Department of Logistics and Supply Chain Management

DEBRE BIRHAN UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS
DEPARTMENT OF LOGISTICS AND SUPPLY CHAIN MANAGEMENT

MODULE NAME
LOGISTICS SERVICE MANAGEMENT

PREPARED BY:
ABEBE YILMA (MA)
EDITED BY:
SEIFE AYELE (MA)

JUANUARY, 2023
DEBRE BIRHAN, ETHIOPIA
Course titles that come under the umbrella of Logistics service management modules are:
 Fundamental of Logistics management
 Transportation management
 Customs clearing and freight forwarding management

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Contents
PART ONE ..................................................................................................................................... 1
FUNDAMENTAL OF LOGISTICS MANAGEMENT ................................................................. 1
INTRODUCTION .......................................................................................................................... 1
1. An overview of logistics .......................................................................................................... 1
1.1. Concepts of Logistics ....................................................................................................... 1
1.2. Evolution/ Development of logistics ................................................................................ 2
1.3. Key activities of logistics ................................................................................................. 4
1.4. Reason for the development of logistics .......................................................................... 4
1.5. Costs associated with logistics activities.......................................................................... 5
1.6. Role of logistics in business ............................................................................................. 5
1.7. The Logistical Value Proposition..................................................................................... 6
1.8. Logistical operation .......................................................................................................... 6
1.9. Logistical Operating Arrangements ................................................................................. 7
1.10. Logistical Synchronization ........................................................................................... 7
1.11. Performance Cycle Structure ........................................................................................ 7
1.12. Performance Cycle Uncertainty.................................................................................... 8
2. Logistics performance dimension ............................................................................................ 8
2.1. Financial Measures of Logistics Performance ................................................................. 8
2.2. Productivity Measures of Logistics Performance ............................................................ 8
2.3. Quality Measures of Logistics Performance ........................................................................ 9
2.4. Customer service measure of logistics performance ........................................................ 9
2.5. Customer satisfaction measures of logistics performance ............................................. 10
2.6. Cycle Time Measures of Logistics Performance ........................................................... 10
3. Customer accommodation ..................................................................................................... 10
3.1. The components of customer service ................................................................................. 10
3.2. Phases in Customer Service ............................................................................................... 11
3.3. Developing customer service policy .................................................................................. 12
3.4 Supply chain service output ................................................................................................ 13
3.5. Value add service ............................................................................................................... 14
4. Market Distribution in the Supply Chain .............................................................................. 15

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 4.1. Marketing functions ........................................................................................................... 15
4.2. Specialization ..................................................................................................................... 15
4.3. Assortment ......................................................................................................................... 15
4.4. Distribution channel participants ................................................................................... 16
4.5. Direct versus Indirect Structures .................................................................................... 16
4.6. Market coverage ............................................................................................................. 16
4.7. E-Commerce Impacts on Market Distribution ............................................................... 16
5. Operational integration .......................................................................................................... 16
5.1. Logistical Integration Objectives ....................................................................................... 16
5.2. Internal logistics integration barriers.................................................................................. 17
5.3. Global logistics integration ................................................................................................ 17
5.4. Logistics in a Global Economy ...................................................................................... 17
5.5. Logistics information System Functionality .................................................................. 17
5.6. Communication systems in logistics .............................................................................. 18
6. Reveres logistics .................................................................................................................... 18
6.1. Reasons to Implement Reverse Logistics....................................................................... 18
6.2. Activities involved in Reverse logistics ......................................................................... 19
6.3. Reverse Logistics Management- Key Benefits .............................................................. 19
6.4. Concepts of third and fourth party logistics (3PL &4PL) .............................................. 19
6.4.1. Third party logistics (3PL) ...................................................................................... 19
6.4.2. Fourth party logistics (4PL) .................................................................................... 20
Self-Test Questions................................................................................................................ 20
PART TWO .................................................................................................................................. 22
TRANSPORTATION MANGEMENT ........................................................................................ 22
Introduction ................................................................................................................................... 22
2. An over view of Transportation Management ................................................................... 22
2.1. Role of transportation ..................................................................................................... 23
2.2. Carrier selection ............................................................................................................. 24
2.3. Importance of transportation from purchasing and marketing point of view ................ 25
2.4. Function of transportation .............................................................................................. 25
2.5. Transport Principles ....................................................................................................... 26

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 2.6. Transport Participants .................................................................................................... 27
2.7. Types of transportation modes/ systems ........................................................................ 27
2.8. Intermodal transport system ........................................................................................... 30
2.9. Transportation management ........................................................................................... 30
2.9.1. Selections of carriers ............................................................................................... 30
2.9.2. Routing Identification ............................................................................................. 31
2.9.3. Transport Regulation and deregulation ................................................................... 31
2.9.4. Loss and Damage Claims........................................................................................ 33
2.10. Emerging Issues in Transportation ............................................................................. 35
2.10.1. Emerging Technology in Transport ........................................................................ 35
2.10.2. Types of Transportation Technology ...................................................................... 36
2.10.3. Environmental issues in transportation ................................................................... 37
2.10.4. Transportation and Energy ...................................................................................... 37
2.10.5. Transportation and Energy Consumption ............................................................... 37
2.10.6. Energy Consumption among Modal Variations ..................................................... 38
2.10.7. The issue of transport and environment .................................................................. 39
2.10.8. Environmental Dimensions ..................................................................................... 39
Self –Test Questions ..................................................................................................................... 40
PART THREE .............................................................................................................................. 42
CUSTOM CLEARING AND FREIGHT FORWARDING ......................................................... 42
Introduction ................................................................................................................................... 42
3. Freight forwarder ................................................................................................................... 42
3.1. Customs Clearance ......................................................................................................... 43
3.1.1. Clearing agent ......................................................................................................... 43
3.1.2. Clearing Agents‘ role: ............................................................................................. 43
3.2. Freight classification ...................................................................................................... 44
3.3. Documentation in freight and shipment ......................................................................... 45
3.4. Freight Forwarding Operations ...................................................................................... 45
3.5. Concept of importing ..................................................................................................... 46
3.5.1. Reason of importing ................................................................................................ 46
3.6. Import Procedures Information of Purchase Agreement................................................ 47

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 3.7. International Commercial Terms (INCOTERMS) in international trade ...................... 48
3.8. Terms of Payments in Foreign Purchasing .................................................................... 48
3.9. Custom Clearance Procedures and Documents in Ethiopia ........................................... 53
3.9.1. Supporting Documents of Customs Declaration..................................................... 54
3.10. Harmonized Tariff Nomenclature Practice in Ethiopia .............................................. 54
3.11. Type and Assessment Method for Imported goods .................................................... 56
Self-Test Question ........................................................................................................................ 58
References ..................................................................................................................................... 59

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 PART ONE
FUNDAMENTAL OF LOGISTICS MANAGEMENT
INTRODUCTION
The scope and influence of logistics has evolved in the late 1940s. In the 1950s, and 60s, military
was the only organization which used logistics. The scope of logistics has been extended beyond
the army, as it has been recognized as one of the important tools for developing competitiveness.
Competitive advantage means the company has the ability to differentiate itself, in the
customer‘s eyes, and also is operating at a lower cost and greater profit. Logistics facilitates in
getting products and services as and when they are needed and desired to the customer. It also
helps in economic transactions, serving as a major enabler of growth of trade and commerce in
an economy. Logistics has come to be recognized as a distinct function with the rise of mass
production systems. Production and distribution were earlier viewed as a sequential chain of
extremely specialized activities. The role of logistics is to ensure availability of all the required
materials before every step in this chain. Obviously inventory of raw materials, semi-finished
and finished goods is a must across this chain to ensure its smooth functioning. The concept of
logistics has its base upon the systems approach. There is a single chain, with flow of materials
starting from the supplier, then to the plant and finally to the end customer, and also these
activities are done sequentially in order to achieve customer satisfaction at low cost. For this to
be successful there has to be co-ordination in the activities of the department. With reference to
an organization, an organization gets a concrete shape due to its structure. In the earlier times,
the suppliers in distribution activities were spread across the entire structure, thus resulting in an
overlapping of activities and finally in unaccountable authority and responsibility. In today‘s
process driven organization, where the focus has shifted from functions to process, logistics has
become an essential part of the process.

1. An overview of logistics

1.1. Concepts of Logistics

Realistically, no true name or true definition that should be pedantically applied, because
products differ, companies differs and systems differ. Logistics is a diverse and dynamic
function that has to be flexible and has to change according to the various constraints and

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demands imposed upon it and with respect to the environment in which it works. There many
terms are used, often interchangeably, in literature and in the business world.

Some definitions of logistics

Logistics is the process of designing and integration of all aspects of support for the operational
capacity of the military forces, and their equipment to ensure readiness, reliability, and efficiency
(military perspective)

The American Council of Logistics Management defines logistics as ―the process of planning,
implementing and controlling the efficient, cost effective flow and storage of raw materials, in-
process inventory, finished goods and related information from point of origin to point of
consumption for the purpose of conforming to customers‘ requirements‖.

Philip Kotler defines logistics as ―planning, implementing, and controlling the physical flows of
materials and finished goods from point of origin to point of use to meet the customer‘s need at a
profit‖.

1.2. Evolution/ Development of logistics

According to Edward frazelle, the five phases of logistics development—workplace logistics,
facility logistics, corporate logistics, supply chain logistics, and global logistics.

1. Workplace Logistics

Workplace logistics (see Figure 1.1) is the flow of material at a single workstation. The objective
of workplace logistics is to streamline the movements of an individual working at a machine or
along an assembly line. The principles and theory of workplace logistics were developed by the
founders of industrial engineering working in WWII and post-WWII factory operations. A
popular name today for workplace logistics is ergonomics.

2. Facility Logistics

Facility logistics is the flow of material between workstations within the four walls of a facility
(that is, interwork-station and intra-facility). The facility could be a factory, terminal, warehouse,
or distribution center. Facility logistics has been more commonly referred to as material
handling. The roots of facility logistics and material handling are in the mass production and

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assembly lines that distinguished the 1950s and 1960s. In those times and even into the late
1970s, many organizations maintained material-handling departments. Today, the term material
handling has fallen out of favor because of its association with no value added activities.

3. Corporate logistics

Corporate logistics is the flow of material and information between the facilities and processes of
a corporation (interwork-station, inter-facility, and intra-corporate). For a manufacturer, logistics
activities occur between its factories and warehouses; for a wholesaler, between its distribution
centers; and for a retailer, between its distribution centers and retail stores. Corporate logistics is
sometimes associated with the phrase physical distribution that was popular in the 1970s.

4. Supply Chain Logistics

Supply chain logistics is the flow of material, information, and money between corporations
(interwork-station, inter-facility, inter-corporate, and intra-chain). There is a lot of confusion
surrounding the terms logistics and supply chain management. To distinguish the two by
explaining that the supply chain is the network of facilities (warehouses, factories, terminals,
ports, stores, and homes), vehicles (trucks, trains, planes, and ocean vessels), and logistics
information systems (LIS) connected by an enterprise‗s supplier‗s suppliers and its customer‗s
customers. Logistics is what happens in the supply chain. Logistics activities (customer response,
inventory management, supply, transportation, and warehousing) connect and activate the
objects in the supply chain. To borrow a sports analogy, logistics is the game played in the
supply chain arena. It is unfortunate that the phrase supply chain management has been so
readily and commonly adopted as a reference to excellence in logistics.

5. Global Logistics

Global logistics is the flow of material, information, and money between countries. Global
logistics connects our suppliers ‗suppliers with our customers ‗customers internationally. Global
logistics flows have increased dramatically during the last several years due to globalization in
the world economy, expanding use of trading blocs, and global access to Web sites for buying
and selling merchandise. Global logistics is much more complex than domestic logistics, due to

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the multiplicity of handoffs, players, languages, documents, currencies, time zones, and cultures
that are inherent to international business.

1.3. Key activities of logistics

There are 14 main activities of logistics. Such as:

 Customer service  Parts and service support

 Demand forecasting/planning  Traffic and transportation
 Inventory management  Facility of location & Network
 Warehousing management design
 Logistics communications  Procurement
 Material handling  Return goods handling
 Order processing  Reverse logistics
 Packaging
1.4. Reason for the development of logistics
There are so many factors that contribute for the growing interest in logistics. Such as;

 Deregulation: the deregulation of the transportation industry in USA in late 1970s and
1980s gave organizations many more options and increased competition within and
between transportation modes.
 Channel power: the shifting of channel power from manufacturers to retailers and
distributors has also had a profound impact on logistics.
 Competitive pressures: with rising interest rates and increasing energy cost during the
1970s, logistics received more attention as a major cost driver. In addition, logistics cost
become a more critical issue for many organizations because of globalization of industry.
 Information technology: the revolution of information technology gave organizations the
ability to better monitor transaction incentive activities such as the ordering, movement,
and storage of goods and materials.
 Profit leverage effect: the profit leverage effect of logistics illustrates that $1 saved in
logistics costs has greater impact on the organization‗s profitability than a $ 1 increase in
sales. In most organizations, sales revenue increases are more difficult to achieve than
logistics cost reduction.

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1.5. Costs associated with logistics activities
 Customer Service Levels: The key cost trade-off associated with varying levels of
customer service is the cost of lost sales.
 Transportation Costs: The activity of transporting goods drives transportation costs.
 Warehousing Costs: Warehousing costs are created by warehousing and storage
activities and by the plant and warehouse site selection process.
 Order Processing/ Information Systems Costs: Order processing costs include such as
order transmittal, order entry, processing the order and related internal and external
costs such as notifying carriers and customers of shipping information and product
availability.
 Lot Quantity Costs: LQC are purchasing or production related costs.
 Inventory Carrying Costs: The logistics activities that make up inventory carrying
costs include inventory control, packaging and salvage and scrap disposal.
The Seven Rights of Logistics
 Right Product, needed for  Right Time
consumption or production,  Right Condition
 Right Quantity  Right Cost
 Right Place  Right Customer

1.6. Role of logistics in business

It is through the logistical process that materials flow into the manufacturing capacity of an
industrial nation and products are distributed to consumers. Logistics adds value to the supply
chain process when inventory is strategically positioned to achieve sales. Creating logistics value
is costly. Logistics allows efficient movement of Goods & Services to the Customer. Efficient
and effective logistics processes have a substantial impact on an organization‘s business costs.
Logistics creates Time and Place utility for an organization‘s products. Time utility is created by
making products available to the customer at the right time for purchase or consumption. Place
utility is created by making products available to the customer at the right place for purchase or
consumption. Time and Place utility complements each other, must happen together.

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1.7. The Logistical Value Proposition
Logistics should be managed as an integrated effort to achieve customer satisfaction at the lowest
total cost. The elements of the logistical value proposition are; service benefit, and cost
minimization.

a) Service Benefits

Almost any level of logistical service can be achieved if a firm is willing to commit the required
resources. In today's operating environment, the limiting factor is economics, not technology.
For instance, to facilitate order processing, dedicated communications can be maintained on a
real time or Internet-enabled basis between a customer and a supplier's logistical operation.

b) Cost Minimization

Total cost was positioned to include all expenditures necessary to perform logistical
requirements. Managers had traditionally focused on minimizing functional cost, such as
transportation, with the expectation that such effort would achieve the lowest combined costs.
The main aim of logistics is to minimize/reduce the total cost.

1.8. Logistical operation

Information from and about customer‗s flows through the enterprise in the form of sales activity,
forecasts, and orders. Vital information is refined into specific manufacturing, merchandising,
and purchasing plans. As products and materials are procured, a value-added inventory flow is
initiated which ultimately results in ownership transfer of finished products to customers. For
better understanding, it is useful to divide logistical operations into three areas: (1) market
distribution, (2) manufacturing support, and (3) procurement.

Market Distribution

The movement of finished product to customers is market distribution. In market distribution, the
end customer represents the final destination. The availability of product is a vital part of each
channel participant's marketing effort.

Manufacturing Support

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The area of manufacturing support concentrates on managing work-in-process inventory as it
flows between stages of manufacturing. The primary logistical responsibility in manufacturing is
to participate in formulating a master production schedule and to arrange for its implementation
by timely availability of materials, component parts, and work-in-process inventory.

Procurement

Procurement is concerned with purchasing and arranging inbound movement of materials, parts,
and/or finished inventory from suppliers to manufacturing or assembly plants, warehouses, or
retail stores. Depending on the situation, the acquisition process is commonly identified by
different names. In manufacturing, the process of acquisition is typically called purchasing. In
government circles, acquisition has traditionally been referred to as procurement. In retailing and
wholesaling, buying is the most widely used term.

1.9. Logistical Operating Arrangements

The potential for logistical services to favorably impact customers is directly related to operating
system design. The many different facets of logistical performance requirements make
operational design a complex task as an operating structure must offer a balance of performance,
cost, and flexibility. The Three widely utilized structures are:

 Echelon,
 Direct, and
 Flexible (combined)

1.10. Logistical Synchronization

Multi firm operational integration across a supply chain is referred to as logistical
synchronization. Logistical synchronization seeks to coordinate the flow of materials, products,
and information between supply chain partners to reduce duplication and unwanted redundancy
to an absolute minimum. It also seeks to reengineer internal operations of individual firms to
create leveraged overall supply chain capability.

1.11. Performance Cycle Structure

The performance cycle represents the elements of work necessary to complete the logistics
related to market distribution, manufacturing, or support procurement. It consists of specific
work ranging from identification of requirements to product delivery.

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1.12. Performance Cycle Uncertainty
A major objective of logistics in all operating areas is to reduce performance cycle uncertainty.
The dilemma is that the structure of the performance cycle itself, operating conditions, and the
quality of logistical operations all combine randomly to introduce operational variance.

2. Logistics performance dimension

Effective measurement systems must be constructed to accomplish the three objectives of
monitoring, controlling, and directing logistical operations. Monitoring is accomplished by the
establishment of appropriate metrics to track system performance for reporting to management.
For example, typically metrics are developed and data gathered to report basic service
performance related to fill rates and on-time deliveries and for logistics costs such as
transportation and warehousing. Controlling is accomplished by having appropriate standards of
performance relative to the established metrics to indicate when the logistics system requires
modification or attention. For example, if fill rates fall below standards, logistics managers must
identify the causes and make adjustments to bring the process back into compliance. The third
objective, directing, is related to employee motivation and reward for performance. For example,
some companies encourage warehouse personnel to achieve high levels of productivity. They
must be paid for 8 hours of work, based on standard measures of picking or loading. If the tasks
are completed in less than 8 hours, they may be allowed personal time off or leisure time.

2.1. Financial Measures of Logistics Performance

Logistics is playing an increasingly important role in value creation, revenue enhancement,
capital consumption, and expense control. As a result, logistics financial performance is playing
a bigger role in corporate financial performance. Measuring and improving logistics financial
performance is increasingly important in measuring and improving corporate financial
performance. In addition, since logistics is often in competition with other business processes for
capital projects, the better the overall financial reporting we do in logistics, the better chance we
have to justify our logistics projects

2.2. Productivity Measures of Logistics Performance

Productivity is a relationship, usually a ratio or an index between output of goods, work
completed, and/or services produced and quantities of inputs or resources utilized to produce the
output. If a system has clearly measurable outputs and identifiable, measurable inputs that can be
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matched to the appropriate outputs, productivity measurement is quite routine. Generally,
logistics executives are very concerned with measuring the productivity of labour. While the
labour input can be quantified in many ways, the most typical manner is by labor expense, labor
hours, or individual employees. Thus, typical labour productivity measures in transportation
include units shipped or delivered per employee, labour dollar, and labour hour. Warehouse
labour productivity may be measured by units received, picked, and/or stored per employee,
dollar, or hour. The productivity of a specified resource(s) is generically measured as the ratio of
the output of the resource(s) to the consumption of the resource(s): Productivity r _=Output r /
Consumption r

2.3. Quality Measures of Logistics Performance

Performance relative to service reliability is generally reflected in an organization's measurement
of logistics quality. Logistics quality performance measures are; frequency of damage, birr
amount of damage, number of customer returns, and costs of returned goods.

2.4. Customer service measure of logistics performance

The elements of basic customer service were identified as availability, operational performance
and service reliability. An effective basic service platform requires specific metrics for assessing
performance in each dimension. Availability is typically reflected by an organization's fill rate. It
is critical to note, however, that fill rate may be measured in a variety of ways:

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2.5. Customer satisfaction measures of logistics performance
This metrics measures the firm‗s ability to provide overall customer satisfaction. Customer
satisfaction is measured by perceptions regarding performance cycle time, perfect order
fulfillment components, and the ability to respond to order status and Inquiry requests.

2.6. Cycle Time Measures of Logistics Performance

The total logistics cycle time (TLCT) includes order entry time (OET), order processing time
(OPT), purchase order cycle time (POCT), if the product is not available from stock), warehouse
order cycle time (WOCT), and in transit time (ITT).

3. Customer accommodation
The definition of customer services various across organization. Suppliers and their customers
can view the concept of service quiet differently. In a broad sense customer service is the
measure of how well the logistics system is performing in providing time and place utility for a
product or service. Customer service is often confused with the concept of customer satisfaction.
In contrast to customer service, customer satisfaction represents the customers overall
assessments of the marketing mix; product, price, promotion, and place.

3.1. The components of customer service

The logistics components of customer service can be classified in different ways. They may be
seen as transaction-related elements, where the emphasis is on the specific service provided, such
as on-time delivery, or they may be seen as functional attributes that are related to overall aspects
of order fulfillment, such as the ease of order taking.

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3.2. Phases in Customer Service
The nature and timing of the particular service requirements (before, during and after delivery of
the product):

1. Pre-transaction elements: these are customer service factors that arise prior to the actual
transaction taking place. They include: written customer service policy; accessibility of order
personnel; single order contact point; – organizational structure; method of ordering; order size
constraints; system flexibility.

2. Transaction elements: these are the elements directly related to the physical transaction and
are those that are most commonly concerned with distribution and logistics. Under this heading
would be included: order cycle time; order preparation; inventory availability; delivery
alternatives; delivery time; – delivery reliability; delivery of complete order; condition of goods;
order status information.

3. Post-transaction elements: these involve that elements that occur after the delivery has taken
place, such as: availability of spares; call-out time; invoicing procedures; invoicing accuracy;
product tracing/warranty; returns policy; customer complaints and procedures; claims
procedures.

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3.3. Developing customer service policy
This is a six steps plan to identify key customer service components and then to design and
maintain a suitable customer service package. Namely:

1. Identify the main elements of service and identify suitable market segments: The first
step is to identify those elements of service that are most highly rated by customers.
2. Determine the relative significance of each service element: Recognized research
techniques can be used within the questionnaire to enable measurement of the relative
importance of the different service components identified.
3. Establish company competitiveness at current service levels offered: Having identified
the key service components and their relative importance to the customer, the next step is
to measure how well the company is performing for each of these key components.
4. Identify distinct service requirements for different market segments: As already
indicated, the needs of different customer types can vary quite substantially. This may be
true in terms of product quality, method of ordering, level of service or any other of the
many different service elements that can be identified.
5. Develop specific customer service packages: This is the implementation phase and it will
depend on the results obtained from the stages that have been described. Alternative
packages for the different market segments need to be costed accordingly and the most
suitable packages determined.
6. Determine monitoring and control procedures: It is vital to ensure that any service policy
implemented is also monitored. This requires an effective focus on the measurement of
the service provided, involving a systematic and continuous concentration on monitoring
and control.

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3.4 Supply chain service output
Bucklin presented a longstanding theory that specifies four generic service outputs necessary to
accommodate customer requirements: (1) spatial convenience, (2) lot size, (3) waiting or
delivery time, and (4) product variety and assortment, different customers may have different
requirements regarding such service outputs.

Spatial Convenience

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Spatial convenience, the first service output, refers to the amount of shopping time and effort that
will be required on the part of the customer. Higher levels of spatial convenience are achieved in
a supply chain by providing customers with access to its products in a larger number of places,
thus reducing shopping effort.

Lot Size

The second service output is lot size, which refers to the number of units to be purchased in each
transaction. When customers are required to purchase in large quantities, they must incur costs of
product storage and maintenance. When the supply chain allows them to purchase in small lot
sizes, they can more easily match their consumption requirements with their purchasing.

Waiting Time

Waiting time is the third generic service output. Waiting time is defined as the amount of time
the customer must wait between ordering and receiving products: the lower the waiting time, the
higher the level of supply chain service.

Product Variety

Different supply chains offer differing levels of variety and assortment to consumers and end
users. Typical supermarkets are involved in supply chains that provide a broad variety of many
different types of products and an assortment of brands, sizes, etc., of each type.

3.5. Value add service

The term value-added services refer to the additional distribution and warehousing services
offered by third-party logistics providers to business looking to outsource their supply chain
operations. Whenever logistics providers add value the right way, it affects the level of customer
satisfaction, while indirectly increasing their bottom line. Service providers know the ins and
outs of the business and they can assist companies in responding to customers‘ needs.
Companies partnering with value-added logistics providers can focus on their core business and
work on being more competent in the market. Value-adding is not a one-time task — it requires
continuous maintenance and 3PLs are working toward providing value-added services in
conjunction with their more traditional offerings. Value-added services (VAS) are services that
add something to pure logistics. Usually they are jobs the customer would otherwise have to do

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themselves. The term value-added services means much more than post-production work. They
include services along the entire value creation chain.

4. Market Distribution in the Supply Chain

Distribution is a management system within logistics that is focused on order fulfillment
throughout distribution channels. A distribution channel is the chain of agents and entities that a
product or service moves through on its way from its point of origin to a consumer. Supply chain
distribution is logistics in practice. If logistics is the process of figuring out how products will get
from the manufacturer to the point of sale, then distribution describes actually getting those
products where they‘re going. For example, let‘s say your warehouse facility produces 100 units
of the item you sell per day, and a nearby department store has placed an order of 300 units.
Logistics is the process of determining how to get those 300 units to the department store in a
timely, cost-efficient fashion. Once you‘ve nailed that down, distribution is the act of
successfully getting the order to the department store. Distributing your product will involve
inventory management, packaging and warehousing.

4.1. Marketing functions

There are many ways to classify these functions; the traditional list includes selling, buying,
transporting, storing, financing, standardization, market financing, risk bearing, and market
information. In the typical channel arrangement, a function may alternately be performed by
different channel members or it may be performed and duplicated numerous times.

4.2. Specialization
Specialization is a fundamental driver of economic efficiency. Manufacturers are specialists in
the production of specific products. Wholesalers and retailers are specialists in the sense that
they buy and sell specific assortments tailored to the requirements of the target markets they
have chosen to serve. Warehousing and transportation firms are specialists in the performance of
logistical functions.

4.3. Assortment
Accommodation requires that distribution channels provide consumers and end users with their
desired levels of product variety and assortment. This process has four basic steps: concentration,
allocation, customization, and dispersion.

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4.4. Distribution channel participants
The main participants in the distribution system are: (1) the manufacturers, (2) the
intermediaries, (3) the facilitating agencies, and (4) the consumers.

4.5. Direct versus Indirect Structures

The alternatives range from the extreme on the left of direct from manufacturer to consumer with
no intermediary involvement, to the extreme on the right, which includes wholesale agents,
wholesale merchants, and retail outlets. Should the channel be direct, involving no or very few
intermediaries, or should it be indirect, involving several different intermediate.

4.6. Market coverage

Market coverage decisions involve choices concerning the relative intensity of outlets in any
given geographic area so that the needs of existing and potential customers are adequately
accommodated. Specifically, market coverage is most directly related to locational convenience
for customers. Three basic market coverage alternatives exist: (1) intensive distribution, (2)
selective distribution, and (3) exclusive distribution.

4.7. E-Commerce Impacts on Market Distribution

The role of logistics in retail is always changing with new technologies and trends, though none
have impacted the structure of warehousing and distribution more so than the emergence and
rapid expansion of e-commerce. The demand for online marketplaces with fast delivery and
accurate service has dramatically changed the business models of many traditional brick and
mortar, which, in turn, has transformed order fulfillment requirements for logistics providers. As
this trend continues to grow across the world, supply chains and distribution channels become
increasingly complex in nature and more expensive to maintain with manual processes.

5. Operational integration
Collaboration is directly related to capturing efficiencies between functions within an enterprise
as well as across enterprises that constitute a domestic or international supply chain. The main
reason for both internal and external integration is to achieve maximum value for customers.

5.1. Logistical Integration Objectives

To achieve logistical integration, six operational objectives must be simultaneously achieved: (1)
responsiveness, (2) variance reduction, (3) inventory reduction, (4) shipment consolidation, (5)

16
quality, and (6) life cycle support. The relative importance of each is directly related to a firm's
logistical strategy.

5.2. Internal logistics integration barriers

Barriers to internal integration find their origins in traditional functional practices related to
organization, measurement and reward systems, inventory leverage, information technology, and
knowledge hoarding.

5.3. Global logistics integration

Effective logistics system is important for domestic supply chain integration, it is absolutely
essential for successful global manufacturing and marketing. Domestic logistics focuses on
performing value-added services to support supply chain integration in a somewhat controllable
environment. Global logistics must accommodate operations in a variety of different national,
political, and economic settings while also dealing with increased uncertainties associated with
the distance, demand, diversity and documentation of international commerce.

5.4. Logistics in a Global Economy

Global operations increase logistics cost and complexity. In terms of complexity global
operations, in contrast to domestic, are characterized by increased uncertainty and decreased
ability to control. Uncertainty results from greater distances, longer lead times, and decreased
market knowledge. Decreased ability to control results from the extensive use of international
service firms coupled with potential government intervention in such areas as customs
requirements and trade restrictions.

5.5. Logistics information System Functionality

From its inception, logistics focused on product storage and flow through the distribution
channel. Information flow and accuracy was often overlooked because it was not viewed as
being critical by customers.

Logistics information systems (LIS) are the thread that links logistics activities into an integrated
process. The integration builds on four levels of functionality:

1. Transaction systems
2. Management control Building blocks of logistics information system
3. Decision analysis

17
 4. Strategic planning

5.6. Communication systems in logistics

The communication module facilitates information flow between functional areas within the firm
and between supply chain partners. Logistics information consists of real time data on company
operations-inbound material flows, production status, product inventories, customer shipments
and incoming orders.

 Electronic Data Interchange

 Internet
 Satellite Technology
 Radio Frequency Exchange
6. Contemporary logistics issues

In addition to increased environmental concerns and severe environmental laws, reverse logistics
(RL) has received increasing attention.

6. Reveres logistics
The Council of Logistics Management (CLM) defines RL as the ―term often used to refer to the
role of logistics in recycling, waste disposal, and management of hazardous materials; a broader
perspective includes a relating to logistics activities carried out in source reduction, recycling,
substitution, reuse of materials, and disposal‖. The European Working Group on Reverse
Logistics, RevLog (1998), has presented the following definition of RL: ―The process of
planning, implementing and controlling flows of raw materials, in process inventory, and
finished goods, from a manufacturing, distribution, or use point to a point of recovery or point of
proper disposal.

6.1. Reasons to Implement Reverse Logistics

Reverse logistics addresses several issues in supply chain management and overall economic &
social responsibilities of businesses. Often a well-managed reverse logistics system can result in
increased profitability improved brand image of the companies. Some reasons are:

 Customer not satisfied  Warranty claim

 Installation or usage problems  Faulty order processing

18
  Retail overstock  Manufacture recall programs
 End of product life cycle or product
replacement
6.2. Activities involved in Reverse logistics
 Collection and separation  Redistribution
 Reprocessing
6.3. Reverse Logistics Management- Key Benefits
 Higher revenue realization from "secondary" sales by offering fresh stock in place of old
stock
 Reduction in Cost by lowering cost of goods sold (COGS) and operating expenses
 Improved Inventory management
 Leads to the Green Way

6.4. Concepts of third and fourth party logistics (3PL &4PL)

6.4.1. Third party logistics (3PL)
Third-party logistics service providers are companies who provide a range of logistics activities
for their clients. They might operate distribution centers, manage the delivery of the product
through their transport fleets or undertake value-adding services such as re-packing. 3PL
providers provide logistics services with their own assets. For example, a distribution service
provider which uses its own resources, e.g. workers, to pack final products for distributing to
different markets as per customer's request is seen as a 3PL provider.

Factors affecting on the development of 3PL

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 6.4.2. Fourth party logistics (4PL)
The concept of Fourth-Party Logistics (4PL) provider is an integrator that assembles the
resources, capabilities and technology of its own organization and other organizations to design,
build, and run comprehensive supply chain solutions. 4PL develops and runs a supply chain
solution for multiple industry players with focus on synchronization and collaboration

The underpinning principle for the existence of 4PL was;

 Modern supply networks are increasingly global and certainly more complex
 The capabilities to manage the network probably do not exist in any one organization

 Self-Test Questions
1. ____________________________are preplanned strategies to resolve
logistical failures.
a) Routine flexible logistical operating arrangement
b) Emergency flexible logistical operating arrangement
c) Echelon logistical operating arrangement
d) Direct logistical operating arrangement
2. _____________________ is the ratio of time inventory sits idle in comparison
to the amount of time it is being productively moved to a desired location in
the supply chain.

20
 a) Cycle time c) Dwell time
b) Lead time d) None
e)
3. _______________________ is the first and foremost class of logistics strategic
decision.
a) Customer service c) Outsourcing
b) Logistics network d) Integration
design
4. Which one is correct about global logistics;

a) In global logistics inventories require shorter lead time to order

b) Global logistics mainly use truck and rail mode of transport
c) Global logistics mainly use ocean and air with significant intermodal
activity
d) In global logistics the risk of cargo is low

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 PART TWO
TRANSPORTATION MANGEMENT

Introduction
Transportation refers to the movement of people, goods and animals from one location to the
other location. Therefore, transportation is one of the basic things for the business organization
or any other daily activities

2. An over view of Transportation Management

Transportation is defined as movement of freight, people and information from one place to
another. In other words, it is the means of conveyance or travel from one place to another. The
important common element in any definition of transportation is movement. Movement is
changing of physical location of freight, passenger or exchange of information. Products must
move to the location where they are needed. Transportation function divided in to passenger and
freight transportation. Passenger transportation includes private transportation such as
automobile or air planes, and public transportation. Freight transportation is the economic
movement of commodities and products and the effect of such movement on the development
and advancement of business. Transport (commonly used in the U.K.), or transportation (used in
the U.S.), is the movement of humans, animals and goods from one location to another. In other
words, the action of transport is defined as a particular movement of an organism or thing from a
point A (a place in space) to a point B. on the other hand; Transportation is defined as movement
of freight, people and information from one place to another. In other words, it is the means of
conveyance or travel from one place to another. The important common element in any
definition of transportation is movement. Movement is changing of physical location of freight,
passenger or exchange of information. Products must move to the location where they are
needed. The field can be divided into infrastructure, vehicles and operations. Transport enables
trade between people, which is essential for the development of civilizations. Transport
infrastructure consists of the fixed installations, including roads, railways, airways, waterways,
canals and pipelines and terminals such as airports, railway stations, bus stations, warehouses,
trucking terminals, refueling depots (including fueling docks and fuel stations) and seaports.
Terminals may be used both for interchange of passengers and cargo and for maintenance.
Vehicles traveling on these networks may include automobiles, bicycles, buses, trains, trucks,

22
helicopters, watercraft, spacecraft and aircraft. Operations deal with the way the vehicles are
operated, and the procedures set for this purpose, including financing, legalities, and policies. In
the transport industry, operations and ownership of infrastructure can be either public or private,
depending on the country and mode. Passenger transport may be public, where operators provide
scheduled services, or private. Freight transport has become focused on containerization,
although bulk transport is used for large volumes of durable items. Transport plays an important
part in economic growth and globalization, but most types cause air pollution and use large
amounts of land.

2.1. Role of transportation

Transportation is a non-separable part of any society. It exhibits a very close relation to the style
of life, the range and location of activities and the goods and services which will be available for
consumption. Advances in transportation has made possible changes in the way of living and the
way in which societies are organized and therefore have a great influence in the development of
civilizations. This chapter conveys an understanding of the importance of transportation in the
modern society by presenting selected characteristics of existing transportation systems, their use
and relationships to other human activities. Transportation is responsible for the development of
civilizations from very old times by meeting travel requirement of people and transport
requirement of goods. Such movement has changed the way people live and travel.

Major role of transportation are:

 Saves time: arrival of goods and services at right time.

 Balance regional development: resource allocation and good communication
 Create employment opportunities.eg, loading and unloading
 Source of income for individuals and government/tax purpose
 For success of war: for defended foreign aggression
 For economic growth: as trade and investment and improved per capital of citizens.
 Greater competition: Without a good transport system, the reach of the market is limited
to areas immediately surrounding the point of production. With an efficient transport
system, the costs of products in distant markets can be competitive with those of other
products for sale in the same markets.

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  Economies of scale: Wider markets can result in lower production costs. With a greater
volume supported by these markets, the producer could better utilize production facilities,
from which specialization of labour usually follows. Inexpensive transport also facilitates
the separation of markets and production sites. This provides a degree of freedom in
selecting production sites such that production can be located at places that offer cost
advantages.
 Reduced price: Inexpensive transport also contributes to reducing product prices because
transport is a component cost, along with production, selling, and other distribution costs,
which make up the product price. As transport becomes more efficient and product prices
decrease, society can benefit from having a higher standard of living by consuming more
products

2.2. Carrier selection

Private carrier: Private carriage is the firm‗s own transportation.
 Not for-hire and not subject to Federal regulations.
 May not be the firm‗s primary business but can charge an intercompany fee for
transportation services.
 Firms gain ultimate control over shipments and achieve maximum flexibility in
moving goods.
 Backhauls are usually empty.
 Requires a large capital investment.
 Requires management time and expertise.
Public carrier: For-hire carrier that serves the general public at reasonable rates and without
discrimination.
 Stringent economic regulation designed to protect the public.
 Must transport all commodities offered.
 Commodities are limited to those that the carrier‗s equipment will handle.
 Carrier is liable for damages to products carried.
 Exceptions to liability include acts of God, acts of the public enemy, acts of public
authority, acts of the shipper and defects inherent in the goods.
Contract carrier: For-hire carrier that does not have to serve the general public.
 May serve one or a few shippers exclusively.

24
  May offer specialized equipment.
 Not subject to regulation on services;
 Other aspects of the carrier/shipper relationship are made a part of the
contract between the two parties.
Exempt carrier: For-hire carrier exempt from economic regulation regarding rates and
services.
 Limited entry controls; low rates.
 Usually haul agricultural products, but there are special rules as to what may
be hauled by each mode of transportation,
 Limited number of carriers restricts availability.

2.3. Importance of transportation from purchasing and marketing point of

view
 Importance of transportation from purchasing point of view

Transportation plays as vital linkages throughout a firm‘s inbound and outbound distribution
channels. There are three major transportation linkages:

 Between a firm and its supplier

 Between a firm and its manufactures
 Firms with multiple production and warehouse facilities.
 Importance of transportation from marketing point of view:
 Transportation is important in market development, expansion and
completion.
 The movement of products from where they are produce to the consumption
center is by transportation.
 Transportation is important to achieve a competitive advantage by helping
satisfying customer needs faster and at low cost.

2.4. Function of transportation

Transportation enterprises provide two major services: product movement and product storage.

Product Movement

25
Whether in the form of materials, components, work-in-process, or finished goods, the basic
value provided by transportation is to move inventory to the next stage of the business process.
The primary transportation value proposition is product movement up and down the supply
chain. The performance of transportation is vital to procurement, manufacturing, and market
distribution. Transportation also plays a key role in the performance of reverse logistics. Without
reliable transportation, most commercial activity could not function.

Product Storage

A less visible aspect of transportation is product storage. While a product is in a transportation

vehicle, it is being stored. Transport vehicles can also be used for product storage at shipment
origin or destination, but they are comparatively expensive storage facilities. Since the main
value proposition of transportation is movement, a vehicle committed to storage is not otherwise
available for transport. A trade-off exists between using a transportation vehicle versus
temporarily placing products in a warehouse.

2.5. Transport Principles

There are two fundamental economic principles that impact transportation efficiency: economy
of scale and economy of distance.

Economy of scale

In transportation is the cost per unit of weight decrease as the size of a shipment increases. For
example, truckload shipments that utilize an entire vehicle's capacity have lower cost per pound
than smaller shipments that utilize a limited portion of vehicle capacity. It is also generally true
that larger capacity transportation vehicles such as rail and water are less costly per unit of
weight than smaller capacity vehicles such as trucks and air. Transportation economies of scale
exist because fixed cost associated with moving a load is allocated over the increased weight.
Fixed costs include administration related to scheduling, cost of equipment, time to position
vehicles for loading or unloading, and invoicing. Such costs are considered fixed because they do
not vary with shipment size. In other words, it costs as much to administer a 100-pound shipment
as one weighing 1000 pounds.

Economy of distance

26
It refers to decreased transportation cost per unit of weight as distance increases. For example, a
shipment of 800 miles will cost less to perform than two shipments of the same weight each
moving 400 miles. Transportation economy of distance is often referred to as the tapering
principle. The rationale for distance economies is similar to economies of scale. Specifically,
longer distances allow fixed cost to be spread over more miles, resulting in lower per mile
charges. These scaling principles are important when evaluating transportation alternatives. The
goal from a transportation perspective is to maximize the size of the load and the distance being
shipped while still meeting customer service expectations.

2.6. Transport Participants

The transportation environment impacts the range of decisions that can be implemented in a
logistical system. Unlike most commercial transactions, transportation decisions are influenced
by six parties: (1) shipper; (2) destination party, traditionally called the consignee; (3) carriers
and agents; (4) government; (5) Internet; and (6) the public.

2.7. Types of transportation modes/ systems

The freight transportation structure consists of the rights-of-way, vehicles, and carriers that
operate within five basic transportation modes. A mode identifies a basic transportation method
or form. The mode of transport describes the type of transport used. There are basically five
different options – rail, road, water, air and pipeline. Each mode has different characteristics, and
the best in any particular circumstances depends on the type of goods to be moved, locations,
distance, value and a whole range of other things.

Rail

Rail transport is most commonly used for heavy and bulky loads over long land journeys. Trains
can maintain a consistent, reasonably high speed, and can link with other modes to carry
containers and bulk freight. The capability to efficiently transport large tonnage over long
distances is the main reason rail continues to handle significant intercity tonnage. Rail operations
have high fixed costs because of expensive equipment, right-of-way and tracks, Switching yards,
and terminals. However, rail enjoys relatively low variable operating costs. The rail fixed-
variable cost structure offers competitive advantages for long-haul moves. Railroads became
more responsive to specific customer needs by emphasizing bulk industries and heavy
manufacturing, as contrasted to standardized boxcar service. To provide improved service to
27
major customers, progressive rail has concentrated on the development of specialized equipment,
such as enclosed tri level automobile railcars, cushioned appliance railcars, unit trains,
articulated cars, and double stack container flatcars. These technologies are being applied by the
railroads to reduce weight, increase carrying capacity, and facilitate interchange faster and less
expensive to operate than traditional trains since it can be routed direct and nonstop from origin
to destination. Another advantage of rail is that the unit transport cost is low, so it can be used to
move large volumes of relatively low-priced materials, such as coal and minerals. All train
services have to be timetabled in advance, so that they can all fit onto the same track.

Road

Road is the most widely used mode of transport and is used at least somewhere in almost all
supply chains. Its main benefit is flexibility, being able to visit almost any location. Although the
maximum speed on roads is limited, this ability to give a door-to-door service avoids transfers to
other modes and can give a shorter overall journey time. Road transport has the advantage of
being able to use extensive road networks. Unlike rail, these already exist, so users do not have
to build and maintain their own tracks. Also, vehicles do not have to keep to such rigid
timetables, so they can go on journeys at short notice and with little planning.

Water

Both rail and road transports have the obvious limitation of only being used on land. Most supply
chains use shipping to cross the oceans at some point, and over 90% of world trade is moved by
sea. You can see the importance of shipping to a country like the UK, where 95% of freight
arrives or leaves by ship, shipping is the fifth largest service sector exporter, the City of London
insures 25% of the world‘s marine risk, the marine and repair business is one of the largest in
Europe, there are 300 ports around the coast, and the surrounding waters are among the busiest in
the world.

The main drawback with water transport is, of course, its inflexibility in being limited to
appropriate ports. Journeys from suppliers and to customers inevitably need a change of mode,
even if they are close to ports. The other problem with shipping is that it is relatively slow and
needs time to consolidate loads and transfer them at ports. However, such transfers can be made

28
efficient, and then coastal shipping can compete with road transport, even for relatively short
distances

Air

Airlines carry a significant amount of freight, for products where speed of delivery is more
important than the cost. In practice, this limits airfreight to fairly small amounts of expensive
materials. There are all sorts of facilities located around major airports for moving materials
from sources onto the right planes, and then away from planes and out to customers.
Unfortunately, these transfers again take time, and can reduce the benefits of air travel. Another
problem for airlines is their costs, over which they have very little control. They have a
combination of high fixed costs (aero planes are expensive to buy) and high variable costs (due
to fuel, landing fees, staff, and so on). It is expensive to keep planes flying, and there is no real
way of reducing these costs. Competition can also be fierce, putting a limit on the amount they
can charge, and this frequently sends new airlines into bankruptcy.

Pipeline

The main uses of pipelines are oil and gas together with the utilities of water and sewage. They
can also be used for a few other types of product such as pulverised coal in oil. Pipelines have
the advantage of moving large quantities over long distances. Unfortunately, they have the
disadvantages of being slow (typically moving at less than 10 km per hour), inflexible (only
transporting between fixed points), and only carrying large volumes of certain types of fluid. In
addition, there is the huge initial investment of building dedicated pipelines.

Despite this initial investment, pipelines are the cheapest way of moving liquids particularly oil
and gas over long distances. Local networks can add flexibility by delivering to a wide range of
locations (such as supplies of water and gas to homes).

2.1.1. Choice of mode

 Speed refers to elapsed movement time.
 Availability refers to the ability of a mode to service any given pair of locations
 Dependability refers to potential variance from expected or published delivery
schedules

29
  Capability is the ability of a mode to handle any transport equipment, such as load
size.
 Frequency relates to the quantity of scheduled movements.

2.8. Intermodal transport system

Intermodal transportation is not new. The practice was first used in 18th century in England.
Intermodal transportation is the movement of cargo from origin to destination by several modes
of transport where each of these modes has a different transport provider or entity responsible,
each with its own independent contract. Intermodal transportation is the use of two or more
modes, or carriers to transport goods (freight) from shipper to consignee. A typical example of
intermodal freight transportation is rail, truck, ship and then truck. Or simply, it is a
transportation system connecting two or more modes. Under this system, goods transportation
takes place in an intermodal container or loading unit, which passes through several modes of
transportation (ocean freight, truck, rail, etc.). Once the product reaches a specific geographical
area, trucks deliver the product to a common collection area. From there, similar vehicles or
smaller transportation deliver the product to the end customer. The entire transportation process
comes under the control of a different carrier or transportation service provider under different
contracts. This model includes airport rail-road link transportation, airport ferry connection,
allowing automobiles on trains, train to ferry connections, and so on.

2.9. Transportation management

Transportation management may be defined as the planning, organizing, implementing, and
controlling of transportation services and freight movements to achieve organizational
objectives.

2.9.1. Selections of carriers

A transport or logistics manager is required to take into consideration the following factors while
selecting transportation mode/carrier.

 The strength and weaknesses of the company in terms of marketing, financial and
production resources. If any volume of freight is moved, some damages will be incurred,
resulting in claims against the carrier. Should the carrier get in to financial difficulty, or
even become insolvent, collection on claims becomes a problem. Therefore, the buyer
should avoid those carriers that are on the margin financially.

30
  The prevailing market characteristics including the competitive scenario, geographical
and territory structure
 Product feature and suitability to various modes of transportation such as height, size,
shape, etc. for example, bulk liquid require railroad tank car, pipeline E.g. concerning
size small shipment trucks & other road carriers
 Quantity to be transported each time
 Distance to be covered
 Total transportation cost of various mode of transportation
 Carrier performance in terms of speed, availability, reliability, safety, claim settlement
procedures and logistical service capacities

2.9.2. Routing Identification

Routing is the design of transportation network. This network created, when different points or
lines linked together in to a structure. Such networks by carrying flows of goods, people,
information or anything else that is moved from one place give rise the benefits of transportation
system. Good identification of routing:

 Reduce transportation costs

 Improve customer services
 Minimize time or distance
 Increase accessibility

2.9.3. Transport Regulation and deregulation

Deregulation is the act or process of removing or reducing state regulations. It is therefore
opposite of regulation, which refers to the process of the government regulating certain activities.

Government transport regulation falls in to two categories: economic and social regulation.
Economic regulation exists in the form of price controls to protect the consumer from price
gouging. Social regulation exists to protect the public as in the case of safer work places and a
clean environment.
A. Economic regulation
To provide dependable transportation service and to foster economic development, both federal
and state governments have actively utilized economic regulation:
 The prevention of monopolists

31
  Development of fair competition
 Development of financial performance of the transportation to provide dependable
transportation service.
Economic regulation generally implemented by controlling entry, rates, and services.
I. Entry and Exit Regulation: this regulation controls carrier entry and exist as well as the
market served in order to:
 Reduce the cutthroat competitive characteristics in larger markets and ensuring
viable services levels for smaller market.
 Limits a carrier‘s ability to leave a market if this would result in a substantial
reduction in service
II. Rate Regulation: Under this regulation, specific consideration includes Rate making, Rate
changes and Rate subsidiaries
Rate Making: refers to the practice of setting rates. Single line rates are the rates between origin
and destination offered by single carrier. Joint rate is a single rate between origin and destination
offered by multiple carriers.
Rate Changes: are the practices required to increases or decrease rate prior to deregulation.
Carriers are not allowed to change rates unless they could justify the necessity to do so.
Temporary rate changes such as those resulting from increases in fuel prices may be
implemented.
Rate subsidies: refers to the practice of assisting or subsidizing one segment of carrier operation
by allowing higher rate on a different segment. It has been argued that the high cost of providing
service in small markets has been subsidized by the rate charged in the relatively lower cost than
major market. Subsidies have been allowed historically when governments desired to promote or
develop a market segment.
III. Services: this concerns the services provided by the carrier prior to deregulation, service
offerings were relatively consistent across carriers and included product transport,
loading and unloading loss about shipment status and invoicing. After deregulation,
shippers and consignees sought carriers that could provide more quality services while
possibly negotiations restructure other responsibilities like liability and loading practices.
B. Social /Safety Regulation
I. Safety of transportation

32
  Quality and durability of the roads, railways, airport etc.
 Technical capability of the modes
II. Safety of the people due to externalities such as:
 Pollution of air, water and damage
 Petroleum combustion
 Hazardous materials
 Traffic congestion(overcrowding)
 Noise disturbance

2.9.4. Loss and Damage Claims

Cargo loses and damage has been the bone of the transportation industry since the invention of
the wheel. For example, in 1986 North American rail road paid about $ 143 million in damage
claims. Since deregulation, the volume of claims has dropped, not because of better handling but
because, during the negotiation process, the shipper agreed to hold the carrier loss liable for
claims in return for lower transportation charges, the transportation deregulation reduced carrier
liability.
The carrier‘s liability varies depending on the service provided and the contractual terms
between the shipper and carrier. The carrier liable for the total or partial loss of the goods and for
damage thereto occurring between the time when he takes over the goods and the time when he
takes over the goods and the time of delivery, as well as for any delay in delivery. Bill of lading
specifically defines the limits of carrier responsibility. The carriers are not liable for loss, damage
or delay because of: the wrongful act or neglect of the claimant, by the instructions of the
claimant given otherwise than as the result of a wrongful act or neglect on the part of the carrier,
by inherent vice of the goods or through force majeure.

Some important aspects in loss and damage claims

1. Determination of freight claim damages: one of the most difficult aspects of claims
work is determining the exact value amount of the damage, the law indicates that the
common carrier is responsible for the full actual loss sustained by the shipper or
consignee.
2. Concealed loss and damage: it is defined as damage that is not discovered until a
package is opened. Another difficult area for shippers and carriers alike involves

33
 concealed loss or damage. If shipments arrive in obviously damaged condition
(Unconcealed loss or damage), the consignee either refuses the goods or makes a notion
of the damage on the delivery receipt. However concealed-loss-and-damage situations are
more difficult to determine. Often, the exterior package does not appear to be damaged or
tampered with: the damage is within the package only when the consignee opens the
package is the damage of loss discovered. different writers appreciated carriers are
reluctant to pay all concealed-loss-and-damage claims for two reasons:
A. If the package comes through the shipment with no exterior damage, then
there is a strong possibility that the product was improperly protected within
the package. If this is the case, the carrier is expected from liability as
improper packaging is a fault of the shippers.
B. The possibility that the consignee‘s employees broke or stole the products.
3. Freight claim prevention: Another important aspect of the traffic manager‘s job is to see
that the freight is packaged handled and transported in such a way that loss and damage
claims won‘t occur.
4. Freight claim arbitration: if the shipper and carrier cannot satisfactory resolve a claim,
the shipper‘s only recourse is to start a legal action against the carrier in the appropriate
state or federal court.
 Overcharges
A Claim against a carrier for overcharges result from some form of miss billing. A number of
reasons for miss billing have been cited, some of these are:
 Application of incorrect  Duplicate collection of freight
classification charges
 Failure to use correct rates  Errors in determining item weights,
 Use of incorrect distance factors or and
basing points  Differences in the interpretation of
 Simple arithmetic errors rules and tariffs.
 Carrier misrouting of joint line
shipments
Normal bill auditing may detect these errors before payment is made, and another corrected
freight bill may be issued.

34
2.10. Emerging Issues in Transportation
Introduction
Transportation systems are linked with a wide range of environmental considerations from the
global to the local. Environmental impacts are related to transport modes, their energy supply
systems, their emissions, and the infrastructures over which they operate. While consuming large
quantities of energy, especially oil, vehicles also emit numerous pollutants such as carbon
dioxide, nitrogen oxide, and noise, and transport infrastructures have damaged many ecological
systems. Several of the environmental impacts of transport systems have been externalized,
implying that a few realize the benefits of mobility while the whole society assumes the costs.
The spatial structure of economic activities, notably their land use, is also increasingly linked
with environmental impacts. The sustainability of transport systems has become one core issue in
the provision of mobility, particularly de-carbonization.

2.10.1. Emerging Technology in Transport

Change is coming to transportation, whether we are ready for it or not. You can see it in public
sector investment in intelligent streets and digital railways, automakers‟ focus on next-
generation vehicles and smart mobility services, and in the widening recognition that the
―information everywhere‖ world will utterly disrupt the transportation status quo. The Digital
Age has begun, and technology has brought us smart phones, real-time planning, open traffic
data, and social customer service. For the first time, the passenger now has more information
than the operator. This fundamental shift offers consumers real choice based on a picture of
alternative routes, comparative pricing and current network status. As transport operators adapt
and new entrants arrive, new business models will transform the use of user information,
payments, integration and automation. These changes will form five disruptive trends for
transport and smart mobility services. Such as
 User-centered mobility - services put travellers in control; public transport will become
personal. This changes the approach to operations and planning based on users‟ choices,
priorities, data flows and dynamic response to disruption. Staff will adopt „digital
uniforms‟, so that they have the information to support customers.
 Integrated and intelligent - transport networks will sense demand, measure performance,
and monitor the health of physical assets. Intelligent systems will respond in real-time to
manage capacity and predict and avoid disruption.

35
  Pricing and payments - will see a revolution over the next five years. Digitization of
tickets and payments will transform metro services and allow all rail operators to follow
airlines by adopting e-tickets. Beyond contactless payments, pay as you travel will be
based simply on location.
 Automation and safety - will benefit from the exponential potential of cognitive
technology, with the potential to save millions of lives worldwide, particularly on the
roads. Increases in safety and changes to the nature of liability will have a fundamental
impact on the insurance industry.
 Public and private innovation - will work together to meet the mobility challenges of the
21st century. The role of the public sector will be critical to stimulate advances and
protect citizens. New private sector entrants will take advantage of peer-to-peer models,
digital and mobile technology, and low costs to scale globally.

2.10.2. Types of Transportation Technology

 Hyper loops - Hyper loops are a proposed method of passenger or freight transportation
that uses electric propulsion and low-pressure tubes to glide along at speeds that surpass
those of commercial aircrafts.
 Underground Tunneling - Underground transit, popularized by Elon Musk, is exactly
how it sounds; moving people or things through vast systems of tunnels under the Earth‘s
surface.
 Aero-space - The transportation technology garnering the most excitement right now is
aero-space. Companies like Space X, Blue Origin and Virgin Galactic are battling it out
to be the first company to offer commercial space flights.
 Autonomous Vehicles - The battle over autonomous vehicles is also heating up with
virtually every big-named auto manufacturer and start-up vying to create the first mass
produced wave of self-driving vehicles.
 Last-Mile Robots - Transportation tech isn‟t all just about transporting people. It can also
include the technology that helps get our packages and products from point A to point B.
 Electric Vehicles - Electric vehicles are having a massive effect on how we get around,
whether it‘s across the city or across the country. Tesla and Nissan have popularized the
electric car, which runs strictly on battery power to get us to where we need to go.

36
2.10.3. Environmental issues in transportation
Through the emissions from combustion of fossil-derived fuels, transportation systems
contribute to degraded air quality, as well as a changing climate. Transportation also leads to
noise pollution, water pollution, and affects ecosystems through multiple direct and indirect
interactions.

2.10.4. Transportation and Energy

According to Dr. Jean-Paul, Transportation activities are significant energy consumers,
providing mobility to passengers and freight, which accounts for about 25% of world energy use.
There are four types of physical work related to human activities:
Modification of the environment - All the activities involved in making space suitable for
human activities, like clearing land for agriculture, modifying the hydrography (irrigation), and
establishing distribution infrastructures, as well as constructing and conditioning (temperature
and light) enclosed structures.
Appropriation of resources - Involves the extraction of agricultural resources from the biomass
and raw materials (minerals, oil, lumber, etc.) for human needs. It also includes the disposal of
wastes, which are in an advanced industrial society very work-intensive to dispose of safely (e.g.
collection, treatment, and disposal).
Processing resources – it is concerned with the modification of products from the biomass of
raw materials and of goods to manufacture according to economic needs. Since the industrial
revolution, work related to processing resources was considerably mechanized, initially with
simple machines, then assembly lines, and currently with automation.
Transfer - Energy is the potential that allows the mobility of passengers and freight from one
location to another. It aims to attenuate the spatial inequalities in the location of resources by
overcoming distance. The less energy costs per ton or passenger – kilometer, the less transfers
are an economic burden. Overcoming space in a global economy requires a substantial amount of
energy and has consequently been subject to massive economies of scale.

2.10.5. Transportation and Energy Consumption

Transportation and energy can be seen from a cost-benefit perspective where giving momentum
to a mass (passengers, vehicles, cargo, etc.) requires a proportional amount of energy. The matter
is how effectively this energy is captured to practical use, which has a strong modal
characteristic. The relationship between transport and energy is direct but subject to different

37
interpretations since it concerns different transport modes, each having its utility and level of
performance. There is often a compromise between speed and energy consumption related to the
desired economic returns.
The transportation market has a broad spectrum of energy consumption which is particularly
impacted by three issues:
 The price level and volatility of energy sources - Stable energy sources are preferred as
they enable long term investments in transportation assets. Volatile energy prices are not
contingent on investments in transport technology.
 Technological and technical changes - In the level of energy performance of transport
modes and terminals, an important goal is thus to improve this energy performance since
it is linked with direct economic benefits for both operators (lower operating costs) and
users (lower rates).
 Environmental externalities - related to the use of specific modes and energy sources
and the goal to reduce them.

2.10.6. Energy Consumption among Modal Variations

 Land transportation - accounts for the vast majority of energy consumption. Road
transportation alone is consuming, on average, 85% of the total energy used by the
transport sector in developed economies.
 Maritime transportation - accounts for 90% of cross-border world trade, as measured by
volume. The nature of water transport and its economies of scale make it the most
energy-efficient mode since it uses only 7% of all the energy consumed by transport
activities, a figure way below its contribution to the mobility of goods.
 Air transportation - plays an integral part in the globalization of transportation networks.
The aviation industry accounts for 8% of the energy consumed by transportation. Air
transport has high energy consumption levels, linked to high speeds. Fuel is the second
most significant cost for the air transport industry accounting for 13-20% of total
expenses.
 Passenger transportation - accounts for 50 to 60% of the energy consumption derived
from transportation activities. There is a close relationship between rising income,
automobile ownership, and distance travelled by vehicles.

38
  Freight transportation - accounts for 40 to 50% of energy consumption derived from
transportation activities. Energy consumption is dominated by road transportation, which
can account for 80% of domestic consumption.

2.10.7. The issue of transport and environment

The issue of transportation and the environment is paradoxical since transportation conveys
substantial socioeconomic benefits, but at the same time, transportation is impacting
environmental systems.
Total emissions are generally a function of the emission factor of each transport mode than their
level of activity, which implies a variety of impacts on the environment. These impacts fall
within three categories:
 Direct impacts - The immediate consequence of transport activities on the environment
where the cause and effect relationship are generally clear and well understood. For
instance, noise and carbon monoxide emissions are known to have direct harmful effects.
 Indirect impacts - The secondary (or tertiary) effects of transport activities on
environmental systems.
 Cumulative impacts - The additive, multiplicative or synergetic consequences of
transport activities. They consider the varied effects of direct and indirect impacts on an
ecosystem, which are often unpredictable.

2.10.8. Environmental Dimensions

Transportation activities support increasing mobility demands for passengers and freight, notably
in urban areas, but transport activities have resulted in growing levels of motorization and
congestion. As a result, the transportation sector is becoming increasingly linked to
environmental problems. Such as
 Climate change
The greenhouse effect is a fundamental component of the regulation of the global climate and is
a naturally occurring process that involves partially retaining heat in the earth‟s atmosphere.
These include carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), and halocarbons,
gases that accumulate in the atmosphere long enough to reach a homogeneous composition
across the world.
 Air quality

39
Highway vehicles, marine engines, locomotives, and aircraft are the sources of pollution in the
form of gas and particulate matter emissions.
 Noise
Noise - represents the general effect of irregular and chaotic sounds on people as well as animal
life. Basically, noise is an undesirable sound. Noise emanating from the movement of transport
vehicles and the operations of ports, airports, and rail yards affects human health through an
increase in the risk of cardiovascular diseases.
 Water quality
Transport activities have an impact on hydrological conditions and water quality. Fuel,
chemicals, and other hazardous particulates discarded from aircraft, cars, trucks, and trains or
port and airport terminal operations can contaminate hydro graphic systems.
 Soil quality
The environmental impact of transportation on soil quality particularly concerns soil erosion and
soil contamination. Coastal transport facilities such as ports have significant impacts on soil
erosion. Shipping activities are modifying the scale and scope of wave actions leading to damage
in confined channels such as river banks. Highway construction or lessening surface grades for
port and airport developments have led to an important loss of fertile land.
 Biodiversity
Transportation also influences biodiversity. The need for construction materials and the
development of land-based transportation has led to deforestation. Many transport routes have
required draining land, thus reducing wetland areas and driving-out water plant species.
 Land take
Transportation facilities have an impact on the urban landscape. The development of port and
airport infrastructure is a significant feature of the urban and pre-urban built environment. Social
and economic cohesion can be severed when new transport facilities such as elevated train and
highway structures cut across an existing urban community.

Self –Test Questions

1. ______________is the costs of loading and unloading passengers or freight.
a) Transshipment costs c) Management costs
b) Infrastructure costs d) Terminal cost
40
2. One is the significance of containerization
a) Illicit trade c) Infrastructure costs
b) Consumption of space d) Security
e)
3. ______________________is any location that has access to a transportation network.
a) Node c) Flow
b) Link d) All
4. ________________________ is a route on which a truck either delivers product from a
single supplier to multiple retailers or goes from multiple suppliers to a single buyer
location.
a) Direct shipping with milk runs route
b) Direct shipment network
c) Shipping via DC Using Milk Runs
d) All shipment via central distribution center

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 PART THREE
CUSTOM CLEARING AND FREIGHT FORWARDING
Introduction
Freight forwarding is the planning and coordinating of the movement of commodities across
international borders, on behalf of shippers. Other tasks involved include, but are not limited to:
warehouse planning, supplying cargo insurance, and customs brokerage. Freight Forwarder is a
multi-function agent/operator who undertakes to handle the movement of goods from point to
point on behalf of the cargo owner. The essence of freight forwarding is to ensure that the cargo
is picked up from the seller and delivered to the buyer at the required place, at the right price and
in the same condition that it is picked up from origin using the most suitable resources and
routing possible..

3. Freight forwarder
Freight Forwarder is a multi-function agent/operator who undertakes to handle the movement of
goods from point to point on behalf of the cargo owner.

Freight forwarder is expected to have below capabilities (either owned or outsourced)

 Experienced in all modes of transportation – road, rail, air and sea

 Able to provide cost-effective and efficient cargo shipping solutions based on the
customer‘s requirement
 Able to arrange storage for the cargo (usually all big forwarders have their own
warehouses)
 Able to arrange the distribution or ―forwarding‖ of the cargo as per the instructions of
their client.
 Act as a multimodal transport operator (MTO) which means he becomes the principal
transport operator with the direct contractual responsibility for the carriage of goods
door to door, assuming liability for those segments of transportation for which he
himself may not be the actual operator.

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  Act as a specialist service provider in packing, container packing / unpacking, customs
clearances and the raising of insurance claims.

3.1. Customs Clearance

What is Customs Clearance?

Customs clearance is the act of taking goods through the customs authority to facilitate the
movement of cargo into a country (import) and outside the country (export).

 Also, the customs clearance means a document issued by the customs authority to a
shipper indicating that all duties have been paid and the shipper‘s goods is cleared for
export

3.1.1. Clearing agent

 A company accredited (acceptability) with the local customs authorities, border
agencies, port etc.
 arranges to pass the relevant documents at customs
 has in-depth knowledge of the HS Codes, the calculation of Duty and VAT
 organizes payment on the duty and VAT applicable
 does not negotiate freight rates with carriers on their own or on behalf of the client
 does not issue own bills of lading in their capacity as a clearing agent may be appointed
by a freight forwarder or by the customer (exporter or importer
They should have a valid clearing license at the time of clearing the goods on behalf of the
customer. A few countries have very strict licensing requirements which are regularly reviewed
and the agents that don‘t follow these may have their licenses revoked.

3.1.2. Clearing Agents’ role:

The clearing agent acts on behalf of the shipper (importer or exporter depending on the INCO
Terms) and arranges for the customs clearances of the imported goods. The role entails:

 Determining the correct harmonized tariff heading of the goods for customs duties, if
applicable.
 Calculating the import duties and taxes / VAT payable.
 Assist with the clearing instruction to confirm that all information received from shipper
and consignee is accurate before submitted for customs clearance – strict rule that is

43
 adhere to and if not, huge penalties that could follow both the clearing agent and the
importer / consignee.
 Collecting payment from the shipper for duties and taxes / VAT and making payment to
Customs authorities.
 Arranging the customs clearance / release with the relevant requirements, i.e. port health
exams, and many more requirements per specific cargo requirements that needs to be met
before a release could be obtained, as well as to avoid penalties / delays

3.2. Freight classification

Why is freight classification important?

• Freight is classified by its dimensions, description, and other factors in order to make for
smooth shipping and billing process for customers. Industry standards prevent the process
of shipping freight from becoming cumbersome and ambiguous.

• According to the National Motor Freight Traffic Association (NMFTA), ―The National
Motor Freight Classification® (NMFC®) is a standard that provides a comparison of
commodities moving in interstate, intrastate and foreign commerce.‖ As a non-profit
membership organization, the NMFTA exists to provide standards for classifying freight,
carrier identification codes and standard point location codes

• How do shippers use NMFC®?

• NMFC informs the freight classification process, providing a uniform approach to

negotiated rates for carriers and shippers. An NMFC number is found by identifying the
materials in a shipment. Descriptions are first separated by a general product grouping
(noun), then narrowed down to individual items that are each assigned a class. These
NMFC product descriptions can change over time, so it is important to confirm that the
correct number is being used to help prevent miscalculated rates on the bill of lading.

• WHAT ARE CLASSES?

• There are a total of 18 NMFC® classes, where 50 is the lowest and 500 is the highest
class. The higher the class, the higher the rate for every hundred pounds you ship. Classes
are based on four transportation characteristics: density, handling, storability and

44
 liability. Collectively, these characteristics determine the appropriate rate for that class,
which is then entered onto the bill of lading.

Density; Density describes the space your cargo occupies in relation to its weight. It‘s
calculated by dividing the weight of the item in pounds by its volume in cubic feet.

Stowability; Stowability quantifies the ease or difficulty of loading and carrying your
cargo onto and off of the truck

Handling; Freight is often loaded using mechanical equipment. Most freight poses no
difficulties, but some cargo requires special attention because of its weight, shape,
fragility, or other safety hazards.

3.3. Documentation in freight and shipment

 The transport document is issued by the ―Carrier‖ whether a shipping line, airline,
trucking company or railroad. They come in various forms and each serves several, but
not necessarily all of the following functions.

A. Bills of Lading

Function of bills of lading

 Receipt for good(guarantee of the cargo good)

 Documentation of title

 Evidence of contract

Types of Bills of Lading

 Marine/Ocean/ Bill of Lading -Conventional Bill of Lading‖

 Straight Bill of Lading -Order Bill of Lading
 Clean Bill of lading: - Foul Bill of Lading:
 Received for Shipment Bill of Lading - Shipped Bill of Lading
 Negotiable/ Non-negotiable Bill of Lading -Multimodal Transport Bill of Lading

3.4. Freight Forwarding Operations

The freight forwarding process refers to the flow of goods between destinations. The process is
conducted by freight forwarders. Businesses seeking to expand and grow by trading at an

45
international level should turn to the freight forwarder to streamline the process and ensure
accuracy.

Shipping items provides an opportunity for an organization to expand its customer base.
However, the logistics process involved in international trade is complicated and requires the
skills of a freight forwarder. Freight operations consist of everything required to move an item of
freight from its origin or shipper to its destination or receiver. In the United States, most freight
operations are handled by the private sector and are considered part of the supply chain
management of business operations. The public sector owns and manages many of the facilities,
including the highway system, that are required to move freight. It also regulates and taxes
freight movement. This division in ownership and responsibility creates some unique challenges
for freight planning .freight operation include;

 Ocean Freight Forwarder operation

 Air freight forwarder operation
 Air Forwarding operation & Air Freight Forwarders
 Rail freight forwarding

3.5. Concept of importing

 An import is the process of receiving or bringing in goods from abroad for the purpose of
trade. These goods can be received by individuals, companies or government, and are
used for the processing of other products or to be resold to the final consumers.

 An import is a good or service bought in one country that was produced in another.
Imports and exports are the components of international trade. If the value of a country's
imports exceeds the value of its exports, the country has a negative balance of trade, also
known as a trade deficit.

3.5.1. Reason of importing

a) Quality
b) Price

Pricing related issue

I. The labor costs in the producing country may be substantially lower than the costs
incurred domestically.

46
 II. The exchange rate may favor buying foreign.

III. The equipment and processes used by the foreign vendor may be more efficient(less cost)
than those used by domestic vendors.

c) Product and Process Technologies

d) Unavailability of Items Domestically
e) Faster delivery and continuity of supply
f) Better Technical Service-better
g) Counter Trade-any
h) Tie – in with Foreign Subsidiaries

3.6. Import Procedures Information of Purchase Agreement

The purchase agreement is a formal contract governed by law. In general, a purchase agreement
is formed by agreement between the seller and the buyer and is the passing of title and ownership
to goods for a price. An agreement is a mutual manifestation of assent to the same terms.
Agreements are ordinarily reached by a process of offer and acceptance.

To reach an agreement in import transaction the following common procedures should be

followed

1. Development Of Detail Product Specification

2. Searching and Evaluating Potential List of Supplier in the Market.

3. Reaching the Best Suppliers to Send the Price Lists of the Product Intended To Import.

4. Sending Requests for Quotations and Offers to Purchase

5. Quotations

6. Purchase Orders

7. Purchase Order Acknowledgments and Acceptances and Sales Confirmations-

8. formation of legal and written contract

9. Commercial Invoices

47
3.7. International Commercial Terms (INCOTERMS) in international trade
INCOTERMS are divided in four groups

1. GROUP “E‖ – Point of departure EXW: Ex Works- Terms where the seller/exporter‘s
cost; risk and responsibility end once the goods are made available for pick up
2. GROUP “F” – MAIN CARRIAGE UNPAID -FCA, FAS, FOB: Terms where the
seller/exporter is responsible to hand over the goods to a carrier named by the buyer.
3. GROUP “C” – MAIN CARRIAGE PAID CFR, CIF, CIP, and CPT: Terms where
the seller/exporter is responsible for contracting and paying for main carriage, but not
responsible for additional costs risk passes to buyer once the goods on board to the
vessel.
4. GROUP “D”- point of arrival DAP, DAT (DPU), DDP: Terms where the
seller/exporter is responsible for all costs and risks associated with transporting the
goods to the place of destination
 The 11 terms have been categorized under two categories
1. RULES FOR ANY MODE OF TRANSPORT
 EXW EX WORKS
 FCA FREE CARRIER
 CPT CARRIAGE PAID TO
 CIP CARRIAGE AND INSURANCE PAID TO
 DAT DELIVERED AT TERMINAL
 DAP DELIVERED AT PLACE
 DDP DELIVERED DUTY PAID
2. RULES FOR SEA AND INLAND WATERWAY TRANSPORT
 FAS FREE ALONGSIDE SHIP
 FOB FREE ON BOARD
 CFR COST AND FREIGHT
 CIF COST INSURANCE AND FREIGHT

3.8. Terms of Payments in Foreign Purchasing

 The terms of payment in import –export is much complex than the domestic business
transactions. The idea is that if the buyer fails to pay, it is much more difficult for a seller

48
 to go to a foreign country, institute a lawsuit, attempt to attach the buyer‘s assets, or
otherwise obtain payment.

 Therefore Payment is an important contract issue that you have to give a due emphasis in
import-export transactions.

 The common payment methods used in international transactions are: Letter of credit,
Cash in advance, open account, On Consignment, and draft or documentary collection
(bill of exchange).

A. Meaning of Letter of Credit

Letters of Credit have been a cornerstone of international trade dating back to the early 1900s.
They continue to play a critical role in world trade today. In simple terms, a letter of credit is a
bank undertaking of payment separate from the sales or other contracts on which it is based. It is
a way of reducing the payment risks associated with the movement of goods. Documentary
Credit (DC) or L/C is a written undertaking by a bank (Issuing Bank) given to the exporter
(Beneficiary) at the request of the importer (Applicant) to effect payment (Reimbursement) up to
a stated amount (Credit Amount) within a stated time period (Expiry date) against presentation of
compliant documents (LC terms).

 Parties Involved in a Letter of Credit Transaction

49
 L/C Opening Procedure in International Practice

The Sales Contract/purchase contracts

Application & Agreement

Issuance of the Letter of Credit

Shipment of Goods

Presentation of Documents by Beneficiary

Sending Documents to the Issuing Bank

Delivering Documents to the Applicant

Payments under letter of credit

Common Defects in Documentation under L/C Mode of Payments

 The agreed time schedule is not followed, because of late shipment or late
presentation.

 The specified documents are not prepared as specified by the letter of credit, other
than the transport document, insurance document and invoice.

o Certificates, such as the certificate of origin and certificate of inspection, are

not signed.

 The goods description on the commercial invoice does not match the description on
the letter of credit.

 Documents are not properly endorsed.

 . Drafts (bills of exchange) are not presented as stipulated by the letter of credit or are
not prepared properly

 Types of Letter of Credit

Documentary/ Letter of Credit can be issued in one of the following forms/types:-

50
  sight Letters of credit can permit the beneficiary to be paid immediately upon
presentation of specified documents (sight letter of credit),

 Term a Letters of credit can permit the beneficiary to be paid at a future date as
established in the sales contract.

 Irrevocable

All documentary credit are irrevocable that cannot be cancelled or amended without the
agreement of issuing bank, confirming bank (if any), applicant and beneficiary.

 Unconfirmed
The advising bank simply notifies the exporter of the terms and conditions of the letter of
credit, without adding its obligation to pay.A credit where only the issuing bank
undertaking is used to facilitate the given transaction

 Confirmed
A confirmed letter of credit also carries the obligation of another bank which is normally
located in the beneficiary‘s country.

 Transferable
A transferable letter of credit allows the beneficiary to act as a middleman and transfer
his rights under a letter of credit to another party or parties who may be suppliers of the
goods

 Revocable
 Revocable L/C can be cancelled or amended at any time by the issuing bank without
notice to the beneficiary. However, drawings negotiated before notice of cancellation or
amendment must be honored by the issuing bank.

 Special Types of Letter of Credit

 Back-to-Back letter of credit; a beneficiary of the L/C seeks to use it as the basis
for requesting a bank to issue a second parallel L/C in favor of a manufacturer or
supplier of those goods needed under the first L/C.

51
  Red Clause Letter of credit; This enables the purchase and accumulation of goods
from a number of different suppliers, and the arrangement of shipment in accordance
with the letter of credit terms. Such advances will be deducted from the amount due
to be paid when the documents called for are presented under the letter of credit.

 Revolving Letter of credit; LCs that are renewed or reinstated within their overall
validity without requiring specific amendments

 Transferable Letter of credit; A credit that specifically states it is ―transferable‖

this credit may be made available in whole or in part to another beneficiary (second
beneficiary at the request of first beneficiary)

B. Cash in advance
 The Cash in Advance or Advance Payment method allows the buyer to pay cash in
advance to the seller.

 Paying in advance gives the greatest protection for the seller and puts the risk on the
buyer

C. Open Account
 An open account transaction means that the goods are manufactured and delivered
before payment is necessary (for example, payment could be due 14, 30, or 60
following shipment or delivery).

D. Consignment
 Consignment sales, the seller does not receive payment until the importer sells or resells
the goods. Consignment sales are very risky and there is no control available to the
exporter.

E. Draft or Documentary Collection (Bill of Exchange

 Draft or Documentary Collection Method, the seller or exporter ships the goods and
draws a draft or bill of exchange on the buyer or importer through an intermediary bank.

The draft is an unconditional order to make a payment in accordance with certain terms

52
 Modes of Payment in Import goods in Ethiopian Bank and Its Practice

Import /export should be recognized by the national bank of Ethiopia. It ensures that
exporters have imported the residual foreign currency in the country and importer has
made use of the currency permit for importation of goods.

3. To achieve its objectives, the Authority shall have the following powers and duties;
• To assess duty paying values, collect duties and taxes, collect license and service
charges;

• To examine documents of importers or exporters so as to enforce customs law;

• To establish customs stations in any customs port, frontier post and transit routes;

• To approve the place for the deposit of import and export goods, establish
warehouses, give license for those who establish customs warehouse, supervise the
proper handling of deposited goods; suspend or revoke warehouse license;

• To prevent and control the importation or exportation of goods in contraband;

• To search any goods and means of transport entered in to or departing from Ethiopia
through customs ports, frontier posts and other customs stations;

3.9. Custom Clearance Procedures and Documents in Ethiopia

According to the Ethiopian custom law, all legally imported goods are subjected for
custom clearance so the customs duties are paid on imports; they have to be declared up
on their arrival .customs clearance procedure includes:

o Applying for customs clearance by filling Ethiopian customs declaration form

(ECDF).

o Submission of all required documents together with copy of Ethiopian customs

declaration form (ECDF)..

o Verification of documents by the customs officer (checking the truthfulness).

o Customs inspections of goods in the presence of the importer or the agent.

o Customs valuation of the declared goods (giving value in terms of money).

53
 o Customs calculation of taxed, fees and duties.

o Authorization of their released.

3.9.1. Supporting Documents of Customs Declaration

On the lodgment of customs declaration and declaration of facts the following original
documents shall be supplied to customs in a number of copies fixed by the Authority:

 Transportation document,

 Price document,

 Bank permit,

 Packing list,

 Certificate of origin, and

 Other necessary documents to be prescribed in the directives issued by the

Authority.

Transportation document that is required in support of export goods shall be a document

that is used as evidence for the transportation of goods up to the customs port of exit.

3.10. Harmonized Tariff Nomenclature Practice in Ethiopia

• The Harmonized Commodity Description and Coding System generally referred to as
"Harmonized System" or simply "HS" is a multipurpose international product
nomenclature developed by the World Customs Organization (WCO).

• It comprises about 5,000 commodity groups; each identified by a six-digit code,

arranged in a legal and logical structure and is supported by well-defined rules to achieve
uniform classification. The system is used by more than 200 countries and economies as
a basis for their Customs tariffs and for the collection of international trade statistics.
Over 98 % of the merchandise in international trade is classified in terms of the HS. The
Ethiopia tariff is based on the Harmonized System (HS). The legal framework for the
application of the HS is Article 4 of the International Convention on the
Harmonized Commodity Description and Coding System and Ratification Proclamation
No.The number of tariff lines is 5608 ,out of which 5424 are subject to advalorem (tax

54
 duties )while the rest are duty free items and prohibited. Currently the lowest and highest
tariffs are 5%and 35% respectively.

• Within the 5 and 10 percent bands are raw materials and machineries, which are used by
manufacturing industries. Items with in the 20 percent band include organic chemicals,
carton, boxes, envelopes, sacks and bags, thread, synthetic filaments, artificial filaments,
yarn and synthetic mono filament staple fibers. Items with in the 30 and 35 percent
bands include perfumes, soap, tiles, transmission belts, ornaments, silk, cotton, jewelry,
footwear, motor vehicles, textiles products and toys.

Tariff - is a legal working document as prescribed in the custom and excise Act. It
systematically and progressively lists of goods, which are involved in international trade.
The Ethiopian custom tariff is based on internationally harmonized commodity
description and coding system in short H.S it is a multipurpose and Digital nomenclature

 Function of the Tariff

 Collection of revenue by using the percentage rate of duty as indicated in the various
tariffs.

 Collection of statistics as provided for in tariff.

 Negotiation of trade agreement in so far as they relate to Ethiopia duties, there by

 Facilitating international trade.

 Embargo

An embargo is a trade restriction, typically adopted by a government, a group of countries or an

international organization as an economic sanction. Embargoes can bar all trade, or may apply
only to some of it, for example to arms imports. They are designed to punish the targeted country
for its actions, and to deny it the means to carry out objectionable policies.

Embargoes take several different forms. A trade embargo bars the export of specific goods or
services. A strategic embargo prohibits only the sale of military-related goods or services.
Sanitary embargoes are enacted in order to protect people, animals, and plants. For example,

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sanitary trade restrictions imposed by the World Trade Organization (WTO) ban imports and
exports of endangered animals and plants.

Some trade embargoes allow the exchange of certain goods, such as food and medicine, to meet
humanitarian needs. In addition, most multinational embargoes contain clauses allowing some
exports or imports according to a limited set of restrictions.

 Effectiveness of Embargoes

Historically, most embargoes eventually fail. While the restrictions imposed might succeed in
changing the policies of a democratic government, citizens of countries under totalitarian control
lack the political power to influence their governments. In addition, totalitarian governments
typically have little concern for how the trade sanctions might harm their citizens.

 Anti-Dumping Duty

Anti-dumping duty is the amount of tax or duty that is imposed on the import of products or
services when the imports are priced by foreign sellers lower than the price that those products or
services will fetch in the open market of the domestic country of those foreign sellers

Anti-dumping duty is a tariff imposed on imports manufactured in foreign countries that are
priced below the fair market value of similar goods in the domestic market. The government
imposes anti-dumping duty on foreign imports when it believes that the goods are being
―dumped‖ – through the low pricing – in the domestic market. Anti-dumping duty is imposed to
protect local businesses and markets from unfair competition by foreign imports

3.11. Type and Assessment Method for Imported goods

1. Custom Duty; Customs duty has 6 band or groups of rate which is applied to
imported goods .these bands are 0%, 5%, 10%, 20%, 30%and35 percent. ERCA
collects customs on a variety of goods which can be classified in to two categories.
The classification is based on the primary purpose of imported goods. import items
used for productive purpose and nonproductive

2. Excise taxes; levied on locally produced and imported items into the country. It is
imposed on luxury goods and basic goods which are demand inelastic. The minimum
excise tax rate applied to excisable goods is 10% while the maximum is 100%.

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 3. VAT; a sales tax based on the increase in value or price of product at each stage
in its manufacture and distribution. The cost of the tax is added to the final
price and is eventually paid by the consumer. The rate of VAT is 15% of the value
for every taxable transaction by a registered person,

4. Surtax tax; Ten percent (10%) of the sum of cost, insurance, fright custom duty ,
excise tax and VAT is the base for computation for surtax on all goods imported into
the country .

5. Withholding Tax; import items is collected on the import of goods for commercial
use and the collected amount is treated as a tax which is withhold and creditable
against the taxpayers income tax liability for the year. Withholding tax of 3 percent
on imported items and a 2 percent made in return of purchase of goods and service.

The individual and firms that enjoy such privilege includes:

 Federal and regional offices covered in definition of public offices.

Non- profit and non-governmental organizations and associations, International

organizations, foreign diplomats, consular missionaries, and their members / Raw
materials and capital inputs like spare parts used by individuals and organization
licensed to engage in the activities of production.

 Gift items, advertising items, sample of goods.

 Individuals and organizations engaged in mining and petroleum for the governed
pursuant to special tax law.

 Ethiopian General Tax Calculation Formulas

 Total Cost of the Goods = Fob Cost + Insurance + Freight
 Total Cost of the Goods X Import Customs Duty = A
 Total Cost of the Goods + A) X Excise Tax Rate (If Applicable) = B
 Total Cost of the Goods + A + B) X VAT = C
 Total Cost of the Goods + A + B + C) X Surtax = D
 Total Cost of the Goods X Withholding Tax = E
 Total Payable at the Time of Import = A+B+C+D+E

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Self-Test Question
1. Which one of the following is tax assessment method in importing good?

a) Embargo c) Ant dumping

d) None
b) Sur tax
2. Which method of international payment is similar to accepting a written check?

a) Consignment d) Payment in advance

b) Clean payment e) None

c) Bill of exchange
3. Confirmed letter of credit means that the letter of credit has been
a) Read by the beneficiary or their legal counsel
b) Approved by the buyer
c) Guaranteed by a second bank
d) None

4. What is a tariff rate quota?

a) Quota on the quantity of a good that can be imported at a reduced tariff rate
b) Quota on the quantity of a good that can be imported at a higher tariff rate
c) Quota on the quantity of a good that can be exported at a reduced tariff rate
d) Quota on the quantity of a good that can be exported at a higher tariff rate
e) None

5. What type of letter of credit allows the seller to receive payment from the issuing bank
before shipping the goods to the buyer?

a) Advance payment c) Sight payment

b) Deferred payment d) Acceptance credit

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References
FUNDAMENTAL OF LOGISTICS MANAGEMENT
1. Bowersox, Closs and Cooper. (2002) Logistics in Supply Chain Management,
MacGrawHill, Newyork
2. Cohen S. (2005). Strategic Supply Chain Management: The five disciplines for
performance, McGraw-Hill, New York.
3. Russell S. Supply Chain Management, more than integrated logistics, 2009,
Volume XXXI, number 2.
4. Long D, (2003). International Logistics: Global Supply Chain Management.
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into integrated value system, Printice Hall, Financial Times.
6. Sunil Chopra, Meindel P, Karla. (2007), Supply Chain Management: strategy,
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1. Coyle J. J.etal.,Transportation,4th Edition, USA
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4. RolaldH. Ballou, Business Logistics Management: 1973
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1. Ethiopian Revenues and Customs Authority (2017), Ethiopian Customs Guide
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4. Coyle J. J.etal.,Transportation,4th Edition, USA
5. D.J. Bowersox, D.J. Class and M. Bixby Cooper
6. Supply chain logistics Management, Michigan state University
7. David A. Hensher, Ann M.Brewer, Transport, Oxford, New Yard
8. RolaldH.Ballou, Business Logistics Management: 1973

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9. Federal Negarit Gazetta Proclamation no. 102/1998],‖ 4th yr. no. 26, March
1998, Addis Ababa.
10. Ethiopian Customs Authority (ECuA) Operations and Training Manuals
11. Globerman, Steven, Fundamentals of International Business Management,
Prentice hall, New Jersey, 1986.
12. Czinkota, Michael R. et al, International Business, 6th ed., Harcourt College
Publisher Inc., Sea harbor Drive, Orlando, 2002.
13. Korth, Christopher M. Korth, International Business: Environment and
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