MANAGING TRANSPORT

OPERATIONS
JLB 20103

Prepared by:
MOHD LUTFI BIN NADZAR
Department of Logistics Studies
UniKL MITEC
Johor Bahru
 CHAPTER 2:

TRANSPORT OPERATION PROCESS

 INTRODUCTION
 Transportation is the single largest element in logistics
 It is also the most visible elements of logistics
 In the last three decades, the role of transportation has
also changed drastically
 Thus, a logistician needs a good understanding of
transportation matters
 This chapter will try to highlight what is essential to the
logistician for his managerial purposes
 The focus would be on examining the functionality and
characteristics between transport alternatives
 TRANSPORT
FUNCTIONALITY
 Transportation enterprises provide two major services:
1. Product Movement
 The basic value provided by transportation is the utility of

place
 In logistics, this is the movement of freight to the specified

destination
 Transport is vital to procurement, manufacturing and

customer accommodation
 It consumers time, financial and environmental resources
 TRANSPORT
FUNCTIONALITY
Transportation enterprises provide two major services:
2. Product Storage
The less visible aspect of transportation
While a product is in a transportation vehicle, it is being stored

Transport can be used as storage at shipment origin or

destination but hey are comparatively expensive
A vehicle committed to storage is not available for transport

Trade-off exists for movement or storage purpose

For example, if products are to be shipped within a few days, it

is acceptable to use vehicles as a storage point
 TRANSPORT OPERATION
PRINCIPLES
The economic efficiency of transport is impacted by:
1. Economy of Scale
 Refers to the reduction in the cost per unit of weight as the

size of shipment increases

 For example, truckload shipment utilizing the full capacity of

vehicle will have a lower cost per kg than smaller shipments

 This principal is also true for larger-capacity transport modes

 For example, rail and water vehicles, are less costly per unit

of weight than smaller capacity vehicles

 Economies of scale exists because fixed cost associated with

transporting a load is allocated over the increased weight

 For example, the administration and documentation cost is

the same for a 100-kg shipment as to a 1000-kg shipment

 TRANSPORT OPERATION
PRINCIPLES (CONT)
 The economic efficiency of transport is impacted by:
2. Economy of Distance
 Refers to the decrease in cost per unit of weight as

distance increases
 For example, a shipment of 800 km will cost less than two

shipments of the same weight each moving 400 km

 The economics 
              
of distance is often called the tapering
principle
 The rationale for distance economies is similar to

economies of scale
 Cost are spread over the distance covered
 Service Choice Consideration

 The user of transportation has a wide range of services to choose

from
 This revolve around the five basic modes: water, rail, truck, air
and pipeline
 The variety of transport service is almost limitless; they may be
used in combination or used exclusively
 A transport service is a set of performance characteristics
purchased at a given price
 To aid in solving the problem of transportation service choice,
decision makers often view the following characteristics:
 Price
 Transit Time and Variability
 Loss and Damage
 Service Choice Consideration
(cont)
A. Price
 This is simply the line-haul rate for transporting goods and
any accessorial or terminal charges for the service provided
 In the case for hire service, price may include additional
charges such as insurance and the preparation of goods for
delivery
 Cost of serve varies greatly from one mode of transport to
another
 Generally airfreight is the most expensive, while pipeline
and water transport are the least expensive
 Service Choice Consideration
(cont)
B. Transit Time and Variability
 Surveys have shown that average delivery time and delivery time
variability are at the top of the list as important transportation
performance characteristics
 Delivery time is referred to as the average time taken to move a
shipment from origin to destination
 Delivery time varies between mode, but it is important to realize
that the best method of evaluation should be based on door-to-
door transit time
 While modes like air transport have high service speed, their
delivery time are dependent on the availability of connecting
services
 Variability refers to the usual differences that occur between
shipment by various modes
 Decision makers often prefer modes with low time variability as it
facilitates planning and standards expectation
 Service Choice Consideration
(cont)
C. Loss and Damage
 The ability of modes to move freight without loss and damage
differs
 Loss and damage experience is also an influential factor in
determining the carrier selected
 The primary consideration will be the product characteristics
and condition
 Different product have different characteristics (i.e.
perishable, value) and this often determines the risk of loss and
damage involved
 Another consideration is the loss in terms of customer service
 For example, delayed shipments will not only result in goods
arriving in unusable condition but may also expose the
organization to the risk of potential claims and the loss of
patronage
 Transport Pricing Economics
 The economics of transport pricing are concerned with
factors and characteristics that drive cost
 To develop effective logistics strategy, it is necessary to
understand such factors and characteristics
 Successful trade-off decisions often require a full
understanding of transportation economics
 The considerations in pricing economics include:
a. Economic Drivers
b. Costing
c. Carrier Pricing Strategy
d. Transportation Rates and Ratings
 Transport Pricing Economics
(cont)
a. Economic Drivers
 Transportation economics are driven by seven factors
 While not direct components of transport tariffs, each
factor influences rate
 The factors are:
i. Distance
ii. Weight
iii. Density
iv. Stowability
v. Handling
vi. Liability
vii. Market
 Transport Pricing Economics
(cont)
a. Economic Drivers (cont’d)
i. Distance
 Is a major influence on transport cost since it directly contributes
to variable expense
 Example: Labor, fuel and maintenance
 Distance cost are affected by the tapering principle; the longer
the distance the lower the cost per unit of weight

ii. Weight
 As mentioned earlier, transport cost is affected by scale
economies
 Transport cost per unit of weight decreases as load size increases
 The managerial implication is that small loads should be
consolidated into larger loads to maximize scale economies
 Transport Pricing Economics
Transport costs
(cont)

Distance
Generalized Relationship between Density
Ahmad Razi Ramli 2007 and Transport Cost
 Transport Pricing Economics
Transport costs
(cont)

Weight of load
Generalized Relationship between Weight
Ahmad Razi Ramli 2007 and Transport Cost
 Transport Pricing Economics
(cont)
a. Economic Drivers (cont’d)
iii. Density
 Density is the combination of weight and volume
 Important because vehicles are often constrained by cubic
capacity rather than weight limitations
 Higher density products are typically charged lower transport cost
per unit of weight as the cubic capacity of vehicles can be fully
utilized

iv. Stowability
 Refers to how product dimensions fit into transport equipment
 Odd package sizes and shapes, as well as excessive length or size,
may not fit well in transportation equipment
 Although density and stowability appears similar, it is possible to
have items that stow differently
 For example, rectangular shapes are much easier to stow than
odd-shaped items (i.e. steel blocks vs. steel rods)
 Transport Pricing Economics
Transport costs
(cont)

Product Density
Generalized Relationship between Density
Ahmad Razi Ramli 2007 and Transport Cost
 Transport Pricing Economics
(cont)
a. Economic Drivers (cont’d)
v. Handling
 Special handling equipment may be required to load and unload
vehicles
 In addition to special handling equipment, the manner in which
products are physically grouped together in boxes or pallets will
impact handling cost

vi. Liability
 Includes product characteristics that can result in damage
 Carriers must have insurance or be prepared to accept financial
responsibility
 The higher the possibility of product damage, the higher the cost
in terms of liability involved
 Transport Pricing Economics
(cont)
a. Economic Drivers (cont’d)
vii. Market
 Market factors such as lane volume and balance influence cost
 Transport lane refers to movements between origin and
destination points
 For example, since vehicles return to their origin, they must find a
back haul load or it will return deadheaded empty
 When empty return movement occur, the cost must be charged
against the original front haul movement
 The ideal situation is to achieve a two-way load; if not imbalances
will affect the cost incurred in the provision of service
 Transport Pricing Economics
(cont)
b. Costing
 The second dimension of transport economics and pricing
concerns the criteria used to allocate cost
 Cost allocation primarily the concern of the carrier, but
since cost structure influences trade-off alternatives,
shipper’s perspective must be included as well
 Transport costs are classified into:
 Variable
 Fixed
 Joint
 Common
 Transport Pricing Economics
(cont)
b. Costing (cont’d)
 Variable Cost
 Costs that change in a predictable, direct
manner in relation to some level of
activity
 Can be avoided by not operating the
vehicle
 Transport rates usually covers variable
cost; typically in the form of labor, fuel
and maintenance cost
 Represents the minimum amount a carrier
must charge for service and generally
measured in terms of cost per mile or per
unit of weight
 Transport Pricing Economics
(cont)
b. Costing (cont’d)
 Fixed Cost
 Expenses that do not change and must be paid even when a
company is not operating
 Include cost not directly influenced by shipment volume
 For example: vehicle cost, terminal cost, cost associated with
information system and support equipment

 Joint Cost
 Expenses created by the decision to provide a particular service
 For example, when a carrier elects to haul a truckload from point
A to point B, there is an implicit decision to incur joint cost for
the backhaul from point B to point A
 Joint cost have significant impact on transportation charges
 Transport Pricing Economics
(cont)
b. Costing (cont’d)
 Common Cost
 Includes carrier costs that are incurred on behalf of all or
selected shipper
 Common costs, such as terminal or management expenses, are
characterized as overhead
 Often allocated to a shipper according to a level of activity like
the number of shipments or delivery appointments handled
 Transport Pricing Economics
(cont)
c. Carrier Pricing Strategy
 When setting rates, carriers typically follow one or a
combination of two strategies
 Although it is possible to employ a single strategy, the
combination approach considers trade-offs between costs of
service incurred by the carrier and value of service to the
shipper
 Pricing strategies are categorized as:
 Cost of Service
 Value of Service
 Combination
 Net-Rate
 Transport Pricing Economics
(cont)
c. Carrier Pricing Strategy (cont’d)
 Cost of Service Strategy
 Is a buildup approach where the carrier establishes a rate
based on the cost of providing service plus a profit margin
 For example, if the cost of service is RM 200 and the profit
margin is 10%, the charge imposed would be RM 220
 The cost of service approach, represents the base or
minimum for transportation charges
 It is most commonly used as a pricing approach for low value
goods or in highly competitive situations
 Transport Pricing Economics
(cont)
c. Carrier Pricing Strategy (cont’d)
 Value of Service Strategy
 A strategy that charges a price based on value as perceived by
the shipper rather than the actual cost of providing the service
 For example, a shipper perceives the transportation of 1000 kg of
electronics equipment to be more valuable than 1000 kg of coal,
since the electronic equipments are worth substantially more
than the coal
 Shipper is perceived to be willing to pay more for such situations
 Carriers tend to utilize this strategy for high-value goods or when
there is limited competition
 Value of service pricing is illustrated by the premium charge
imposed for overnight freight market by DHL and FedEx
 Transport Pricing Economics
(cont)
c. Carrier Pricing Strategy (cont’d)
 Combination Strategy
 Establishes transport price at an intermediate level between
the cost-of-service minimum and the value-of-service maximum
 Most transport firms use a determined midrange pricing
 Logistics managers must understand the range of prices to
affectively understand the cost trade-off involved

 Net Rate Strategy

 Net rate pricing is a simplified pricing format
 This approach does away with complex discount procedures
based on specific customers
 Pricing is based on a single all-inclusive format
 Transport Pricing Economics
(cont)
d. Transportation Rates and Ratings
 Transportation rates are complex and the structures
employed date to the time of regulation, when
committees of carriers would establish rates subject to
the approval of some regulatory agency.
 Rate structure deals with three factors:
i. Relationship between different products, in term of
handling characteristics. Eg: the difference between
carrying 2000 kg of ball points and 2000 kh of chicken
ii. Relationship between different weight. Eg:
shipments of 1 kg each, 10 kg each or 100 kg each
iii. Relationship between different distance.
 Shipments
Routing Guides (Shipping Guides) contain instructions for choice of
mode and carrier for every shipment.
Today, many of routing guides are computerized, and the decision
regarding how to ship is determined at the time of order processing ,
with the appropriate documents and labels produced by computers.

5 general types of shipments:

a. Small-Volume Shipments
b. Less Truck Load (LTL) or Less Container Load (LCL)
c. Full Truck Load (FTL) or Full Container Load (FCL)
d. Bulk
e. Project Cargo and Oversized Moves
Small Volume Shipments - Parcel
 Shipment less than 50 kg.
 Walk in customers brings in materials to be packaged and
sent via mail, UPS, or other forms of transport.
 In some cities, taxis can be used to deliver packages.
 In Malaysia, parcel is a service of Pos Malaysia that has
definite size and weight limitations. Charge are based on
weight and distance and are relatively low. In most cases,
a parcel must be carried to the post office, but it will be
delivered to the shipper.
 United Parcel Service is the best-known parcel carrier,
which now operates in 200 countries and financially dwarfs
any other transportation company. The firm has over
345,000 employees, 157,000 trucks and 600 planes.
 LTL Shipments
- Freight Forwarders
 Act as agents
 Most popular in road and air transportation.
 Eg:
A road carrier rate from Pasir Gudang to Kuala Lumpur might be
RM500 per 100 kilograms for shipments under 2000 kilograms.
This is called Less Truck Load (LTL) or Less Container Load (LCL)
rate. The Full Truck Load (FTL) or Full Container Load (FCL) rate
might be RM200 per 100 kilograms when shipments of 2000
kilograms or more are tendered. The freight forwarder exist by
offering a service to shippers that must use LTL rates because
they do not generate enough volume to use FTL rates. Without
the freight forwarder, the small shipper has to use the RM500/100
kg rate. The freight forwarder, however, offers the same
transportation service for a rate between the LTL and FTL rate –
say, RM400. This is possible because the freight forwarder
consolidates all the small shipments it has and gives them to the
carrier and hence qualifies for the RM200/100 kg rates.
LTL - Shippers’ Cooperatives
 Perform basically the same function as surface and air freight
forwarders, except they do not operate as profit-making organizations.
 All profits achieved through their consolidation programs are returned
to members.
 This type of consolidation program has been well received by shippers

LTL - Brokers
 Act as a facilitator who brings together a buyer and seller.
 Some brokers handle LTL shipments by consolidate the
shipments and then turn them over to truckers,
forwarders, or shippers’ association.
 FTL
FTL Shipments cost less than LTL for three reasons:
1. The shipper loads and the consignee unloads the
trailer
2. The load goes directly from shipper to consignee
without passing through terminals.
3. Paperwork, billing and control costs are no more for a
truckload than they would be for a 100 kg shipment.

FTL can be calculated on a one-shot or single trip basis, or they may be to

cover a span of time – say, two truckloads a week for one year.

Split delivery, in which the truck carries a full load but delivers portions of
that full loads to several address, also possible
 Bulk Shipment
 Bulk cargo travels in loose rather than in packaged form and is
handled by pumps, scoop, conveyer belts, or the force of gravity
 Bulk cargo has various handling characteristics and an ideal
equipment configuration for one bulk cargo may not be able to handle
another
 Bulk cargo can be transported by truck hauls, rail, water carriers and
pipelines.

Project Cargo and Oversized Moves

 The movement is so unique and so difficult that a specialized
engineering-logistic study is needed to determine how the move
should be accomplished.
 Rate and Service Negotiations
 In many corporations, the decision to use more expensive forms of
transport is made by senior management.
 In fact, rate and service negotiations is the major activities that transport
manager involve.
 Normally, rate and service are being considered together in a negotiation.

Items of Negotiations
 Billing procedures
 Pallet Loading and Unloading
 Carrier equipment and driver
 How loss and damage claims are handled
 Proof of delivery
 EDI capability
 Tracing service
 Back hauling capability etc
 Private Transportation
 Result from frustration with inconsistent service on some
shipments
 In most private road transport fleet had many more trailers
than prime movers because trailer were dropped off and left
to be loaded and unloaded
 Reasons for private transportation:
a) Improved level of customer service
b) Advantage from advertising of products by way of the
billboards that appear on the vehicles. Petroleum companies
like to have deliveries to filling stations made in tank trucks
carrying their brand names rather than unmarked truck.
 Both private and contract carrier can be used simultaneously,
that can provide valuable knowledge of the costs of running
transportation and in a better position to evaluate the merits
of carrier rate proposal.
 Documentation
 BILL OF LADING (BL) – The most important single document in
general transport. It functions as a delivery receipt when products
are tendered to carriers.
 On receipt of the freight, the carrier signs the BL and gives the
original to the shippers. The signed original of the BL is the shipper’s
legal proof that the carrier received the freight.
 BL is a binding contract, specifying the duties and obligations of
both carrier and shipper.
 Two types of BL:
- Straight BL, the name of the consignee is stated in the
appropriate place and the carrier is under a strict legal obligation to
deliver the freight to the named consignee and to no one else.
- Order BL, the name of the consignee is not stated
 FREIGHT BILL – An invoice, submitted by the carrier, requesting to
be paid. The transport manager must approve each freight bill
before it is paid.
 Transaction with government usually involve the issuance of LOCAL
ORDER (LO) by the government.
 Diversion and Reconsignment

 DIVERSION occurs when the shipper notifies the

carrier, prior to the shipment’s arrival in the
destination city, of a change in destination.
 RECONSIGNMENT is a also a change in destination
but it occurs after the shipment has arrived in the
destination city. These services are commonly used
in conjunction with order BL. They are also used by
shippers of perishables goods that starts their loads
in the direction of the market and sell them while
they are en route.
 Tracing and Expediting
 TRACING is the attempt to locate lost or late shipments.
When the transportation department determines that a
shipment has not arrived at its destination on time, it may
contact the carrier to whom it tendered the shipment and
ask the carrier to trace the shipment, for no cost. Tracing
should be requested only when a shipment is unreasonably
late. Nowadays, tracing is done by by computer system.
 EXPEDITING involves notifying the carriers as far in
advance as possible of the need to expedite or rapidly
move a shipment through the carrier’s system. The carrier
makes every effort to ensure that the shipment is
delivered to its destination with maximum speed.
 A general observation today would be that both tracing
and expediting are less likely to be used as carriers are
performing better today.
 Loss and Damage
 Cargo loss and damage has been the bane of the transportation
industry since day one and filing claims against carriers is a
routine matter.
 If carrier and shipper are not able to solve a dispute over a loss
and damage claim, the dispute is handled by the court system.
The administrative costs in handling freight claims is absorbed
by the shipper or consignee.
 The value to be paid to the claimer is either the wholesale
price or retail price
 Concealed loss or damage is a situation where the exterior
package of freight does not appear to be damaged or tampered
with. The consignee opens the package and finds that the
product damage or missing. In this case, the carrier is exempted
from liability because improper packaging is the fault of the
shipper.
 Transit Privileges
 Is offer by some carriers, allow cargo to be stopped en route
between its initial origin and final destination and to be
unloaded, stored, or processed and then reloaded for shipment
to its final destination.
 Although the products move from A to B and later, from B to
C, the total charges are for only A to C.

Reparations
 Are payments made to a shipper by a carrier that has charged illegally
high rates in the past. The traffic manager must be assertive to protect
the interests of his or her company, even it involves alienating carriers.
 Reparations are also collected is some instances in which carriers do
not live up to the terms of their contracts with shippers.
 Demurrage
 Demurrage is a penalty payment made by the shipper or consignee
to a carrier for keeping a transport equipment beyond the time
when it should be released back to the carrier.
 It is also collected by inland water carriers if their barges are kept
by the shipper or consignee for a longer period than allowed.
 Pipelines are involved demurrage if oil is stored in tanks at
destination is not removed within specified time limits.

Detention
 Basically the same concept as demurrage except that it usually refers to the
trucking industry.
 The carriers’ concern is that their equipment will be used as temporary
warehouses by either shippers or consignees.
 In haulage transportation, it has trailer detention charges.

Demurrage and Detention usually start after the expiration of the applicable
free time or grace period. Often demurrage and detention charge are
negotiable between parties involved
 Demurrage
 Demurrage is a penalty payment made by the shipper or consignee
to a carrier for keeping a transport equipment beyond the time
when it should be released back to the carrier.
 It is also collected by inland water carriers if their barges are kept
by the shipper or consignee for a longer period than allowed.
 Pipelines are involved demurrage if oil is stored in tanks at
destination is not removed within specified time limits.

Detention
 Basically the same concept as demurrage except that it usually refers to the
trucking industry.
 The carriers’ concern is that their equipment will be used as temporary
warehouses by either shippers or consignees.
 In haulage transportation, it has trailer detention charges.

Demurrage and Detention usually start after the expiration of the applicable
free time or grace period. Often demurrage and detention charge are
negotiable between parties involved