PURCHASING MANAGEMENT

PURCHASE OF TRANSPORTATION SERVICES

 PURCHASE OF TRANSPORTATION SERVICES

• The Council of Supply Chain Management Professionals

defines logistics management as “that part of supply
chain management that plans, implements, and controls
the efficient, effective forward and reverse flow and
storage of goods, services, and related information
between the point of origin and the point of consumption
in order to meet customers’ requirements.”
 PURCHASE OF TRANSPORTATION SERVICES

• Transportation service providers support the four major

linkages throughout a typical supply chain:
(1) inbound logistics
(2) intraorganizational movements
(3) outbound logistics
(4) recovery and recycling (or reverse logistics)
PURCHASE OF TRANSPORTATION SERVICES
 PURCHASE OF TRANSPORTATION SERVICES

• Deregulation of Transportation and Supply

Management’s New Role
– Transportation Deregulation
– Legislation passed in the United States during the late 1970s and early 1980s,
designed to open up economic competition in transportation, also encouraged
supply management’s involvement in the procurement and management of
transportation services.
– Congress passed the Air Cargo Deregulation Act in 1977, the Air Passenger
Deregulation Act in 1978, and the Negotiated Rates Act in 1993. Shortly after, the
Motor Carrier Act of 1980 and the Staggers Rail Act became law.
– Other major deregula_x0002_tion legislation in the United States includes the
Transportation Industry Regulation Reform Act of 1994, the ICC Termination Act
of 1995 (creating the Surface Transportation Board), and the Ocean Shipping
Reform Act of 1998, which reduced the Federal Maritime Commission’s authority.
 PURCHASE OF TRANSPORTATION SERVICES

• Deregulation of Transportation and Supply

Management’s New Role
– Transportation Deregulation
– The primary objective of deregulation in the United States was to make its
domestic transportation system more efficient by increasing marketplace
competition in the transportation industry and reducing burdensome economic
regulation.
– From the buyer’s perspective, these laws offered new opportunities to negotiate
lower transportation rates and higher service levels with individual carriers.
– From the carrier’s perspective, these laws took away a comfortable blanket of
government protection and significantly reduced profit margins on almost all
national contracts.
• Effectively managing transportation services is important
for several reasons:
– Transportation is a major cost center at most manufacturing
companies.
– Transportation affects production and scheduling systems,
inventory levels, carrying costs, and customer order
management.
 PURCHASE OF TRANSPORTATION SERVICES

• Deregulation of Transportation and Supply

Management’s New Role
– A New Role for Supply Management
– As supply management professionals take a more active role in transportation
procurement, what exactly are the duties they assume? Supply management can
support:
» the purchase of inbound
» the purchase of outbound
» ancillary transportation services just as it supports the purchase of other
products, materials, and services.
– Supply management can also negotiate long-term freight agreements and
evaluate carrier performance similarly to evaluating suppliers of purchased
goods.
 PURCHASE OF TRANSPORTATION SERVICES

• International Commercial Terms 2010

– Incoterms
– are internationally recognized standard definitions that describe the
responsibilities of a buyer and seller in a commercial transaction.
– They are used in conjunction with a sales agreement or other method of
transacting the sale.
– The buyer and seller have an array of terms from which to choose, depending on
the extent to which each party wants to be involved with the transportation and
insurance.
– EXW, CPT, CIP, DAF, DDU, and DDP are commonly used for any mode of
transportation. FAS, FOB, CFR, CIF, DES, and DEQ are used for sea and inland
waterway.
PURCHASE OF TRANSPORTATION SERVICES
 PURCHASE OF TRANSPORTATION SERVICES

• A Decision-Making Framework for Developing a

Transportation Strategy
– Determine When and Where to Control Transportation
– The initial decision regarding transportation requirements involves determining
how, when, and where to control shipments.
– Identify Key Transportation Performance Variables
– Different carrier or 3PL performance variables must be carefully determined and
evaluated when developing an effective transportation strategy.
– Data on the following set of variables should be collected and evaluated when
comparing competing transportation modes as well as specific carriers within the
same mode.
 PURCHASE OF TRANSPORTATION SERVICES
• A Decision-Making Framework for Developing a
Transportation Strategy
– Total Cost
– Total cost plays a major role in the transportation decision-making framework.
– Selecting a mode or carrier based solely on the lowest freight cost ignores the
total cost and customer service implications of the decision.
– The cost variable, although important, should not be the sole variable used.
Furthermore, any cost evaluation should always be in a total cost context, not
merely using the price shown on the freight bill.
– Speed
– This variable refers to the in-transit time of a mode or carrier. For some items,
such as bulk raw materials, speed may not be an important factor.
– Companies that ship products directly to customers after receiving an order are
more likely to be focused on speed as a key performance variable.
 PURCHASE OF TRANSPORTATION SERVICES

• A Decision-Making Framework for Developing a

Transportation Strategy
– Reliability
– A critical performance variable for any mode or carrier is reliability, which refers to
the accuracy and on-time consistency of the transportation service, arriving
neither late nor early. It also relates to a carrier’s ability to deliver a shipment in
an undamaged condition.
– Capability
– This variable refers to a mode or carrier’s ability to provide the proper equipment
and provide the appropriate services for a given product movement.
– Capability is important because it affects a mode or carrier’s ability to provide
consistent transportation service or provide a requested service.
 PURCHASE OF TRANSPORTATION SERVICES
• A Decision-Making Framework for Developing a
Transportation Strategy
– Accessibility
– Transportation accessibility refers to a mode or carrier’s ability to provide service
over a geographic area.
– A totally accessible mode or carrier is capable of picking up a shipment and
delivering it directly to its final destination.
– A carrier may not have the appropriate authority or travel the physical routes
necessary to transport goods between two points or to operate in a specific
geographic region.
– Select a Transport Mode
– There must be a close match between those key transportation performance
variables identified in the previous section and the ability of the different modes or
carriers to satisfy these variables.
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• Five principal modes of transportation

– Motor Carriers
– It should come as no surprise that over-the-road motor carriers are a popular
transportation option.
– They uniquely provide direct door-to-door service, making it a highly flexible
mode of transportation.
– motor carriers are ideal for carrying smaller-volume, or less-than-truckload (LTL),
shipments, involving multiple shippers and multiple consignees.
– The most significant disadvantage of a motor carrier is its relatively higher cost.
– motor carriers have limited abil_x0002_ity to transport bulk commodities as
compared to rail, inland water, and pipelines. There are minimal economies of
scale in motor carrier; you cannot simply add additional cargo-carrying capacity,
because of weight, width, and length constraints.
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• Five principal modes of transportation

– Rail Carriers
– A major advantage of a rail carrier is the wide range of items it is capable of
hauling.
– A railcar can handle virtually any type of shipment, including manufactured
goods.
– Another advantage of rail, and perhaps its primary one, is its relatively low cost.
The ability to move huge amounts of freight over long distances at a per-pound
cost that is lower than other transportation modes is the main reason that rail still
commands a large share of all intercity ton-mile shipments.
– The costs associated with owning and operating equipment, switch yards, and
rail line rights-of-way means that rail carriers have comparatively high fixed costs.
However, their low variable cost structure allows rail carriers to move freight at a
relatively low rate per mile.
 PURCHASE OF TRANSPORTATION SERVICES

• Five principal modes of transportation

– Air Carriers
– Air carriers haul the least amount of commercial freight because of the high cost
of air travel and the limited amount and type of freight a plane can carry.
– More firms are evaluating air transportation in relation to their just-in-time
inventory and manufacturing systems. Shipping a high-priced component via air
may actually be a cost-effective option, particularly if the material does not require
much space, because of high inventory carrying costs.
– Higher cost per pound is the primary disadvantage to the increased use of air
transportation. Air has a high variable-cost-to-fixed-cost ratio due to the high
costs of operating a flight, such as fuel and labor.
– Air carriers also suffer from lim_x0002_ited capacity and flexibility. The
dimensions of the plane itself limit the size and weight of a shipment.
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• Five principal modes of transportation

– Water Carrier
– This transportation mode includes both inland water (river, canal, and lake) and
oceangoing vessels. Inland water carriers typically transport low-value, large-
quantity items such as bulk commodities and raw materials (e.g., ores,
chemicals, sand, rocks, cement, and agricultural products).
– Inland water carriers rarely transport finished or semifinished products because of
the lengthy in-transit time.
– The main advantage of water transportation is the large volume an inland barge
or ship can move at one time, as well as the relatively low cost per pound.
– The primary disadvantages include limited flexibility of shipping and receiving
points, seasonal shipment in some areas of the country, slow speed, and the
potential for natural disasters such as oil spills, which can have devastating
effects on the natural environment.
 PURCHASE OF TRANSPORTATION SERVICES

• Five principal modes of transportation

– Pipeline
– The use of a pipeline is usually not part of the decision tradeoff between
transportation modes.
– Pipelines primarily transport petroleum products, natural gas, or coal in a slurry
condition.
– The total cost structure of pipelines is similar to rail carriers as the equipment,
rights-of-way, and physical pipeline have a high fixed cost and a low variable
operating cost.
– Labor and direct operating costs are relatively low for this mode. Although
pipeline movement is low cost and reliable, it is extremely slow.
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PURCHASE OF TRANSPORTATION SERVICES
 PURCHASE OF TRANSPORTATION SERVICES
• Intermodal Transportation
– If the shipper or consignee were to deal individually with each
mode and carrier, the administrative cost and effort would be
prohibitive and inefficient. To resolve this complexity and provide
better service, many global carriers now offer one-stop shopping,
where the shipper or consignee contracts with one carrier, which
then coordinates and manages the entire intermodal shipment,
regardless of carrier or mode, and also provides a single point of
contact and unified freight bill.
– The underlying idea of intermodal transportation is to utilize the
inherent advantages of each mode while minimizing their
respective disadvantages, resulting in a seamless movement to
the customer.
 PURCHASE OF TRANSPORTATION SERVICES

• A Decision-Making Framework for Developing a

Transportation Strategy
– Select the Carrier
– Once the buyer decides what transportation mode is best suited to move a given
item, the next step involves evaluating and selecting the actual service provider.
– Shippers can select a common (or public) carrier, negotiate for services with a
contract or exempt carrier, arrange shipments on company-owned vehicles
(private carrier), or use a third-party logistics provider to select and manage the
carrier.
 PURCHASE OF TRANSPORTATION SERVICES

• Types of Carrier
– Common Carriers
– By law, a common carrier must serve the general public without discrimination
based on published rates for specific goods.
– Part of a common carrier’s operating authority comes from its obligation to serve
transportation users in a fair and non discriminatory manner.
– a common carrier must offer reasonable rates, although rates are not published
in the same manner as they were during the days of economic regulation.
– Contract Carriers
– Shippers that rely heavily on precise and frequent transportation might consider
the use of a contract carrier.
– A contract carrier does not hold itself out to serve the general public, as does a
common carrier. The contract carrier serves a shipper (i.e., a buyer) under
specific, negotiated contract terms.
 PURCHASE OF TRANSPORTATION SERVICES

• Types of Carrier
– Private Carriers
– A private carrier is a manufacturer or distributor that controls and manages its
own transportation equipment, whether owned or leased.
– Typically, a private carrier moves goods between suppliers, in-house facilities, or
customers.
– Private carriers may also be utilized to make daily “milk runs,” picking up smaller
amounts of materials from close by suppliers to be used in a just-in-time
environment.
– Exempt Carriers
– Exempt carriers are free of any economic regulation. They gain this status
because of the type of commodities they haul and the nature of their operation.
– These carriers usually transport seasonal agricultural products, newspapers,
livestock, or fish. Exempt carriers are primarily local water carriers of bulk items.
 PURCHASE OF TRANSPORTATION SERVICES

• A Decision-Making Framework for Developing a

Transportation Strategy
– Negotiate Transportation Rates and Service Levels
– A buyer with substantial transportation needs across its supply chain will likely
negotiate directly with a single carrier or a small number of carriers for dedicated
or contracted services.
– A major outcome from transportation economic deregulation has been the shift of
pricing information garnered from published tariffs and rate bureaus to the
negotiating table.
– A buyer can negotiate specific services and required service levels, while the
carrier can indicate what freight volumes are necessary to support a particular
service level or rate.
 PURCHASE OF TRANSPORTATION SERVICES

• A Decision-Making Framework for Developing a

Transportation Strategy
– Negiotiate Transportation Rates and Service Levels
– This negotiation process can address a number of topics:
» The carrier’s service performance guarantees with penalties and rewards
based on actual performance
» The shipper’s commitment to ship a minimum amount of volume during the
life of the contract
» How the parties handle freight loss and damage claims
» The type and quantity of equipment utilized by the carrier
» Frequency and timing of shipments
» Establishment of information-sharing systems
» Freight rates and discounts
» Creative and innovative joint cost reduction activities
 PURCHASE OF TRANSPORTATION SERVICES

• OPTIMISE YOUR PACKING PROCESS

– There’s more to packing than just throwing items in a box as
quickly as possible. It’s an opportunity to make completely sure
that you’re sending the right products to the right customers
and in the most efficient way.
– Box size: More and more shipping companies are incorporating
package dimensions into their pricing – rather than it being
based solely on weight. Meaning box sizes could be having a
direct impact on costs. Having 50 different box size options is a
great way to overwhelm packers and severely slow down
warehouse operations.
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• Packaging material
– Another element to the packing process is choosing the most
appropriate packaging material. This is all about striking a
balance between keeping the goods protected during transit,
minimizing the overall weight of the package (and therefore
courier costs) and keeping the cost of the packaging material
itself down.
PURCHASE OF TRANSPORTATION SERVICES

Here are some

of the most
common things
use to protect
goods in transit: