Lecture 5: Transportation

OPS228 – Logistics Management

 Outline

• Transport functionality and participants

• Transportation modal structure
• Transportation operations and strategy
• Transportation economics and costs
 Transportation Functionality
• Transportation provides two major logistical services
– Product movement
– Product storage

• Transportation consumes time, financial, and

environmental resources
– Transportation takes more than 60% of the cost of logistics
– Impacts environmental resources both directly and
indirectly
 Product Movement
• Product movement is the movement of inventory to
specified destinations
– Restrictive element—in-transit inventory is “captive”,
usually inaccessible during transportation
– Flexible element—inventory can be diverted during
shipment to a new destination

• It is a primary part of transport functionality

 Storage Services
• In-transit inventory is captive in the transport system
– Managers strive to reduce in-transit inventory to a minimum
• Product can also be stored in vehicles at origin or
destination (trailers, trucks, railcars, etc)
– Usually more expensive than traditional warehousing (must
pay rental or demurrage charges on vehicles used for
storage)
– The cost of unloading, warehousing, and reloading versus
The cost of using a vehicle for storage
• Diversion occurs when a shipment destination is
changed after a product is in transit
Transporting when producing?
 Two fundamental transport principles
• Economy of weight is the cost per unit weight decreases as
the size of the shipment increases
– To a certain point (e.g., until you fill the carrying vehicle)!
– Cost decreases because the fixed cost of the carrier is allocated over a
larger weight of shipment
• Economy of distance is the cost per unit weight decreases as
distance increases
– Often called the tapering principle
– Longer distances allow fixed cost of the carrier to be spread over more
miles, lowering the per mile charge
• Goal is to maximize the size of the load and distance shipped
while still meeting service expectations
 Best operating level (recap)

Source: Reid, R.D. & Sanders, N.R. (2012), Operations Management, 5th Ed. Hoboken, N.J.: John Wiley & Sons. Fig.9-1 & 9-2.
 Transport participants
• Shipper
• Consignee (Receiver)
• Carrier and Agents
• Government
• Internet
• Public
Major relationships among transportation
participants

Figure 8.1 Relationship Among Transportation Participants

 Role and perspective of participants
• Shipper and consignee have a common interest in moving goods
from origin to destination within a given time at the lowest cost
• Carriers desire to maximize their revenue for movement while
minimizing associated costs
• Agents (brokers and freight forwarders) facilitate carrier and
customer matching
• Government desires a stable and efficient transportation
environment to support economic growth
• Public is concerned with transportation accessibility, expense, and
standards for security, safety and the environment
• Internet provides vital communication links among the participants
 Transportation structure
• Consists of rights-of-way,
vehicles, and carriers
operating within five basic
modes
• A mode identifies basic
transportation method or
form
– Rail
– Highway
– Pipeline
– Water
– Air
 Rail Mode
• Rail mode has historically handled
the largest number of ton-miles
• Traffic shifted from broad range of
commodities to hauling specific
freight in traffic segments
– Carload
– Intermodal
– Container
• High-speed trains?
 Truck Mode
• Truck mode has expanded rapidly
• Key benefits include
– Speed of transit
– Ability to operate door-to-door
• More efficient than rail for small
shipments over short distances
– Dominate freight moves under 500
miles and from wholesalers and
warehouses to retailers
• Many companies run their own truck
fleets as well (e.g. WalMart)
 Pipeline Mode
• Have the highest fixed cost
and lowest variable cost of all
modes
• Unique transportation mode
– Can operate 24 hours a day, 7
days a week
– No emissions
– No empty container or vehicle to
return
• Not flexible, and limited to
liquids and gases
• Experiment on movements of
solid products
 Water Mode
• Water mode is the oldest form of
transportation
• Ranks between rail and truck in
fixed cost
• Different types
– Sea / deepwater shipping
– Navigable inland water transport
• Stable network size
• The capacity to transport
extremely large shipments
 Air Mode
• Air mode is the newest and
least utilized transport mode
for freight
• Accounts for only 1% of
intercity ton-miles
• Fastest of all the modes
• Fixed cost is 2nd lowest but
variable costs are extremely
high
• Most products air-shipped have
high value, high priority or
extreme perishability
 Comparison of fixed and variable cost
structure of each transport mode
Table 8.4 Cost Structure For Each Model
 Operating characteristics for transport modes

• Speed is the elapsed movement time from origin to

destination
• Availability is ability of a mode to service any given pair of
locations
• Dependability is the potential deviation from expected
delivery schedule
• Capability is the ability to handle any load size or
configuration
• Frequency is the quantity of scheduled movements a mode
can handle
 Operating characteristics for transport modes

Table 8.5 Relative Operating Characteristics by Mode

Lowest score is best

• Highway transport is appealing partly due to its

relative ranking across characteristics
Note: Lower is better
 Intermodal Transportation
• Traditional carriers provide service using only one of the five
basic transport modes
– E.g. trucking firm or an airline
• Intermodal transportation combines two or more modes to take
advantage of the inherent economies of each and provide an
integrated service at a lower total cost
– Package service providers
– Nonoperating intermediaries
• Transportation service is achieved by combining modes
 Package Service
• Package service is growing rapidly with the rise in e-
Commerce and Internet consumer sales
• Ground package service offers regular delivery within
metropolitan areas and between cities
• Air package service (combined with ground service)
provides a premium service to deliver certain packages
door-to-door by next-day or second-day
– Integrates truck and air modes seamlessly
• Provide both regular and premium service
 Intermodal Transport: Piggyback
• Piggyback integrates rail and motor
service
• Most widely used systems:
– Trailer on a flatcar (TOFC)
– Container on a flatcar (COFC)

• Trailer or container is hauled by

truck at origin and destination
– Railcar hauls for portion of intercity travel

• A variety of coordinated service

plans have been developed
 Coordinated Air-Truck Modal
• Commonly used to provide
premium package services
– Many smaller cities lack airfreight
services
– Costs can be leveraged with delivery
time by linking the modes
 Containerships
Containerships are also part of intermodal transport

• Loads a truck trailer, railcar or container

onto barge or ship for the line-haul
movement on waterways
• Transfer of freight between modes often
requires handling containers and
imposition of duties
– Function of ports is to make this seamless
and fast
• Port throughput is big concern for
supply chain managers
 Non-operating Intermediaries
Non-operating intermediaries do not own
their own equipment
• Freight forwarders—businesses that consolidate
small shipments from various customers into bulk
shipment for a common carrier for transport
• Shipper associations and agents—groups of shippers
who employ an agent to consolidate purchases and
shipments for them
– E.g. garment industry in New York
• Brokers—intermediaries that coordinate
transportation arrangements for shipper, consignees
and carriers, operating on a commission basis
 Transportation Strategy
• An effective logistics strategy must understand
– Economic drivers that influence rates
– Costing methods to allocate costs
 Economic drivers that influence rates
• Distance
• Weight
• Density
• Stowability
• Handling
• Liability
• Market
 Distance is a major influence on cost
• Directly contributes to variable
expenses
– Labor, fuel, and maintenance
• Cost curve starts above zero
because of fixed costs associated
with pickup and delivery regardless
of distance
• Cost curve increases at a decreasing
rate as distance increases (tapering
principle)

Figure 8.2 Generalized Relationship between Distance

and Transportation Cost
 Weight as the cost factor
• Cost per pound decreases as
weight increases (until the best
operating level is achieved)
– Relationship starts again for the next
vehicle load
• Small loads should be consolidated
into larger loads to maximize scale
economies

Figure 8.3 Impact of Weight on Transportation Cost

 Density
Density is the combination of weight and volume
• Volume is important
because vehicles are
typically constrained more
by cubic capacity than by
weight loaded
• Cost per unit of weight
declines as product density
increases
– Higher density products
allowed fixed transport costs
to be spread over more
weight

Figure 8.4 Impact of Density on Transportation Cost

 Stowability
Stowability is how product dimensions fit
into transportation equipment
• Odd package shapes and sizes can waste
cubic capacity
• Items with rectangular shapes are easier
to stow
• Nesting refers to ability of product to be
placed in itself or collapsed for better
stowability
 Special handling
• Some products may require
special handling equipment
• Special equipment may be needed
to load and unload trucks, railcars,
or ships
• How products are grouped
together in boxes or pallets will
also impact handling cost
 Liability
Liability includes product characteristics that can
result in damage.
• Carriers must pay for liability
insurance or accept financial
responsibility
• Shippers can reduce their risk by
– Improved packaging and loading
– Reducing susceptibility to loss or
damage
 Market factors
• Market factors such as lane volume and balance
influence transportation cost
• Transport lane refers to movements between origin
and destination points
– Carriers must find a backhaul load or vehicle is returned
empty
• Imbalances in volume between shipping points can
result in higher transport costs
 Cost Allocation
• Variable costs
– Only incurred if you operate the vehicle
– Measured per mile or unit weight or both, e.g. per ton-miles
• Fixed costs
– Fixed costs are not influenced by shipment volume
– Includes vehicles, terminals, rights-of-way, information systems, and
support equipment
• Joint costs
– Joint costs are created by the decision to provide a particular service
– Typical example: the implicit decision to incur a joint / implied cost for a
backhaul from a destination
– Significant impact on charges – Carrier quotations must include implied
joint costs based on assessment of back-haul recovery
 Common costs
• Common costs are incurred on behalf of all
or a select group of shippers
• Terminal or management expenses are
typical examples
• Usually allocated to shippers based on level
of activity for that customer
– E.g. number of shipments
 Factors of the base rate
• What are you shipping?
– Determines freight class
– Classification is the grouping of similar products into uniform
classes that are assigned a rating
• How far are you shipping from origin to destination?
– Determines rate table of distance
• How much are you shipping?
– Truckload (TL) or
– Less than truckload (LTL)
 Transportation Operations

• Seeks an optimal balance between

low cost and high service
• Transportation managers are
responsible for inventory to be
positioned in a timely and economical
manner
• Environmental cost of carbon
footprint and sustainability have
become a big concern
Some Concepts of Transportation Operations
• Consolidation
• Negotiation
• Control
• Audit and administration
• Logistical integration
 Product Pricing and Transportation
Product pricing is an important aspect of marketing strategy that directly
impacts logistical operations, and transportation costs can play a large part
in pricing strategy
• FOB Pricing
• Delivered
• Pickup Allowances

A major recent trend is to debundle the price of products and materials so

that transportation becomes a separate visible item
 Pricing Fundamentals: FOB
• F.O.B (freight on board or free on board) pricing
– F.O.B. origin—Seller states price at point of origin,
and agrees to load a carrier, but assumes no further
responsibility. Buyer selects carrier and mode, pays
transportation and assumes the risk for in-transit
loss or damage
– F.O.B. destination—Seller arranges for
transportation and adds charges to the sales invoice.
Title does not pass to the buyer until delivery is
completed.
 Pricing Fundamentals: Delivered Pricing
• Delivered pricing—Seller includes transportation in the
product price
– Single zone delivered pricing
• Buyer pays a single price regardless of where they are located
– Multiple zone pricing
• Seller charges different prices for different geographic areas
– Parcel carriers use this.
– Base point pricing
• Final delivered price is determined by the product’s list price plus
transportation cost from a designated base point
 Pickup Allowances
• Seller offers discounts if buyer picks up the shipment
themselves
• Equivalent to purchasing FOB origin, however seller
provides a discount to buyer to account for
transportation expense
 Pricing issues
• Potential discrimination—Zone pricing may be discriminatory
because some buyers pay more than the actual transportation
cost while others pay less
– Sellers have to be careful about Federal price discrimination laws

• Quantity discounts—may be discriminatory against smaller

buyers
• Promotional prices—special prices given for large sales
promotions
– EveryDay Low Pricing (EDLP) is a collaborative pricing framework
developed by Wal-Mart
 Learning Objectives
• Understand transportation as an important function and its
participants, and understand how transportation operations seek
balance between cost and service
• Be able to describe the operating characteristics, and the
advantages and disadvantages of different transportation modes
• Understand the importance of intermodal transportation and how
to achieve intermodal transportation
• Be able to explain the operational drivers behind economy of scale
and economy of distance
• Be able to describe how the economic drivers and cost allocation
influence transportation rate
• Understand the relationship between product pricing and
transportation