Chapter 12

1. Chapter 12 Shipper Strategy

2. INTRODUCTION • Both shippers and carriers utilize strategies to manage their respective networks. • The shipper strategy is focused on purchasing and managing transportation services to meet the needs of their external and internal customers. • Carrier strategy is focused on the efficient use of resources to provide the economical and efficient service the shipping public desires.

3. TRANSPORTATION MANAGEMENT • Transportation management is currently the term applied to the purchase and control of transportation services in some organizations.

4. Transportation Management as a Procurement Function • Transportation management is a special form of procurement and purchasing. • Procurement is a term that applies to a wide range of activities that basically consists of obtaining goods and services for the firm.

5. Transportation Management as a Procurement Function • Traditionally, a minimum transportation cost goal was employed for this function • Today many companies first establish a customer service goal and then evaluate transportation and logistics in terms of minimized total logistics costs while attaining the service goal.

6. SHIPPER TRANSPORTATION STRATEGIES • Transportation decisions must be made to benefit the total logistics process and the firm, not merely the transportation department. • As an example, slow but low-cost transportation can have an adverse impact on customer service and inventory levels. • Although such methods might minimize transportation cost, inventory levels might need to be much higher to accommodate longer transit times.

7. As Figure 12.1 indicates, transportation strategy is concerned with the purchase and control of transportation services. • Transportation purchasing decisions include modal selection, consolidation, private transportation, intermediaries, and contracting.

9. General Strategy • As Figure 12.1 indicates, transportation strategies have been separated into those that apply to all types of shipments, including small and bulk shipments.

10. Proactive Management • Modern management philosophy emphasizes finding solutions to company transportation problems. • The transportation manager relies on basic management techniques to seek innovative transportation systems that will provide the company with a competitive price or service advantage in the marketplace. • The thrust of the proactive management strategy is problem solving.

11. Improve Information • Transportation costs, shipment volume, and carrier performance are the typical data collected. These data are essential to carrier negotiation, freight consolidation, contracting, and private motor carrier decisions. • A major source of transportation information is the bill of lading (discussed in Chapters 11 and 13)

12. Limit Number of Carriers Used • Reducing the number of carriers it uses > shipper increases its market power > ability to effectively negotiate with its carriers. • Each carrier has a larger share of the shipper’s volume > each carrier more important to the shipper > reduces the number of relationships that have to be managed.

13. Limit Number of Carriers Used • This usually results in more effective collaboration between the shipper and its carrier base that eliminates costs, thereby reducing the shipper’s expense and increasing the carriers’ operating margin.

14. Limit Number of Carriers Used • Disadvantage is the increased dependency on the carriers that are used. • If one of the major carriers ceases operation, the service disruption results in a reduced customer service level, increased managerial costs, and greater transportation costs. • The greater cost and lower customer service level exist until a replacement carrier is selected and is efficiently operating.

15. Carrier Negotiation • Market power determines the shipper’s ability to negotiate acceptable rates and services. • To increase market power as discussed above, shippers use the strategy of limiting the number of carriers, thereby concentrating more of its economic power with a carrier and increasing the carrier’s dependence on the shipper.

16. Carrier Negotiation • Freight characteristics also has a effect on negotiations and market power. • Freight that has low density, is hard to handle, is easily damaged, and moves in small volumes irregularly is undesirable freight for the carrier. • Conversely, products that have high density and high value, are difficult to damage, and move in large volumes regularly are more economical for the carrier to move.

17. Carrier Negotiation • the shipper’s negotiating position is improved if the freight moves in the direction of the carrier’s empty backhaul.

18. Contracting (contracting with for-hire carriers) • The contracts allow the shipper to realize the lower rates and necessary service levels that are not attainable from a regulated carrier. • During the term of the contract, the shipper is guaranteed the contracted rate and service (most contracts are for 1 to 3 years).

19. Review Private Motor Carrier Transportation • The decision to use or discontinue the use of private motor carriage is a continual strategic issue for the transportation manager. • Private fleet vs contracting etc

20. Small Shipment Strategy • As Figure 12.1 indicates, the small shipment strategies consist of freight consolidation, using drop-off carriers and pooling services, and avoiding the use of private motor carriage. • The strategic thrust for small shipments is to reduce the inherently high transportation costs associated with small-sized shipments. • By increasing the size of the shipments, the shipper can take advantage of the carrier’s low rates for heavier shipments.

21. Small Shipment Strategy • Another small shipment strategy is the use of stopping-in-transit (SIT) service provided by motor carriers. • SIT permits the shipper to load a number of shipments on a vehicle and stop along the way to unload the individual shipments.

22. Small Shipment Strategy • The use of private motor carriage for small shipments is normally not cost effective. • The small shipment size prevents full use of the private motor carrier equipment, with the result that costs are higher than the charges assessed by for-hire carriers. • For-hire carriers are in a position to consolidate small shipments from many shippers to make the operation economical.

23. Bulk Shipment Strategy • The primary strategy used in the transportation of bulk commodities is contracting. Examples? • Most bulk raw materials are moved under long-term contracts with rail, water, and motor carriers. • The large volume of product moved gives the shipper the requisite negotiating and market power to realize lower rates and guaranteed service levels.

24. Bulk Shipment Strategy • The sheer volume of transportation involved has caused both shippers and carriers to realize their mutual dependency. • If the carrier ceases operation, the shipper experiences serious disruptions in service, higher costs, and possibly a short-run closing of production because alternative transportation is not available. • Likewise, the carrier is aware of the large percentage of its business that is accounted for by one shipper.

25. Bulk Shipment Strategy • Given this mutual dependency, a shipper attempts to provide the carrier with a balanced load, that is, a load into the facility and one out of the facility – eliminating empty backhauls

26. Inbound Transportation Strategy • In the past, the purchase order items would stipulate “FOB, Delivered” or “ship the best way.” • These terms of sale give the supplier control over the purchaser’s inbound transportation and assume that the supplier has the ability and desire to use the transportation carrier that minimizes the purchaser’s costs.

27. By modifying the shipping terms to “FOB, Origin,” the buyer takes on the inbound transportation responsibility and authority and can apply the transportation strategies identified above to achieve lower rates and improved service. • Another approach is to use the “FOB, Delivered” term in the purchase order but request that the supplier use one of the carriers from a list of carriers approved by the buyer.

28. In addition to increased attention to inbound shipments, reverse logistics is a new area requiring significant transportation activity and, in some cases, extreme control. • Reverse logistics can cover everything from the return of repairable items and parts for rebuilding to the recall of food or pharmaceuticals. In some cases, this is really a continuous cycle. • Example: toner

29. LINE ASPECTS OF TRANSPORTATION MANAGEMENT • The daily activities of transportation management are numerous. The typical transportation management process is as follows: • Shipment planning • Carrier selection • Ordering service • Expediting/tracing • Pre-auditing/rating • Auditing/paying the freight bill • Detention/demurrage processes • Claims, if any • Other—private car or motor carrier fleet management, transportation budget management

30. Shipment Planning • Inbound and outbound shipping schedules should be coordinated with purchasing and distribution or production. • A continuous flow of product should be maintained, unhindered by the unavailability of transportation (no equipment or service). • Further, physical loading and unloading must be planned according to the efficient use of docks and labour.

31. Carrier Selection • This task involves selecting the actual carrier that will move the shipment.

32. Ordering Service • To order a transportation service – phone, internet etc. • The transportation manager needs to inform the carrier personnel of the shipper’s name and pickup point, weight, commodity, destination, and sometimes the cube measurement of the shipment. • Upon vehicle arrival, the equipment is loaded according to plans established in the first step (shipment planning). • They include crew assignment, loading arrangement, bracing, dunnage, documentation, and any other special needs.

33. Expediting/Tracing • The transportation manager keeps track of shipment progress and alerts the carrier of any in-route changes that might be necessary. • Expediting/tracing is a valuable control tool for the shipper and consignee because they can plan production and assembly around shipment progress or problems.

34. Pre-auditing/Rating • Pre-auditing is the process of determining what the proper freight charges for a shipment should be. • Often shippers pre-audit shipments before billing by the carrier so that freight bill overcharges and undercharges can be reduced or avoided.

35. Auditing/Paying the Freight Bill • Auditing entails checking the accuracy of the freight bill after it is presented by the carrier or after it has been paid. • Some firms do this in house, whereas others hire outside consultants to perform this job after the bill has actually been paid.

36. Detention/Demurrage Processes • Detention is a charge assessed by a motor carrier against a shipper or consignee for keeping equipment for loading or unloading beyond a specified period. • Demurrage is the same concept in the rail industry. • The transportation manager is usually responsible for monitoring, managing, and paying for detention and demurrage obligations.

37. Claims • Loss and damage sometimes occur to shipments while in the possession of carriers. • Transportation managers will then file claims to recoup part or all of these damaged amounts

38. Claims • Common carrier motor carrier companies and railroads are liable for all loss, damage, and delay to a shipment with limited exceptions. These exceptions include the following: • An act of God—an unavoidable catastrophe • An act of a public enemy—armed aggression against our country • An act of public authority—through due process of law, a government agency causes damage, loss, or delay • An act of the shipper—actions by the shipper contribute to the damage, such as improper packaging • The inherent nature of the goods—natural deterioration

39. Claims • The carrier is normally liable for the full value of the product at destination. However, carriers, especially motor carriers, can limit their liability by use of the released value rate. In return for a lower rate, the shipper agrees to hold the carrier liability to something less than the full value of the product.

40. Private Car and Motor Carrier Fleet Management • This entails coordination and control tasks with the goal of minimizing fleet costs and providing quality service.

41. Transportation Budget Management • The transportation manager must keep track of current and future activities and expenditures and relate them to the original plan. • Cost escalators that a transport manager should account for in costing and budgeting are fuel and insurance.

42. Mode Selection • The transportation manager selects the mode for specific classes of shipments or products, market areas, or each plant or warehouse. Each mode offers specific inherent service and cost advantages.

43. Monitoring Service Quality • If the transportation manager can get the products to the customer on a timely, consistent, and undamaged basis, the buyer’s inventory and stockout costs are lowered, making it advantageous for the buyer to do business with the seller. • The key to monitoring transportation service quality is information

44. Figure 12.3 is a sample carrier evaluation report. The carrier evaluation report is used to assure that carriers are providing the service quality that is demanded by the customers or specified by agreement. • Typically, the most important evaluation criteria are meeting pickup and delivery schedules and transit time.

46. Service/Supply Assurance • Strikes in the motor carrier industry causes carrier supply disruption. • Also, seasonality of demand many times puts pressures on equipment availability. • Back-up plans (contingency management)

47. Negotiations • Negotiations require a large degree of preparation, analysis, and proper approach and conduct. • A negotiation that attains a rate that the carrier eventually finds unprofitable and incapable of serving effectively is to be avoided. • In this instance, both the shipper and carrier lose.

48. Negotiations • Many negotiations take place for specific services, rather than lower rates. • These include specific car supply or transit time performance.

49. Regulatory Matters • Safety issues such as hazardous materials transportation require expertise and skill to avoid serious problems. • Safety issues, along with security issues, today takes up a larger portion of the transportation manager’s time.

50. Planning Annual Transportation Requirements • Another staff-related task is interpreting the firm’s purchasing, production, and marketing plans for future periods and translating the plans into specific shipping needs.