Lecture Purchasing and supply chain management (3rd/e): Chapter 15 - W. C. Benton

Chapter 15 - Purchasing transportation services. Chapter 15 provides an in-depth analysis of transportation costs. With JIT systems transportation costs are magnified. Some of the transportation costs include such activities as selecting the mode of transportation to be used in moving a particular shipment.

Chapter15: Purchasing TransportationServices PurchasingandSupplyChainManagement 3rdedition PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. PurchasingandSupplyChainManagement3rdedition,Copyright2013W. Content ã Major activities related to purchasing transportation • Mode selection • Carrier selection • Rate determination  • Third­party outsourcing • Shippingdocumentationandterminology PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. TransportationActivity ã ã Transportationisoneofthemostexpensivecomponents ofmostmanufacturingfirms ã In2009,transportationrevenueswereapproximately$1.1trillion • More than 50,000 private trucking fleets in the United States Factors associated with cost:  • Frequency • Product type • Volume of shipments PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. InboundFreight ã Usuallyacomponentofmaterialscosts ã ã ã e.g.,F.O.B.delivered Freightbuyingiscomplexbecauseofthemany alternativemodes Modes: • Rail • Air • Truck • Ocean cargo PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. 2012 TransportationandPurchasingManagement ã Purchasingsroleintransportation: ã Facilitatesthemovementsofrawmaterialsandcomponentparts fromsuppliersthroughthefirmsmanufacturingprocesstothe ultimatecustomers ã Oftenthemostcostlyandtimeưconsumingactivity ã Requiresextensiveplanningtomeetdeliveryschedules ã Requiresknowledgeofbasictransportationdecisionmaking activities PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. ModeSelection ã Each of the modes has specific operating and cost  characteristics • • • e.g., cost, reliability, and speed The buying professional must evaluate the trade off  between characteristics and select the most appropriate  transportation mode  Typical decisions: • When speed is critical, high cost modes are selected • Under normal operating conditions, on­time deliveries and service  quality modes are preferred Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved.            Characteristics of Rail • Cost structure is characterized by high fixed costs  • • • Majority of the fixed costs are unrelated to volume Theoretical pricing advantages: • Has the largest share of the ton­miles in the United States • Most bulk commodities are initially shipped by rail and later  shifted to motor carriers • Generally less expensive than air and truck modes Disadvantages: Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved.            • Truck Mode • Industry composition: • For­hire carriers  • • • e.g., United Parcel Service Private carriers  • 2/3 of intercity truck ton­mileage   • 50,000 private trucking fleets • Manufacturers (1/3) • Producers of construction materials (75%) • Food processors (55%) Industry characteristics: Fragmentation and high competition • PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. AirMode ã ã Domesticaircargomarketin2009 ã Approximately$252.2billion ã 4.5billiontonscarriedover40.1billionmiles ã Average shipment was 10.8 pounds  Industry characteristics: • Only premium and emergency goods are shipped  • Highest­cost shipping mode • Major categories are computer components, electronics, and  fashion goods Anintegralstrategicweaponforfirmsthatcompeteonafastư PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. ã WaterMode ã ã Classificationcategories: ã Inland(suchasriversandcanals) ã Lakes • Coastal and inter­coastals • International deep sea  Industry characteristics: • Direct competition with rail and pipelines • Approximately $114.9 billion in revenues • Majority of commodities shipped via water  • Semi­processed materials, fuel, oil, coal, chemicals, minerals, and petroleum  products  Advantages 10 Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved.            • Pipeline Mode • In 2009, $399.6 billion in revenues • Industry characteristics • Used to transport low­valued, nonperishable products  • e.g., oil, diesel fuel, jet fuel, kerosene, and natural gas 11 Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved.            Carrier Selection • • After the appropriate transportation mode is selected, the  specific carrier within the mode must be determined Requires careful research and numerous economic tradeoffs • • Transportation costs consist of all direct costs associated with the  movement of a product from one location to another  Depending on the shipper’s needs,  the shipper may choose  to use:  • One shipper • Multiple shippers • Shipper might achieve better prices and higher service quality • Evaluation of the carrier is easier 12 PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. CarrierEvaluation ã ã Routineevaluationoftheperformanceintermsof: ã Consistencyofservice ã Qualityofservice Key competitive criteria: • Price • On­time deliveries • Loss and damage claims • Billing accuracy 13 PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. RateDetermination ã Generalfactorsaffectingfreightrate: Shipping weight per cubic  foot Liability for damage Perishability Liability for damage to other  commodities being  transported Liability for spontaneous  combustion or explosion Susceptibility to theft Value per pound in  comparison with other  articles 10 11 12 13 14 15 Ease or difficulty in loading and  unloading Excessive weight  Excessive length  Care or attention  necessary in loading and  transporting  Trade conditions Valueofservice Competitionwithother commoditiestransported Quantityofferedasasingle consignment 14 PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. RateNegotiation ã Deregulationhasmadenegotiationsveryimportant • Negotiation is a management process  • • Involves:  • Planning • Analysis • reviewing Influencedbythecharacteristicsofthe: ã Currentbusinessenvironment ã Organization 15 PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. ã Individuals Third­Party Outsourcing • The decisions to transfer logistics activities to a third  party  • • Must include all of the parties that will be affected  Combine freight  • Organize transportation councils  • To simplify the negotiations process • To reduce price • Fewer third parties 16 Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved.            Third­Party Outsourcing (cont.) • Negotiation process: 1) Prequalify a set of carriers 2) Bid by identifying and communicating to the third­party base all  data needed  3) Enforce a common bid format for accurate evaluation  4) Third­party contract • Detailed and specific operation section 17 Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved.            Shipping documentation • Definition • Also called bill of lading • Serves as the basic contract  • • • Specifies the commodities and quantities shipped, routing, rates, and  carrier liability  Serves as a receipt for delivery Classification: • Order  Notifybillsofladingarenegotiableandaresimilartolettersof credit 18 PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. ã Terminology ã FreightTerms ã Prepaid • • Collect  • • The consignee owns the freight Prepaid/collect beyond  • • The shipper owns the freight Thereisashippersprepaymentportionofthefreightandthe consigneeisresponsibleforthebalanceofthepayment Thirdparty Establishesthatneithertheconsignornortheconsigneeowns thepaymentprocessfunction 19 PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. ã ã Prepayandadd Questions? 20 Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved.            ... • Air • Truck • Oceancargo PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. 2012 TransportationandPurchasingManagement ã Purchasingsroleintransportation:... Purchasing? ?and? ?Supply? ?Chain? ?Management,  3rd edition, Copyright © 2013,? ?W.? ?C.? ?Benton? ?Jr., All rights reserved.            • • Prepay? ?and? ?add  Questions? 20 Purchasing? ?and? ?Supply? ?Chain? ?Management,  3rd edition, Copyright © 2013,? ?W.? ?C.? ?Benton? ?Jr., All rights reserved.           ... PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. ã WaterMode ã ã Classificationcategories: ã Inland (such as rivers? ?and? ?canals) • Lakes • Coastal? ?and? ?inter­coastals