C6

Overview of Chapter 6

  • Focus: Transportation in the Supply Chain
  • Sub-topics
    • 6.1 Transportation Functionality
    • 6.2 Basic Modes of Transportation
    • 6.3 Documentation
    • 6.4 Product Pricing & Transportation (including 6.4.1 FOB, 6.4.2 Delivered, 6.4.3 Pickup Allowances)

Learning Objectives

  • Identify transportation functionality & its role in supply-chain performance
  • Describe modes, characteristics, pros & cons of each transport mode
  • Discuss documentation unique to each mode
  • Explain management & pricing strategies that improve overall supply-chain results

Introduction to Transportation

  • Most visible logistics element; accounts for >60\% of a typical firm’s logistics budget
  • Consumes time, money, environmental resources
  • Offers value beyond physical movement by creating time & place utility and linking geographically separated partners
  • Major driver of a firm’s financial performance and competitive advantage

Definition

  • Physical movement of goods between origin & destination
  • Begins with raw-material movement to factory/warehouse and ends at customer’s doorstep

Role in Supply-Chain Management (SCM)

  • Enables logistics; without reliable transport commercial activity stalls
  • Creates critical links among suppliers, manufacturers, warehouses & customers
  • Service availability enables demand fulfilment; efficiency promotes competitiveness

Transportation Functionality

  • Two primary services:
    1. Product Movement
    2. Product Storage (in-transit)
Product Movement
  • Moves materials, components, WIP, finished goods up & down the value chain
  • Objective: ship from origin to destination while minimising time, cost & environmental impact, plus loss/damage
  • Must meet customer expectations for delivery speed & shipment visibility
Product Storage (In-Transit)
  • Goods inside vehicles are technically in storage
  • Vehicles sometimes used for short-term storage at origin/destination when reload costs exceed holding costs
  • Diversion: rerouting shipments mid-transit via phone or satellite comms to better match demand changes

Basic Modes of Transportation

Five global modes, each with unique tech, infrastructure, regulations:

  1. Railway (Train)
  2. Road/Truck
  3. Water (Inland & Ocean)
  4. Air
  5. Pipeline
Comparative Snapshot (strengths vs. limitations)
  • Truck: Accessible, fast, versatile | limited capacity, high cost
  • Rail: High capacity, low cost | accessibility & service inconsistency
  • Air: Highest speed, great security | very high cost, low capacity
  • Water: High capacity, low cost, int’l reach | slow, weather/port delays
  • Pipeline: Continuous flow, low variable cost | limited to liquids/gases, high fixed cost, leakage risk
Railway Transportation
  • Steel wheels on steel rails ⇒ low friction, high load potential
  • Engines: diesel-electric or electric; complex signalling for multi-route networks
  • Advantages: large cargo volumes, low cost
  • Disadvantages: inconsistent service, fixed routes, track maintenance cost
Road / Truck Transportation
  • Predominant global freight mode for foreseeable future
  • Highly varied vehicle types; body-on-frame typical
  • Specialised variants: refuse, fire, concrete mixers, suction excavators
  • Advantages: very flexible door-to-door reach, relatively quick transit
  • Disadvantages: small capacity per vehicle, high driver & fuel cost
Water Transportation
  • Oldest mode; uses rivers, lakes, coastal & deep-sea lanes
  • Modern cargo ships are sophisticated with container compatibility (easy intermodal transfer)
  • Advantages: low cost per unit, very high capacity
  • Disadvantages: slow, port congestion/delays, piracy risk, geographic limitation
Air Transportation
  • Newest & least-used (by tonnage)
  • Speed enables lower inventory & warehousing needs
  • Capability limited by weight/size & aircraft availability
  • Fixed infrastructure costs borne largely by governments (airports/airways); carrier costs = aircraft + specialised containers
  • Advantages: fastest, secure, ideal for small/high-value/time-critical items (e.g., fresh food, pharma)
  • Disadvantages: most expensive, low tonnage capacity
Pipeline Transportation
  • Suited to continuous, high-volume flow of liquids & gases (oil, natural gas, chemicals, water, sewage)
  • Materials range from cast iron to glass-fibre concrete
  • Involves inspection gauges (“pigs”) for cleaning/safety
  • Legislation emerges due to land-rights & environmental impact
  • Often cheaper than rail for land transport; under-sea lines costly ⇒ tankers handle most seaborne oil
  • Advantages: all-weather, continuous, low energy per unit, space-efficient
  • Disadvantages: limited commodity types, leakage risk, high fixed (construction) cost
Flow of Oil & Gas (simplified)
  • Gathering lines → pump/compressor → storage/treatment → transmission lines → refineries/processing → storage → distribution systems → end-users (industrial, commercial, residential)

Key Documentation

Purpose: convey cargo info, allocate liabilities, enable customs clearance, support freight payment.
Primary types: Bill of Lading, Freight Bill, Shipment Manifest

Bill of Lading (BoL / B/L)
  • Contract of carriage + receipt + document of title
  • Parties: Shipper (consignor), Carrier, Consignee (buyer)
  • Contains: origin, destination, routing, terms, consignor/consignee data, commodity description/quantity/class/rate
  • Carrier delivers only to BoL holder; title transfer governed by BoL endorsement
  • Example shown: Maersk short-form non-negotiable BoL with 500500 laptop units, FOB 20102010 terms, 3 originals issued
Freight Bill
  • Invoice issued by carrier to consignee
  • Itemises shipment description, weight, origin, charges
  • Developed from BoL data
  • Terms: prepaid (shipper pays) vs. collect (consignee pays)
Shipment Manifest
  • Consolidated list of all cargo (or passengers) on a conveyance
  • Includes vessel/vehicle ID, route, and BoL references
  • Essential for customs; cargo cannot load/unload without matching manifest
  • Example: vessel carrying 10001000 gensets to Djibouti plus other goods; customs verifies manifest vs. physical cargo

Product Pricing & Transportation

  • Pricing strategy directly affects logistics responsibility, title transfer, and liability
  • Trend: de-bundling—transport previously hidden in “delivered” price now itemised
  • Two dominant approaches: FOB pricing & Delivered pricing
FOB (Free/Freight On Board) Pricing
  • Specifies geographic delivery point & liability transfer
  • Variants
    • FOB Origin (Shipping Point)
      • Seller quotes price at origin, loads goods, no further liability
      • Buyer selects mode/carrier, pays freight, assumes in-transit risk once goods loaded
      • Title transfers at shipment departure
    • FOB Destination
      • Seller arranges & pays transport, retains title & risk until delivery
      • Seller adds freight cost to invoice, manages claims, replaces damaged goods
      • Title transfers upon buyer receipt & acceptance
Delivered Pricing
  • Transportation cost embedded in product price; freight not shown separately
  • Models
    1. Single-Zone Delivered Pricing
      • All buyers pay same delivered price regardless of location
      • Based on average freight cost ⇒ some overpay, others underpay
      • Works when freight share of selling price is small; offers seller strong logistical control & buyer simplicity
    2. Multi-Zone Delivered Pricing
      • Market divided into distance-based zones; customers within a zone pay identical delivered price
      • Fairer cost allocation than single-zone while retaining simplicity
      • Example: PosLaju Malaysia rate card with 55 zones & weight slabs (e.g., 4.41 RM4.41\text{ RM} for first 500 g500\text{ g} in Zone 1)
    3. Base-Point Pricing System
      • Seller chooses a base city; charges freight from that city to customer regardless of actual ship-from point
      • Final price = list price + freight from base point
      • Creates possible “phantom freight” (buyer pays more than actual)
      • Seller may use Freight Absorption to pay part/all freight to remain competitive
Pickup Allowances
  • Seller offers discount off delivered price when buyer arranges pickup (equivalent to FOB origin)
  • Benefits
    • Seller handles fewer small outbound loads; less consolidation work
    • Buyer gains earlier control of goods; may better utilise own vehicles/drivers

Ethical, Environmental & Practical Considerations

  • Environmental impact significant (fuel use, emissions) ⇒ modal choice affects sustainability
  • Pipeline land-rights & community impact require legislation & stakeholder engagement
  • Piracy & security risks in water transport influence insurance & routing decisions
  • High air-freight costs vs. reduced inventory holding illustrates trade-off analysis in total logistics cost models

Connections & Real-World Relevance

  • Time & place utility (from earlier logistics principles) materially created by transport
  • Diversion capability mirrors agile supply-chain practices (postponement, demand-driven fulfilment)
  • Pricing debates (bundled vs. unbundled) reflect broader shift toward transparency & cost-to-serve analysis
  • Intermodal containers exemplify integration across rail, road & water, echoing concept of “seamless” supply chains

Numerical / Statistical Highlights

  • Transportation commonly >60\% of logistics spend
  • Example BoL: 11 container, 500500 laptops, gross weight 1650 kg1650\,\text{kg}, volume 10.2 m310.2\,\text{m}^3, ocean freight USD  3,300USD\;3{,}300
  • PosLaju multi-zone sample cost: Zone 1 first 500 g=4.41 RM500\text{ g} = 4.41\text{ RM}; each extra 250 g=1.01 RM250\text{ g} = 1.01\text{ RM}

Quick Reference: Mode→Typical Product Examples

  • Truck: food, clothing, electronics, furniture (high value, B2C)
  • Rail: coal, lumber, grain, chemicals (bulk, low value)
  • Air: computers, periodicals, urgent pharmaceuticals (time-sensitive, high value)
  • Water: ore, farm products, containerised consumer goods (bulk + finished)
  • Pipeline: crude oil, gasoline, natural gas (liquids/gases)

Study Tips

  • Memorise FOB vs. Delivered pricing differences; sketch FOB title-transfer diagrams
  • Use comparative mode table to select optimal transport given cost, speed, capacity needs
  • Practise reading a BoL: identify parties, terms, quantities, and where liability shifts
  • Consider environmental & ethical impacts when recommending modal choices