Fall 2018: Chapter 7 – Transportation Systems

Why Is Transportation Important?

  • Transportation plays a massive role in getting the product to the correct channels, as well as making sure the necessary materials for those goods arrive on time
  • Transportation accounts for a massive portion of a company’s costs
  • Transportation can make or break large organizations due to the financial and production impacts it can have

The Different Forms of Transportation

  • Truck/Motor
  • Air
  • Water
  • Intermodal transportation
  • Pipeline

Transportation Costs

  • Both fixed (does not vary with the volume being moved, these costs include buildings, equipment, and land) and variable (varies with the volume being moved, such as fuel, maintenance, and wages)
  • These costs appear across three different areas
    • 1. The ways (road, air, water)
    • 2. Terminals
    • 3.  The vehicles themselves
  1. Ways- these can be owned by the operator (such as railroad tracks), the government (roads and canals), or be made by nature such as the oceans
  2. Terminals- the shipment centers used to sort, load, and unload goods. These connect distribution centers, stores, manufacturing plants, etc.
  3. Vehicles- The trucks, boats, planes, trains, etc.

Modes of Transportation

  • In the United States, the most used mode of transportation in terms of dollar volume are
  • 1. Truck
  • 2. Railways
  • 3. Water
  • 4.Air
  • In terms of longest average miles per shipment, it goes…
  1. Air
  2. Rail
  3. Water


  • Slowest, least flexible, yet overall cheapest mode of transportation
  • Requires a natural monopoly because rail owners must provide their own system
  • High fixed costs and low variable costs
  • Three general types of railroads
    • 1. Class 1
    • 2. Regional and local line haul
    • Switching and terminal (S&T) carriers
  • Each types has its own set of guidelines and qualifications  

Air Carriers-

  • Fastest mode of cargo transportation
  • Very expensive
    • High variable costs- Fuel, operating costs
    • Low Fixed costs- Government controlled terminals, air traffic control
  • Predominate use-
    • High value, low volume, time sensitive goods at premium rates

Water Carriers-

Water transportation is the oldest method of cargo movements-

Fairly slow, not flexible- used mostly for large and long haul, low value goods.

Two types consist of-


Deepwater (international) responsible for 81% of international freight movement

Path generally dictated by naturally occurring waterways

But supplemented by government operated canals and ports

Other Major carriers

  • Intermodal- Freight being moved in an intermodal carrier or vehicle
    • Most used are trailers on flatbed trucks, and on a rail flatcar
    • No handling costs when transferring intermodal freight
  • Pipeline- High volume gases or liquids moving from point to point
    • Equipment fixed in place, product moves through in high volume
      • Mostly used for crude oil and petroleum products

Global intermediaries- 

Freight broker- Main function is to bring together the buyer (shipper of goods) and seller (transportation company)

Freight forwarder- Advises and assists clients on how to move goods most efficiently from one destination to another

  • Provides assembling and consolidation services for smaller shipments or breaks larger shipments into smaller

Customs brokers- Perform transactions at ports for other parties.

  • Will recommend efficient means for clearing goods through customs entry and can also estimate the landed costs for shipments entering the country.

Types of carriage

For hire- offer service to general public and are subject to government regulations in regards to rates, routes, markets served.

Common carriers- licensed to carry only certain goods to designated points

Such as – Public airlines, cruise ships

Contract carriers- Interstate operators that transport under contracts

Private- When a company transports its own good, and vehicles are not for hire

IE- walmart trucks all across 81

Cost of transportation

Distance- Further distance= more variable cost

Weight- Cost per unit decreases as the load weight increases (economies of scale)

Density- Combination of weight and cubic volume

  • Trucks tend to cube out before weighing out
    • Shipping higher density products can help you to fit more into each truck and save money

Cost Elements: Line Haul

Movement of freight with any mode of transportation.

Basic costs to move product from point to point including fuel, labor and depreciation.

    • Line Haul Cost = Total Costs / Distance Traveled
    • Other Line Haul Services Potentially Required:
      • Reconsignment: Changing consignee while shipment is in transit; goods shipped before sold
      • Diversion: Changing of destination during shipping
      • Pooling: Consolidating smaller shipments going to same destination
      • Stopping in transit: Dropping of portions of freight at various locations from one truck
      • Transit Privilege: Unload trailer, process shipment, then reload


  • Pickup and delivery: Dependent on time spent picking up and dropping off cargo

Cost Elements: Terminal Handling

Cost of handling depends on the # of times the shipment is handled.  Consolidating shipments when possible is wise.

Other Terminal Services Affecting Costs:


  • Consolidation: Small shipments turned into one larger shipment for lower rate
  • Dispersion: Opposite of consolidation; splitting one large shipment
  • Vehicle service: Maintaining vehicle fleet
  • Weighing: Carrier provides the weight of shipment
  • Tracing: GPS services for improved communication and planning
  • Expediting: Move shipment faster; more expensive

Rate Determination

Classification first determined, based off of density, stowability, ease of handling and liability.

Can be determined by origin of freight, its destination and additional services


  • Cube or Density Rates: By volume and weight
  • Exception Rates: Deviation from class rate
  • Commodity Rates: rate for specific route despite of class or freight product
  • Freight-all-kind Rates: Rates for carrier’s tariff class for various or pooled freight

Domestic Transportation Documents

Terms of Sale Negotiates:

  • Who pays freight bill
  • Which party has title to goods
  • Which party controls the movement of goods

Two Major Terms: Free On Board (F.O.B.)

  • F.O.B. Origin: buyer pays for freight, takes title of goods once loaded and controls movement of the goods.
  • F.O.B. Destination: seller pays for freight, has title to goods and controls movement of goods.

International Transportation Documents

  • Documentation for international transportation is more complex than domestic
  • Two major categories of documentation
    • Sales
    • Transportation

Sales Documents

  • Sales contracts
    • First document used in international trade
  • Letter of credit
    • Document issued by a financial institution ensuring payment to a seller of goods or services
  • Export License
    • Express authorization by a country’s government to export a product before shipping
    • Governments may require an export license for:
      • Political / Military reasons
      • Control export of natural resources
      • Control export of national treasures / antiques
  • Export Declaration
    • Required by U.S. customs
      • Tracks goods exported from U.S., destination, and value
  • Possible export taxes and quotas
  • Import Documents
    • Certificate of origin
      • Provided by exporter’s chamber of commerce
      • States country of origin
      • Is used by importing country to judge tariffs
    • Certificate of manufacture
      • Provided by exporter’s chamber of commerce
      • States goods were manufactured in the country exporter is located in
    • Certificate of inspection
      • Provided by independent inspection company
      • Claims goods conform to description/ value of invoice provided by exporter
      • Obtained by exporter within exporting country as a result of a pre shipment inspection (PSI)
    • Certificate of free sale
      • Goods sold by exporter can be legally sold in country of export
      • Designed to prevent export of defective products
    • Import license
      • Issued importing country
      • Prevents import of nonessential or overly luxurious products in developing countries short of foreign currency
    • Certificate of insurance
      • Some international terms of sale or Incoterms (International Commerce Terms) require exporter to provide insurance
      • Proof of insurance
    • Carnet
      • Customs doc. that simplify customs procedures for temporary importation of various types of goods by avoiding extensive customs procedures and eliminating payment of duties and value added taxes
      • Ease temporary transportation of:
        • Commercial samples, professional equipment, goods for exhibitions and fairs
      • Replace the purchase of temporary import bonds

International Commercial Terms (Incoterms)

  • Set of rules that define the responsibilities of sellers and buyers for the delivery of goods under sales contracts for trade (both domestic and international)
  • Published by International Chamber of Commerce (ICC)
  • Widely used in international commercial transactions
  • Goal is to simplify the drafting of contracts and avoid misunderstandings
  • Terms may include:
    • Export packing costs
    • Inland transportation
    • Export clearance
    • Vehicle loading
    • Transportation costs
    • Insurance
    • Duties
  • Two main categories
    • Group 1: Any mode of Transport Incoterms’
      • EXW – Ex Works
      • FCA – Free Carrier
      • CPT – Carriage Paid To
      • CIP – Carriage and Insurance Paid To
      • DAT – Delivered at Terminal
      • DAP – Delivered at Place
      • DDP – Delivered Duty Paid
  • Group 2: Sea and Inland waterway Incoterms’
    • FAS – Free Alongside Ship
    • FOB – Free on Board
    • CFR – Cost and Freight
    • CIF – Cost, Insurance, and Freight


International Transportation Documents

  • Issued by
    • Shipping line, airline, international trucking company, railroad, freight, forwarder, or logistics company
  • International Bill of Landing
    • Helps guarantee exporters receive payment and importers receive importers
    • Specific types of B/Ls:
      • Ocean bill of landing – sets terms, lists origin, destination ports, quantities, weight, rates, and special handling needs for ocean travel. Ocean carrier may be held liable for damages.
      • Air waybill – used in air transportation of goods domestically or internationally
    • Can also be for receipt/ /title to goods
      • Negotiable or to order B/L – allows owner of goods to sell while in transit (only in ocean transit)
      • Clean B/L
        • Issued by carrier after goods arrive in port
        • Notes damages

Key Metrics

  • Main key metrics
    • Service quality
    • Efficiency
    • May also include
      • On time delivery
      • Loss and damage rate
      • Billing accuracy
      • Equipment condition
      • Customer service


  • Transportation Management Systems (TMS)
    • Historically been add ons to:
      • Enterprise Resource Planning (ERP)
      • Legacy Order-Processing
      • Warehouse Management Systems (WMS)
    • Benefits
      • Automated auditing and billing
      • Optimized operations
      • Improved visibility
    • Functionality to plan, schedule, and control org’s. Transportation system
      • Planning and decision making – helps define the most efficient transport plan
      • Transportation execution – allows for execution of a transportation plan
      • Transport follow up – tracking physical/ administrative transportation operations
      • Measurement – cost control and key performance indicators (KPI)

Relationships Between Location and Spatial Issues

  • RFID’s used to track and monitor trucks and other modes
    • Improves communication between carrier and consignee
  • Autonomous and electric vehicles
    • Reduces labor costs and fuel costs
  • Johnson Controls transportation security system
    • Location technology provides security by sending location of freight goods veering off their course
    • Drivers can send alerts to disable their vehicle if stolen

Technology in transportation supply chain

1. Predictive maintenance
a. Italy’s railway operator Trenitalia has a model that analyzes sensor data and monitors equipment behavior remotely to decrease maintenance and service costs.
b. They operate nearly 30,000 moving assets that move 2+ million passengers each day.
c. https://www.digitalistmag.com/digital-supply-networks/2017/08/22/4-ways-technology-shaping-future-of-transportation-and-supply-chain-05300801

Next-Gen GPS Devices
a. These GPS are more versatile. They do the basic functions (calculate total mileage and provide estimated time of arrival) but also can make adjustments for extreme weather, traffic conditions, or preferred route.
b. https://cerasis.com/2018/04/18/transportation-technologies/

3. Automatic guided vehicles (AGVs)
a. These transport loads of materials to place that might otherwise be service by fork lift trucks, conveyors, or manual cart transportation. They are typically used in high volumes of repetitive movements of materials where little to no human decisions making skills is required.
b. BASF, the world’s largest chemical company, uses these to supply their production n plants faster and at a lower cost. It is project that it will take one hour from order to deliver of raw materials in huge tanks.
c. https://www.forbes.com/sites/stevebanker/2018/09/18/one-of-the-worlds-most-innovative-supply-chains/#4d9c657d5fae
d. https://www.bastiansolutions.com/solutions/technology/automated-guided-vehicles




Chapter 7_ Transportation Systems


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