TRANSPORTATION MANAGEMENT

BASIC TRANSPORT ECONOMICS & PRICING

To properly negotiate during transportation agreements, it is a must to know transportation economics It requires discussion on 3 topics transportation economics and pricing: to know

To know the factors affecting the economics To understand the cost structure To know the rate structures customer is charged

ECONOMIC FACTORS
DISTANCE

Major influence on transportation cost It contributes to variable cost - fuel, maintenance Tapering principle - Longer movement will have greater intercity distance and lower intracity miles Within a city the miles covered by same amount of fuel will very less in comparison with intercity miles

ECONOMIC FACTORS
WEIGHT / VOLUME

Economies of scale applies here as well Transport cost of per unit weight decreases as load volume decreases This happens because fixed costs (pick-up, delivery, admin costs) get spread over additional volume It limits to maximum size of the vehicle, once the truck is full, relationship repeats for the second vehicle

ECONOMIC FACTORS
DENSITY

Product density - weight and space consideration Transportation cost is usually quoted in terms of dollars per unit weight like Amount per ton or amount per hundredweight (CWT) There is always space constraint in a vehicle than weight constraint i.e. Once the vehicle is full, you cannot load anything even if unit is of light weight Higher the density, more the transportation cost being spread over additional weight

ECONOMIC FACTORS
STOWABILITY

It refers to product dimensions and how they affect vehicle space utilization Odd sizes, shapes, excessive weight or length do not stow well and typically waste space Though density and stowability are similar & yet two items with same density can stow differently

ECONOMIC FACTORS

HANDLING

Different equipments are needed to load and unload trucks, railcars, ships & air cargo It also depends on the way goods are packed (taped, boxed or palletized)

ECONOMIC FACTORS
LIABILITY - Affect risk of damage and increase in claims

Susceptible to damage Property damage to freight Perishability

Susceptibility to theft
Spontaneous combustion or explosion Value per pound

ECONOMIC FACTORS
MARKET FACTORS

Back-haul or Deadhead Movement of goods in each direction need not be same so varying freight rates in either direction Ex. Movement from Bangalore to Shillong must be different from Shillong to Bangalore as this route, chances of goods movement is less and more chances of DEADHEAD movement.

COST STRUCTURE
VARIABLE COSTS - Directly associated with movement of goods. Transport rates must at least cover variable costs. Measured in terms of cost per mile or cost per unit of weight. Labor, fuel and maintenance FIXED COSTS - Do not change in the short run and will have to bear even if company is closed on a day. Fixed costs can be like IS, Vehicles, Terminals etc. Must be covered above variable costs on a per shipment basis

COST STRUCTURE
JOINT COSTS - During Back-haul, it is understood that the costs are borne by shipper or else would be jointly shared. Or else back-haul shipper must be found. COMMON COSTS - Incurred on behalf of all the shippers. Ex. - terminal maintenance costs. Using activity-based costing would be better approach as far as these costs are concerned.

PRICING STRATEGIES
COST-OF-SERVICE STRATEGY - Straight-forward approach. Transportation cost + 10% profit mark-up. Better for low-value goods VALUE-OF-SERVICE STRATEGY - Shipping 1000 pounds of electronic equipment is more critical than shipping 1000 pounds of coal. In the former case, shipper would be interested in paying premium for a better service

PRICING STRATEGIES

COMBINED STRATEGY - Somewhere between costof-service minimum and value-of-service maximum. Most transporter price in this manner.
GOODS & SALES TAX EFFECT may change pricing structure in India

RATING
CLASS RATES: Price in dollars or cents per hundredweight (CWT) to move a specific product between two locations is known as RATE.
The printed list is called as TARIFFS. CLASS RATES because the products have to be classified before they are priced

Determination of class rates is two-step process:

Classification

Rate Administration

CLASSIFICATION
Considers various characteristics of product that effect the cost of transport like volume, density, stowability, handling, liability etc. Rating is products classification placement, to find its freight rate It is based on relative percentage index of 100. Rating of 100 is for average product but rating can vary from as high as 500 and as low as 35. Higher the rating, higher the transportation cost for the product

CLASSIFICATION

Rates vary depending on whether it is LTL or TL shipment Rates can vary depending on packaging of items too Significant savings can be realized by properly determining which options your product can choose to minimize costs

RATE ADMINISTRATION
Once classified, it is now time to find its specific weight given in rupees/cwt (hundred weight) or dollars/CWT. Look out for discounts offered It can be given in terms of per hundredweight charge or in terms of per mile charge Two more charges - Minimum Charge and Surcharge

COMMODITY RATES

Commodity rates are not specific to any classification.

They might be applicable only for few products Whenever commodity rates exists, look out for this than Class rates

SPECIAL RATES
LOCAL RATES: When the products move under the tariff of single carrier

JOINT RATES: If more than one carrier is involved, joint rate may be applicable.
PROPORTIONAL RATES: If the special price incentive is only for part of the desired route. Especially when it is a single-line rate crossing boundaries with different rates

TRANSPORTATION PLANNING
Transportation is single largest logistics cost Transportation planning will help reduce cost

It also helps in knowing what items are being shipped and when they are being shipped to reduce cost
Now, consider a company that ships 20 million pounds of different products each year from Mumbai to Los Angeles DC. Containers are used to ship the product.

TRANSPORTATION PLANNING
Each container can be loaded up to 100000 pounds and each container has 2600 cubic feet of volume Assume that the company negotiated the rate structure with the carrier as shown below:
Rate & Weight Structure

Container weight
0 to 50000 50000 to 75000

Avg. Cost per CWT

8.00 / CWT 6.40 / CWT

75000 to 90000
90000 to 100000

6.20 / CWT
5.40 / CWT

TRANSPORTATION PLANNING to ship This company has enough volume

containers for a total cost of $1080000

200

But due to lack of visibility container doesnt get filled and the number of containers will increase and cost
Actual volume for one year
No. Cntners shipped Cost per CWT

Avg. Wt / cntnr

Total weight
1350000 2340000 3360000 12901000 19951000

Total costs 108000 149760 208320 696650 1162730

30 39 40 133 242

45000 lbs 60000 lbs 84000 lbs 97000 lbs 286000 lbs

8.00 6.40 6.20 5.40 5.83

TRANSPORTATION PLANNING
Fill rate is ratio of what was actually loaded to best freight rate

In this case (19951000/242) / 90000 = 82442/90000

Fill rate is 91.6 But 42 containers were used which was more than planned and necessary DRP helps by providing Transportation Planning Report

DC TRANSPORTATION PLANNING REPORT

Week DC No. of Pallets Weight Cube

1
2 3 4 5

LA
LA LA LA LA

95
80 110 98 100

390000
340000 420000 405000 392000

9800
8040 10730 10380 10060

Weight, Cube and Pallet Capacity Limitations

Weight Cube Pallet

More than

20000

330

10

Less than

60000

2360

20

DETAILS TO DC TRANSPORTATION PLANNING REPORT - LA DC

Week

Item No.

Qty
4000

Pallets 10

Weight 35000

Cube 740

D3467

2
2

A4538
H3297

6700
7000

25
20

50000
80000

1280
2650

2
2

S6730
N4510

2500
3900

10
10

90000
70000

1010
1300

T3256

1500

5
80

15000
340000

1060
8040

DETAILS TO DC TRANSPORTATION PLANNING REPORT - LA DC

Week

Item No.

Qty
5600 7200

Pallets 15 20

Weight 50000 55000

Cube 1740 1490

3 3 3

A3468 H4388 V3498

9000 8500
9300 6800 4500 1900

18 11
14 18 9 5 110

45000 82000
68000 68000 37000 15000 420000

1700 1710
1480 1300 850 460 10730

3 3 3
3 3

R6638 B4325 Y3598

E7843 T3346

DRP for A3468

Lead time - 3 weeks Order qty - 15000
Past due
Demand

2550 2050 5600 1450 2300 8100 750 2550

1500 Schd Recpts 0 1765 1560 1000 1315 1240 8550 6250 9850 On-hand 5200 0 0 0 0 0

Recpt Start
1500 0

1500 0