Transportation and

Distribution Management
Session-3
• Transportation cost- variable n fixed costs
• Transportation rate

• Rate-cost=profit

2
 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 Factor Examples
Shipping between India and
Distance, physiography,
Geography banhaldesh vs. shipping
accessibility
between India and US
Packaging, weight, Shipping coal
Type of product
perishable Shipping flowers or wine
A 747 compared to 737
(passengers)
Economies of scale Shipment size
ULCC compared to a VLCC
(freight)
Trade between China and
Trade imbalance Empty travel
the United States
Capacity, limitations,
Infrastructure The Interstate
operational conditions
Capacity, limitations,
Mode A bus compared to a car
operational conditions
Tariffs, restrictions, safety,
Competition and regulation The European Union, NAFTA
ownership

4
 Factors Driving Costs
• Distance
• Volume
• Density
• Stowability
• Handling
• Liability

5
 Factors Driving Costs
• Distance
Cost

Distance

6
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.

7
Distance, Mode and
Transportation Cost

8
 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
distance—why?
• 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)

10
 Factors Driving Costs
• Density

Cost per Tonne

Product density

11
 Factors Driving Costs
• Stowability- how pdt. Dimensions can be
positioned.
• Handling- Load n Unload.
• Liability- pdt characteristics that can result
in damage n claims.

12
 Transportation Costs

Product related Market related

• density • intramode/intermode competition
• location of markets
• stowability • nature and extent of regulation
• ease or difficulty • balance/imbalance of freight traffic
of handling • seasonality of product movements
• liability • 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 value of service
demand

rate level

minimum cost of service supply

fully allocated
average variable
out-of-pocket
 Fixed and Operating Transport Costs
Mode Fixed/Capital Costs Operating Costs
Rail or Land, Construction, Maintenance, Labor,
Highway Rolling Stock Fuel
Pipeline Land, Construction Maintenance,
Energy
Air Land, Field & Terminal Maintenance, Fuel,
Construction, Aircraft Labor
Maritime Land for Port Maintenance, Labor,
Terminals, Fuel
Cargo Handling
Equipment, Ships
Fixed & Variable Cost N Service
in Transportation System
Characteristic Fixed Infrastructure Variable Costs
Highways, rail tracks, Trucks, railcars, planes,
Examples
airports, ports ships
Ownerships Mostly public Mostly private
Short to average (5 to 20
Lifespan Very long (decades)
years)
Rate of change Slow Rapid redeployment

Impact on service Shapes accessibility Shapes level of service

Source of comparative
Competition Level the playing field
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 18
 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 Factors Example
Geography Distance and Long distance
accessibility rates
Type of product Packaging, weight, Seafood; time
perishable sensitive goods
Economies of scale Shipment size Container vs
less than
container
Trade imbalance Empty travel- “back Wine ship
haul rates”
Infrastructure Quality of Surface Natural disasters
Mode Capacity, Air cargo; rail
limitations, bulk; distance
operational
conditions
limits?
 Conditions Affecting Transport Costs
Condition Factors Example

Elasticity of High value versus Grain vs.

Demand Low value goods

Fabrication in Uniform rate to Grain to cereal

transit capture business

Infrastrucure Quality of surface Natural

disasters; IHS

Competition and Cost reductions to Rail vs. highway

regulation capture traffic
 Transportation Rates

Rate from Chennai to rest of India for Vegetables and Fruits

Weight(tonne) Bangalore Trivandrum Hyderabad Vijaywada

1
2
5
9
12
14

• 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 delivery—deliver 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 delivery—redirect 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

14-26
 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 - don’t 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
14-30