ORGANIZATION FOR LOGISTICS DECISIONS

The management of inventory in motion and at rest is referred to as logistics. Logistics is

defined as:
“That part of the supply chain that plans, implements, and controls the efficient, effective
flow and storage of goods, services, and related information from the point of origin to the
point of consumption in order to meet customers’ requirements.”
By the Council of Logistics Management
Logistics costs can be divided into three categories inventory carrying costs, administrative
costs, and transportation with transportation accounting for the bulk of the costs.
Due to the large number of dollars involved in the movement of goods into and out of an
organization and the potential effect on profits, largest firms have a separate logistics services
department with specialists in areas such as selection of carriers and routing, expediting,
packaging, and handling claims in the case of loss or damage to goods during shipment.
In the very large firm, the logistics function may be specialized even further, based on the
purpose of shipment. For example, an automobile producer may have three separate
departments: one concerned with incoming materials shipments, one making the decisions on
in-plant and interplant materials movement, and the third concerned with the shipment of
finished goods through the distribution channels to customers.
In the medium-sized and smaller organization, the number of logistics decisions may not be
large enough to warrant a full-time logistics specialist. Here the transport decisions are handled
by the buyer or supply manager. This person must make these decisions in light of their impact
on other areas such as inventory levels, carrying costs, and the use of capital.

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 TRANSPORTATION

Depending on the type of goods being moved, transportation may account for as much as 40
percent of the total cost of the item, particularly if it is of relatively low value and bulky, such as
agricultural commodities or construction materials. But in the case of very-high value, low-
weight, and bulk electronics goods, transport costs may be less than 1 percent of total purchase
costs. It is not unusual in many firms to find that a significant percent of their purchase
expenditures go for transportation costs. While target savings vary from firm to firm, many
have found that only a modest effort to manage transportation services more efficiently will
result in substantial savings.
If minimization of costs were the only objective in buying transportation services, the task
would be easy. However, the transportation buyer must look not only at cost but also at service
provided. For example, items are purchased to meet a production schedule, and the available
modes of transport require different amounts of transport time. If items are shipped by a
method requiring a long shipment time, inventory may be exhausted and a plant or process
shut down before the items arrive. Also, reliability may differ substantially among various
transportation companies; service levels, lost shipments, and damage may vary greatly
between two different carriers. The buyer should use the same skill and attention in selecting
carriers as used in selecting other suppliers. The effects of transportation deregulation have
made the carrier selection and pricing decision far more important today.
Outsourcing, or using third-party logistics service (3PL) providers, has become increasingly
popular as organizations downsize, focus on core competencies, and seek partnerships or
alliances with key suppliers. 3PLs provide a wide range of logistics services for their clients, with
the most popular being warehousing, outbound and inbound transportation, freight bill
auditing and payment, freight consolidation and distribution, cross-docking, product marking,
and packaging and returns.

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 FOB TERMS AND INCOTERMS

The term FOB stands for free on board, meaning that goods are delivered to a specified point
with all transport charges paid. There are several variations in FOB terms. Shipping terms and
the responsibilities of buyer and seller in international contracts are covered by The selection of
the FOB point is important to the purchaser, for it determines four things:
1. Who pays the carriers?
2. When legal title to goods being shipped passes to the buyer.
3. Who is responsible for preparing and pursuing claims with the carrier in the event goods are
lost or damaged during shipment.
4. Who routes the freight.
The claim that FOB destination is always preferable because the seller pays the transportation
charges are incorrect. While the seller may pay the transportation charges, in the final analysis
the charges are borne by the buyer, because transportation costs will be included in the
delivered price charged by the supplier. In effect, if the buyer lets the supplier make the
transportation decisions, then the buyer is allowing the supplier to spend the buyer’s money.
In purchases from international suppliers, FOB is an Incoterm meaning free on board (named
port of shipment), and the seller passes title to the goods to the buyer when the goods are
passed over the rail of the ship. The ocean carrier typically does not provide any insurance on
goods in transit; therefore, it is important when goods are bought FOB origin for the buyer to
ensure that adequate insurance coverage is provided. The two marine freight terms commonly
used are CFR and CIF. CFR, cost and freight, is similar to FOB origin, with freight charges paid by
the seller. However, under CFR the buyer assumes all risk and should provide for insurance. CIF,
cost, insurance, and freight, means that the seller will pay the freight charges and provide
appropriate insurance coverage. This is similar to FOB destination, freight prepaid. In some
instances, the buyer may wish to obtain equalization of freight charges with the nearest
shipping point of the seller, or some competitive shipping point. In that case, the following
clause can be used: “Freight charges to be equalized with those applicable from seller’s
shipping point producing lowest transportation”.

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 TRANSPORTATION CARRIERS

While deregulation has reshaped the transportation sector, some terminology is still used to
describe carriers that is based on the legal designations under regulation: common carriers,
contract carriers, exempt carriers, and private carriers. While these legal designations
technically no longer exist, they still provide guidance in terms of the role and function of each
group.
 Common carriers offer transportation service to all shippers at published rates, in a
nondiscriminatory basis, between designated points.
 A contract carrier is a for-hire carrier that provides service to a limited number of
shippers
 and operates under specific contractual arrangements that specify rates and services.
 Exempt carriers are also for-hire carriers, but they are exempt from regulation of rates
and services.
 A private carrier provides transportation for its company’s own products and the
company owns (or leases) all related equipment and facilities.
Today, common and contract carriers enjoy the same flexibility and many companies have
chosen to outsource transportation services as a result.

Modes of Transportation:
The five basic modes of transportation are motor, rail, air, water, and pipeline. Supply
professionals need to understand the characteristics of each mode in order to assess tradeoffs
when making transportation decisions. A brief description of each follows.

1) Motor Carriers
Motor carriers, or trucks, are the most flexible mode of transportation. This mode offers the
advantage of point-to-point service, over any distance, for products of varying weight and size.
Compared to other modes, service is fast and reliable, with low damage and loss rates.
Consequently, motor carriers are the preferred mode for organizations operating under a just-
in-time system.
Motor carriers can be divided into three categories: (1) less-than-truck-load (LTL), (2)
truckload (TL), and (3) small parcel, ground.

2) Rail Carriers and Intermodal

Rail carriers are relatively inflexible and slow and have higher loss and damage rates, compared
to motor carriers. However, rail has the advantage of lower variable operating costs, which
makes it attractive for hauling large tonnage over long distances.
Intermodal freight services are divided between containers on flatcars (COFC) and truck trailers
on flatcars (TOFC), sometimes referred to as piggyback systems.

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 3) Air Carriers
The primary advantage of airfreight is the speed. Airfreight is costly and also must be combined
with trucks to provide door-to-door service. Consequently, products best suited for this mode is
of high value and/or extremely perishable. Although airfreight volume has increased over the
past two decades, most shippers still regard this mode as premium emergency service.

4) Water Carriers
Although most international trade uses water carriers, referred to as international deep sea
transport, this mode is also used domestically in inland water and coastal systems and lakes.
Although inexpensive compared to other modes, water carriers are slow and inflexible.
Furthermore, compared to other modes, water carriers are disadvantaged because of the need
for suitable waterways, ports, and handling equipment. Water carriers also must team up with
motor carriers to provide door-to-door service.

5) Pipelines
Since pipelines can only transport products in either a liquid or gaseous state, the use of
this mode of transport is quite limited. However, once the initial investment in the pipeline
is recovered, the variable costs of operation are relatively low.

Selection of Mode and Carrier

Each form of common carrier transportation rail, truck, air, and inland water has its own
distinct advantages for shippers in respect to speed, available capacity, flexibility, and cost. By
the same token, each mode has inherent disadvantages. For example, comparing air with truck
transport, air has the advantage in terms of speed; truck transport can accommodate greater
volume and has lower rates and greater flexibility in terms of delivery points. The astute buyer
must recognize such advantages/limitations and arrive at the best overall balance, considering
the needs of the organization.

After determining the mode of transport, a decision must be made on a specific carrier and the
specific routing of the shipment. The factors to be considered when selecting mode of
shipment, carrier, and routing include the following:
1) Required delivery time
2) Reliability and service quality.
3) Available services.
4) Type of item being shipped.
5) Shipment size.
6) Possibility of damage.
7) Cost of the transport service
8) Carrier financial situation
9) Handling of claims
10) Private fleets.

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Name: Hina Azeem

Student I.D: 12843

Final Project

Submitted To: Sir Kashif Shafiq