Transportation

3.3 Physical Distribution and Commercial Logistics

Introduction

The transportation system is essential in connecting companies to customers, suppliers, and other logistical points, directly impacting organizational performance, costs, and customer satisfaction. Transportation not only links fixed logistical points but also adds value by ensuring goods are available at the right time and place. The geographical distance between production sources and markets, often due to economies of scale, further highlights transportation’s role. Logistics management in manufacturing and production involves planning, implementing, and controlling the flow and storage of goods from origin to consumption. Key logistics activities include sourcing, procurement, production planning, and customer service. Technological advancements are shaping global supply chains, enhancing efficiency in logistics management.

Transportation Infrastructure:

Transportation infrastructure is split into hardware (physical assets like terminals and vehicles) and software (services like maintenance). The type of infrastructure affects each mode’s economic and legal aspects, which are vital for deciding transportation methods based on shipment needs, especially for high-value or time-sensitive goods. The main modes include:

1. Rail: Efficient for large shipments over long distances, railroads have high fixed costs but low variable costs, benefiting from economy of scale in intercity tonnage transport.
2. Motor Carriers (Highways): Known for flexibility and speed in short-haul and high-value shipments, they face high variable costs due to labor but offset these with innovations like tandem operations.
3. Water Transport: Optimal for bulk goods, with moderate fixed costs and low variable costs, though limited by navigable routes and slower speeds. Water transport competes with rail in bulk goods transport.
4. Pipelines: Ideal for gas, liquid, and slurry, pipelines have high fixed costs but extremely low variable costs, operating continuously with minimal labor needs.
5. Air Transport: Fast but costly, suitable for high-value and time-sensitive shipments. Air freight has low fixed costs and very high variable costs, making it suitable for urgent deliveries, especially in overnight services offered by companies like FedEx.
   

These modes have distinct cost structures and advantages, influencing logistics choices based on shipment size, value, and required delivery speed.

Mode	Nature of Traffic Composition
Rail	Extracting industries, Heavy manufacturing, Agricultural commodities
Highway	Medium and light manufacturing, Distribution between wholesalers and retailers
Water	Mining and basic bulk commodities, Chemicals, Cement, Some agricultural products
Piepeline	Petroleum, Coal slurry, No particular commodity
Air	Emergency rather than regular basis

Transport Functionality & Principles:

Transportation serves two main functions:

1. Product Movement: Essential for moving goods through production stages or closer to the customer, aiming to add value without wasting resources.
2. Product Storage: Used less frequently, transport vehicles may temporarily store goods when in-transit storage costs less than unloading and reloading. Diversion, or changing the delivery destination mid-transit, is also used for flexible storage.

Principles of Transportation:

1. Economy of Scale: Larger shipments reduce transportation costs per unit of weight as fixed costs are spread across more goods.
2. Economy of Distance: The cost per mile decreases as travel distance increases, allowing fixed costs to be spread over a longer distance.
   

Together, these principles guide transportation strategies to optimize load size and shipping distance while meeting customer needs effectively.

Participants in Transportation Transactions:

Transportation transactions involve five main participants: shipper, consignee, carrier, government, and public.

1. Shippers and Consignees: Aim to move goods efficiently from origin to destination at minimal cost, valuing timely and damage-free delivery.
2. Carriers: Serve as intermediaries, prioritizing revenue maximization and cost reduction. They seek flexibility in scheduling to consolidate loads and reduce expenses.
3. Government: Ensures a stable transportation environment essential for economic growth. Governments may regulate carrier services, promote industry development, or own transportation assets, influencing markets and economic success.
4. Public: Focuses on the accessibility, cost, and safety of transportation. Environmental concerns, like pollution and safety standards, are significant, affecting cost and consumer demands.
   

Infrastructure & Regulations: Transportation infrastructure includes routes, vehicles, and organizations, shaping the economic and legal aspects of each transport mode (e.g., rail, highway). Regulations ensure smooth transport, especially in international trade, where various documents and government oversight play critical roles. Historical laws, like the 1887 Act to Regulate Interstate Commerce, reflect long-standing government involvement.

Transport Structure: The structure consists of five modes: rail, highway, water, pipeline, and air, evaluated by system mileage, traffic volume, revenue, and freight type.

Transport economics

Transport economics and pricing focus on factors that determine transport costs and rates. Key factors include:

1. Distance: Influences costs by affecting variable expenses like labor and fuel. Fixed costs for pickup and delivery mean the cost curve doesn’t start at zero and rises at a decreasing rate.
   

1. Volume: Economies of scale reduce costs per unit as load volume increases, limited by vehicle capacity. Consolidating small loads improves economic efficiency.
   

1. Density: High-density products are transported more cost-effectively as they better utilize vehicle capacity.
2. Stowability: Space utilization depends on product dimensions; odd shapes or sizes lead to wasted space.
3. Handling: Specialized equipment or techniques (like palletizing) can reduce handling costs.
4. Liability: Carriers account for the risk of damage, perishability, theft, and other liabilities, which can be mitigated with protective packaging.
5. Market Factors: Demand imbalances create “deadhead” trips (empty returns), increasing costs unless balanced by “back-haul” loads.
   

Total Transportation Costs

Total transportation cost includes not only the base rate for moving goods but also several additional expenses:

1. Transit Time Cost: The longer goods are in transit, the more inventory costs accrue, as items are inaccessible. Longer transit increases the need for safety stock and working capital.
2. Obsolescence and Deterioration Cost: Perishable or delicate items, like vegetables, may lose value over time due to delays, leading to potential sales at reduced prices.
3. Protective Packaging Costs: Products may require specialized packaging to avoid damage, contributing to overall transportation costs. For instance, using containers can reduce protective packaging needs compared to shipping by truck.
4. Insurance Costs: Transit insurance covers goods against loss or damage during transport, essential for both domestic and international shipments.
5. Class Rates: Transport rates are based on the classification of goods, with higher-rated products (based on characteristics like density and stowability) incurring higher costs. Packaging variations also impact classification and rates.
6. Other Costs: Additional expenses, such as terminal fees, management costs, tolls, and taxes, are typically applied in road transport.
7. Joint Costs: These are costs that are unavoidable when providing certain services, like operating a particular transportation mode.
   

Strategic decisions in transportation, such as choosing modes (e.g., rail, truck, air), shipment size, frequency, and load allocation, are typically guided by cost models to optimize total transportation and inventory expenses.

Transportation Administration and Documentation

Traffic managers in transportation administration oversee six key responsibilities to ensure efficient logistics:

1. Operations Management: Involves scheduling, load planning, routing, and carrier management to maintain smooth logistics.
2. Freight Consolidation: Combining shipments to reduce costs and improve security, using reactive or proactive methods to maximize transport efficiency.
3. Rate Negotiation: Ensuring the lowest rates that meet service standards across various transport modes, guided by tariff references.
4. Freight Control: Managing shipment tracing to locate delays or lost items, and expediting urgent deliveries to minimize disruptions.
5. Auditing and Claims: Auditing bills for accuracy and handling claims for losses, damages, or rate discrepancies.
6. Logistical Integration: Meeting transportation needs within budget while exploring ways to lower logistics costs overall.
   

As expectations for faster delivery and precise operations grow, effective management of these areas is essential for supporting procurement, production, and customer satisfaction.

Documentation

Three primary documents are essential for transportation services to clarify responsibilities and protect involved parties:

1. Bill of Lading: This fundamental document acts as a receipt, listing products and quantities, and outlines carrier liability for losses or damages, excluding unavoidable events like natural disasters.
2. Freight Bill: Based on the bill of lading, this is the carrier’s invoice for transport services. It can be prepaid or collected upon delivery.
3. Shipment Manifest: For multi-stop shipments, it lists stops, bills of lading, weights, and case counts, offering an overview of the load’s contents without reviewing each individual bill of lading.
   

These documents ensure clear legal responsibility, essential when products are sold and transferred during transport, safeguarding all parties in the transaction.