Transportation economics are driven by seven factors. While not direct components of transport tariffs,
each factor influences rates. The factors are: (1) distance, (2) weight, (3) density, (4) stowability, (5)
handling, (6) liability, and (7) market. The following discusses the relative importance of each factor from a
shipper’s perspective. Keep in mind that the precise impact of each factor varies, depending on specific
market and product characteristics.
Distance is a major influence on transportation cost since it directly contributes to variable expense, such as
labor, fuel, and maintenance. Figure 9.1 illustrates the general relationship between distance and
transportation cost. Two important points are illustrated. First, the cost curve does not begin at zero
because there are fixed costs associated with shipment pickup and delivery regardless of distance.
Second, the cost curve increases at a decreasing rate as a function of distance. This characteristic is
known as the tapering principle.
The second factor is load weight. As with other logistics activities, scale economies exist for most
transportation movements. This relationship, illustrated in Figure 9.2 , indicates that transport cost per unit of
weight decreases as load size increases. This occurs because the fixed costs of pickup, delivery, and
administration are spread over incremental weight. This relationship is limited by the size of the
transportation vehicle. Once the vehicle is full, the relationship begins again with each additional vehicle.
The managerial implication is that small loads should be consolidated into larger loads to maximize scale
A third factor is product density. Density is the combination of weight and volume. Weight and volume are
important since transportation cost for any movement is usually quoted in dollars per unit of weight.
Transport charges are commonly quoted per hundredweight (CWT). In terms of weight and volume,
vehicles are typically more constrained by cubic capacity than by weight. Since actual vehicle, labor, and
fuel expenses are not dramatically influenced by weight, higher-density products allow fixed transport cost
to be spread across more weight. As a result, higher density products are typically assessed lower transport
cost per unit of weight. Figure 9.3 illustrates the relationship of declining transportation cost per unit of
weight as product density increases. In general, traffic managers seek to improve product density so that
trailer cubic capacity can be fully utilized.
Stowability refers to how product dimensions fit into transportation equipment. Odd package sizes and
shapes, as well as excessive size or length, may not fit well in transportation equipment, resulting in wasted
cubic capacity. Although density and stowability are similar, it is possible to have items with similar densities
that stow very differently. Items having rectangular shapes are much easier to stow than odd-shaped
items. For example, while steel blocks and rods may have the same physical density, rods are more difficult
to stow than blocks because of their length and shape. Stowability is also influenced by other aspects of
size, since large numbers of items may be nested in shipments whereas they may be difficult to stow in small
quantities. For example, it is possible to accomplish significant nesting for a truckload of trash cans while a
single can is difficult to stow.
Special handling equipment may be required to load and unload trucks, railcars, or ships. In addition to
special handling equipment, the manner in which products are physically grouped together in boxes or on
pallets for transport and storage will impact handling cost.
Liability includes product characteristics that can result in damage. Carriers must either have insurance to
protect against potential damage or accept financial responsibility. Shippers can reduce their risk, and
ultimately transportation cost, by improved packaging or reducing susceptibility to loss or damage.
Finally, market factors such as lane volume and balance influence transportation cost. A transport
lane refers to movements between origin and destination points. Since transportation vehicles and drivers
typically return to their origin, either they must find a back- haul load or the vehicle is returned or
deadheaded empty. When empty return movements occur, labor, fuel, and maintenance costs must be
charged against the original front-haul movement. Thus, the ideal situation is to achieve two-way or
balanced movement of loads. However, this is rarely the case because of demand imbalances in
manufacturing and consumption locations. For example, many goods are manufactured and processed in
the eastern United States and then shipped to consumer markets in the western portion of the country. This
results in an imbalance in volume moving between the two geographical areas. Such imbalance causes
rates to be generally lower for eastbound moves. Movement balance is also influenced by seasonality,
such as the movement of fruits and vegetables to coincide with growing seasons. Demand location and
seasonality result in transport rates that change with direction and season. Logistics system design must
take such factors into account to achieve back-haul economies whenever possible.
The second dimension of transport economics and pricing concerns the criteria used to allocate cost. Cost
allocation is primarily a carrier concern, but since cost structure influences negotiating ability, the shipper’s
perspective is important as well. Transportation costs are classified into a number of categories.
Costs that change in a predictable, direct manner in relation to some level of activity are labeled variable
costs. Variable costs in transportation can be avoided only by not operating the vehicle. Aside from
exceptional circumstances, transport rates must at least cover variable cost. The variable category
includes direct carrier cost associated with movement of each load. These expenses are generally
measured as a cost per mile or per unit of weight. Typical variable cost components include labor, fuel,
and maintenance. The variable cost of operations represents the minimum amount a carrier must charge
to pay daily expenses. It is not possible for any carrier to charge customers a rate below its variable cost
and expect to remain in business long.
Expenses that do not change in the short run and must be paid even when a company is not operating,
such as during a holiday or a strike, are fixed costs. The fixed category includes costs not directly influenced
by shipment volume. For transportation firms, fixed components include vehicles, terminals, rights-of-way,
information systems, and support equipment. In the short term, expenses associated with fixed assets must
be covered by contribution above variable costs on a per shipment basis.
Expenses created by the decision to provide a particular service are called joint costs. For example, when
a carrier elects to haul a truckload from point A to point B, there is an implicit decision to incur a joint cost
for the back-haul from point B to point A. Either the joint cost must be covered by the original shipper from
A to B or a back-haul shipper must be found. Joint costs have significant impact on transportation charges
because carrier quotations must include implied joint costs based on assessment of back-haul recovery.
This category includes carrier costs that are incurred on behalf of all or selected shippers. Common
costs, such as terminal or management expenses, are characterized as overhead. These are often
allocated to a shipper according to a level of activity like the number of shipments or delivery
appointments handled. However, allocating overhead in this manner may incorrectly assign costs. For
example, a shipper may be charged for delivery appointments when not actually using the service.
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 cost of service incurred
by the carrier and value of service to the shipper.
The cost-of-service strategy is a buildup approach where the carrier establishes a rate based on the cost of
providing the service plus a profit margin. For example, if the cost of providing a transportation service is
$200 and the profit markup is 10 percent, the carrier would charge the shipper $220. The cost-of-service
approach, which represents the base or minimum for transportation charges, is most commonly used as a
pricing approach for low-value goods or in highly competitive situations.
An alternative strategy that charges a price based on value as perceived by the shipper rather than the
carrier cost of actually providing the service is called value-of-service. For example, a shipper perceives
transporting 1000 pounds of electronics equipment as more critical or valuable than 1000 pounds of coal,
since electronics are worth substantially more than the coal. Therefore, a shipper is probably willing to pay
more for transportation. Carriers tend to utilize value-of-service pricing for high-value goods or when limited
Value-of-service pricing is illustrated in the premium overnight freight market. When FedEx first introduced
overnight delivery, there were few competitors that could provide comparable service, so it was perceived
by shippers as a high-value alternative. They were willing to pay a premium for overnight delivery of a single
package. Once competitors such as UPS, and the United States Postal Service entered the market,
overnight rates were discounted to levels reflecting the value and cost of this service.
A combination pricing strategy establishes the transport price at an intermediate level between the cost-
of-service minimum and the value-of-service maximum. In practice, most transportation firms use
managerially determined midrange pricing. Logistics managers must understand the range of prices and
the alternative strategies so they can negotiate appropriately.
By taking advantage of regulatory freedom generated by the Trucking Industry Regulatory Reform
Act (TIRRA) of 1994 and the reduced applicability of the filed rate doctrine, a number of common carriers
are experimenting with a simplified pricing format termed net-rate pricing. Since TIRRA eliminated tariff filing
requirements for motor carriers that set rates individually with customers, carriers are now, in effect, able to
simplify pricing to fit an individual customer’s circumstance and need. Specifically, carriers can replace
individual discount sheets and class tariffs with a simplified price sheet. The net-rate pricing approach does
away with the complex and administratively burdensome discount pricing structures that became
common practice following initial deregulation.
Established discounts and accessorial charges are built into net rates. In other words, the net rate is an all-
inclusive price. The goal is to drastically reduce a carrier’s administrative cost and directly respond to
customer demand to simplify the pricing process. Shippers are attracted to such simplification because it
promotes billing accuracy and provides a clear understanding of how to generate savings in
The previous discussion introduced key strategies used by carriers to set prices. This section presents the
traditional pricing mechanics used by carriers. This discussion applies specifically to common carriers,
although contract carriers follow a similar approach.
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. The term class rate evolved from the fact that all products transported by common carriers
are classified for pricing purposes. Any product legally transported in interstate commerce can be shipped
via class rates.
Determination of common carrier class rates is a two-step process. The first step is to determine
the classification or grouping of the product being transported. The second step is the determination of the
precise rate or price based on the classification of the product, weight, and the origin/destination points of
All products transported are typically grouped together into uniform classifications. The classification takes
into consideration the characteristics of a product or commodity that will influence the cost of handling or
transport. Products with similar density, stowability, handling, liability, and value characteristics are grouped
together into a class, thereby reducing the need to deal with each product on an individual basis. The
particular class that a given product or commodity is assigned is its rating, which is used to determine the
freight rate. It is important to understand that the classification does not identify the price or rate charged
for movement of a product. Rating refers to a product’s transportation characteristics in comparison to
Truck and rail carriers each have independent classification systems. The trucking system uses the National
Motor Freight Classification, while rail classifications are published in the Uniform Freight Classification. The
truck classification system has 18 classes of freight, and the rail system has 31. In local or regional areas,
individual groups of carriers may publish additional classification lists.
In May 2007, the Surface Transportation Board (STB) issued a ruling that abolished the antitrust immunity of
the National Motor Freight Traffic Association (NMFTA) effective December 2007. The NMFTA is a nonprofit
organization comprised of more than 1000 motor carriers that collaborate to publish the Nation Motor
Freight Classification (NMFC). This ruling reversed immunity from legal action, which had prevailed since
passage of the Reed-Bulwinkle Act in 1948. Many industry officials and observers feel this administrative
ruling represents an effort to encourage simplification of the traditional freight classification practice.
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. Each product is assigned an
item number for listing purposes and then given a classification rating. As a general rule, the higher a class
rating, the higher the transportation cost for the product. Historically, a product classified as 200 would be
approximately twice as expensive to transport as a product rated 100. While the actual current multiple
may not be two, a class 200 rating will still result in substantially higher freight costs than a class 100 rating.
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 truckload (TL) shipments.
Table 9.1 illustrates a page from the National Motor Freight Classification. It contains general product
grouping 86750, which is glass, leaded. Notice that the leaded glass category is further subdivided into
specific types of glass such as glass, microscopical slide or cover, in boxes (item 86770). For LTL shipments,
item 86770 is assigned a 70 rating. TL shipments of leaded glass are assigned a class 40 rating, provided a
minimum of 360 hundredweight is shipped.
Products are also assigned different ratings on the basis of packaging. Glass may be rated differently when
shipped loose, in crates, or in boxes than when shipped in wrapped protective packing. It should be noted
that packaging differences influence product density, stowability, and damage, illustrating that cost
factors discussed earlier enter into the rate-determined process. Thus, a number of different classifications
may apply to the same product depending on shipment size, transport mode, and product packaging.
One of the major responsibilities of transportation managers is to obtain the best possible rating for all
goods shipped, so it is useful for members of a traffic department to have a thorough understanding of the
classification systems. Although there are differences in rail and truck classifications, each system is guided
by similar rules.
It is possible to have a product reclassified by written application to the appropriate classification board.
The classification board reviews proposals for change or additions with respect to minimum weights,
commodity descriptions, packaging requirements, and general rules and regulations. An alert traffic
department will take an active role in classification. Significant savings may be realized by finding the
correct classification for a product or by recommending a change in packaging or shipment quantity that
will reduce a product’s rating.
Once a classification rating is obtained for a product, the rate must be determined. The rate per
hundredweight is usually based on the shipment origin and destination, although the actual price charged
for a particular shipment is normally subject to a minimum charge and may also be subject to surcharges.
Historically, the origin and destination rates were manually maintained in notebooks that had to be
updated and revised regularly. Then rates were provided on diskettes by carriers. Today, options for
selecting carriers range from Internet software that examines carrier Web sites and determines the best
rates to participation in online auctions.
Origin and destination rates are organized by zip codes. Table 9.2 illustrates rates for all freight classes from
Atlanta, Georgia (zip 303), to Lansing, Michigan (zip 489). The table lists rates for shipments ranging in size
from the smallest LTL (less than 500 pounds; listed as L5C) to the largest TL (greater than 40,000 pounds;
listed as M40M). The rate is quoted in cents per hundredweight. Assuming a shipment of 10,000 pounds, the
rate for class 85 between Atlanta and Lansing, using this example tariff, is $12.92 per hundredweight.
Historically, the published rate had to be charged for all shipments of a specific class and origin/destination
combination. This required frequent review and maintenance to keep rates current. Following
deregulation, carriers offered more flexibility through rate discounts. Now instead of developing an
individual rate table to meet the needs of customer segments, carriers apply a discount from class rates for
specific customers. The discount, generally in the range of 30 to 50 percent, depends on the shipper’s
volume and market competition.
An alternative to the per hundredweight charge is a per mile charge, which is common in TL shipments. As
discussed previously, TL shipments are designed to reduce handling and transfer costs. Since the entire
vehicle is used in a TL movement and there is no requirement to transfer the shipment at a terminal, a per
mile basis offers a more appropriate pricing approach. For a one-way move, charges may range from
$1.50 to over $3.00 per mile, depending on the market, the equipment, and the product involved.
Although it is negotiable, this charge typically includes loading, unloading, and liability.
In addition to the variable shipment charge applied on either a per hundredweight or per mile basis, two
additional charges are common for transportation: minimum charges and surcharges. The minimum
charge represents the amount a shipper must pay to make a shipment, regardless of weight. To illustrate,
assume that the applicable class rate is $50/CWT and the shipper wants to transport 100 pounds to a
specific location. If no minimum charge exists, the shipper would pay $50. However, if the minimum charge
were $250 per shipment, the shipper would be required to pay the minimum. Minimum charges cover fixed
costs associated with a shipment.
A surcharge represents an additional charge designed to cover specific carrier costs. Surcharges are used
to protect carriers from situations not anticipated when publishing a general rate. The surcharge may be
assessed as a flat charge, a percentage, or a sliding scale based on shipment size. A common use of
surcharges is to compensate carriers for dramatic changes in fuel cost. The surcharge approach provides a
means of immediate relief for the carrier to recover unexpected costs while not including such costs in the
long- term rate structure.
Class rates, minimum charges, arbitrary charges, and surcharges form a pricing structure that, in various
combinations, is applicable within the continental United States. The tariff indicates the class rate for any
rating group between specified origins and destinations. In combination, the classification framework and
class rate structure form a generalized pricing mechanism for all participating carriers. Each mode has
specific characteristics applicable to its tariffs. In water, specific tariff provisions are made for cargo
location within the ship or on the deck. In addition, provisions are made to charter entire vessels. Similar
specialized provisions are found in air cargo and pipeline tariffs. Non-operating intermediaries and
package services also publish tariffs specialized to their service.
Considerable attention has recently focused on development of a simplified method of transportation
pricing. Typically called cube or density rates, the new approach replaces the 18 traditional freight
classifications of the NMFC with five cube groupings. Under the cube concept, shippers complete a cube
shipping document (CSD), which replaces the traditional Bill of Lading. To further identify freight
characteristics, shippers provide the total weight of both stackable (ST) and non-stackable (NST) freight
included in the shipment. Rates are then determined for the weight contained in each category of freight.
The CSD offers five weight break groups. Four are weight breaks for shipments under 500 pounds. Rates for
shipments over 500 pounds are based on multiples of 500 pounds with no shipment weight limit. While still in
development, cube-based rates and the associated cube shipping document offer a promising approach
to reducing the complexity of traditional transportation pricing.
When a large quantity of a product moves between two locations on a regular basis, it is common
practice for carriers to publish a commodity rate. Commodity rates are special or specific rates published
without regard to classification. The terms and conditions of a commodity rate are usually indicated in a
contract between the carrier and shipper. Commodity rates are published on a point-to-point basis and
apply only on specified products. Today, most rail freight moves under commodity rates. They are less
prevalent in motor carriage. Whenever a commodity rate exists, it supersedes the corresponding class or
Special rates published to provide prices lower than the prevailing class rates are called exception
rates. The original purpose of the exception rate was to provide a special rate for a specific area,
origin/destination, or commodity when justified by either competitive or high-volume movements. Rather
than publish a new tariff, an exception to the classification or class rate was established.
Just as the name implies, when an exception rate is published, the classification that normally applies to the
product is changed. Such changes may involve assignment of a new class or may be based on a
percentage of the original class. Technically, exceptions may be higher or lower, although most are less
than original class rates. Unless otherwise noted, all services provided under the class rate remain under an
Since deregulation, several new types of exception rates have gained popularity. For example,
an aggregate tender rate is utilized when a shipper agrees to provide multiple shipments to a carrier in
exchange for a discount or exception from the prevailing class rate. The primary objective is to reduce
carrier cost by permitting multiple shipment pickup during one stop at a shipper’s facility or to reduce the
rate for the shipper because of the carrier’s reduced cost. To illustrate, UPS offers customers that tender
multiple small package shipments at one time a discount based on aggregate weight and/or cubic
volume. Since deregulation, numerous pricing innovations have been introduced by common carriers,
based on various aggregation principles.
A limited service rate is utilized when a shipper agrees to perform selected services typically performed by
the carrier, such as trailer loading, in exchange for a discount. A common example is a shipper load and
count rate, where the shipper takes responsibility for loading and counting the cases. Not only does this
remove the responsibility for loading the shipment from the carrier, but it also implies that the carrier, once
the trailer is sealed, is not responsible for guaranteeing case count. Another example of limited service is
a released value rate, which limits carrier liability in case of loss or damage. Normally, the carrier is
responsible for full product value if loss or damage occurs in transit. The quoted rate must include
adequate insurance to cover the risk. Often it is more effective for manufacturers of high-value product to
self-insure to realize the lowest possible rate. Limited service is used when shippers have confidence in the
carrier’s capability. Cost can be reduced by eliminating duplication of effort or responsibility.
Under aggregate tender and limited service rates, as well as other innovative exception rates, the basic
economic justification is the reduction of carrier cost and subsequent sharing of benefits based on
Special Rates and Services
A number of special rates and services provided by carriers are available for use in logistical operations.
Several common examples are discussed.
As indicated earlier, freight-all-kind (FAK) rates are important to logistics operations. Under FAK rates, a
mixture of different products is transported under a negotiated rating. Rather than determine the
classification and applicable freight rate of individual products, an average rating is applied for the total
shipment. In essence, FAK rates are line-haul rates since they replace class, exception, or commodity rates.
Their purpose is to simplify the paperwork associated with the movement of mixed commodities.
Numerous special rates exist that may offer transportation savings on specific freight movements. When a
commodity moves under the tariff of a single carrier, it is referred to as a local rate or single-line rate. If more
than one carrier is involved in the freight movement, a joint rate may be applicable even though multiple
carriers are involved in the actual transportation process. Because some motor and rail carriers operate in
restricted territory, it may be necessary to utilize the services of more than one carrier to complete a
shipment. Utilization of a joint rate can offer substantial savings over the use of two or more local rates.
Special price incentives to utilize a published tariff that applies to only part of the desired route are
called proportional rates. Proportional provisions of a tariff are most often applicable to origin or destination
points outside the normal geographical area of a single-line tariff. If a joint rate does not exist and
proportional provisions do, the strategy of moving a shipment under proportional rates provides a discount
on the single-line part of the movement, thereby resulting in a lower overall freight charge.
Transit services permit a shipment to be stopped at an intermediate point between initial origin and
destination for unloading, storage, and/or processing. The shipment is then reloaded for delivery to the
destination. Typical examples of transit services are milling for grain products and processing for sugar
beets. When transit privileges exist, the shipment is charged a through rate from origin to destination plus a
transit privilege charge.
For a variety of reasons, a shipper or consignee may desire to change routing, destination, or even the
consignee after a shipment is in transit. This process is called diversion and reconsignment. This flexibility can
be extremely important, particularly with regard to food and other perishable products where market
demand can quickly change. It is a normal practice among certain types of marketing intermediaries to
purchase commodities with the full intention of selling them while they are in transit. Diversion consists of
changing the destination of a shipment prior to its arrival at the original destination. Reconsignment is a
change in consignee prior to delivery. Both services are provided by railroads and truck carriers for a
A split delivery is desired when portions of a shipment need to be delivered to different destinations. Under
specified tariff conditions, delivery can involve multiple destinations. The payment is typically structured to
reflect a rate as if the shipment were going to the most distant destination. In addition, there typically is a
charge for each delivery.
Demurrage and detention are charges assessed for retaining freight cars or truck trailers beyond specified
loading or unloading time. The term demurrage is used by railroads for holding a railcar beyond 48 hours
before unloading the shipment. Trucks use the term detention to cover similar delays. In the case of motor
carriers, the permitted time is specified in the tariff and is normally limited to a few hours.
In addition to basic transportation, truck and rail carriers offer a wide variety of
special or accessorial services. Table 9.3 provides a list of frequently utilized ancillary services.
Carriers may also offer environmental services and special equipment. Environmental services refer to
special control of freight while in transit, such as refrigeration, ventilation, and heating. For example, in the
summer, Hershey typically transports chocolate confectionery products in refrigerated trailers to protect
them from high temperature levels. Special equipment charges refer to the use of equipment that the
carrier has purchased for a shipper’s convenience. For example, specialized sanitation equipment is
necessary to clean and prepare trailers for food storage and transit if the trailer has been previously utilized
for nonfood products or commodities.
Although the brief coverage of special services is not all-inclusive, it does offer several examples of the
range and type of services carriers offer. A carrier’s role in a logistical system is most often far greater than
providing line-haul transportation.
TRANSPORTATION OPERATIONAL MANAGEMENT
The fundamental responsibility of a traffic department is to oversee day-to-day Transportation Operations.
In large-scale organizations, traffic management involves a wide variety of administrative responsibilities.
Firms are increasingly implementing Transportation Management Systems (TMS) as integral parts of their
integration information technology strategies.
In general, a TMS must proactively identify and evaluate alternative transportation strategies and tactics to
determine the best methods to move product within the existing constraints. As shown in Table 9.4 , this
includes capabilities to select modes, plan loads, consolidate loads with other shippers, take advantage of
current unbalances in traffic movement, route vehicles, and optimize use of transportation equipment. The
principal deliverables of TMS are cost savings and increased functionality to provide credible delivery times.
From an operational perspective, key elements of transportation management are equipment scheduling
and yard management, load planning, routing, and carrier administration.
Equipment Scheduling and Yard Management
One major responsibility of the traffic department is equipment scheduling and yard management.
Scheduling is an important process in both common carrier and private transportation. A serious and costly
operational bottleneck can result from transportation equipment waiting to be loaded or unloaded. Proper
yard management requires careful load planning, equipment utilization, and driver scheduling.
Additionally, equipment preventive maintenance must be planned, coordinated, and monitored. Finally,
any specialized equipment requirements must be planned and implemented.
Closely related to equipment scheduling is the arrangement of delivery and pickup appointments. To
avoid extensive waiting time and improve equipment utilization, it is important to preschedule dock
positions or slots. It is becoming common practice to establish standing appointments for regular shipments
to facilitate loading and unloading. Some firms are implementing the practice of establishing advanced
appointments at the time of order commitment. Increasingly, the effective scheduling of equipment is key
to implementing time-based logistical arrangements. For example, cross-dock arrangements are totally
dependent on precise scheduling of equipment arrival and departure.
How loads are planned directly impacts transportation efficiency. In the case of trucks, capacity is limited
in terms of weight and cube. Planning the load sequence of a trailer must consider product physical
characteristics and the size of individual shipments, as well as delivery sequence if multiple shipments are
loaded on a single trailer. As noted earlier, TMS software is available to help facilitate load planning.
How effectively load planning is performed will directly impact overall logistical efficiency. For example, the
load plan drives the work sequence at warehouses. Transportation equipment must be available to
maintain an orderly flow of product and material from warehouse or factory to shipment destination.
Routing and Advanced Shipment Notification (ASN)
An important part of achieving transportation efficiency is shipment routing. Routing predetermines the
geographical path a vehicle will travel. Once again, routing software is an integral part of TMS.
From an administrative viewpoint, the traffic department is responsible for assuring that routing is performed
in an efficient manner while meeting key customer service requirements. It is common practice for shippers
to electronically provide consignees advanced shipment notification (ASN). While the specifics of ASN
documents vary, their primary purpose is to allow adequate time to plan arrival, arrange delivery
appointments, and plan to redeploy the shipment’s content. How deliveries are planned must take into
consideration special requirements of customers in terms of time, location, and special unloading services.
Traffic managers have the basic responsibility of administering the performance of for-hire and private
transportation. Effective administration requires continuous carrier performance measurement and
evaluation. Until recently, efforts to measure actual carrier service were sporadic and unreliable. A
traditional procedure was to include postcards with shipments requesting consignees to record time and
condition of arrival. The development of information technology has significantly improved shipment
information reliability. The fact that most shippers have reduced their carrier base has greatly simplified
administration. Effective administration requires carrier selection, integration, and evaluation.
A basic responsibility of the traffic department is to select carriers to perform for-hire transport. To some
degree all firms use the services of for-hire carriers. Even those with commitment to private fleets regularly
require the supplemented services of common, contract, and specialized carriers to complete
transportation requirements. Most firms that use for-hire transportation have implemented a core carrier
The concept of a core carrier is to build a working relationship with a small number of transportation
providers. Historically, shippers followed the practice of spreading their transportation purchases across a
wide variety of carriers to assure competitive rates and adequate equipment supply. During the regulated
era, few differences in price existed between carriers. As a result, shippers often conducted business with
hundreds of different carriers. The concentration of volume in a few core carriers creates a business
relationship that standardizes operational and administrative processes. Mutual planning and
acknowledged dependency between a shipper and carrier result in dependable equipment supply,
customized services, improved scheduling, and more efficient overall administration.
In a number of situations, the core carrier relationships are directly between the shipper and the
transportation provider. A recent development is the use of integrated service providers (ISPs) to establish
and maintain business relationships with core carriers. In such situations, the ISP facilitates administration
and consolidates freight across a wide variety of shippers.
The range of relationship models is ever-changing as service providers devise new and better methods of
identifying and integrating transportation requirements. However, at the end of the day, it remains a
fundamental responsibility of transportation management to assure a firm is supported by reliable and
economical transportation. This fundamental responsibility cannot be delegated.
BILL OF LADING
The bill of lading is the basic document utilized in purchasing transport services. It serves as a receipt and
documents products and quantities shipped. For this reason, accurate product description and count are
essential. In case of loss, damage, or delay, the bill of lading is the basis for damage claims. The designated
individual or buyer on a bill of lading is the only bona fide recipient of goods. A carrier is responsible for
proper delivery according to instructions contained in the document. The information contained on the bill
of lading determines all responsibilities related to timing and ownership.
The bill of lading specifies terms and conditions of carrier liability and documents responsibilities for all
possible causes of loss or damage except those defined as acts of God. Figure 9.4 provides an example of
a Uniform Straight Bill of Lading. Government regulations permit uniform bills of lading to be computerized
and electronically transmitted between shippers and carriers. `
In addition to the uniform bill of lading, other commonly used types areorder-notified,
export, and government. It is important to select the correct bill of lading for a specific shipment.
An order-notified or negotiable bill of lading is a credit instrument. It provides that delivery not be made
unless the original bill of lading is surrendered to the carrier. The usual procedure is for the seller to send the
order-notified bill of lading to a third party, usually a bank or credit institution. Upon customer payment for
the product the credit institution releases the bill of lading. The buyer then presents it to the common
carrier, which in turn releases the goods. This facilitates international transport where cross-border payment
for goods may be a major consideration. An export bill of lading permits a shipper to use export rates,
which may be lower than domestic rates. Export rates may reduce total cost when applied to domestic
origin or destination line-haul transport. Government bills of lading may be used when the product is owned
by the U.S. government.
The Freight Bill represents a carrier’s method of charging for transportation services performed. It is
developed by using information contained in the bill of lading. The freight bill may be
either prepaid or collect. A prepaid bill means that transport cost is paid by the shipper prior to
performance, whereas a collect shipment shifts payment responsibility to the consignee.
Considerable administration is involved in preparing bills of lading and freight bills. There has been
significant effort to automate freight bills and bills of lading through EDI or Internet transactions. Some firms
elect to pay their freight bills at the time the bill of lading is created, thereby combining the two
documents. Such arrangements are based upon the financial benefits of reduced paperwork cost, and as
noted earlier shift the audit responsibility to the carrier.
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
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. For single-stop shipments,
the manifest is the same as the bill of lading.
TRANSPORTATION PRICING FUNDAMENTALS
Pricing decisions directly determine which party in the transaction is responsible for performing logistics
activities, passage of title, and liability. F.O.B. origin and delivered pricing are the two most common
The term F.O.B. technically means free on board or freight on board. A number of variations of FOB pricing
are used in practice. F.O.B. origin is the simplest way to quote price. Under F.O.B. origin the seller indicates
the price at point of origin and agrees to tender a shipment for transportation loading, but assumes no
further responsibility. The buyer selects the mode of transportation, chooses a carrier, pays transportation
charges, and takes risk of in-transit loss and/or damage. In F.O.B. destination pricing, title does not pass to
the buyer until delivery is completed. Under F.O.B. destination pricing, the seller arranges for transportation
and the charges are added to the sales invoice.
The range of terms and corresponding responsibilities for pricing are illustrated in Figure 9.5. Review of the
various sales terms makes it clear that the firm paying the freight bill does not necessarily assume
responsibility for ownership of goods in transit, for the freight burden, or for filing of freight claims. These are
issues of negotiation that are critical to supply chain collaboration.
The primary difference between F.O.B. and delivered pricing is that in delivered pricing the seller
establishes a price that includes transportation. In other words, the transportation cost is not specified as a
separate item. There are several variations of delivered pricing. Under single-zone delivered pricing, buyers
pay a single price regardless of where they are located. Delivered prices typically reflect the seller’s
average transportation cost. In actual practice, some customers pay more than their fair share for
transportation while others are subsidized. The United States Postal Service uses a single-zone pricing policy
throughout the United States for first-class letters. The same fee or postage rate is charged for a given size
and weight regardless of distance traveled to the destination.
Single-zone delivered pricing is typically used when transportation costs are a relatively small percentage
of selling price. The main advantage to the seller is the high degree of logistical control. For the buyer,
despite being based on averages, such pricing systems have the advantage of simplicity.
The practice of multiple-zone pricing establishes different prices for specific geographic areas. The
underlying idea is that logistics cost differentials can be more fairly assigned when two or more zones—
typically based on distance—are used to quote delivered pricing. Parcel carriers such as United Parcel
Service use multiple-zone pricing. The most complicated and controversial form of delivered pricing is the
use of a base- point pricing system in which the final delivered price is determined by the product’s list
price plus transportation cost from a designated base point, usually the manufacturing location. This
designated point is used for computing the delivered price whether or not the shipment actually originates
from the base location. Base-point pricing is common in shipping assembled automobiles from
manufacturing plants to dealers.
Figure 9.6 illustrates how a base-point pricing system typically generates different net returns to a seller. The
customer is quoted a delivered price of $100 per unit. Plant A is the base point. Actual transportation cost
from plant A to the customer is $25 per unit. Plant A’s base product price is $85 per unit. Transportation costs
from plants B and C are $20 and $35 per unit, respectively.
When shipments are made from plant A, the company’s net return is $75 per unit, the $100 delivered price
minus the $25 transportation cost. The net return to the company varies if shipments are made from plant B
or C. With a delivered price of $100, plant B collects $5 in phantom freight on shipments to a customer.
Phantom freight occurs when a buyer pays transportation costs greater than those actually incurred to
move the shipment. If plant C is the shipment origin, the company must absorb $10 of the transportation
costs.Freight absorption occurs when a seller pays all or a portion of the actual transportation cost and
does not recover the full expenditure from the buyer. In other words, the seller decides to absorb
transportation cost to be competitive.
Base-point pricing simplifies price quotations but can have a negative impact on customers and supply
chain collaboration. For example, dissatisfaction may result if customers discover they are being charged
more for transportation than actual freight costs. Such pricing practices may also result in a large amount
of freight absorption for sellers.