logistic notes for student who needs it to study

CHAPTER 3:
TRANSPORTATION
[5H/CLO1/C3/PLO2/QUIZ 2/TEST 1]
DPL10023: FUNDAMENTALS OF LOGISTICS MANAGEMENT

SYNOPSIS
SLIDE: 2
FUNDAMENTALS OF LOGISTICS MANAGEMENT course aims to introduce basic
terms, concepts, principles and methods for the successful planning,
organizing and controlling of logistics management. The topics covered in this
course include the role of logistics in economy and organization, customer
service, logistics information system, transportation, inventory concepts and
warehousing, as well as current issues, development and challenges in logistics
industries.
CLO1:
Explain the role of logistics,
customer service, and
transportation in managing
business logistics.
(C3,PLO2 )
CLO3:
Present verbally current
issues, development and
challenges in logistics
industries.
(A2, PLO5)
CLO2:
Respond digitally the concepts of
logistics information system,
inventory and warehouse
management in solving industrial
logistics operations.
(P2, PLO6)

3.1 Identify the transportation cost and pricing
3.1.1 Time and place utility
3.1.2 Transportation interfaces
3.1.3 Factors influencing transportation costs and pricing
AT THE END OF THIS CHAPTER, STUDENTS SHOULD BE ABLE TO;
SLIDE: 3
3.2 Explain the logistics and traffic management
3.2.1 Inbound and outbound logistics
3.2.2 Carrier-shipper contracts
3.2.3 Carrier-shipper alliances
3.2.4 Private carriage
3.2.5 Mode/carrier selection decision process
3.2.6 Routing and scheduling
3.2.7 Service offerings
3.2.8 Computer technology

3.3 Describe carrier pricing and related issues
3.3.1 Rates and rate determination
3.3.2 FOB pricing
3.3.3 Delivery pricing
3.3.4 Quantity discounts
3.3.5 Allowances
3.3.6 Pricing and negotiation
AT THE END OF THIS CHAPTER, STUDENTS SHOULD BE ABLE TO;
SLIDE: 4

3.1 The transportation cost and pricing
SLIDE: 5
Physically moves products from production
point to consumption point.
Transportation
 The expenses incurred in the process of
moving goods, services, or people from
one location to another.
Transportation Cost
 The charges are based on cost plus a
value or level determined by prevailing
market forces.
Transportation Pricing

3.1 The transportation cost
SLIDE: 6
Global Logistics Costs by Function and Mode, 2018

3.1 The transportation cost and pricing
SLIDE: 7
 Logistics costs are the summation of all expenditures undertaken
to make a good or service available to the market, mainly to the
end consumer.
 The most significant logistics cost concerns transportation (58%),
followed by inventory carrying (23%) and warehousing (11%);
they jointly account for 92% of all logistics costs.
Logistic Cost
It encompasses various factors and
expenditures associated with
transportation, including fuel costs,
carrier rates, mode of transportation,
distance, warehousing, customs fees,
insurance, and other related expenses.
Transportation can
represent 50% of
logistics cost and up to
10-20% of retail price.

SLIDE: 8
Utility is an economic term used to describe perceived value.
Utility
Economic utility defined as the value or
usefulness of a product in fulfilling customer
needs or wants.
There are four general types of
economic utility;
Logistics creates time and
place utility primarily
through transportation.
Time utility
Possession
utility
Form utility
Place utility

SLIDE: 9
Time utility is the value added by having the products when it is
needed. Logistics create time utility by warehousing and storing
products util they are needed.
Time Utility
Companies are continually improving supply chain management,
which has led to services such as same-day delivery and 24/7
availability.
Transportation is a factor in time utility; it determines how fast and
how consistently a product moves from one point to another. This is
known as time-in-transit and consistency of service.
Time utility is the value
derived by the products
being readily available when
it is needed.
The more easily and quickly a
product can be purchased/ used at
that time, the higher its perceived
time utility.

SLIDE: 10
Place utility is the value added by having the products available where
it is needed. Logistics creates place utility trough transportation by
moving the product from points of lesser value to points of greater
value.
Place Utility
Transportation physically moves products from where they are
produced to where they are needed. This movement across space or
distance adds value to products.
Place utility involves
delivering product exactly
where it is needed.
Related with distribution channels and
the physical locations at which goods or
services are sold.
Online retailers like Amazon.com and Alibaba.com provide place
utility by delivering products directly to home or office.

3.1.2 Transportation interfaces
SLIDE: 11
Transportation moves products to
markets that are geographically
separated and provides added value
to customers when the products
arrives on time, undamaged, and in
the quantities required.
Transportation contributes to
the level of customer service,
which is one of cornerstones
of customer satisfaction; an
important components of the
marketing concept.
 The availability, adequacy and cost of transportation impact
business decisions.
Transportation creates place and time utility , both are
necessary for successful marketing efforts
 This cost may account for a significant portion of the selling price
of products.
Transportation is one of the largest logistics cost

3.1.3 Factors influencing transportation costs and pricing
SLIDE: 12
Factors influencing transportation cost and pricing can be grouped
into TWO major categories;
Market Related Factors
Product Related Factors
Density
(space of product
takes up in relation to
its weight)
Stowability
(the utilization of space)
Easy or difficult
of handling
(easy or difficult for the
carrier to stow)
Liability
(the risk of damage)

3.1.3 Product Related Factors
SLIDE: 13
It refers to a products weight to volume ratio.
1) Density
High density product Low density product
Items such as steel canned
foods, building products and
bulk paper have high weight to
volume ratios.
Product is relatively heavy given
their size.
Items such as electronics,
clothing, luggage and toys have
low weight to volume ratios.
Product is relatively huge given
their weight.
In general, low density products those
with low weight to volume ratios tend
to cost more to transport on a kilo
basis than high density products.

SLIDE: 14
It refers to the degree to which a product can fill the available space
in a transport vehicle.
2) Stowability
High degree of stowability Low degree of stowability
Able to utilize space in a
transport vehicle.
Example; grain, sand and
petroleum can occupy complete
space of the container/truck.
Unable to utilize space in a
transport vehicle.
Example; Automobiles and
machinery do not have good
stow-ability or cube utilization
A product’s stow-ability
depends on its size, shape,
fragility and other physical
characteristics.

SLIDE: 15
It related to the easy or difficulty of handling the product.
3) Ease or difficulty of handling
Easy to handle Difficult to handle
Products that are uniform in
their physical characteristics
require less handling expenses
and are therefore less costly to
transport.
Products require more care or
special instructions than others
when loading, unloading and
transporting across destinations are
more costly to transport.
The products’ shape, weight, and unique
restrictions, such as special attention,
fragility, and hazardous properties, may
determine these additional
requirements.

SLIDE: 16
Liability is the commodity’s value and potential risk of damage,
theft, or loss or the risk of causing damage to other items in transit.
4) Liability
High liability
Low liability
Greater the risk of damage to a product, higher the
costs of transportation and warehousing.
Lower the risk of damage to a product, lower the
costs of transportation and warehousing.
Higher prices may be charged for the measures
taken to prevent damage.

3.1.3 Market Related Factors
SLIDE: 17
5
4
3
2
1
6 Degree of intra- mode and
inter mode competition
Locations of markets,
which determine the
distance goods, must be
transported.
Nature and extent of
government regulations of
transportation carriers.
Balance of imbalance of
freight traffic into and out
of market
Seasonality of product
movement
Whether the product
domestically or
internationally.

The strategies of carriers and shippers
are in inextricable interrelated.
Transport is an integral
component of logistics strategy.
3.2 The logistics and traffic management
SLIDE: 18
Carrier must understand the
role of transportation in a
firm’s overall logistics system.
The administration of transportation
activities is referred to as traffic
management.

SLIDE: 19
Moving raw materials, supplies, or
finished goods into a supply
chain.
Inbound Logistics
The logistics processes that
transport raw materials, inventory,
or supplies from a supplier and
into a business’s warehouse,
distribution center, fulfillment
center, or retail store
Moving finished goods out of a
supply chain.
Outbound Logistics
The logistics processes that
transport inventory out of
storage, fulfilling orders, and
delivering those orders to end
customers.
Inbound is all about receiving, while
outbound focuses on delivery.

Transportation is one of the most significant areas of logistics
management because of its impacts customer service level and the
firm’s cost structure.
Inbound and outbound
transportation costs can account for
as much as 10%, 20% or more of the
product price.
Firms in medium and high
cost business sectors will be
especially conscious of the
transportation activity.
SLIDE: 20
 Transport function must interface with other department within and
outside of the logistics areas.
 Include; accounting (freight bills), engineering (packaging,
transportation equipment), legal (warehouse and carrier contracts),
manufacturing (just in time deliveries), purchasing (expediting,
supplier selection), marketing (customer service standards),
receiving (claims, documentation) and warehousing (equipment
supply, scheduling).
Effective transport management can achieve
significant improvements in profitability

3.2.2 Carrier-shipper contracts
SLIDE: 21
1) Permits the shipper to exercise greater control over the
transportation activity – lower cost.
2) Provides the shipper with the service level guarantees.
3) Allows the shipper to use transportation to gain a competitive
advantage.
The advantages of carrier-shipper contracts
The shipper is the company that owns
the goods being shipped.
The carrier is the company that transports
the goods on behalf of the shipper.
The written contract between a shipper and carrier sets forth
the terms, conditions, and obligations of each party with
respect to the carriage of the particular goods.
The exact format of carrier-shipper contract will vary depending on
factors such as the mode involved, the type of shipping firms, the
products to be transported and the level of competition.

3.2.3 Carrier-shipper alliances
SLIDE: 22
Carriers often choose to form shipping
alliances to benefit from competitive prices
and wider service coverage.
Carrier-shipper alliances are cooperative
agreements to utilize fleet space in the
most efficient way rather than operate their
own fleets separately.
An effective logistics network requires a cooperative relationship
between shippers and carriers on both strategic and operational
level.
The shipper and carrier may become part of a partnership or
alliance after cooperation takes place.

3.2.4 Private carriage
SLIDE: 23
A private carrier is any
transportation used to moves
products for the manufacturer firm
that own it.
Private carriage
A private carrier does not transport goods as its primary business.
Thus, does not seek to transport the goods of other companies like a
common carrier does.
Private carriers typically have a smaller fleet of vehicles than common
carriers and often use less-than-truckload (LTL) shipping. This allows
private carriers to ship items more efficiently and at a lower cost than
if they were shipping each item individually.

SLIDE: 24
Economic and resource constraints, competitive pressure and
customer requirements mandate that firms make the most efficient
and productive mode/carrier selection decision possible.
Search
process
Post-choice
evaluation
Choice
process
01
03
02
04
Four separate and distinct decision stages
Problem
recognition

SLIDE: 25
The problem drive by variety of factors, such as customer
requirements, dissatisfaction with an existing mode, and changes in
the distribution patterns of a firm.
1) Problem Recognition
Typically, the most significant factors are related to service. In
circumstances where the customer does not specify the transport
mode, a search is undertaken for feasible alternatives.
In this process, transportation executives scan a variety of
information sources to aid them in making optimal mode/carrier
selection decision.
2) Search Process
Possible sources include past experience, carrier sales calls,
company shipping records, and customers of the firm.

SLIDE: 26
Involves the selection of an option from the several mode and
carrier available.
3) Choice Process
The transportation executive determines the best option meets the
firm’s customer service requirement at an acceptable cost by using
the information previously gathered.
The management perfume some evaluation procedure to
determine the performance level of mode/carrier after choice of
mode and carrier has been made.
4) Post-choice Evaluation
Post-choice evaluation usually
conducted as to respond to
customer complaints about its
carriers.
Other techniques used by firms,
such as cost studies, audits and
review of on time pickups and
delivery performance.

3.2.6 Routing and scheduling
SLIDE: 27
Primarily deals with determining the most efficient and cost-
effective route to deliver goods from one point to another.
The idea is to use roads that are either the shortest or the fastest.
Routing
Focuses on organizing a shipping schedule and coordinating
pickups, deliveries, or transfers.
Scheduling
Routing and scheduling are two
distinct processes that are integral
to logistics management. Both are
critical to ensure timely delivery of
goods and services.

3.2.6 Routing and scheduling benefits
SLIDE: 28
Benefits
Carriers can achieve sizeable
benefits by optimizing the
routing and scheduling activities.
Carriers can improve vehicle
utilization and reduce
equipment cost on a per
delivery basis.
Carriers also can achieve higher
level of customer service, lower
transportation cost, reduce capital
investment in equipment and
better management decision
making.
Cost and service improvement
can results from better routing
and schedule for the shipper.
1 2
3 4

3.2.7 Service offerings
SLIDE: 29
In the traditional areas of service; pick up and delivery, claims,
equipment availability, time in transit, and consistency of service –
competitive pressure from the marketplace have worked to improve
service level.
Carriers have had to develop customer service
packages that meet the needs of increasingly
demanding customers.
Such improvements have ben benefits shippers and
have required carriers to maximize their efficiency and
productivity in order to remain profitable.
Carriers have begun to expand into non-traditional areas such as
warehousing, logistics consulting, import-export operations and
facility location analysis.
The transportation carrier has become a logistics service firm.

SLIDE: 30
The use of computers has become widespread in logistics,
especially in the area of traffic management.
Computerized transportation activities can be categorized into four
groups:
1
4
3
2
Transportation
Analysis
Traffic Routing
and Schedule
Freight Rate
Maintenance and
Auditing
Vehicle
Maintenance

SLIDE: 31
This software allows management to monitor costs and service by
providing historical of key performance indicators such as carrier
performance, shipping modes, traffic lane utilization, premium
freight usage and backhauls.
1) Transportation Analysis
Software in this area provide
features such as the sequence
and timing of vehicle stops, route
determination, shipping
paperwork preparation and
vehicle availability.
2) Traffic Routing and Schedule

SLIDE: 32
These software systems maintain a database of freight rates used to
rate shipments or to perform freight bill auditing.
3) Freight Rate Maintenance and Auditing
Features commonly provided
by these packages include
vehicle maintenance
scheduling and report.
4) Vehicle Maintenance
They compare actual freight bills with charges computed from the
lowest applicable rates in the database. The system can then pay,
authorize payment, or report on exceptions.

3.3 Describe carrier pricing and related issues
SLIDE: 33
Several pricing issues are important in transportation.
Include how rates are develop open in general and how specific
rates are determined by a carrier to transport a shipment between
an origin and destination point.
ISSUE
S
3
1
2
4
6
5
Rates and rate
determination
FOB pricing
Delivery pricing
Pricing and
negotiation
Quantity discounts
Allowances

SLIDE: 34
Two methods of transportation pricing can be utilized:
Establishes transportation rates at level that cover a carrier’s fixed
and variable costs, plus allowance for some profit.
1) Cost Of Service Pricing
Transportation cost can vary because
of two major factors;
1) Distance
2) Volume
This approach is appealing
because it established the
lower limit of rates.
1) A carrier must be able to identify its fixed and variable costs.
2) This approach requires hat fixed cost be allocated to each freight
movement (shipment).
Difficulties

SLIDE: 35
Transportation rates based on charging what market will bear, based
on the demand for transportation services and competitive situation.
2) Value Of Service Pricing
This approach
establishes the upper
limit on rates.
The rates set will maximize the difference
between revenue received and the variable
cost incurred for carrying a ship.
In most instances, competition will determine the price charged.

SLIDE: 36
There are two types of charges assessed by carriers;
Cost of transportation for the movement of goods based on the
total distance between the pickup and delivery locations and the
weight of the freight.
Line Haul Rates
Class Rates
Exception Rates
Special Rates and
Services
Commodity Rates
Rates charged excludes loading,
unloading or transfer costs.
These apply to long-distance
transportation.
Goods that are
transported from
one place to by
smaller vehicles like
trucks

SLIDE: 37
Class rates are the freight charges that apply to all products in the
group that form a class.
1) Class Rates
A product’s specific
classification is referred to as
its class rating, which is used
to determine the freight rate.
A basic rate would be Class 100,
with higher number representing
more expensive rates and lower
numbers less expensive rates.
Class rates allows for a more simplified billing process and can be
helpful when shipping large quantities of items.
 All products transported are typically grouped to into uniform
classifications.
 The classification takes into consideration the characteristics of a
product that will influence the cost of handling or transport.
Classification

SLIDE: 38
Exception rates are special rates with prices lower than the prevailing
class rates provided to shipper.
2) Exception Rates
The purpose of the exception rate was to provide a special rate for a
specific area, origin-destination, or commodity when competition or
volume justified the lower rate.
Rather than publish a new
tariff, an exception to the
classification or class rate was
established.
Just as the name implies, when an
exception rate is published, the
classification that normally applies
to the product is changed.

SLIDE: 39
A number of special rates and
services provided by carriers
are available for use in
logistical operations.
3) Special Rates and Services
Special rates such as Contract Rate
and Freight-All-Kind (FAK) apply in
special circumstances.
 Rate based on negotiated between a shipper and carrier.
 Formalized through a written contractual agreement.
 As contract carriage grows in popularity, this practice is becoming
more common.
 Rate based on an average rating is applied for the total shipment
instead determine the classification and applicable freight rate of
individual products.
 A mixture of different products is transported under a negotiated
rating.
Contract Rate
Freight-All-Kind (FAK)
, FAK rates are line-haul rates since they replace class, exceptio
or commodity rates. Their purpose is to simplify the paperwo
associated with the movement of mixed commodities. Numer
special rates exist that may offer transportation savings on
specific freight movements.

SLIDE: 40
Commodity rates apply when a large quantity of a product is
shipped between two locations on a regular basis.
4) Commodity Rates
Commodity rates are special or specific rates are published on a
point to point bass without regard to product classification.

SLIDE: 41
Fees charged by carriers for additional transportation services that
are not based on distance or fuel.
Accessorial Charges
Rate which cover all other payment made to
carriers for transporting, handling or
servicing a shipment.
Common
accessorials include;
unpacking, liftgates,
detention,
multi-stop charges,
driver unload,
lumper fees, or
in-transit dwell.

3.3.2 FOB pricing
SLIDE: 42
Free On Board (FOB) pricing is a shipping term that defines the
point at which ownership and responsibility for goods are
transferred from the seller to the buyer.
It indicates who bears the risk and cost of
transportation during the shipping process.
The costs associated with FOB can include transportation of the
goods to the port of shipment, loading the goods onto the shipping
vessel, freight transport, insurance, and unloading and transporting
the goods from the arrival port to the final destination.

SLIDE: 43
A pricing method in which the final price to the buyer is adjusted to
include transportation costs; the seller takes responsibility for
arranging delivery but adds the cost to the quoted price.
Delivery Pricing
Three widely used methods of delivery pricing;
Refers to the pricing method where the seller charges the same
price plus freight to all customers, regardless of their location.
1) Uniform Delivered Pricing
 Sometimes referred to as 'postage stamp' pricing.
 Seller disregards the differences in costs of distributing to
different customers.

SLIDE: 44
 A method that categorizes geographic area into zones.
 Each zone will charge a particular delivery.
 The closer the zone to the seller, the lower the delivery cost and
vice versa.
Refers to the pricing method in which all customers within a defined
zone or region are charged the same price.
2) Zone Pricing
 The seller select one or more locations that serve as point of
origin.
 The seller will often use a manufacturing plant, distribution
center, port, free trade zone, and so forth as a basing point.
Refers to the pricing method where the buyer must pay the price for
a product inclusive of freight costs, depending on the distance from
a specific location.
3) Basing Point Pricing

3.3.4 Quantity discounts
SLIDE: 45
A quantity discount is an incentive offered to buyers that results in
a decreased cost per unit of goods or materials when purchased in
greater numbers.
Quantity discount can be cumulative or
noncumulative.
Price reductions to the buyer based on the amount of purchase over
some prescribed price of time.
Cumulative Quantity Discount
Price reductions to the buyer applied to each order and do not
accumulate over a time period.
Non-cumulative Quantity Discount

3.3.5 Allowances
SLIDE: 46
Allowance is a price reduction provided by sellers to buyers that
perform some of the delivery function.
Most common allowances are provided for customer
pickup of the product or unloading of the carrier
vehicle upon delivery at the customer’s location.
The allowance should be equal to or greater than
the costs to the buyer for assuming these
responsibilities.

3.3.6 Pricing and negotiation
SLIDE: 47
Shippers are concentrating more business with fewer carriers and
placing greater emphasis on negotiation pricing.
During price negotiation, there are two roles that
arise: buyer and seller.
The purpose of price negotiation is to
discuss a price that is agreeable or
acceptable to both parties with the goal of
the relationship is to reduce the total cost
of service pricing.
Price negotiation as it is a usual occurrence when develop an
agreement that is mutually beneficial, recognizes the needs of the
parties involved and motivates them to perform.

Commodity Rates When a large quantity of a product moves between two locations on a regular basis, it is common practice for
carriers to publish a commodity rate. Commodity rates are special or specific rates published without regard to classification. The
terms and conditions of a commodity rate are usually indicated in a contract between the carrier and shipper. Commodity rates are
published on a point-to-point basis and apply only on specified products. Today, most rail freight moves under commodity rates.
They are less prevalent in motor carriage. Whenever a commodity rate exists, it supersedes the corresponding class or exception
rate.
Exception Rates Special rates published to provide prices lower than the prevailing class rates are called exception rates. The
original purpose of the exception rate was to provide a special rate for a specific area, origin/destination, or commodity when
justified by either competitive or high-volume movements. Rather than publish a new tariff, an exception to the classification or
class rate was established. Just as the name implies, when an exception rate is published, the classification that normally applies to
the product is changed. Such changes may involve assignment of a new class or may be based on a percentage of the original class.
Technically, exceptions may be higher or lower, although most are less than original class rates. Unless otherwise noted, all services
provided under the class rate remain under an exception rate. Since deregulation, several new types of exception rates have gained
popularity. For example, an aggregate tender rate is utilized when a shipper agrees to provide multiple shipments to a carrier in
exchange for a discount or exception from the prevailing class rate. The primary objective is to reduce carrier cost by permitting
multiple shipment pickup during one stop at a shipper’s facility or to reduce the rate for the shipper because of the carrier’s
reduced cost. To illustrate, UPS offers customers that tender multiple small package shipments at one time a discount based on
aggregate weight and/or cubic volume. Since deregulation, numerous pricing innovations have been introduced by common
carriers, based on various aggregation principles. A limited service rate is utilized when a shipper agrees to perform selected
services typically performed by the carrier, such as trailer loading, in exchange for a discount. A common example is a shipper load
and count rate, where the shipper takes responsibility for loading and counting the cases. Not only does this remove the
responsibility for loading the shipment from the carrier, but it also implies that the carrier, once the trailer is sealed, is not
responsible for guaranteeing case count. Another example of limited service is a released value rate, which limits carrier liability in
case of loss or damage. Normally, the carrier is responsible for full product value if loss or damage occurs in transit. The quoted rate
must include adequate insurance to cover the risk. Often it is more effective for manufacturers of high-value product to self-insure
to realize the lowest possible rate. Limited service is used when shippers have confidence in the carrier’s capability. Cost can be
reduced by eliminating duplication of effort or responsibility.
Under aggregate tender and limited service rates, as well as other innovative exception rates, the basic economic justification is
the reduction of carrier cost and subsequent sharing of benefits based on shipper/carrier cooperation.
Special Rates and Services A number of special rates and services provided by carriers are available for use in logistical operations.
Several common examples are discussed. As indicated earlier, freight-all-kind (FAK) rates are important to logistics operations.
Under FAK rates, a mixture of different products is transported under a negotiated rating. Rather than determine the classification
and applicable freight rate of individual products, an average rating is applied for the total shipment. In essence, FAK rates are line-
haul rates since they replace class, exception, or commodity rates. Their purpose is to simplify the paperwork associated with the
movement of mixed commodities. Numerous special rates exist that may offer transportation savings on specific freight
movements. When a commodity moves under the tariff of a single carrier, it is referred to as a local rate or single-line rate. If more
than one carrier is involved in the freight movement, a joint rate may be applicable even though multiple carriers are involved in
the actual transportation process. Because some motor and rail carriers operate in restricted territory, it may be necessary to utilize
the services of more than one carrier to complete a shipment. Utilization of a joint rate can offer substantial savings over the use of
two or more local rates. Special price incentives to utilize a published tariff that applies to only part of the desired route are called
proportional rates. Proportional provisions of a tariff are most often applicable to origin or destination points outside the normal
geographical area of a single-line tariff. If a joint rate does not exist and proportional provisions do, the strategy of moving a
shipment under proportional rates provides a discount on the single-line part of the movement, thereby resulting in a lower overall

• TRANSPORTATION PRICING FUNDAMENTALS
•Pricing decisions directly determine which party in the transaction is responsible for performing logistics activities,
passage of title, and liability.
• F.O.B. origin and delivered pricing are the two most common methods.
•F.O.B. Pricing
•The term F.O.B. technically means free on board or freight on board. A number of variations of FOB pricing are used in
practice.
•F.O.B. origin is the simplest way to quote price. Under F.O.B. origin the seller indicates the price at point of origin and
agrees to tender a shipment for transportation loading, but assumes no further responsibility. The buyer selects the
mode of transportation, chooses a carrier, pays transportation charges, and takes risk of in-transit loss and/or damage.
In F.O.B. destination pricing, title does not pass to the buyer until delivery is completed. Under F.O.B. destination pricing,
the seller arranges for transportation and the charges are added to the sales invoice. The range of terms and
corresponding responsibilities for pricing are illustrated in Figure 9.5. Review of the various sales terms makes it clear that
the firm paying the freight bill does not necessarily assume responsibility for ownership of goods in transit, for the freight
burden, or for filing of freight claims. These are issues of negotiation that are critical to supply chain collaboration.
Delivered Pricing
The primary difference between F.O.B. and delivered pricing is that in delivered pricing the seller establishes a price that
includes transportation. In other words, the transportation cost is not specified as a separate item. There are several
variations of delivered pricing. Under single-zone delivered pricing, buyers pay a single price regardless of where they are
located.
Delivered prices typically reflect the seller’s average transportation cost. In actual practice, some customers pay more
than their fair share for transportation while others are subsidized. The United States Postal Service uses a single-zone
pricing policy throughout the United States for first-class letters. The same fee or postage rate is charged for a given size
and weight regardless of distance traveled to the destination.
Single-zone delivered pricing is typically used when transportation costs are a relatively small percentage of selling price.
The main advantage to the seller is the high degree of logistical control. For the buyer, despite being based on averages,
such pricing systems have the advantage of simplicity.
The practice of multiple-zone pricing establishes different prices for specific geographic areas. The underlying idea is that
logistics cost differentials can be more fairly assigned when two or more zones— typically based on distance—are used
to quote delivered pricing. Parcel carriers such as United Parcel Service use multiple-zone pricing.
The most complicated and controversial form of delivered pricing is the use of a base- point pricing system in which the
final delivered price is determined by the product’s list price plus transportation cost from a designated base point,
usually the manufacturing location. This
•18. designated point is used for computing the delivered price whether or not the shipment actually originates from the
base location. Base-point pricing is common in shipping assembled automobiles from manufacturing plants to dealers.
Figure 9.6 illustrates how a base-point pricing system typically generates different net returns to a seller. The customer is
quoted a delivered price of $100 per unit. Plant A is the base point. Actual transportation cost from plant A to the

Answer:
a) Rates and rate determination
 Two forms or methods of transportation pricing can be utilized; cost of service and value of service.
 Cost of service pricing establishes transportation rates at levels that cover a carrier’s fixed and
variable costs, plus allowance for some profit.
a) FOB pricing
 Free on board (FOB) pricing is a shipping term that defines the point at which ownership and
responsibility for goods are transferred from the seller to the buyer.
 It indicates who bears the risk and cost of transportation during the shipping process.
 The costs associated with FOB can include transportation of the goods to the port of shipment,
loading the goods onto the shipping vessel, freight transport, insurance, and unloading and
transporting the goods from the arrival port to the final destination.

a) Delivery pricing
 A pricing method in which the final price to the buyer is adjusted to include transportation costs; the
seller takes responsibility for arranging delivery but adds the cost to the quoted price.
 Three widely used methods of delivery pricing are zone pricing, basing point pricing and uniform
delivered pricing.
a) Quantity discounts
 A quantity discount is an incentive offered to buyers that results in a decreased cost per unit of
goods or materials when purchased in greater numbers.
 Quantity discount can be cumulative or noncumulative.
 Enticing buyers to purchase in bulk enables sellers to increase their units per transaction (UPT),
lower their inventories, and potentially reduce per-unit costs.
a) Allowances
 Seller will provide price reduction to buyer that performs some of the delivery function.
 The most common allowances are provided for customer pickup of product or unloading of the
carrier vehicle upon delivery at the customer’s location.
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Exception Rates
Contract Rates
Commodity Rates
Freight all kinds(FAK)

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