CH 2 FTand Warehouse-1.ppt freight transportation and cost structure

ware house and inventory Management
freight transportation and cost structure

1. CHAPTER 2 Freight Transportation and Cost Structure 3/25/2022 1 LSCM-531

2. Introduction to Freight transportation Freight transport  is the physical process of  transporting   commodities  and  merchandise  goods and  cargo . The demand for freight transportation is usually dependent upon the demand for a product in another location. Freight is not usually transported to another location unless there is a need for the product . 3/25/2022 2 LSCM-531

3. Ctd …. The characteristics of derived demand imply that freight transportation would not be effected by transport carrier actions. For example , if a freight carrier lowers the rate to zero for moving high-tech personal computers (Pc) to a developing nation, this may not materially change the demand for Pc in the developing nation. This is because demand for Pcs is dependent on the educational level of the citizens , electrical availability, and the price of the computer itself. 3/25/2022 LSCM-531 3

4. 2.1 Freight classification All products transported are typically grouped together into uniform classifications. Products may be classified based on : 1. The characteristics of a product It takes into consideration the characteristics of a product that will influence the cost of handling or transport . It reduces the need to deal with each product on an individual basis . The particular class that a given product or commodity receives is its rating, which is used to determine the freight rate . The classification does not identify the price charged for movement of freight. It refers to freight’s transportation characteristics in comparison to other commodities. Motor carriers and rail carriers each have independent classification systems 3/25/2022 4 LSCM-531

5. CONT’D…. Classification of individual products is based on a relative index of 100. Class 100 is considered the class of an average product, while other classes run as high as 500 and as low as 35. As a general rule, the higher a class rating, the higher the transportation cost for the product . Historically, a product classified as 400 would be approximately four times more expensive to transport than a product rated 100 3/25/2022 5 LSCM-531

6. 2 . Products are also assigned classifications on the basis of the quantity shipped. Less-than-truckload (LTL) shipments of identical products will have higher ratings than carload (CL) or truckload (TL) shipments. 3. Products are also assigned different ratings on the basis of packaging. E.g Glass may be rated differently when shipped loose , and in boxes than when shipped in wrapped protective packing. It should be noted that packaging differences influence product density, stowability , and damage , which finally affects freight rate-determination process. 3/25/2022 6 LSCM-531

7. Ctd …. A number of different classifications may apply to the same product depending on: where it is being shipped, shipment size, transport mode, and product packaging. 3/25/2022 LSCM-531 7

8. CONT’D… One of the major responsibilities of transportation managers is to obtain the best possible rating for all goods shipped. It is possible to have a product reclassified by written application to the appropriate classification board. The board reviews proposals for change or additions with respect to minimum weights , commodity descriptions, packaging requirements , and general rules and regulations . 3/25/2022 8 LSCM-531

9. 2.2 Documents in freight shipments Well-defined documentation is required to perform a transportation service. The primary purpose of transportation documentation is to protect the interest of all parties involved in the performance of the transaction. The transportation documents that will be mentioned in this section will include : 3/25/2022 9 LSCM-531

10. I. Packing List: It provides information about what is supposed to be included in the particular shipment . It may specify which package or container contains each item to simplify the unpacking and warehousing of the cargo. If a box is missing, one can determine from the packing list which one it is and what it contains . II. Bill of Lading: it is a document that a transport company possesses acknowledging that it has received the goods, and serves as a title for the purpose of transportation. It is primarily a receipt for goods delivered to a carrier. CONT’D… 3/25/2022 10 LSCM-531

11. a Bill of Lading is a contract between a carrier and shipper for the transportation of goods. accurate product description and count are essential . B/c in case of loss , damage, or delay , the bill of lading is the basis for damage claims. A carrier is responsible for proper delivery according to instructions contained in the document. The bill of lading specifies terms and conditions of carrier liability and responsibilities for all possible causes of loss or damage except those defined as acts of God. A Bill of Lading is foremost a contract among three parties to provide the transportation of cargo. CONT’D… 3/25/2022 11 LSCM-531

12. Figure 2.1: Parties to Bill of Lading CONT’D… 3/25/2022 12 LSCM-531

13. The Contents of Bill of Lading 3/25/2022 13 LSCM-531

14. Three major Functions of Bill of Lading are: As a receipt: shipped on board in apparent good order and condition. As contract of carriage: contract itself made before bill of lading is issued. As evidence of title: gives the right to possession the key to warehouse. CONT’D… There are several kinds of bill of lading but the most widely used are: 1 . Straight Bill of Lading: it is a Bill of Lading, which names one specific consignee to whom delivery must be made. Figure 2.2: A Straight Bill of Lading 3/25/2022 14 LSCM-531

15. CONT’D… Figure 2.3: A Document of Straight Bill of Lading (http://www.showtrans.com/bl.htm) 3/25/2022 15 LSCM-531

16. 2. Order Bill of Lading: it is negotiable ; it enables a shipper to collect for a shipment before it reaches its destination (this is done by sending the original Bill of Lading, with a draft drawn on the consignee through a bank). CONT’D… Figure 2.4: Order Bill of Lading 3/25/2022 16 LSCM-531

17. 3. Bearer/holder/carrier Bill of Lading: If the original consignee endorses the B/L over to a third party and gives the original to that third party, the third party and no other may claim the cargo upon presentation of the endorsed order bill of lading to the carrier. If the original consignee merely endorses the Order Bill of Lading without naming a new consignee, the Bill of Lading becomes a Bearer Bill of Lading and anyone who presents the original to the carrier may claim the cargo. 3/25/2022 17 LSCM-531

18. 4. Through Bill of Lading: Often a number of carriers are involved, each providing transport for one leg of a journey. Such a B/L will cover the journey from the port of origin to each intermediate carrier in turn, all the way to the destination. A Through Bill of Lading can be either a Straight or Order Bill of Lading . CONT’D… 3/25/2022 18 LSCM-531

19. Taking Exception The process of noting damage or discrepancies on the B/L is called Taking Exception. If no apparent damage can be noted and the contents of the shipment match the Bill of Lading, a Clean Bill of Lading will be issued. If any damage can be seen or if the contents are not what were represented , a notation will be made and the document is then called a Foul Bill of Lading. Figure 2.5: Taking Exception 3/25/2022 19 LSCM-531

20. 5. Received, On Board and Shipped Bill of Lading: is a B/L will note the location of the cargo as of its issuance. If the B/L is marked receive d, the cargo has been delivered to the carrier but not yet loaded on the transportation. If it is marked on board, the cargo has been loaded on the transportation but the transportation has not yet begun its journey. If the B/L is marked shipped, the transportation/conveyance has left the point of origin with the cargo on board. CONT’D… 3/25/2022 20 LSCM-531

21. III. Shipper’s Letter of Instruction: It may be presented in a variety of forms. The freight forwarder may provide his/ her own forms. A shipper can and should make its instructions to the freight forwarder as specific as possible. Figure 2.6: A Shipper’s Letter of Instruction 3/25/2022 21 LSCM-531

22. If a shipper deals directly with an inland carrier, it provides a document known as Delivery Instructions that indicates where and when the shipment is to be picked up and where, when and to whom it is to be delivered. iv. Delivery Order and Freight Release: A written order by the shipper that names the party to whom delivery is to be made is called a Delivery Order if for an inland carrier, and a Pier Release if for an ocean carrier. When all freight charges are paid, the carrier will issue a Freight release or Freight Bill Receipt that is evidence that the carrier has no further lien on the cargo for transportation costs. CONT’D… 3/25/2022 22 LSCM-531

23. CONT’D… V. Airway bill: Air cargo operations use a document similar to the B/L called an Air waybill. VI. Certificate of Origin: it certifying either that the cargo is from a particular country or that it meets the rules of origin for imports into that country. It might also certify that a certain amount of the value of the product was added in a particular country for customs purposes. 3/25/2022 23 LSCM-531

24. VII. Customs Invoice: Most, but not all, nations’ customs services accept a commercial invoice as evidence of the nature and value of that cargo for customs purposes . VIII. Consular Invoice: Other countries will not accept an invoice prepared by the shipper and require that their consulate abroad issue an invoice for customs purposes. IX. Rebilling Invoice: This is prepared to substitute for the original invoice if the shipment is to be divided, the consignee is to be changed or any other change is made since the original invoice was issued. 3/25/2022 24 LSCM-531

25. X . Inspection Certificate: In the sales contract the parties may agree that the goods are to be of a certain grade or quality. so, often, the parties agree to have an independent party or government employee inspect the goods and give written assurance that they meet the standards. XI. Shipment Manifest: The shipment 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/box/container count for each shipment. The objective of the manifest is to provide a single document that defines the overall contents of the load without requiring review of individual bills of lading. 3/25/2022 25 LSCM-531

26. 2.3 The concept of Multimodal and Intermodal Transport Journeys that use several modes of transport are called intermodal . Multimodal transport is the carriage of goods by at least two different modes of transport on the basis of a multimodal transport contract . In multimodal transport, one transport document ; one rate and through liability are used . Ultimate aim of multimodal is to make the movement of goods from seller to buyer more efficient through faster transit at reduced costs. 3/25/2022 26 LSCM-531

27. Intermodal transport The aim of intermodal transport is to combine the benefits of several separate modes, but avoid the disadvantages of each. The main problem is that each transfer between modes causes delays and adds costs for extra handling. Technically, coordinated or intermodal transportation could be arranged among all the basic modes except for pipelines. 3/25/2022 27 LSCM-531

28. Intermodal transportation coordination 3/25/2022 28 LSCM-531

29. 2.4 Freight forwarding operations Freight forwarders or forwarding agents are agencies that organize the freight shipments of other companies or individuals. They often do not own transport equipment except for pickup and delivery operations. They consolidate numerous small shipments of different shippers into large shipments. Freight forwarders can be classified as surface or air forwarders, based on the transportation modes they use. Also, a forwarding agent can be considered as an international forwarder or as a domestic forwarder 3/25/2022 29 LSCM-531

30. The main advantage of the forwarder is : a lower rate per hundredweight obtained from large shipment faster transport of small shipments than would be experienced individual customer dealt directly with the common carrier. Freight forwarders accept full responsibility for shipment performance. According to the latest ministry of trade and industry data, in Ethiopia, there are about 53 licensed freight forwarding firms and 21 Goods-Transit and shipping agents that are members of the Association of Ethiopian Forwarding Businesses These companies are small in size and capacity. The biggest forwarding company is publicly owned Maritime and Transit Services Enterprise (MTSE) 3/25/2022 30 LSCM-531

31. Costing , Pricing and rate making in freight Transportation Transportation economics and pricing are concerned with factors and characteristics that drive cost . An overview of transportation economics and pricing builds upon four topics: T he factors that drive transport costs , T he cost structures or classifications, C arrier pricing strategy, and T ransportation rates and ratings 3/25/2022 31 LSCM-531

32. Factors influencing transportation costs and pricing Transportation costs are driven by seven factors. Distance (5) Handling Volume (6) Liability Density (7) Market. Stowability 3/25/2022 32 LSCM-531

33. In general factors influencing transportation costs / prices A . PRODUCT RELATED FACTORS: The product related factors include: Density : Stowability : Ease or difficulty of handling: Liability: Market related factors . Product related factors 3/25/2022 33 LSCM-531

34. 1. Density: Density is a combination of weight and volume . Transport charges are commonly quoted as amount per hundredweight. In terms of weight and volume, vehicles are forced more by cubic capacity than by weight . The higher the product density , the greater the amount of weight that can be hauled and the lower the cost per hundredweight . The lower the product density , the lower the amount of weight that can be hauled and the higher the cost per hundredweight hauled. 3/25/2022 34 LSCM-531

35. 2. Stowability: It refers to how product case/box / container/ holder dimensions fit into transportation equipment . It is the degree to which a product can fill the available space in a transport vehicle. Odd package sizes and shapes , as well as product characteristics such as excessive weight, length, and height result in higher stowage costs for the carrier and a corresponding higher classification rating because it may not fit well in transportation equipment; this results in wasted cubic capacity . 3/25/2022 35 LSCM-531

36. 3. Ease or difficulty of handling: Difficult to handle Items are more costly to transport than Items easy to handle. Because Special handling equipment may be required to load and unload items those are difficult to handle . 4. Liability : It considers the value of the product . Products that do have high value-weight ratios and easily damaged and subject to higher rates of theft or likely to damage other freight increase the potential liability cost and are placed into a higher classification rating and cost more to transport . 3/25/2022 36 LSCM-531

37. B . Market related factors . 1. Distance (Location of markets), determines the distance goods, must be transported . It has a major influence on transportation costs since it directly contributes to variable costs , such as labor, fuel, total journey time, maintenance costs etc. 2 . Market factors ( Balance or imbalance of freight traffic into and out of market) : Factors such as lane/path volume and balance, influence transportation cost. Since transportation vehicles and drivers must return to their origin, either they must find a load to bring back or the vehicle is returned empty. 3/25/2022 37 LSCM-531

38. Cost Structure: There are three perspectives from which freight transport costs can be considered differently. From the freight transport operators ‟ perspective, It refer to the expenditure they incur in providing the services. From the freight owners ‟ perspective, It refer mainly to the charges t hey pay to freight transport operators. From the national perspective , It include costs associated with social, environmental and economic aspects, 3/25/2022 38 LSCM-531

39. CONT’D… In general, Transportation costs are classified into a number of categories. The most are: Variable Cost: T hey changes in a direct manner in relation to some level of activity. Variable costs can only be avoided by not operating the vehicle . B . Fixed Cost: are expenses that do not change in the short run and must be serviced even when a company is not operating, C. Joint Cost: are expenses unavoidably created by the decision to provide a particular service. D. Common Cost: This category includes carrier costs that are incurred on behalf of all or selected shippers, such as terminal or management expenses , are characterized as overhead 3/25/2022 39 LSCM-531

40. Pricing in transportation management When setting rates to charge shippers, carriers typically follow one or a combination of two pricing strategies. Cost-of-Service: is a build up approach where the carrier establishes a rate based on the cost of providing the service plus a profit margin. Value-of-Service: it is pricing according to the value of the product. Combination Pricing: it establishes the transport price at an intermediate level between the cost-of-service (minimum) and the value-of-service (maximum). 3/25/2022 40 LSCM-531

41. Rate making practices The overall carrier pricing function revolves around costing, rates, and tariffs. We can classify the rate making in to two main categories these are: General rate making Special rate making. 3/25/2022 41 LSCM-531

42. A.General rate making: The rates under the general rate making are class rate, exception rate, and commodity rate structures. In transportation terminology, the price in dollars 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 on computer files known as tariffs. 1. Class rate: The transportation industry has taken three major steps toward simplification of freight rates. These are: 3/26/2022 42 LSCM-531

43. The first step is consolidating the shipping points into groups by dividing the nation into geographic squares. The second step deals with the thousands and thousands of different items that might be shipped between any two base points. The third step simply groups together products with similar transportation characteristics so that one rating can be applied to the whole group. CONT’D… 3/25/2022 43 LSCM-531

44. 2. Exception Rates: An exception rate is a modification (change in rating, minimum weight, density group and so on) to the national classification instituted by an individual carrier. Exception ratings are published when the transportation characteristics of an item in a particular area differ from those of the same article in other areas. Just as the name implies, when an exception rate is published, the classification that normally applies to the product is changed. 3/25/2022 44 LSCM-531

45. 3. Commodity Rates: Can be constructed on a variety of bases, but the most common is a specific rate published on a specific commodity or group of related commodities between specific points and generally via specific routes in specific directions. This type of rate is offered for those commodities that are moved regularly in large quantities. However, it completely undermines the attempts to simplify transportation pricing through the class-rate structure Commodity rates are usually published on a point-to-point basis and apply only on specified products. 3/25/2022 45 LSCM-531

46. B.Special rate making A countless of special rate forms have evolved over the years either as a result of special cost factors or to induce certain shipment patterns. Special rate making can be further grouped or based on: Character of shipment rates and Area, location and route rates 3/25/2022 46 LSCM-531

47. (a) Character of shipment rates One set of special rates is relates to the size or character of the shipment. Many rate forms have been developed under this category. These includes: LTL/TL Rates: Incentive Rates: it generally apply to a rate designed to encourage the shipper to load existing movements and equipment more fully. Per-Car and Per-Truckload Rates: are single-charge rates for specific origin–destination moves regardless of shipment commodity or weight Any-Quantity Rates: it provide no discount or rate break for larger movements. Density Rates: Some rates are published according to density and shipment weight, rather than by commodity or weight alone. 3/25/2022 47 LSCM-531

48. (b) Area , location or route rates A number of rates relate to area, location, or route. These special rates deserve consideration and discussion. Local Rates: Local rates apply to any rate between two points served by the same carrier. Joint Rates : Joint rates are single rates published from a point on one carrier’s route to another carrier’s destination Differential Rates : The term differential rates generally apply to a rate published by a carrier that faces a service time disadvantage compared to a faster carrier or mode. 3/25/2022 48 LSCM-531

49. CONT’D... Per-Mile Rates : Some rail, motor, and air carriers provide rates that are based purely upon the mileage involved. T erminal-to-Terminal Rates : Terminal-to-terminal rates, often referred to as ramp -to-ramp rates, apply between terminal points on the carrier’s lines. Blanket or Group Rates: These rates apply to or from whole regions, rather than points. Combination rates : rates in that two or more rates may be combined when no published single-line or joint rate exists between two locations 3/25/2022 49 LSCM-531

50. Most Common Mistakes in Pricing: The first common mistake is to make pricing too reliant or dependent on costs. The second common mistake is that prices are not revised frequently enough to capitalize on market changes. Setting the price independently of the marketing mix is a third common mistake. Finally, price is sometimes not varied enough for different service offerings and market segments . A “one price for all ” mentality does not work in the transportation industry. 3/25/2022 50 LSCM-531

51. Thanks 3/25/2022 51 LSCM-531