followed by rail and air.

10. Service choices – Loss and Damage • When product shipment is delayed or products arrive in unusable condition, • A shipper may suffer from direct costs associated with resolving the problem and indirect cost from customer dissatisfaction. • For the customer that does not receive products as planned, there can be higher inventory costs arising from a greater number of stock-outs or back orders.

11. Appropriate products for each mode • What products to be transported by each single mode? • Rail: a long hauler and slow mover of raw materials, such as coal, lumber, and chemicals, and of low-valued manufactured products, such as paper and wood products. • Truck: a transportation service for moderately high-valued, time-sensitive semi-finished or finished products • Air: a mode for very high-valued, time sensitive products • Water: a mode for very low-valued products if moved domestically and high-valued products if moved internationally • Pipe: a model generally limited to petroleum products and natural gas.

12. International transportation • The dominance of particular transportation modes is largely affected by the geography of the countryand the proximity of major trading partners. • Route choices become much limited than in domestic movement since there are a limited number of ports and custom points.

13. International transportation – Cont. • International shipments must move under more documents than domestic shipments and are subject to delays when entering or leaving a country. • Limited carrier liability results in increased protective packaging and increased insurance. • For example, ocean carriers should need to provide a seaworthy vessel as evidence of responsibility.

14. Free Trade Zones • Trade zones are duty-free areas established at one or more entry points within a country, such as seaports and airports, where foreign goods may enter, be held or processed in some way, and be reshipped without incurring any duties. • Advantages of trade zones include: • Imported good can be left for storage, manipulation to change custom classification, assembly, exhibition, grading, cleaning, and etc., and then reshipped to another country without customs formalities. • Imported goods can be repacked; • Savings can sometimes be realized by shipping goods unassembled and then assembling them.

16. Rate profile • Transportation rates are the prices that 3rd-party logistics companies charge for their services. • The most common rate structures are related to • Volume • Distance • Demand

17. Rate profile – Volume-related • There can be three levels of volume-related rates: • A minimum charge or an any-quantity (AQ) rate if the shipment is small and results in little revenue; • A less-than-vehicle load rate, which may vary with the particular volume; • A vehicle-load rate if the quantity exceeds the designated vehicle-load quantity.

18. Rate profile – Distance-related • Distance-related rate structures include: • Uniform rate: One transport rate for all distances, simplest. • Note that this rate structure would be a big problem if the variable cost is at least 50% of the total cost. • Proportional Rate: Transport rate increases in distance in a linear fashion. • Appropriate for modes with significant variable costs;

19. Rate profile – Distance-related • Tapering Rates: Transport rate increases with distance but at a decreasing rate. • A major reason for this rate structure is that with increased distance, fixed costs are distributed over more miles. • The degree of taper depends on the level of fixed costs and the extent of economies of scale in operations.

20. Rate profile – Distance-related • Blanket Rates: single rates that cover a wide area at the origin, destination, or both. • Blanket rates are most common for products being hauled over a long distance and whose manufacturers or markets are grouped in certain areas.

21. Rate profile – Demand-related • Demand, or value-of-service, may dictate rate levels bearing little resemblance to the cost of the transportation service. • Users view transportation as having only so much value to them so that the rates cannot exceed an upper limit if users want to hire 3rd-party carriers.

22. Example: Demand-related rate Question: What is the maximum transportation rate that Company A can reasonably pay?

23. Special service charges • Carriers may make extra charges for special services such as • Diversion and Re-consignment • Transit Privileges • Protection in transportation • Interlining • Pickup and Delivery • Demurrage and Detention

24. Diversion and Re-consignment • Diversion refers to changing the destination of a shipment while en route. • Re-consignment refers to changing the consignee of a shipment after it has reached the original destination. • How to take advantage of this privilege?

25. Transit Privileges • The freight charge is composed of the through rate from origin to destination plus a small additional charge for the stop. • To complete loading halfway. The shipper can ask the carrier to stop at an intermediate point to complete the loading. • To partially unload halfway. • Without this privilege, users would pay the sum of the through rate from the origin to the stop-off point and the through rate from the stop-off point to destination.

26. Example: Transit Privileges • Suppose a shipment of 18,000 lbs is originated at point I. An additional 36,000 lbs is to be combined with it at point J and both shipments are to move on to point K. • The line-haul rate from point I to point J is $0.5 /cwt. and the line-haul rate from point J to point K is $1.00/cwt. • The line-haul rate from point I to point K is $1.10/cwt. The stop-off charge is $25. Question: Should the shipper use the transit privilege?

27. Interlining • Not all carriers serve all regions. • One carrier may pick up a shipment and then give it to another carrier that serves the destination region. In this case, the first carrier pays the second, but the shipper is billed by the first.

28. Demurrage and Detention • Demurrage and Detention are equivalent terms referring to penalty charges imposed on the shipper or consignee for holding the carrier’s equipment beyond an allowed free time that the carrier may hold a shipment. • In the case of rail cars, 48 hours is the standard free time permitted for loading or unloading. • The free time can be much shorter for trucking equipment.

29. Documentation • The three basic document types in domestic transportation are • The bill of lading • A legal contract between the shipper and the carrier for the movement of designated freight with reasonable dispatch to a specified destination, arriving damage free. • Freight bill • A document that contains freight charge information. • Freight claim • Usually there are two types of claims against the carrier: 1) Loss, Damage, and Delay claims, and 2) Overcharges.

30. Documentation • Many more documents are involved in international transportation, such as • Dock receipt, delivery instructions, export declaration, letter of credit, consular invoice, certificate of origin, insurance certificate, and etc., and etc., for Exporting; • Arrival notice, customs entries, carrier’s certificate and release order, delivery order, freight release, and special customs invoice, for Importing.

31. Next Week • Transportation Decisions • Transport Service Selection • Basic cost trade-offs • Competitive considerations • Consolidation of Deliveries • Vehicle Routing • Separate single-origin and single-destination networks • Multiple-origin and multiple-destination networks • Coincident origin-and-destination-point networks • Principles for Vehicle Routing and Scheduling • Logistics Outsourcing