Purchasing and Supply Management by W. C. Benton

Purchasing and Supply Management by W. C. Benton

Chapter Fourteen

Purchasing Transportation Services

Copyright ©2007 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin

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Learning Objective1. To understand how to purchase transportation

services.

2. To understand the changes in the transportation sector.

3. To identify the advantages and disadvantages of various transportation modes.

4. To understand how to select and evaluate the most appropriate transportation mode for specific products.

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Learning Objective5. To understand how to determine the appropriate price

determination strategy for alternative transportation modes.

6. To understand how “third-party relationships” work.

7. To understand the terms and conditions of transportation of merchandise.

8. To understand what F.O.B. means.

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Transportation Purchasing _____________________________________

________________________________________________________.

As illustrated in the purchasing transportation network of a typical manufacturing firm shown in the Figure below ,the systems flows are impressive.

In traditional systems, inventory management is a manufacturing activity.

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Transportation Revenue Many Fortune 500 firms have moved to just-in-time

manufacturing, ________________________________________________________________________________.

In 2002, transportation revenues were approximately $848 billion. Over-the-road transportation accounted for approximately 83 percent of the total transportation costs.

In other words, a large share of the expenditures was associated with moving products from the manufacturing facility to the ultimate consumer. _______________________________________.

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TRANSPORTATION’S ROLE IN PURCHASING

Transportation is often the most costly and time-consuming component of purchasing management.

Its planning is also critical in meeting manufacturing and customer delivery scheduling requirements.

Transportation ________________________________________________________________________________________________________________________________.

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Transportation Modes

The initial decision requires the buying firm to select the appropriate shipment mode.

Each of the modes has specific operating and cost characteristics and the buying professional must weigh them in selecting the most appropriate transportation mode.

_____________________________________________

_________________________________________.

_______________________________________________________________________________________________________.

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Mode Selection

In many cases, __________________________________________________________________________________.

The “model split” is usually determined by time pressures, ______________________________________________________________________________________________________________________

The most recent statistical data for modal freight activity in the United States is presented in Figure 14.2.

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TABLE 14.2

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Rail

___________________________________________________________________________________________________________________________________________________________________

As can be seen in Figure 14.2, the rail mode ranks second in terms of ton miles. The rail service also includes more than 23,000 locomotives and 1.2 million freight cars.

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Rail

The Class I railroads are systems that generated more than $320 billion in total revenues in 2002.– The Class I freight systems are shown in Table 14.2.

________________________________________________________________________________________________________________________.

There are also more than 520 regional and local railroads.

________________________________________________________________________________________________________________

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The Class I railroads in the United States also account for approximately __________________________________________________________________________________________.

Deregulation ________________________________________________________________________________________.

CSX–Sea Land Corporation, Union Pacific–Overnite

(trucking), and Norfolk Southern–North American Van Lines (trucking) are the most significant intermodal firms.

Rail

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Rail The rail mode has the largest share of the ton-miles

in the United States. Most bulk commodities are initially shipped by rail and later shifted to motor carriers.

Rail transportation is generally less expensive than air and truck modes. ________________________________________________________________________________________________.

The primary products shipped via rail are __________________________________________________________________________________.

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Truck ________________________________________________

_________.

The industry is composed of a large number of for-hire and private carriers. _________________________________.

________________________________________________

_____________________________________________.

__________________________________________________________________________________.

The products carried by trucks are different from those

carried by other modes.

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Truck

Approximately 85 percent of the tonnage originated by Class I motor carriers are manufactured goods.

Class I carriers are those that generate annual operating revenues ________________; motor carriers generating between_____________ million in annual operating revenue are considered Class II carriers; and those with annual operating revenues of less _______________ are categorized as Class III carriers.

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Truck __________________________________________

_______________________________________.

There are approximately 850 Class I carriers. United Parcel Service is currently the largest Class I carrier with revenues in excess of $150 billion.

A carrier must have ICC authority to handle traffic covered by 16 commodity categories.– _______________________________________________

__________________________________________________________________________________________.

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General commodity carriers usually specialize in either truckload (TL) or less-than-truckload (LTL) operations. Truckload shipments are defined by the ICC as loads in excess of 10,000 pounds. _________________________________________.

___________________________________________. The three largest carriers in this industry sector are

Schneider National, J.B. Hunt Transport, and Werner Enterprises. ____________________________________________________________________________________.

The Carriers

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The Economics of the Truck Mode

Another special ICC category is the parcel delivery service and limited shipment size category. UPS is the largest carrier in this sector.

____________________________________________________.

In 2004, UPS delivered more than 2.94 billion

parcels and documents.

______________________________________________________________________________________.

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The Economics of the Truck Mode The truck mode is used to transport a variety of

perishable consumer goods, ____________________________________________________________________________.

The primary advantages of this mode are flexibility and versatility. – __________________________________________.

The competition in the trucking industry is fierce ________________________________.

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Motor Carrier Rates and Price Competition

The average revenue per intercity ton-mile realized by Class I motor carriers was 16.2 cents for TL and 49.76 cents for LTL service in 2005. – The average rail revenue was 2.67 cents per ton-mile.

These average prices are misleading when selecting one mode over another.

_____________________________________________________________________________________________________________________________________________________________________________________________________________________.

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Motor Carrier Rates and Price Competition In contrast, in long-haul volume movements of bulk

commodities, _________________________________________.

_______________________________________________________________________________________________________________________.

The various levels of competition between owner-operators clearly show that they do not understand their cost structure. Irrational owner-operators will eventually go bankrupt.

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Motor Carrier Services

Realizing that most shippers are interested in more than transportation, some carriers have formed third-party logistics enterprises. UPS, Yellow Freight, and Roadway Express have expanded into this market.

Just-in-time manufacturing also has resulted in a significant operating change in the general commodity carriers.

_______________________________________________________________________________________________________________________________.

In addition, ___________________________________________.

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The Air Mode

The domestic air cargo market in 2002 was approximately $279.5 billion, based on 3.9 billion tons carried over 66.9 billion miles.

__________________________________________

_______________________________________________________________.

Integrated air cargo companies have air service–related support and handle air cargo from origin to destination.

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The Air Mode

Companies with a significant presence in the market are Federal Express, UPS, Airborne, DHL, and the U.S. Postal Service.

As can be seen in Table 14.3, Federal Express accounts for more than 43.3 percent of this market and UPS more than 25 percent.

__________________________________________________________________________________.

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Air Cargo Rates and Competition

With the movement toward high customer service, air cargo has become an integral strategic weapon ___________________________________________________________________________.

The average revenues per ton-mile of air cargo

carriers in 2002 were 44.45 cents versus 25.82 cents for trucking and 2.67 cents for rail.

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Air Cargo Rates and Competition

________________________________________________________________________________________________________________________________________.

The revenues per ton-mile for Federal Express and UPS are approximately $1.12. For the most part, the competition in this mode is between UPS and Federal Express.

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Water Carriers

Water carriers are classified into several categories: _________________________________________________________________________________________________________________________________________________________.

American water carriers compete directly with rail and pipelines. In 2002, water carriers accounted for approximately $90.9 billion in revenues.

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Water Carriers

The majority of commodities shipped via water carriers are semiprocessed materials, _________________________________________________________________________________.

Water carriers are an excellent transportation shipping mode for low-valued bulk commodities in large quantities. ______________________________________.

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Pipelines

Pipelines are used ______________________________________________________________________________________.

In 2002, pipelines accounted for $116.9 billion in revenues.

A comparison of each of the transportation modes is shown in Figure 14.2.

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Relative Prices for Transportation Goods and Services

The United States had relatively lower prices for transportation goods and services in 1999 than did 15 out of 25 Organization for Economic Cooperation and Development (OECD) countries.

However, the nation’s top two overall merchandise trade partners, Canada and Mexico, had lower relative prices in 1999 than did the United States.

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Carrier Selection

The choice of transportation mode is the most important element in distribution management.

Selecting the incorrect transportation mode can easily jeopardize a firm’s operational efficiency because it may lead to higher costs and lower service levels.

Total supply chain costs _________________________________________________________________________________________________________________.

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Carrier Selection

The most important criteria to consider for carrier selection are competitive rates, customer service, transit time reliability, pick-up and delivery service, availability of equipment, loss and damage claims, electronic data interchange (EDI), geographic coverage, problem resolution, insurance coverage, and billing accuracy.

_____________________________________________________________.

The shipper gains a competitive ______________________________________________________________________________________________.

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Carrier Selection

Using multiple shippers is perhaps better than using a single shipper.– By diversifying the shipments, you achieve better prices

and higher service quality. When more than one carrier is used, evaluation of the carrier is easier.

_______________________________________________________________________________.

Some of the performance measures __________________________________________________________________________________________.

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Carrier Evaluation

Remember, the primary objective of the buying/shipping firm is to provide for cost-effective continuous operation of the business by ensuring the availability of goods and services.

__________________________________________

_________________________________________________.

The general consensus is that ____________________________________________________________________.

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Rate Determination

Rate making in non-regulated transportation markets.

Railroad movements of fresh fruits and vegetables, piggyback traffic, box cars, frozen food, and various building products are no longer regulated by the ICC.

Air cargo rates were deregulated between 1977 and 1979. In these cases, carriers can change whatever they like with no advanced warning.

Rate making in regulated transportation markets.

There are still many transportation sectors that a reregulated by the ICC. The rates for common carrier service that are filed must be either offered to all customers or offered only to the customer for which the carrier has negotiated with the federal government, which has been involved in the ratemaking business since the Interstate Commerce Act in 1887.

The original purpose of federal government involvement was to protect both the customer and the carrier from unhealthy competition. In today’s business environment, this involvement is criticized.

The pricing of transportation services is determined in two ways, depending on whether federal regulation applies:

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The Rate Quotation Process

Submitting rate quotations to shippers involves a complex process.

The complexity is the result of the millions

of different commodities that are shipped, _____________________________________________________________________________________________________________________________________.

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Factors Considered in Rating FreightThere are numerous factors that are included in rate

determination for a particular commodity. These

factors include the following:

1. _____________________.

2. __________________.

3. Perishability.

4. ___________________________________.

5. Liability for spontaneous combustion or explosion.

6. ________________________________.

7. _____________________________________.

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Factors Considered in Rating Freight8. ____________________________________.9. Excessive weight.10. Excessive length.11. ____________________________________.12. Trade conditions.13. _____________.14. __________________________________.

15. Quantity offered as a single consignment.

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This list of the factors is compounded by the specific commodity that is being shipped. The basic steps involved in the determination of the applicable rates are as follows:

1. Use the classification to look up the commodity being shipped and determine its rating

2. ____________________________________________________________________________________

3. Cross-reference ________________________________________________________________________________________.

Factors Considered in Rating Freight

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Rate Negotiation

Deregulation has given carriers more pricing freedom; negotiating skills have become very important for both carriers and shippers.

______________________________________________________________________.

_____________________________________.

____________________________________________________.

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Rate Negotiation

In many instances, the negotiation process in transportation has become more formalized.

_______________________________________________________________________.

_____________________________________

__________________________________________________________________.

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Rate Negotiation Negotiation is a management process that involves

planning, analysis, and reviewing.

Negotiation activities are influenced __________________________________________________________________________.

The environment factors include competition, technology, and legislation.

_________________________________________________________________________________.

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The business climate between shippers and carriers offers an a priori assessment of the power dependence relationship.

Bargaining activities __________________________________________.

____________________________________________

_______________________________________.

A day should be set aside to handle _____________________________________.

The Negotiations Process

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Rate Negotiation Negotiate at the buying organizations facilities.– ________________________________________

________________________________________________________________________.

Technology also influences the transportation negotiation process. – Computer technology offers shippers real-time

information related to shipment tracking, _______________________________________________________________________________________________.

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Legal Constraints and Restrictions

Shippers and carriers _____________________________________________________________________________.

They must consider the implications of legal constraints on each movement under the final contractual agreement.

_________________________________________________________________________________________________________________.

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Third-Party Relationships There are several challenges that buyers face in order

to transfer logistics activities to a third party.

__________________________________________________________________________________.

In some cases, the third-party logistics decision is made in the finance department and not at the operations and logistics level in the shippers’ firm.

___________________________________________

__________________________________________.

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Negotiations Strategy with Third Party In developing a negotiation strategy,

__________________________________________________________________________________.

As with any other buying situation, the shipper must

establish a set of desires (costs) and demand (services) expected from the carrier.

The first step

______________________________________________________________________________________________________________________________________. – Only those third parties that can meet certain minimum service

levels will be offered an opportunity to negotiate.

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If the shipper only requires standard third-party service but desires a longer-term relationship, the bidding process is appropriate.

The shipper ___________________________________________________________________________________________________________________________________________________.

Third-Party Relationships

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Third-Party Relationships Once a relationship between a shipper and a third

party is established, ___________________________________________________________________.

The scope of the operation section of the contract must be detailed and specific.

Activities such as vehicle spotting, __________________________________________________________________________________. – The performance measures should be part of the

agreement.

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Third-Party Relationships

Specific performance measures are __________________________________________________________________.

Many firms require certain indemnification clauses to be included with any third-party agreement with suppliers.

__________________________________________________________________________________________________________________________.

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Freight Consolidation

____________________________________.

To take advantage of these rate economies, the shipper should attempt to consolidate shipments.

____________________________________.

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Documentation/Tracing/Claims

_____________________________________________________________________________________.

This serves as the basic contract between the carrier and shipper and specifies the commodities and quantities shipped, routing, rates, and carrier liability.

___________________________________________.

________________________________________________________________________________.

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Terms and Conditions of Transportation Purchasing

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Freight Terms ________________________________________

______________________________________________________________.

Freight terms outline the responsibilities of the shipper and carrier.

The following definitions must be understood before entering into an agreement:– Prepaid _____________________________.

– Collect_____________________________.

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Freight Terms Prepaid/collect beyond

___________________________________________________________________________________________________.

Third-party _________________________________________________________________.– The legal payment function may or may not

belong to the third party.

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Freight Terms The obligation is determined from the parties

indicated on the bill of lading contract. – _______________________________________________

______________________________________________________________________________.

Prepay and add ___________________________________________________________________________________________________________________________.

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Terms of Sale/Purchase The terms of sale or purchase are used to

identify the passage of title and are usually expressed by an F.O.B. designation: F.O.B. origin or F.O.B. destination.

– F.O.B. origin means ____________________________________________________.

– F.O.B. destination _______________________________________________________________________.

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Bills of Lading

Bills of lading convey the freight terms andact both as a contract for carriage and areceipt for delivery.

1.Order notify bills of lading ___________________________________________________________.

2.Sales/purchase orders ____________________________________________________________.

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THREE TRANSPORTATION PURCHASING EXAMPLES

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Ross Laboratories

Background Ross Product Division was founded in 1903 by

Harry Moores and Stanley Ross under the name of Moores and Ross Milk Company in Columbus, Ohio. They were the first to operate the old stand-and-drive milk truck.

They were also the first to deliver milk in glass bottles to homes. In 1924 the partners made an innovative move by producing and marketing milk-based infant formula, and in 1959 the company introduced Similac with Iron infant formula.

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Ross Labs Selection Criteria The core carriers for Ross’s transportation needs are KLLM, Martin,

ROCOR, FWC, Gasel, Consolidated Freightways, UPS, and Federal Express. Ross’s carrier selection criteria consist of the following:

1. ____________2. Equipment base3. ______________4. Cost containment and reduction programs5. ___________________6. Nature of client base7. _________________________8. ________________________9. Rates10. Accessories11. __________________________12. _________________________

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The Ross Pricing Process

The executive in charge of purchasing transportation services stated that in order for Ross to negotiate effectively, they must understand the cost drivers associated with each potential transportation mode.

___________________________________________

__________________________________.

He also stated that the competitive bidding process is used exclusively for third-party carrier relationships.

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Consolidated StoresBackground Consolidated Stores is the nation’s largest

broadline closeout retailer with annual sales over $3 billion and more than 1,300 stores nationwide.

In 2004, all of the store names were changed to Big Lots, Inc. The company has more than 45,000 employees.

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Consolidated Stores

Annual sales have increased by at least 11 percent since 1991. The company opened 83 new stores and 105 new furniture departments.

The company has stores in 46 states; distribution

centers are located in Columbus, Ohio; Montgomery, Alabama; Rancho Cucamonga, California; and Tremont, Pennsylvania.

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The core carriers for the distribution centers’ needs are UPS, BNSF, CSX, NS, and KCS rail lines along with stack train operators such as Mitsui, Pacer, and K-line. The stack train operators utilize the railroad tracks, ramps, and trains.

The core trucking companies are J. B. Hunt and Warner. The core drayage carriers are Total Express, BTT, We R Drayage, Golden Eagle, and Pacer Cartage.

Finally, the core steamship carriers are Trailer Bridge, Crowley, Navieras, Sea Star, CSX Lines, Maesk Seal, Mitsui, Yang Ming, Hanjin, Hyundai, and P&O Nedloyd.

Transportation Purchasing at Consolidated Stores

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According to the executive in charge of purchasing transportation services, Consolidated’s carrier selection criteria consist of the following:

1.____________________________.2.________________________________.3._______________________________4.______________________________.5.__________________________.

Consolidated Stores Selection Criteria

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The Consolidated Pricing Process Both electronic and conventional competitive

systems are used at Consolidated. _________________________________________

______________________________________.

The bidders are required to fill in a standard spreadsheet and e-mail it to Consolidated before the deadline.

According to the executive in charge of purchasing transportation services, __________________________________________________________.

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Copeland Inc.Background

Copeland was founded in 1921 by Edmund Copeland in Detroit, Michigan. Copeland manufactures scroll compressors for commercial air conditioning.

The company has more than 8,000 employees and gross sales of $15.5 billion. Copeland manufactures its products in 11 countries throughout North America, Europe, and Asia.

Copeland currently maintains contracts with four major steamship lines, 18 LTL motor carriers, four truckload carriers, and three multimode carriers.

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Copeland Inc. Selection Criteria

According to the executive in charge of purchasing transportation services, Copeland’s carrier selection criteria consist of the following priorities:

1. _______________

2. _______________

3. Experience

4. ______________

5. Financial stability

6. ______________

7. __________________

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The basic contract is the same for both LTL and truckload carriers. However, the specific negotiating techniques are different.

In the case of truckload traffic, price is negotiated on lines for which the carrier is strongest. The result is usually lower cost and higher service.

On the other hand, LTL traffic is negotiated based on frequency and size of shipment organized locally or regionally.

Copeland Inc.

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Copeland Inc. Quoting ProcessThe competitive quoting process atCopeland is as follows:

1. ____________________________________.2. Prequalify eligible bidders.3. ________________________________________.4. Set the rules of engagement.5. ____________________________.6. Select the best service provider.7. _______________________.

8. Implement program.