CHAPTER II

TRANSPORTATION MANAGEMENT

Transportation represents the most important single elements in logistical costs for most firms.
Freight movement typically absorbs two-thirds of the logistics expense. For this reason, the
logistician should have a good understanding of transportation matters.
The five basic transportation modes are Rail, Highway, Water, Pipeline, and Air. The relative
importance of each mode can be measured in terms of:
 System mileage,
 Traffic volume,
 Traffic revenue, and
 The nature of traffic composition.
Generally, an enterprise has three alternative ways to obtain transportation capacity.
A) Private--a private fleet of equipment may be purchased or leased.
B) Contract--specific contracts may be arranged with transport specialists to provide
movement service.
C) Common carriage--an enterprise may engage the services of any legally authorized
transport company that offers point-to – point transfer at specified charges.
From the logistical system viewpoint, three factors are of primary importance in establishment
of the transport service capability:
 Cost
 Speed, and
 Consistency
The cost of transport accrues from the actual payment for movement between two points, plus
the expenses related to owning in-transit inventory. Logistical systems should be designed to
minimize the transport cost in relation to the total system cost. However, this does not mean
that the most inexpensive method of transportation is always desirable.
Speed of transportation service is the time required to complete a movement between two
locations. Speed and cost are related in two ways:
1. Transport specialists capable of providing faster service will charge higher rates.
2. The faster the service, the shorter the time interval during which materials and products
are captured in transit.
Consistency of transportation service refers to the variance in time for a number of movements
between the same locations. In essence, how dependable is a given method of transportation
with respect to time? In many ways, consistency of service is the most important characteristic
of transportation.
2.1 Basic Transport Economics & Pricing
Transport economics and pricing are concerned with the factors and characteristics that
determine transport costs and rates. To develop an effective logistics strategy and to
successfully negotiate transport agreements, it is necessary to understand the economics of the
industry. A discussion of transportation economics and pricing required coverage of three
topics:

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  The factors that influence transport economics
 The cost structures that influence expense allocation.
 The rate structures that form the foundation for actual customer charges.
2.1.1 Economic Factors
Transport economics is influenced by seven factors. The specific factors are distance, volume,
density, stowability, handling, liability, and markets. In general, the above sequence reflects the
relative importance of each factor.
Distance—is a major influence on transportation cost since it directly contributes to variable
cost, such as labor, fuel, and maintenance. The following figure shows the general relationship
and illustrates two important points.
1) The cost curve does not begin at the origin because there are fixed costs associated
with shipment pickup and delivery regardless of distance.
2) The cost curve increases at a decreasing rate as a function of distance.
This characteristic is known as the tapering principle, which results from the fact that longer
movements tend to have a higher percentage of intercity rather than urban miles.

Generalized relationship between distance and transportation

Volume—like many other logistics activities, transportation scale economies exist for most
movements. This relationship, illustrated in the following figure, indicates that transport cost
per unit of weight decreases as load volume increases. This occurs because the fixed costs of
pickup and delivery as well as administrative costs can be spread over additional volume. The
relationship is limited to the maximum size of the vehicle (such as a trailer). Once the vehicle
is full, the relationship repeats for the second vehicle. The management implication is that
small loads should be consolidated into larger loads to take advantage of scale economies.

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 Generalized relationship between weigh and transportation cost/pound.

Price per pound

Density—the third economic factor is product density, which incorporates weight and space
considerations. These are important since transportation cost is usually quoted in terms of
dollars per unit of weight, such as amount per ton or amount per hundredweight (cwt). In terms
of weight and space, an individual vehicle is constrained more be space than by weight. Once a
vehicle is full, it is not possible to increase the amount carried even if the products is light.
Since actual vehicle labor and fuel expenses are not dramatically influenced by weight, higher
density products allow relatively fixed transport costs to be spread across additional weight. As
a result, these products are assessed lower transport costs per unit weight.
In general, logistics managers attempt to increase product density so that more can be loaded in
a trailer to better utilize capacity. Increased packaging density allows more units of product to
be loaded into the fixed cube of the vehicle. At a certain point, not additional benefits can be
achieved through increased density liquids such as beer or soda ‘weighs out” a highway trailer
when it is about half full. As such, the weight limitation is reached before the volume
restriction is met. Nevertheless, efforts to increase product density will generally result in
decreased transportation cost.
Generalized relationship between density and transportation cost/pound.

Stowability—refers to product dimension and how they affect vehicle (railcar, trailer, or
container) space utilization. Odd sizes and shapes, as well as excessive weight or length, do not
stow well and typically waste space. Although density and stowability are similar, it is possible
to have products with the same density that stow very differently. Items with standard
rectangular shapes are much easier to stow than odd-shaped items. Stowability is also
influenced by the shipment size; sometimes large numbers of items can be “nested” that might
otherwise be difficult to stow in small quantities.

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Handling—Special handling equipment may be required for loading or unloading trucks,
railcars, or ships. Furthermore, the manner in which products are physically grouped together
(e.g., taped, boxed, or palletized) for transport and storage also affects handling cost.
Liability—includes six product characteristics that primarily affect risk of damage and the
resulting incidence of claims. Specific product considerations are susceptibility to damage,
property damage to freight, perishability, and susceptibility to theft, susceptibility to
spontaneous combustion or explosion, and value per pound. Carriers must either have
insurance to protect against possible claims or accept responsibility for any damage. Shippers
can reduce risk, and ultimately the transportation cost, by improved protective packaging or by
reducing susceptibility to loss or damage.
Market Factors—Finally, market factors, such as lane volume and balance, influence
transportation cost. A transport lane refers to movements between origin and destination points.
Balance is also influenced by seasonality such as the movement of fruits and vegetables to
coincide with the growing season. Demand directionality and seasonality result in transport
rates that change with direction and season. Logistics system design must take this factor into
account and add back-haul movement where possible.
2.1.2 Cost Structures
The second dimension of transport economics and pricing concerns the criteria used to allocate
cost components. Cost allocation is primarily the carrier’s concern, but since cost structure
influences negotiating ability, the shipper’s perspective is important as well. Transportation
costs are classified into a combination of categories.
Variable Costs—are those costs that change in a predictable, direct manner in relation to some
level of activity during a time period. Variable costs can be avoided only by not operating the
vehicle. Aside from exceptional circumstances, transport rates must at least cover variable
costs. The variable category includes direct carrier costs associated with movement of each
load. These expenses are generally measured as a cost per mile or per unit of weight. Typical
cost components in this category include labor, fuel, and maintenance.
Fixed Costs—are those costs that do not change in the short run and must be covered even if
the company is closed down (e.g., during a holiday or a strike). The fixed category includes
carrier costs not directly influenced by shipment volume. For transportation firms, fixed
components include terminals, right-of-way, information systems, and vehicles. In the short
term, expenses associated with fixed assets must be covered by contributions above variable
cost on a per shipment basis. In the long term, the fixed cost burden can be reduced somewhat
by the sale of fixed assets; however, it is often very difficult to sell rights-of-way or
technologies.
Joint Costs—are expenses unavoidably created by the decision to provide a particular service.
For example, when a carrier elects a haul a truckload from point A to point B, Either the joint
cost must be covered by the original shipper from A to B, or a back-haul shipper must be found.
Joint costs have significant impact on transportation charges because carrier quotations must
include implied joint costs based on considerations regarding an appropriate back-haul shipper
and/or back-haul charges against the original shipper.
Common Costs—this category includes carrier costs that are incurred on behalf of all shippers
or a segment of shippers. Common costs, such as terminal or management expenses, are

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characterized as overhead. These are often allocated to a shipper according to a level of activity
like the number of shipments handled (e.g., delivery appointments). However, allocating
overhead in this manner may incorrectly assign costs.
2.1.3 Pricing Strategies
When setting rates to charge shippers, carriers can adopt one or a combination of two strategies.
Although it is possible to employ a single strategy, the combination approach considers trade-
offs between the cost of service incurred by the carrier and the value of service to the shipper.
Cost-of-Service Strategy—is a “buildup” approach where the carrier establishes a rate based
on the cost of providing the service plus a profit margin. For example, if the cost of providing a
transportation service is Br. 200 and the profit markup is 10 percent, the carrier would charge
the shipper Br. 220. The cost-of-service approach, which represents the base or minimum
transportation charge, is a pricing approach for low-value goods or in highly competitive
situations.
Value-of-Service Strategy—is an alternative strategy that charges a rate based on perceived
shipper value rather than the cost of actually providing the service. For example, a shipper
perceives transporting 1,000 Birr of electronic equipment as more critical or valuable than
1,000 Br. of coal since the equipment is worth substantially more than the coal. As such, a
shipper is probably willing to pay more to transport it. Carriers tend to utilize value-of-service
pricing for high-value goods or when limited competition exists.
Combination Strategy—establishes the transport price at some intermediate level between the
cost-of-service minimum and value-of-service maximum. In standard practice, most
transportation firms use such a middle value. Logistics managers must understand the range of
prices and alternative strategies so that they can negotiate appropriately.
Net Rate Pricing—it is a simplified pricing format. Carriers can replace individual discount
sheets and class tariffs with a single price sheet—and thus make the customer’s interpretation of
the rate-making process much simpler.
Established discounts and accessorial charges are built into the net rates. In other words, the net
rate represents a final price. The goal is to drastically reduce carriers’ administrative costs and
directly respond to customer demand to simplify the rate making process. Carriers thus hope to
win over new shippers and solidify current shipper accounts by taking much of the calculation
out of finding a price. Shippers welcome pricing simplification because it promotes billing
accuracy and provides a clear understanding of how to generate savings in transportation.
Rating
This section presents the actual pricing mechanics used by carriers and it applies specifically to
common carriers, although contract carriers utilize similar concepts.
Class Rates—in transportation terminology, the price in Birr and cents per hundredweight to
move a specific product between two locations is referred to as the rate. The rate is listed on
pricing sheets or computer files known as tariffs. The term class rate evolved from the fact that
all products transported by common carriers are classified for pricing purposes. All products
legally transported in interregional commerce can be shipped via class rates.
Determination of common carrier class rates is a two-step process:
1. The classification or grouping of the product being transported.

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 2. The determination of the precise rate (i.e., price) based on the classification of the
product and the origin-destination points of the shipment. Typically, this procedure is
referred to as rate administration.
1. Classification—all products transported together are typically grouped into uniform
classifications. The classification takes into consideration the characteristics of a product or
commodity that will influence the cost of handling or transport. Product with similar
density, stowability, handling, liability, and value characteristics are grouped together into a
class, thereby reducing the wide range of possible ratings to a manageable size. The
particular class that a given product or commodity receives is its rating. The rating is the
product's classification placement, which is used to determine the freight rate. It is
important to understand that the classification does not define the price charged for
movement of a product. It refers to a product’s transportation characteristics in comparison
to other commodities.
Products are also assigned different ratings on the basis of packaging. Glass may have a
different rating when shipped loose, in crates, or in boxes than when shipped in wrapped
protective packing.
2. Rate Administration—once a classification rating is obtained for a product, the specific
rate must be determined. The rate per hundredweight is usually based on the shipment
origin and destination, although the actual price charged for a particular shipment is
normally subject to a minimum charge and may also be subject to surcharges or ancillary
assessments. Historically, the origin and destination rates were maintained in notebooks that
had to be updated and revised regularly.
In addition to the variable shipment charges on either per hundredweight or a per mile basis,
two additional charges are common for transportation:
 Minimum charges and
 Surcharges.
The minimum charge represents the amount a shipper must pay to make a shipment regardless
of weight.
Commodity Rates—when a large quantity of a product moves between two locations on a
regular basis, it is common practice for carriers to publish a commodity rate. Commodity rates
are special or specific rates published without regard to classification.
Exception Rates—exception rates, or exceptions to the classification, are special rates
published to provide shippers lower rates than the prevailing class rate. The original purpose of
the exception rate was to provide a special rate for a specific area, origin-destination, or
commodity when either competitive or high volume movements justified it.
An aggregate tender rate is utilized when a shipper agrees to provide multiple shipments to a
carrier in exchange for a discount or exception from the prevailing class rate. The primary
objective is to reduce carrier cost by permitting multiple shipment pickups during one stop at a
shipper’s facility or to reduce the rate for the shipper because of the carrier’s decreased
management and marketing expenses.
A limited service rate is utilized when a shipper agrees to perform services typically performed
by the carrier, such as trailer loading, in exchange for a discount. A common example is a
shipper load and count rate, where the shipper takes responsibility for loading and counting the

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cases. Another example of limited service is a released value rate, which limits carrier
liability in case of loss or damage. Normally, the carrier is responsible for full product value if
loss or damage occurs in transit.
Transport Decision Making
Transportation decision making requires the availability of information and the assignment of
knowledgeable, trained individuals to process the information in order to serve the enterprise’s
functional and strategic transportation needs. Information is provided through a variety of
transport documents. Utilization and analysis of the information are the responsibility of
various members of the traffic department.
Transport Documentation
Several documents are required to perform each transport movement. The three primary
types are bills of lading, freight bills, and shipping manifests.
Bill of Lading—is the basic document utilized in purchasing transport services. It serves as
a receipt and documents commodities and quantities shipped. For this reason, accurate
description and count are essential. In case of loss, damage, or delay, the bill of lading is the
basis for damage claims. According to Charles Taff, the bill of lading has the following three
purposes:
1) It serves as a receipt for goods, subject to the classifications and tariffs that were in
effect on the date that the bill of lading was issued.
2) It serves as a contract of carriage and identifies the contracting parties and prescribes
the terms and conditions of the agreement.
3) It serves as documentary evidence of title.
Freight Bill—represents a carrier’s method of charging for transportation services
performed. It is developed using information contained in the bill of lading. The
freight bill may be either prepaid or collect. A prepaid bill means that transport cost
must be paid prior to performance, whereas a collect shipment shifts payment
responsibility to the consignee.
Shipping Manifest—lists individual stops or consignees when multiple shipments are
placed on a single vehicle. Each shipment requires a bill of lading. The manifest lists the
stop, bill of lading, weight, and case count for each shipment. The objective of the manifest
is to provide a single document that defines the contents of the total load without requiring a
review of individual bills of lading. For single-stop shipments, the manifest is the same as
the bill of lading.

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