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Transportation and Distribution Management

Session-3

Transportation cost- variable n fixed costs Transportation rate Rate-cost=profit

Freight Transportation Service Spectrum

Source: adapted from Global Insight, Inc., TRANSEARCH database, and U.S. Department of Transportation Freight Analysis Framework data 3

Conditions Affecting Transportation


Condition Geography Type of product Factor Distance, physiography, accessibility Packaging, weight, perishable Shipment size Examples Shipping between India and banhaldesh vs. shipping between India and US Shipping coal Shipping flowers or wine A 747 compared to 737 (passengers) ULCC compared to a VLCC (freight) Trade between China and the United States The Interstate A bus compared to a car The European Union, NAFTA 4

Economies of scale

Trade imbalance Infrastructure Mode Competition and regulation

Empty travel Capacity, limitations, operational conditions Capacity, limitations, operational conditions Tariffs, restrictions, safety, ownership

Factors Driving Costs


Distance Volume Density Stowability Handling Liability

Factors Driving Costs


Distance
Cost

Distance

Friction of Distance Functions


There are four major categories of friction of distance functions:
No effects of distance Rare, as very few economic activities on which distance has no effects. telecommunication networks and the have such a cost structure. All those activities generally have a fixed cost which is not related to distance, but often to a service zone. Linear effects of distance -Transport costs are increasing proportionally to distance. Fuel consumption can be included in this category since it is a direct function of the distance traveled. Non-linear effects of distance -Freight distribution costs are growing in a non-linear fashion with distance from the distribution center. This mainly involves the costs of returning back empty. Inversely, intercontinental air transportation costs may be considered, which are not much higher than continental air transportation costs. Multimodal transport chain -Is a combination of linehaul and terminal costs. Transshipment costs at terminals (e.g. ports and airports) which, without involving a distance, increase the friction of distance as efforts must be spent at loading or unloading.

Distance, Mode and Transportation Cost

Shape of Transport Cost Curves


Many simple models, such as Von Thunen and Weber view transport costs as: 1. Proportional to distance 2. Each additional unit of distance adds an equal increment of cost In reality transport costs are less than proportional to distancewhy? Existence of fixed costs of transport facilities incurred regardless of length of journey Fixed or terminal costs (interest on capital, costs of maintaining plant and equipment, depreciation) dilute the unit cost as distance increases Therefore costs per mile tend to decline with increasing distance

Factors Driving Costs


Volume
Cost per Tonne

Weight of the Shipment (tonnes)

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Factors Driving Costs


Density
Cost per Tonne

Product density

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Factors Driving Costs


Stowability- how pdt. Dimensions can be positioned. Handling- Load n Unload. Liability- pdt characteristics that can result in damage n claims.

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Transportation Costs
Product related density stowability ease or difficulty of handling liability
Market related intramode/intermode competition location of markets nature and extent of regulation balance/imbalance of freight traffic seasonality of product movements domestic vs. international

Transportation Cost Structures


Variable: costs vary with services or volume: line-haul costs of fuel, labor and maintenance handling pickup and delivery Fixed: constant regardless of activity Facilities, equipment and administration Joint: hand-in-hand costs -- unavoidable Example: the backhaul move Common: shared costs (overhead) need for Activity-based costing

Pricing Structures
Cost-of-service: cost plus method Value-of-service: market based method Combination: a middle of the road approach using cost (minimum) and value (maximum) Net Rate Pricing: All-inclusive prices specific to customers needs (not discount-based)

Limits on Rates
maximum demand value of service

rate level minimum cost of service fully allocated average variable out-of-pocket supply

Fixed and Operating Transport Costs


Mode Rail or Highway Pipeline Air Fixed/Capital Costs Land, Construction, Rolling Stock Land, Construction Land, Field & Terminal Construction, Aircraft Land for Port Terminals, Cargo Handling Equipment, Ships Operating Costs Maintenance, Labor, Fuel Maintenance, Energy Maintenance, Fuel, Labor

Maritime

Maintenance, Labor, Fuel

Fixed & Variable Cost N Service in Transportation System


Characteristic Examples Ownerships Lifespan Rate of change Impact on service Competition Fixed Infrastructure Highways, rail tracks, airports, ports Mostly public Very long (decades) Slow Shapes accessibility Level the playing field Variable Costs Trucks, railcars, planes, ships Mostly private Short to average (5 to 20 years) Rapid redeployment Shapes level of service Source of comparative advantages

Source: adapted from J. Cortright (2001) Transportation, Industrial Location and the New Economy: How Will Changes in Information Technology Change the Demand for Freight Transportation and Industrial Location? Impresa Inc., March

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Cost Variations in Transport


Elasticity of Demand- goods of high unit value are better able to bear costs of transport than low value goods- charge what traffic will bear Competition between Transport Modes Example: Rail wishes to compete with trucks on short haul must keep rates down Other examples: Wine ship Angelo Petri

Fixed and Running Costs


Highway and trucking costs are only slightly less than proportional to distance This is due to very low terminal charges (fixed costs are only 10 % of total) Rail and Water- relatively high terminal charges but lower line haul costs Rail and Water networks are coarser than highway- fewer terminal facilities but larger in scale Containerization has helped reduced costs and port costs are becoming more and more efficient

Cost Variations in Transport


Differences in Cost of Services: Loading characteristics- light, bulky goods demand higher charges than heavy, compact articles Size of Shipment- large, single consignments permit economies in administration and terminal costs Susceptibility to Loss and Damage and Risk Liability- a. fragile and/or perishable goods- b. refrigerated, insulation and special packaging

Conditions Affecting Transport Costs


Condition
Geography Type of product

Factors
Distance and accessibility Packaging, weight, perishable Shipment size

Example Long distance rates Seafood; time sensitive goods Container vs less than container Wine ship Natural disasters Air cargo; rail bulk; distance

Economies of scale

Trade imbalance Empty travelback haul rates Infrastructure Mode Quality of Surface Capacity, limitations,

Conditions Affecting Transport Costs


Condition
Elasticity of Demand Fabrication in transit Infrastrucure

Factors
High value versus Low value goods Uniform rate to capture business Quality of surface

Example Grain vs.

Grain to cereal Natural disasters; IHS Rail vs. highway

Competition and Cost reductions regulation to capture traffic

Transportation Rates
Rate from Chennai to rest of India for Vegetables and Fruits Weight(tonne) Bangalore 1 2 5 9 12 14 Trivandrum Hyderabad Vijaywada

unit weight rate /per kilometer charge for FTL Minimum charge n surcharge Ancillary value added services

Transportation Rates
Ancillary value added services COD Collect payment on delivery Inside deliverydeliver product inside a building Marking or tagging mark or tag a product as it is transported Notify before delivery make appointments before delivery Reconsignment of deliveryredirect shipments to a new destination while in transit Redelivery attempt a second delivery Residential delivery deliver at a residence with out a truck dock Sorting and segregation sort commodity prior to delivery Storage store commodity prior to deliver

Tailored Transportation
The use of different transportation networks and modes based on customer and product characteristics Factors affecting tailoring:
Customer distance and density Customer size Product demand and value

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Routing and Scheduling


Goals: find best path a vehicle should follow through networks of roads, rail lines, shipping lanes, and air routes determine best pattern for stops, multi-vehicle use, driver layovers, time of day restrictions Benefits: greater vehicle utilization improved and more responsive customer service reduced transportation expenses reduced capital investment in equipment

Principles for Good Routing/Scheduling


load trucks with deliveries for customers closest to each other stops on individual days arranged together start routes with farthest stops first circular routes - dont cross paths use largest vehicles first if can be filled mix pickups in with deliveries, not at end if one stop far from other, use other truck avoid narrow stop time windows, or handle separately

Transportation Administration
Operation n Fleet Mgt Freight Consolidation Rate Negotiation Freight Control

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Trade-offs Between Transportation Cost and Customer Responsiveness


Temporal aggregation is the process of combining orders across time Temporal aggregation reduces transportation cost because it results in larger shipments and reduces variation in shipment sizes However, temporal aggregation reduces customer responsiveness
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