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Chapter 8 part two flashcards |

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  • Freight Forwarders:

    businesses that consolidate small shipments from various customers into bulk shipment for a common carrier to transport

    Shipper Associations and Agents

    : groups of shippers who employ an agent to consolidate purchases and shipments for them


    intermediaries that coordinate transportation arrangements for shipper, consignees and carriers, operating on a commission basis

    An effective logistics strategy must recognize four interrelated topics

    1.) Economic Drivers
    2.) Costing Methods
    3.) Carrier Pricing Strategy
    4.) Rates and Rating Mechanics

    1. Economic Drivers Influence Rates


    1. Economic Drivers: Distance

    - Distance directly contributes to variable expenses through: Labor, fuel, and maintenance
    - Cost curve starts above zero because of fixed costs associated with pickup and delivery regardless of distance
    -However, rate of cost DECREASES as distance increases

    tapering principle

    When the rate of cost decreases as distance increases

    1. Economic Drivers: Weight

    Weight is the second major factor for most transportation costs

    -Cost per pound decreases as weight increases until the carrier vehicle is full
    -Relationship starts again for the next vehicle load
    -Small loads should be consolidated into larger loads to maximize scale economies

    1. Economic Drivers: Density

    -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


    is the combination of weight and volume

    1. Economic Drivers: 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



    refers to the ability of product to be placed in itself or collapsed for better stowability

    1. Economic Drivers: Handling

    -Handling some products may require special 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

    1. Economic Drivers: 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 of liability by

    -Improved packaging and loading
    -Reducing susceptibility to loss or damage

    1. Economic Drivers: 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

    2. Costing Methods: Variable Costs

    -Variable costs change in a predictable, direct manner in relation to some level of activity
    -Variable costs in transportation are only incurred if you operate the vehicle
    -Transport rates must cover these at the very least!
    -Generally measured per mile or per unit weight or both
    e.g., per ton-miles transported

    2. Costing Methods: Fixed Costs

    -Fixed costs must be paid even when the carrier is not operating its equipment
    -Fixed costs are not influenced by shipment volume
    -Includes vehicles, terminals, rights-of-way, information systems, and support equipment
    -Must be covered by contribution above variable costs on a per shipment basis

    2. Costing Methods: Joint Costs

    -Joint costs are unavoidably created by the decision to provide a particular service
    -For example, when a carrier elects to haul a truckload from point A to point B, there is an implicit decision to incur a joint cost for the back-haul from point B back to point A.

    -Joint costs have a significant impact on transportation charges because

    -carrier quotations must include implied joint costs.
    -Either a back-haul shipper must be found
    -Or the joint cost must be covered by the original shipper from A to B and built into the quote.

    2. Costing Methods: 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

    3. Carrier Pricing Strategies

    Carrier pricing strategies for setting rates follows one or two of the following approaches

    -Cost-of-service strategy
    -Value-of-service strategy
    -Combination pricing strategy
    -Net-rate pricing strategy

    3. Carrier Pricing: Cost-of-Service Strategy

    -Cost-of-Service pricing is similar to a cost-plus pricing strategy for manufacturing
    -The carrier estimates the cost of providing the service and then adds on a percent profit margin
    -Commonly used for pricing transportation of low value goods or in highly competitive situations

    3. Carrier Pricing: Value-of-Service Strategy

    -Value-of-service price is based on value as perceived by the shipper rather than the carrier
    -Higher margins than cost-of-service pricing
    -Depends on the value of the goods being shipped
    -Used for high value goods or when no competition exists
    e.g., 1980's FedEx overnight delivery

    3. Carrier Pricing: Combination Strategy

    -Combination price is set at a value between cost-of-service minimum and value-of-service maximum
    -Most carriers use some form of combination pricing
    Common in highly volatile markets and changing competitive situations

    3. Carrier Pricing: Net-Rate Pricing Strategy

    -Net-rate is a simplified pricing format made possible by deregulation
    -Established discounts and accessorial charges are rolled into one all-inclusive price
    -Pricing is tailored to the individual customer's needs

    4. Rates and Rating Mechanics

    Three Factors Determine the Base Rate
    1.)How much are you shipping?
    2.) What are you shipping?
    3.) How far are you shipping from origin to destination?

    4. Rates and Rating Mechanics

    -Class Rates
    -Rate Determination
    -Cube Rates
    -Commodity Rates
    -Exception Rates
    -Special Rates and Services


    is the grouping of similar products into uniform classes that are assigned a rating

    -Class Rates

    are the price in dollars and cents per hundredweight to move a specific product (i.e., class) between two locations

    -Rate Determination

    is based on the classification rating, shipment origin, and destination

    -Cube Rates

    replace the 18 traditional freight classifications of the National Motor Freight Classification (NMFC) with five cube groupings

    Commodity Rates

    are for a large quantity of product which moves between two locations on a regular basis
    -Typical for most rail freight today

    Exception Rates

    are special rates to provide prices lower than the prevailing class rates

    Special Rates and Servicess

    include (see next few slides)
    FAK rates, Joint rates, Transit services, Split delivery, etc.

    Special Rates and Services

    -Joint Rates
    -Transit Services
    -Freight-All-Kind (FAK)

    Joint Rates

    can be negotiated if a shipper needs to use a combination of carriers

    Transit Services

    permit shipments to be stopped at an intermediate point between origin and destination for special processing

    Freight-All-Kind (FAK)

    rates allow a mixture of different products to be transported under a negotiated rating

    Special Rates and Services (continued)

    -Diversion and re-consignment allows changing the destination and/or consignee prior to arrival at the original destination
    -Split delivery is delivering portions of a shipment to multiple destinations

    Product storage services

    -Demurrage (rail) charge for holding a railcar for more than 48 hours before unloading
    -Detention (motor) charge for holding a truck for more than a few hours before unloading

    Demurrage (rail)

    -charge for holding a railcar for more than 48 hours before unloading

    Detention (motor)

    -charge for holding a truck for more than a few hours before unloading

    Transportation Administration Activities

    Operational Management
    Auditing and Claims Administration

    Key elements of operational management

    -Equipment Scheduling and Yard Management
    -Load Planning and Routing
    -Advance Shipment Notification (ASN)
    -Movement Administration
    -Transportation Management System (TMS)
    -An integral information technology solution to help oversee day-to-day activities

    Administrative Activities: Consolidation

    Consolidation is combining LTL or parcel shipments moving to a general location
    Shift to "response-based" logistics has made the industry rethink consolidation
    -Two groups of techniques

    Reactive approach

    -does not attempt to influence composition and timing of transportation movements, but reacts to shipments as they come
    -Example is UPS nightly sorting of package freight for intercity movement


    approach includes preorder planning of quantity and timing with the shipper to facilitate consolidated freight movement

    Administrative Activities: Negotiation

    -Seeking win-win agreements where both shippers and carriers share transportation consolidation and productivity gains
    -Collaborative negotiation: Both parties seek the lowest total logistical cost consistent with the shipper's needed service level (i.e. delivery time)

    Administrative Activities: Control

    Control responsibilities include tracing, expediting and driver hours of service administration
    -Tracking driver Hours of Service (HOS)


    is procedure to locate lost or late shipments
    i.e., tracking with RFID and GPS systems
    Proof of delivery


    involves the shipper notifying carrier that it needs a specific shipment to move quickly and with no delays

    -Tracking driver Hours of Service (HOS

    ) to comply with federal regulations

    Administrative Activities: Auditing & Claims Administration

    Auditing and claims administration is needed when services are not performed as promised


    is checking freight bills to ensure accuracy
    Pre-audit determines proper charges prior to payment
    Post-audit does the same after payment
    Pay particular attention to accessorial charges !

    Claims can be

    -Loss and damage resulting from poor performance
    -Overcharge/undercharge when amount billed is different from expected


    Primary purpose of documentation is to protect all parties involved in the transaction
    -Bill of Lading
    -Freight Bill
    -Shipment manifest

    Bill of Lading (BOL)

    is the basic document utilized in purchasing transport services
    Serves as a receipt and documents products and quantities shipped
    Specifies terms and conditions of carrier liability

    Freight Bill

    represents a carrier's method of charging for transportation services rendered
    Can be prepaid or collect

    Shipment Manifest

    lists the individual stops or consignees when multiple shipments are placed on a single vehicle

    Pricing Practices

    Pricing practices have a direct impact on logistical operations
    -Traditionally, logistics pricing was "BUNDLED" into the price for a product or service
    -Trend has been to DE-BUNDLE these charges so they become separate and visible to the customer
    -Focus is still on DELIVERING VALUE to the customer

    Pricing Fundamentals of F.O.B. pricing

    F.O.B (freight on board) pricing aka "free-on-board"

    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 of Delivered Pricing

    Delivered pricing — the seller includes transportation in the product price

    Single Zone delivered pricing
    Buyer pays a single price regardless of where they are located
    Example, USPS First class letters

    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

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