Chapter 7: Transportation Management
Chapter 7: Transportation Management
PART II
ANSWERS TO END-OF-CHAPTER QUESTIONS
CHAPTER 7: TRANSPORTATION MANAGEMENT
1. How is the transportation manager’s job different today than when the first edition of this book was published in the late 1970s?
Two major reasons for this difference are globalization and changes in regulation. In the late 1970s, the People’s Republic of
2. Discuss how transportation managers could be involved with other operations of the firm.
They assist marketing by quoting freight rates for salespeople, suggesting quantity discounts that can be based on transportation savings, and selecting carriers and routes for reliable delivery of products. Transportation managers can help manufacturing by advising on packaging and materials handling and making certain that an adequate supply of transportation is available when it is needed. In addition, transportation managers help purchasing by advising about methods to control the costs and quality of inbound deliveries and by tracing and expediting lost or delayed shipments of important inputs.
3. Briefly explain the class rate system.
The class rate system simplifies rate determination in terms of three primary factors—product, weight, and distance. Four factors are used to determine a product’s classification. They are density, stowability, ease of handling, and liability to damage and theft. Distances are simplified in terms of rate basis numbers; higher rate base numbers reflect greater distance between two points. Weight is divided into different groups, such as less than 500 pounds, 500-999 pounds, and so on.
4. Discuss the four factors used in determining a product’s freight classification.
Density, which refers to how heavy a product is in relation to its size, is viewed as the primary factor for setting a product’s classification. Low density products (low weight per cubic feet) are assigned a higher classification because these products tend to cube out before they weigh out. Stowability refers to how easy the commodity is to pack into a load, while ease or difficulty of handling refers to challenges to handling that might be presented by a commodity’s size, weight, and so on. The liability for loss and damage considers, among others, a commodity’s propensity to damage other freight, its perishability, and its value.
5. Explain the weight break concept.
The fact that lower volume rates (e.g., LTL rates) tend to be higher than higher volume rates (e.g., TL rates) leads to the weight break concept, that is, the shipment size that equates transportation charges for different rates and weight groups. The weight break concept can be applied whenever rates differ by volume and there is a minimum weight specified for the higher volume classification.
6. Discuss how a transportation manager might take advantage of the trade-offs between price and service.
The text provides two examples where monetary premiums were paid for meeting predetermined service standards and there can be monetary penalties for failure to achieve predetermined service standards. For example, two-day delivery of product should be cheaper than next day delivery of product. Price and service tradeoffs are limited only by the transportation manager’s creativity and ingenuity.
7. Why is the carrier selection process less straightforward than the modal selection process?
There are several reasons why the carrier selection process is less straightforward than the modal selection process. First, while there are only five modes, there are many different types of carriers and a plethora of individual carriers within individual modes. Second, there is a lack of agreement as to the number of relevant factors that might be used in carrier selection; the number of carrier selection factors evaluated in academic research has ranged from less than 10 to over 150.
8. Define what is meant by an amodal shipper and discuss the factors that have contributed to its growth.
An amodal shipper refers to a transportation manager who purchases a prespecified level of transportation service (e.g., two-day delivery for a particular price) and is indifferent to the mode(s) and / or carriers used to provide the actual transportation service. One reason for its growth is that non-asset based third-party logistics companies have the ability to develop multi-modal solutions to a client’s transportation problems. Amodalism is also aided by companies such as UPS and FedEx that own companies that provide different types of transportation services (e.g., air, expedited, etc.).
9. The bill of lading is the single most important document in transportation. Discuss some of the basic functions it performs.
The bill of lading is the basic operating document in the transportation industry. It functions as a delivery receipt when products are tendered to carriers. The signed original bill of lading is the shipper’s legal proof that the carrier received the freight. Furthermore, the bill of lading is a binding contract, specifying the duties and obligations of both the carrier and shipper.
10. Distinguish between the straight bill of lading and the order bill of lading.
A straight bill of lading is printed on white paper. It states the name of the consignee in the appropriate place and the carrier is under a strict legal obligation to deliver the freight to the named consignee and to no one else. An order bill of lading is printed on yellow paper and the name of the consignee is not specified. Order bills of lading guarantee that the customer pays for the product prior to receipt.
11. What is a freight bill? Why should each freight bill be audited?
A freight bill is an invoice that is submitted by the carrier requesting to be paid. Each freight bill should be audited to ensure that companies are not being charged too much (overcharges) for transportation services.
12. What is the basic rule of thumb regarding the determination of the full actual loss sustained by the shipper or consignee in a loss or damage claim situation?
The owner should be made whole by receiving the proper money equivalent for what has actually been lost or to restore the owner to the position he (she) would have occupied had the carrier performed its contract. Products going into general inventory replacement stock mean that the shipper would recover wholesale costs while products destined for the final customer means that the shipper / consignee would receive the retail price.
13. Discuss the basic issues, conflicts, and problems involved in concealed loss and damage claims.
Concealed loss and damage claims are more difficult to handle because the exterior package does not appear to be damaged or tampered with. At a later date, the consignee opens the package and finds that the product is damaged or missing. Carriers are reluctant to pay concealed loss and damage claims for two reasons. If the package came through the shipment with no exterior damage then there is a strong possibility that the product was improperly protected on the inside. If this is the case, then the carrier is exempted from liability because improper packaging is the fault of the shipper. Second, the possibility exists that the consignee’s employees broke or stole the products.
14. Explain why smaller shipments are challenging to transportation managers.
The transportation manager faces the decision of whether and when to consolidate large numbers of small shipments into small numbers of large shipments because it costs less on a per-pound basis to ship larger quantities. However, it could take some time to accumulate the units and this increased time could result in poorer service to the customer. A large number of small shipments also mean that there needs to be an information system capable of keeping track of each shipment’s status. Moreover, while larger shipments may yield transportation cost savings there are inventory cost considerations to holding units during consolidation.
15. Discuss the basic idea of demurrage and detention and how averaging agreements can be helpful in this area.
Demurrage is a penalty payment made by the shipper or consignee to a railroad, inland water carrier, or pipeline for keeping particular equipment beyond the time when it should be released back to the carrier. Detention is the same concept applied to trucking companies. In averaging agreements, an accounting system of debits and credits is established. A credit is received every time the equipment is released early and a debit is recorded every time the equipment is released late.
16. Distinguish between diversion and reconsignment.
Diversion occurs when a shipper notifies a carrier, prior to the shipment’s arrival in the destination city, of a change in the destination. Reconsignment is similar but it occurs after the shipment has arrived in the destination city. Both services are commonly used in conjunction with order bills of lading.
17. Explain how a routing guide might be used by a transportation manager.
Routing can be defined as the process of determining how a shipment will be moved between consignor and consignee or between points of acceptance by the carrier and place of delivery to the consignee. A routing guide provides guidance in terms of a preferred list of carriers for shipments moving between two points. The text provides an example of a company that 1) specifies preferred carriers for each origin / destination combination and 2) specifies the ordering of the carriers (most preferred, 2nd most preferred, etc.).
18. What challenges might occur if rail movements of hazardous materials are banned from going through major cities?
Railroads currently have a common carrier obligation to transport hazardous materials and if those shipments are prohibited from moving through major cities, they will be rerouted through other, less populated areas—it is not likely that these areas will be happy. Moreover, rerouting will add to transit times and transport costs, and the railroads’ cost of hauling hazardous materials have increased dramatically in recent years because of higher insurance premiums associated with transporting hazardous materials.
19. Distinguish between tracing and expediting. Why are motor carriers being used to a greater extent in expediting?
Tracing refers to determining a shipment’s location during the course of its move and the ability to trace a shipment directly affects expediting, which involves the need to rapidly move a shipment to its final destination. Motor carriers are being used to a greater extent in expediting because they are less expensive than air transportation and because expedited motor carriers can often dedicate one truck to one shipment, expedited shipment by motor carriage can provide faster and more reliable service than expedited shipments involving air transportation.
20. What is a carrier performance scorecard? How might it be used by a transportation manager?
Carrier performance scorecards contain a list of relevant attributes (perhaps the same attributes used to select carriers) and an evaluation of each carrier on every attribute. The performance scorecard could be used as a diagnostic tool; if an individual carrier’s performance is below a certain number, then the carrier might be put on probation for a certain time period. If performance does not show satisfactory improvement during the probationary period, then the carrier might be fired.
PART III
EXAMINATION QUESTIONS
CHAPTER 7: TRANSPORTATION MANAGEMENT
Multiple Choice Questions
1. In general terms, ____ accounts for about 6% of U.S. Gross Domestic Product.
a. warehousing
b. logistics
c. supply chain management
d. transportation
(d; p. 160)
2. Studies have indicated that transportation managers can spend up to one-third of their time dealing with ____ considerations.
a. modal and carrier selection
b. international transportation
c. documentation
d. rate (pricing)
(d; p.161)
3. Which of the following is not one of the primary factors that transportation rates are based upon?
a. product
b. density
c. weight
d. distance
(b; p. 161)
4. A(n) ____ rate refers to a specific rate for every possible combination of product, weight, and distance.
a. exception
b. class
c. ad valorem
d. commodity
(d; p. 161)
5. A(n) ____ rate simplifies each of the three primary rate factors—product, weight, and distance.
a. class
b. ad valorem
c. commodity
d. exception
(a; p. 162)
6. How many factors are used to determine a product’s freight classification?
a. three
b. four
c. five
d. six
(b; p. 162)
7. Which of the following is not a factor used to determine a product’s classification?
a. density
b. liability to damage and theft
c. stowability
d. ease of handling
e. all are factors used to determine a product’s classification
(e; p. 162)
8. ____ refers to how easy a commodity is to pack into a load.
a. Ease of handling
b. Recoupering
c. Stowability
d. Drayage
(c; p. 162)
9. Suppose that there is a rate of $75 per hundredweight and you have a 600 pound shipment. What is the correct transportation charge for this shipment?
a. $8
b. $450
c. $1,200
d. $45,000
e. cannot be determined
(b; p. 162)
10. The shipment size that equates transportation charges for different weights and weight groups is the ____ concept.
a. optimum cost reliability point
b. satisficing
c. weight break
d. maximum-minimum
(c; p. 166)
11. Suppose the LTL rate is $2.00 per hundredweight, the TL rate is $1.40 per hundredweight and the TL minimum is 18,000 pounds. What is the weight break?
a. 5,294 pounds
b. 10,588 pounds
c. 12,600 pounds
d. 30,0000 pounds
e. cannot be determined
(c; p. 166)
12. Which of the following tends to be the most important factor in carrier selection?
a. pricing
b. loss and damage performance
c. transit time reliability
d. financial stability
e. none of the above
(e; p. 168)
13. A(n) ____ refers to a transportation manager who purchases a prespecified level of transportation service and is indifferent to the mode and carrier used to provide the transportation service.
a. industrial transportation manager
b. certified logistics professional
c. third-party logistics shipper
d. amodal shipper
(d; p. 168)
14. The most important single transportation document is the:
a. bill of lading
b. freight bill
c. commercial invoice
d. certificate of origin
(a; p. 169)
15. Each of the following is true, except:
a. the bill of lading is the most important transportation document
b. the straight bill of lading contains the name of the consignee
c. the order bill of lading does not contain the name of the consignee
d. the bill of lading adds to the complexity of the transportation manager’s job
e. all of the above are true
(d; p. 169)
16. Each of the following is a type of bill of lading, except:
a. long
b. straight
c. short
d. order
e. all are a type of bill of lading
(e; p. 169)
17. An order bill of lading is used:
a. for overseas shipments
b. when a shipment must be expedited
c. when a shipment is started before the buyer is known
d. to guard against disruptions in transit
(c; p. 169)
18. An invoice submitted by the carrier requesting to be paid is ____.
a. a bill of lading
b. a freight bill
c. a carnet
d. dunnage
(b; p.171)
19. The ____ was formed by shippers and carriers as a means for settling freight claims disputes.
a. Transportation Arbitration Board
b. Freight Claims Council
c. Shipper-Carrier Mediation Board
d. Traffic Management Claims Committee
(a; p. 173)
20. If a product destroyed or damaged in transit is intended to be placed into general replacement inventory, then the retailer would likely receive:
a. nothing but an apology from the carrier
b. the wholesale price plus 20%
c. the retail price minus 20%
d. the wholesale price, plus freight if previously paid
(d; p. 173)
21. Since deregulation, the volume of transportation claims activity has:
a. stayed the same
b. decreased
c. slightly increased
d. dramatically increased
(b; p. 173)
22. Small shipments are defined as those that:
a. involve three or fewer cartons
b. are moved primarily by parcel carriers
c. weigh more than 150 pounds but less than 500 pounds
d. weigh more than 10 pounds but less than 100 pounds
(c; p. 174)
23. Which of the following statements is false?
a. carriers may be reluctant to accept small shipments because they require a high degree of manual labor
b. some carriers believe that they lose money on small shipments
c. consolidating small shipments into larger ones could result in poorer service to the final customer
d. consolidating small shipments into larger ones likely results in higher inventory carrying costs
e. all statements are true
(e; p. 174)
24. Demurrage charges are collected by which two modes of transportation?
a. truck; rail
b. pipeline; air
c. rail; water
d. truck; pipeline
(c; p. 176)
25. Which of the following statements is false?
a. demurrage is a penalty payment made by the shipper or consignee to a railroad for keeping equipment beyond the time it should be released
b. detention is similar to demurrage, except that detention applies to the trucking industry
c. averaging agreements can be used with demurrage
d. carriers and shippers can negotiate demurrage / detention policies
e. all statements are true
(e; p. 176)
26. ____ occurs when a shipper notifies a carrier, prior to a shipment’s arrival in a destination city, of a change in destination.
a. Diversion
b. Dispatch
c. Demurrage
d. Detention
(a; p. 176)
27. ____ occurs when a shipment’s destination is changed after it has arrived in the destination city.
a. Diversion
b. Demurrage
c. Reconsignment
d. Re-routing
(c; p. 176)
28. ____ can be defined as the process of determining how a shipment will be moved between consignor and consignee or between place of acceptance by the carrier and place of delivery to the consignee.
a. Tracing
b. Recoupering
c. Transportation
d. Routing
e. None of the above
(d; p. 177)
29. A ____ provides guidance in terms of a preferred list of carriers for shipments moving between two points.
a. routing guide
b. manifest
c. bill of lading
d. carnet
(a; p. 177)
30. The
a. 18th
b. 19th
c. 20th
d. 21st
(b; p. 177)
31. Which of the following is false?
a. a number of large
b. hazardous materials are very common and include some everyday household items
c. the
d.
(c; p. 177)
32. ____ is the attempt to locate lost or late shipments.
a. Expediting
b. Recoupering
c. Reparation
d. Tracing
e. None of the above
(d; p. 179)
33. ____ refers to rapidly moving a shipment through a carrier’s system.
a. Expediting
b. Recoupering
c. Reparation
d. Cross-docking
(a; p. 179)
34. Tracing refers to:
a. determining the least expensive route for a shipment
b. locating the proper rate
c. locating lost or delayed shipments
d. finding the shortest distance between two points
(c; p. 179)
35. The installation costs for transportation management systems range from:
a. $500,000 - $1,000,000
b. $50,000 – several million dollars
c. $25,000 - $500,000
d. $100,000 - $2,000,000
(b; p. 179)
True-False Questions
1. Today’s transportation manager can play an active role in blending the appropriate pricing and service packages for his / her organization. (True; p. 160)
2. Freight transportation accounts for approximately 10% of U.S. Gross Domestic Product. (False; p. 160)
3. Studies have indicated that transportation managers can spend up to one-third of their time dealing with rate considerations. (True; p. 161)
4. A commodity rate is very good for dealing with demand-specific situations. (True; p. 161)
5. The class rate system simplifies with respect to three primary factors—density, product, and distance. (False; p. 162)
6. Weight is one of the four factors used to determine a product’s freight classification. (False; p. 162)
7. Stowability refers to how easy a commodity is to pack into a load. (True; p. 162)
8. A transportation charge (the cost of transportation) can be calculated by multiplying the weight times the rate. (True; p. 162)
9. With respect to a commodity’s freight classification, shippers tend to prefer a higher classification number while carriers tend to prefer a lower classification number. (False; p. 164)
10. A weight break refers to the maximum weight of freight that can be loaded into a vehicle before another vehicle is needed. (False; p. 166)
11. Fewer than 500 motor carriers currently use the freight classification system. (False; p. 166)
12. The price and service tradeoffs available to today’s transportation manager are limited only by her / his creativity and ingenuity. (True; p. 167)
13. The carrier selection procedure appears to be less straightforward than the procedure for modal selection. (True; p. 168)
14. Transit time reliability is the most important factor that shippers tend to use when selecting carriers. (False; p. 168)
15. An amodal shipper uses a logistics intermediary to make the relevant transportation decisions. (False; p. 168)
16. Transportation documentation serves both a practical function (e.g., what, where, and how much is being transported) as well as potentially providing legal recourse if something goes awry. (True; p. 169)
17. The most important single transportation document is the bill of lading. (True; p. 169)
18. An order bill of lading specifies the consignee. (False; p. 169)
19. The long-form bill of lading contains the entire contract between shipper and carrier. (True; p. 169)
20. The bill of lading is an invoice, submitted by the carrier, requesting to be paid. (False; p. 171)
21. Freight bill audits are designed to detect errors that result in overcharges and to correct these errors in the future. (True; p. 172)
22. The Transportation Arbitration Board (TAB) was formed by a group of disgruntled shippers as a method for settling claim disputes. (False; p. 173)
23. Suppose that a shipment of products destined for a particular retailer is lost or damaged. If these products were going into general inventory replacement stock, then the retailer is entitled to recover the wholesaler price plus freight costs (if they were paid). (True; p. 173)
24. Concealed loss and damage claims are some of the most difficult for shippers and carriers to handle. (True; p. 173)
25. Since deregulation, the volume of transportation claims activity has increased. (False; p. 173)
26. Small shipments refer to those that can be handled relatively expeditiously and inexpensively by either the postal system or UPS. (False; p. 174)
27. From a transportation manager’s perspective, small shipments are costly to transport and often receive poor service from transportation carriers. (True; p. 174)
28. Transportation specialists such as freight forwarders, shippers’ associations, and transportation brokers can be helpful in achieving consolidation across place for small shipments. (True; p. 174)
29. Demurrage is a payment penalty associated with railroads, while detention is a payment penalty associated with the trucking industry. (True; p. 176)
30. In demurrage-related averaging agreements, slow equipment returns can be offset by fast equipment returns. (True; p. 176)
31. Today’s transportation carriers tend to have uniform demurrage and detention policies. (False; p. 176)
32. Diversion occurs after a shipment has arrived in its destination city. (False; p. 176)
33. Although the text presents diversion and reconsignment as two separate concepts, the two terms are sometimes used interchangeably. (True; p. 176)
34. A carnet provides guidance in terms of a preferred list of carriers for shipments moving between two points. (False; p. 177)
35. The
36.
37. Tracing refers to determining a shipment’s location during the course of its move. (True; p. 179)
38. Expedited shipment by motor carriage can sometimes provide faster and more reliable service than expedited shipping involving air transportation. (True; p. 179)
39. The installation costs for transportation management systems range from $500,000 to $1,500,000. (False; p. 179)
40. Some transportation managers have developed performance scorecards that contain a list of relevant attributes and an evaluation of each carrier on every attribute. (True; p. 180)
PART IV
CASE SOLUTIONS
CASE 7-1 CHIPPY POTATO CHIP COMPANY
Because motor freight classifications are not static, but change over time, it is suggested that students visit www.nmfta.org, a website that provides up-to-date information on the National Motor Freight Classification (NMFC).
Question 1: If you worked for Chippy, what new classification would you ask for? Give your reasons.
As of December 2006, the NMFC indicated that absent compelling information about other freight classification characteristics (e.g., stowability), density becomes the chief criteria guiding classification. The “old” style chips have a density of 4.67 pounds per cubic foot (carton weight of 14 pounds divided by carton size of 3 cubic feet, while the “new” style chips have a density of 10 pounds per cubic foot (carton weight of 10 pounds divided by carton size of 1 cubic feet). Again, as of mid-2003, a 10 lb/cubic foot density could qualify for a classification of 100. Moreover, the relatively low value per pound of the product qualifies for a classification of less than 100.
Question 2: Classifications are based on both cost and value of service. From the carriers’ standpoint, how has cost of service changed?
At a minimum, the cost of service is changed in the sense that the increased density per cubic foot means that carriers will be able to carry greater weight before cubing out of vehicle space. The cost of service might also change because the tubular containers may result in less product damage.
Question 3: Given the existing LTL classification of 200, how has value of service to the customer changed?
Because the tubular containers may result in less product damage, the value of service to the customer may change. On the other hand, the value of service appears to be negatively impacted in that they are paying $.59 for a five ounce container, versus $.59 for an eight ounce bag—in other words, about a 40% decrease in product for the same price.
Question 4: The new tubular containers are much sturdier. If you worked for Chippy, how—if at all—would you argue that this factor influences classification?
As pointed out in questions 2 and 3, Chippy might argue that the sturdier container makes it less likely that the potato chips will be damaged and because of this, a lower classification should be assigned.
Question 5: You work for the motor carrier classification bureau and notice that the relationship between the weight of potato chips and the weight of packaging has changed. How, it at all, should this influence changes in the product’s classification?
It appears as if the ratio of total product weight to total carton weight with the “old” chips is approximately 85.7%. (The carton weighs 14 pounds or 224 ounces; the product weight is 24 bags times 8 ounces per bag, or 192 ounces. 192 divided by 224 equals 85.7%.) As such, packaging appears to account for 14.3% of the total carton weight. By contrast, the product to carton weight for the “new” chips is 75% (120 ounces of product divided by 160 ounces of carton weight), meaning that packaging appears to be 25% of the total carton weight. The motor carrier classification bureau could argue several things with respect to classification: (1) That there is less packaging efficiency in the new system (in the sense that less of the carton contains actual product) and thus classification should be higher; (2) The increased proportion of packaging might be a surrogate for susceptibility to loss and damage, which again would argue for a higher classification.
Question 6: One of Chippy’s own trucks, used for local deliveries, has two axles and an enclosed body measuring (inside) seven feet by eight feet by twenty feet and is limited by law to carrying a load of no more than 8,000 pounds. Because the truck is not supposed to be overloaded, what combinations, expressed in terms of cartons of each, of new- and old-style chips can it legally carry? (Hint: use a piece of graph paper.)
As a starting point, one might calculate the number of cartons that it would take to weigh out as well as cube out. With respect to the “old” style, 8,000 pounds of capacity divided by 14 pounds per carton yields a capacity of 571 cartons. The capacity of the truck is 1,120 cubic feet (7 times 8 times 20); the 3 cubic foot carton for the “old” style yields a capacity of 373 cartons. In other words, the vehicle will cube out before it weighs out (373 cartons times 14 lbs/carton = 5,222 pounds).
In terms of the “new” style, the 8,000 pound vehicle capacity divided by 10 pounds per carton yields 800 cartons. As for cubic usage the 1,120 cubic feet divided by the 1 cubic foot carton gives us 1,120 cartons; thus the vehicle will weigh out before it cubes out.
CASE 7-2 Nuernberg Augsburg Maschinenwerke (N.A.M.)
Question 1: Assume that you are Weiss. How many viable alternatives do you have to consider regarding the initial shipment of 25 buses?
The answer to this question can vary depending on how students define “viable alternatives.” If we take a broad perspective and just focus on the primary cities, Bremerhaven does not appear to be an option because there is no scheduled liner service in the desired time frame. That leaves us with Prague to Santos through Hamburg and Prague to Santos through Rotterdam. Several of the vessel departure dates for both alternatives are not feasible. For example, the 18 day transit time from Hamburg eliminates both the October 31st and November 3rd departures; likewise, the 17 day transit time from Rotterdam eliminates the November 2nd departure. And although the October 27th departure from Hamburg or the October 28th departure from Rotterdam should get the buses to Santos by November 15th, neither departure leaves much room for potential transit delays (e.g., a late season hurricane). As such, it appears that Weiss has but two viable alternatives; the October 24th departure from Hamburg and the October 23rd departure from Rotterdam.
Question 2: Which of the routing alternatives would you recommend to meet the initial 90-day deadline for the 25-bus shipment? Train or waterway? To which port(s)? What would it cost?
If one assumes that rail transport is used from Prague to either Hamburg or Rotterdam, then the total transportation costs of the two alternatives are virtually identical. Although rail costs to Rotterdam are € 300 higher than to Hamburg, the shipping costs from Rotterdam are € 300 lower than from Hamburg (based on € 6000 times .95). Because the total transportation costs are essentially the same, the decision likely needs to be based on service considerations. The initial shipment is extremely important. It might be suggested that Prague to Hamburg by rail and Hamburg to Santos by ocean vessel is the preferred alternative. Our rationale is that the provided transit times with Hamburg are definitive, that is, 3 days by rail and 18 days by water. With Rotterdam, by contrast, the rail transit time is either 4 or 5 days, although water transportation is 17 days.
Question 3: What additional information would be helpful for answering question 2?
There is a variety of other information that would be helpful for answering question 2. For example, the case offers no insight about port congestion issues and how this congestion might impact the timeliness of shipment loadings. There also is no information about port performance in terms of loss and damage metrics. In addition, although the case indicates that rail transit time from Prague is either 4 or 5 days, it might be helpful to know what percentage of shipments is completed in 4 days. Students are likely to come up with more suggestions.
Question 4: How important, in fact, are the transport costs for the initial shipment of 25 buses?
Clearly, with ocean shipping costs of either € 5700 or € 6000 per bus, transportation costs cannot be ignored. Having said this, the initial shipment holds the key to the remainder of the order (another 199 buses) and appears to be instrumental in securing another order for 568 buses (for a total of 767 more buses). As such, N.A.M might be somewhat flexible with respect to transportation costs for the initial shipment. Suppose, for example, that N.A.M. can earn a profit of € 5000 per bus (such profit on a € 120000 bus is by no means exorbitant). A profit of € 5000 times 767 buses yields a total profit of € 3,835,000. Because of such a large upside with respect to additional orders, N.A.M. might focus on achieving the specified metrics for the initial shipment without being overly concerned with transportation costs.
Question 5: What kinds of “customer service” support must be provided for this initial shipment of 25 buses? Who is responsible?
Although a number of different constituencies are involved in the initial shipment (e.g., railroads, dock workers, ocean carrier, etc.), the particular customers—the public transit authorities—are buying product from N.A.M. Because of this, N.A.M. should be the responsible party with respect to customer service support. There are myriad kinds of customer service support that might be provided. Real-time shipment tracking should be an option so that the customers can know, at any time, the location of the shipment. N.A.M. might also provide regular updates of shipment progress; perhaps N.A.M. could email or fax “important” progress points (e.g., the shipment has left Prague; the shipment has arrived in Hamburg, etc.) to the customers. Because successful performance on the initial shipment is crucial to securing future business, N.A.M. might have one of their managers actually accompany the shipment.
Question 6: The Brazilian buyer wants the buses “delivered” at Santos. Weiss looks up the International Chamber of Commerce’s year 2000 Incoterms and finds two categories of “delivered” at a receiving port. They are:
DES (Delivered Ex Ship). In this type of transaction, the seller must pay all the costs and bear all the risk of transport up to the foreign port of unloading, but not including the cost or risk of unloading the cargo from the ship.
DEQ (Delivered Ex Quay). This is the same as DES except that the terms provide for the seller to pay the costs of unloading the cargo from the vessel and the cost of import clearance.
How should he choose? Why?
Again, given the importance of the initial shipment, it would appear that the more control that N.A.M. has over the process, the better. Although the DEQ option is more costly, it also affords N.A.M. a bit more control later into the shipment process. Moreover, a willingness by N.A.M. to take on the additional costs associated with DEQ might be viewed in a positive fashion by the customers.
Question 7: Would you make the same routing recommendation for the second, larger (199 buses) component of the order, after the initial 90-day deadline is met? Why or why not?
Time pressures do not appear to be as critical for the larger component of the order, so this might argue for use of water transportation between Prague and Hamburg. The rationale would be that even though water transportation is slower, it saves money (€ 48 per bus) over rail shipments. Alternatively, given that the selling price per bus is likely to be around € 120000, trading off 3 days transit time in exchange for a savings of € 48 might not be such a good idea.
Question 8: How important, if at all, is it for N.A.M. to ship via water to show its support of the “Green” movement’s desires?
On the one hand, N.A.M. could use rail transportation to Hamburg, Bremerhaven, or Rotterdam—a significant point in that the case indicates that the “Green” movement appears to be more concerned with substituting water for truck movements than with substituting water for rail movements. Alternatively, the case also indicates that the “Green” movement has not hesitated to publicly embarrass shippers who use trucks instead of water. Have (will) the “Greens” also targeted shippers who use rail instead of water? What is the nature of the public embarrassment formulated by the “Greens?”
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