CHAPTER 5

Shipper/Carrier Network
Strategies
1
 Introduction
Both shippers and carriers utilize strategies to
manage their respective networks.
The shipper strategy is focused on purchasing and
managing transportation services to meet the needs
of their external and internal customers.
Carrier strategy is focused on the efficient use of
resources to provide the economical and efficient
service the shipping public desires.
2
 Shipper Transportation Strategy
The transportation function is one element of the total
logistics function.
The strategies and operating decisions used in
transportation management must support the strategies
and objectives of the logistics function and those of the
company.
Current management strategy focuses on optimization
between the various elements within the logistics
sector.
3
 Shipper Transportation Strategy….
Transportation is often one of the largest cost elements, and
decisions in this area can favorably or negatively impact the total
distribution performance.
For example, slow but low cost transportation can have an adverse
impact on customer service and inventory levels.
Although such methods may minimize transport cost, inventory levels
may need to be much higher to accommodate longer transit times.
These higher stocking levels, with the resultant increase in inventory
carrying cost, may more than offset any saving in freight charges.

4
 Shipper Transportation Strategy…
Transportation strategy is concerned with the
purchase and control of transportation services.
Transportation purchasing decisions include:
– modal selection, consolidation, private trucking,
– Intermediaries, and contracting.
– The resources, organization, and trade terms decisions
are concerned with controlling transportation.

5
General Strategy
•Proactive management Strategic Decisions
•Improve information
•Modal selection
•Limit Carriers used
•Contracts for service •Consolidation
•Negotiate
•Private trucking
•Review private trucking
•Intermediaries
Small Shipments •Trade terms
•Consolidate
•Pooling services •Contracting
•Avoid private trucking •Resources
•Organization
Bulk Shipments
•Contracts
•Balanced loads for carrier 6
 GENERAL STRATEGY
Proactive Management
The transportation manager relies on basic
management techniques to seek innovative
transportation systems that will provide the company
with a competitive price or service advantage in the
marketplace.
Today the transportation manager must rely on his
or her ability and creativity to design a transportation
system that permits product differentiation and a
competitive advantage. 7
 GENERAL STRATEGY….
Proactive Management….
The current competitive environment requires that
the transportation manager focus on customer service
and competitive strategies.
Successful logistics strategies are seen as a true
competitive advantage, requiring transport support
that can respond to ever increasing demands for
smaller inventory levels combined with immediate
delivery.
8
 GENERAL STRATEGY…
Improve Information
To effectively manage the transportation function,
reliable and current information is a necessity.
– Without information, the manager unable to plan and
control the transportation activities and make sound
decisions.
Transportation costs, shipment volume, and carrier
performance are the typical data collected .
– These data are essential to carrier negotiation, freight
consolidation, contracting, and private trucking decisions.
9
 GENERAL STRATEGY…
Improve Information…
A major source of transportation information is the bill of lading.
The bill of lading indicates the customer or vendor, the shipment volume, origin and
destination, date, and carrier.
The carrier’s freight bill (invoice) provides similar data as well as the transportation
cost for the shipment.
Other sources include the purchase order, order entry system, invoice, and internal
studies. Some companies use a third-party provider, such as a bank or freight
payment company, to pay freight bills, and most of these freight payment firms have
the computer capabilities to provide transportation data reports in the format required
by management.

10
 GENERAL STRATEGY…
Carrier Negotiation
Negotiating with for-hire carriers is standard operating
procedure today.
Market power determines the shipper’s ability to negotiate
acceptable rates and services.
To increase market power, shippers use the strategy of
limiting the number of carriers, thereby concentrating more of its
economic power with a carrier and increasing the carrier ’s
dependence on the shipper.
11
 GENERAL STRATEGY…
Carrier Negotiation….
A shipper’s market power and negotiating strength also
are determined by the characteristics of its freight .
– Freight that has low density, is hard to handle, is easily
damaged, and moves in small volumes irregularly is
undesirable freight for the carrier.
– Conversely, products that have high density and high
value, are difficult to damage, and move in large
volumes regularly are more economical for the carrier to
move. 12
 GENERAL STRATEGY…
Contracting
The contracts allow the shipper to realize the lower rates and
necessary service levels that are not attainable from a regulated carrier.
During the term of the contract, the shipper is guaranteed the
contracted rate and service.
If properly written, the provisions of the contract take precedence over
the bill of lading and transportation regulations.
The transportation manager must take precautions to ensure that the
contract provides desired terms such as rates, services, equipment, and
liability.
13
SMALL SHIPMENT STRATEGY
The strategic thrust for small shipments is to reduce
the inherently high transportation costs associated
with small-sized shipments.
– By increasing the size of the shipments, the shipper can
take advantage of the carrier’s low rates for heavier
shipments.
– Rate discounts from 30 percent to 50 percent or more
are possible for heavier loads.

14
 Small Shipment Strategy…
A shipper consolidates its freight by using its order
entry system. As customer orders arrive, a
computer uses a three-digit zip code to match
shipments going to the same general area.
As discussed above, the need for information is
critical to any freight consolidation program. The
transportation manager must know the shipments
that are shipped to a given area on a given date as
well as delivery requirements.
15
 Small Shipment Strategy…
If the consolidated load consists of many shipments going to
different consignees in a general area, the shipper may use
the pooling service offered by for-hire carriers.
The pooling service charges the shipper the lower volume
rate from one origin to one destination.
– Because the consolidated load contains shipments for many
consignees at different destinations, a warehouse or drayage firm is
used to separate and deliver the individual shipment, and an added
cost is incurred for this additional break-bulk and delivery service.

16
 Small Shipment Strategy…
Another small shipment strategy is the use of stopping-
in-transit (SIT) service provided by motor carriers.
SIT permits the shipper to load a number of shipments
on a vehicle and stop along the way to unload the
individual shipments.
Conversely, SIT can be used for inbound shipments by
having the carrier stop along the way to load additional
shipments and deliver a consolidated row material
shipment to the plant, warehouse, or retail store.
17
 Bulk Shipment Strategy
The primary strategy used in the transportation of
bulk commodities is contracting.
Most bulk raw materials are moved under long-
term contracts with rail, water, and motor carriers.
The large volume of product moved gives the
shipper the requisite negotiating and market power
to realize lower rates and guaranteed service
levels.
18
 Bulk Shipment Strategy….
The sheer volume of transportation involved has
caused both shippers and carriers to realize their
mutual dependency.
If the carrier ceases operation, the shipper
experiences serious disruptions in service, higher
costs, and possibly a short-run closing of production
because alternative transportation is not available.
Likewise, the carrier is aware of the large percentage
of its business that is accounted for by one shipper.
19
 Bulk Shipment Strategy…
Given this mutual dependency, a shipper attempts
to provide the carrier with a balanced load, that
is, a load into the facility and one out of the
facility.
A balanced load eliminates the empty backhaul
costs that the carrier must account for in the
initial loaded move and enables the carrier to
spread this round-trip cost over two commodity
moves instead of one. 20
 Bulk Shipment Strategy…
To accomplish the balanced load strategy, cooperation is
required between outbound and inbound (purchasing)
transportation and may necessitate resourcing material
purchases from areas where the carrier experiences empty
backhauls.
Recently, a major manufacturer contacted other shippers in
an attempt to generate freight for its contract carrier to haul
over an otherwise empty backhaul. This can be difficult if the
commodity being transported required dedicated or
specialized trailers.
21
 Traffic Management
Traffic management is the traditional term for the task
of obtaining and controlling transportation services for
shippers or consignees or both.
In many firms, it is the core of business logistics
department.
Transportation in the firm exists in close trade-off
relationships with purchasing, warehousing, inventory
control, packaging, production scheduling, and
marketing.
22
 Traffic Management as a
Procurement Function…..
Traffic management is a special form of
procurement and purchasing. Procurement is a
term that applies to a wide range of activities
that basically consists of obtaining goods and
services for the firm.
All of these factors provide the firm with a
system to obtain the physical goods and special
services it requires.

23
 Traffic Management…..

Carrier Selection Process

The traffic manager’s decisions have a direct
impact upon the company’s total logistics costs
and quality of service provided to the customer.
The transport selection decision is a two-part
decision.
1. Selection of the mode
2. Selection of the specific carrier within the
mode. 24
 Traffic Management…..
Carrier Selection Process….
That is, the traffic manager examines the cost and service
characteristics of the different modes, including the
combination of two or more modes, and selects the mode
that matches the company’s cost and service goals.
Next, the traffic manager examines the cost and service
characteristics of the individual carriers within the selected
mode and selects the specific carrier to provide the desired
transport service.
25
 Traffic Management…..
Carrier Selection Process….
The relevant carrier selection factors include
– transport cost,
– transit time,
– transit time reliability,
– accessibility,
– capability, and
– security.
These factors impact the total logistics costs of movement and storage
and are used in both the selection of the mode and specific carrier.

26
 Traffic Management…..
Transportation Budget Management
The transportation budget is the major overriding financial control in all
these tasks
The traffic manager must keep track of current and future activities and
expenditures and relate them to the original plan.
Cost escalators, such as fuel and insurance, have crated major
problems for most traffic managers who attempt to operate within
planned budgets.
Escalation will no doubt continue to be a complicating cost and budget
problem in the future.
27
 Traffic Management…..
Monitoring Service Quality
If the traffic manager can get the products to the customer
in a timely, consistent, and undamaged basis, the buyer’s
inventory and stockout costs are lowered, making it
advantageous for the buyer to do business with the seller.
The key to monitoring transportation service quality is
information.
The traffic manager must have information regarding the
customer’s demands for transportation service and the
service level provided by current carriers. 28
 Traffic Management…..
Monitoring Service Quality…
The carrier evaluation report is used to assure that
carriers are providing the service quality that is demanded
by the customers or specified by agreement.
Carriers not providing the expected level of service are
asked to take corrective actions or the traffic manager will
replace the carrier.
Typically, the most important evaluation criteria are
meeting pickup and delivery schedules and transit time.
29
 Traffic Management…..
Information Systems
The astute traffic manager will always seek ways to attain
and report information relating to the carrier’s services and
individual manager performance.
Many firms monitor and report cost and transit time
performance for all movements, including the private fleet.
They also may record cost recoveries and claims
progress.
In all, performance reevaluation and decision-making
information systems are a prime necessity. 30
 Traffic Management…..
Systems Analysis
There is no one best way of always transporting a firm’s goods.
Where motor might be a proper choice in normal periods, air
freight might be necessary occasionally.
What is a good choice one day might be poor one the next.
Within traffic management, continuous analyses must be
conducted to put together the best service and total cost
configuration.
Traffic management must be integrated within the overall
materials management and distribution scheme of the firm.
31
CARRIER STRATEGIES

32
 Carrier Strategies
Transportation is a service, not a production
activity.
It is a derived demand and not a primary demand
for its services.
Further, transportation is a service that cannot be
stored; it is unlike a physical product that can be
produced according to certain logistical efficiencies
and then held until the market demands it.

33
 Operations
The rule of efficiency states that it is most efficient to
move in a continuous, straight line whenever possible.
This rule describes the most efficient movement for
goods and people.
It calls for little or no circuitry and minimized stopping
and restarting. Sporadic movement means energy
loss, chances for delay and damage, and an overall
increase in costs.

34
 Operations…
This general rule can be observed in practice in many areas.
– Unit trains such as coal or grain avoid intermediate
classification yards between the shipper and receiver.
– Truck firms attempt to consolidate long-haul loads so
that a single through run, with no intermediate handling,
is made and the goods can be sorted for final local
delivery at the ultimate destination.
– The airline industry strives to maximize long-haul
nonstop flights because major fuel and engine-wear costs
are incurred in take-offs.

35
 Operations….

The full capacity of the transportation vehicle should be

maximized on each run.
Transportation costs of trucks, trains, ships, and planes
are similar in that the costs of personnel, depreciation,
licenses, and taxes are relatively fixed costs that are
incurred for each run.
The variable amount of goods or people in the run will
affect fuel costs, some servicing costs, and loading and
unloading costs.
36
 Operations…
Most transportation managers seek to fill the capacity of
the vehicle before dispatching it.
In the railroad and trucking industries, managers often
will delay runs so that more freight can be accumulated
for the long haul.
The driver or engine crew is paid the same regardless
of the weight in the truck or the cars on the train.
Airline marketing and pricing managers use low-cost trip
fares to induce vacationers to fill what normally would
be empty seats.
37
 Operations…

Consolidation and break-bulk activities should be used

for long-haul advantages.
One means of attaining full equipment use is to use a
pickup and delivery network to accumulate freight for
the line-haul efficiency.
Trucking firms do this with city vehicles that bring
different shipments to a terminal for sorting,
accumulation, and shipping in bulk to the destination
city terminal.
38
 Operations…
This system avoids the prohibitive use of many small trucks
and shipments by using large, efficient single units on 400 to
500 mile runs.
Railroads perform this task in much the same way. Here
smaller planes bring passengers from less populated, outlying
cities to the hub where the larger, more efficient planes can be
used for the long haul.
At the destination, the process is reversed.
Empty mileage should be minimized. The cost of moving an
empty vehicle is almost that of moving a loaded one without the
offset of revenue.
39
 Operations….

Energy is a major cost in transportation systems.

In very few instances can a firm afford one-way loaded
movements with empty return hauls.
Each mile traveled requires the use of energy, and often
the payload in freight or passengers represents only a
small part of the total energy consumed in the move.

40
 Operations….

That is, the movement of the vehicle itself can often be

responsible for a large part of the fuel consumed.
For this reason, transportation route strategies, carrier
marketing and pricing personnel, and dispatchers strive to
arrange two-way or three-way moves with almost all miles
bearing revenue payloads.
Empty miles represent wasted fuel, labor, capital costs,
and lost revenue.

41
 Operations….
Movements should be scheduled and dispatched so as to fully
use labor and equipment in line with the market.
Transportation service cannot be stored.
Because the service must be in place for the market, this rule
calls for the optimal equipment levels to be in place with the
required personnel.
Neither the equipment nor the required labor should delay the
move.

42
 Technology and Equipment
The more expensive the long-haul vehicle, the greater
the required investment in fast load/unload and other
support equipment.
Because these expensive investments are only earning
revenue when they are running, firms strive to operate
with a minimum of down time or loading and unloading
time.
Generally, the larger the vehicle, or the more freight or
passengers that can be moved in it, the less each unit
will cost to move.
43
 Technology and Equipment…
With most transportation vehicles, the larger they are,
the lower the ton-mile or seat-mile cost will be.
Vehicle weight should be minimized in relation to gross
weight.
Therefore, the less the vehicle itself weights, the more
it can carry in the form of freight or passengers. This is
the reason why lighter metals and plastics are
designed for use in motor-carrier tractors and in
aircraft.
44
 Technology and Equipment…
Equipment should be standardized as much as possible.
Standardized equipment simplifies planning, purchasing, crew
training, maintenance, and spare parts inventories.
When equipment is standardized among firms, efficient
equipment interchange can take place.
Many shipping firms require specialized equipment for the
economical movement of particular commodities.

45
 Technology and Equipment…

The transportation industry is also characterized

by extremely sophisticated communications
technology.
Nearly all truckload carriers currently have
installed satellite technology and computers on
their tractors to be able to communicate in real
time with drivers.

46
 The Hub-and-Spoke Route System
The hub-and-spoke system concentrates the flow of
passengers and freight along a fewer number of routes with a
main mixing point (hub) at a center.
All flights or runs meet at this hub where passengers or freight
can be switched to runs to any other point in the system.
It expands the number of points the carrier can offer travelers
with good schedules , and it concentrates more business into a
fewer number of runs.
The motor-carrier industry employs this structure using break-
bulk terminals that consolidate freight to faraway points with a
minimum of intermediate handling.
47
 Marketing
Transportation firms are faced with the challenge of developing and
marketing something that cannot be felt, inventoried, or tested.
Because transportation services are:
• intangible
• highly labor-intensive.
• Produced and consumed simultaneous
• perishable
This makes the marketing of carrier services extremely important
to the profitability of the firm, and a knowledge of marketing
concepts is critical to this success.

48