Transportation and Distribution Management

Session-3

• Transportation cost- variable n fixed costs

• Transportation rate

• Rate-cost=profit

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Freight Transportation Service Spectrum

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

Conditions Affecting Transportation

Condition Factor Examples

GeographyDistance, physiography, accessibility

Shipping between India and banhaldesh vs. shipping between India and US

Type of productPackaging, weight, perishable

Shipping coalShipping flowers or wine

Economies of scale Shipment size

A 747 compared to 737 (passengers) ULCC compared to a VLCC (freight)

Trade imbalance Empty travelTrade between China and the United States

InfrastructureCapacity, limitations, operational conditions

The Interstate

ModeCapacity, limitations, operational conditions

A bus compared to a car

Competition and regulationTariffs, restrictions, safety, ownership

The European Union, NAFTA4

Factors Driving Costs

• Distance

• Volume

• Density

• Stowability

• Handling

• Liability

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Factors Driving Costs

• Distance

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Distance

Cost

Friction of Distance FunctionsThere 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.

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Distance, Mode and Transportation Cost

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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

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Weight of the Shipment (tonnes)

Cost per Tonne

Factors Driving Costs

• Density

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Product density

Cost per Tonne

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)

maximum value of service demand

rate level

minimum cost of service supplyfully allocated

average variableout-of-pocket

Limits on Rates

Fixed and Operating Transport Costs

ModeMode Fixed/Capital Fixed/Capital CostsCosts

Operating CostsOperating Costs

Rail or Rail or HighwayHighway

Land, Construction, Land, Construction, Rolling StockRolling Stock

Maintenance, Maintenance, Labor, FuelLabor, Fuel

PipelinePipeline Land, ConstructionLand, Construction Maintenance, Maintenance, EnergyEnergy

AirAir Land, Field & Land, Field & Terminal Terminal Construction, Construction, AircraftAircraft

Maintenance, Maintenance, Fuel, LaborFuel, Labor

MaritimeMaritime Land for Port Land for Port Terminals,Terminals,Cargo Handling Cargo Handling Equipment, ShipsEquipment, Ships

Maintenance, Maintenance, Labor, FuelLabor, Fuel

Fixed & Variable Cost N Service in Transportation System

Characteristic Fixed Infrastructure Variable Costs

ExamplesHighways, rail tracks, airports, ports

Trucks, railcars, planes, ships

Ownerships Mostly public Mostly private

Lifespan Very long (decades)Short to average (5 to 20 years)

Rate of change Slow Rapid redeployment

Impact on service Shapes accessibility Shapes level of service

Competition Level the playing fieldSource of comparative advantages

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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

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

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Conditions Affecting Transport Costs

ConditionCondition FactorsFactors ExampleExampleGeographyGeography Distance and Distance and

accessibilityaccessibilityLong distance Long distance ratesrates

Type of productType of product Packaging, Packaging, weight, weight, perishableperishable

Seafood; time Seafood; time sensitive sensitive goodsgoods

Economies of Economies of scalescale

Shipment sizeShipment size Container vs Container vs less than less than containercontainer

Trade imbalanceTrade imbalance Empty travel- Empty travel- “back haul rates”“back haul rates”

Wine shipWine ship

InfrastructureInfrastructure Quality of Quality of SurfaceSurface

Natural Natural disastersdisasters

ModeMode Capacity, Capacity, limitations, limitations, operational operational conditionsconditions

Air cargo; rail Air cargo; rail bulk; distance bulk; distance limits?limits?

ConditionCondition FactorsFactors ExampleExample

Elasticity of Elasticity of DemandDemand

High value High value versus versus

Low value goodsLow value goods

Grain vs. Grain vs.

Fabrication in Fabrication in transittransit

Uniform rate to Uniform rate to capture businesscapture business

Grain to Grain to cerealcereal

InfrastrucureInfrastrucure Quality of surfaceQuality of surface Natural Natural disasters; IHSdisasters; IHS

Competition and Competition and regulationregulation

Cost reductions Cost reductions to capture trafficto capture traffic

Rail vs. Rail vs. highwayhighway

Conditions Affecting Transport Costs

Transportation Rates

Weight(tonne) Bangalore Trivandrum Hyderabad Vijaywada

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Rate from Chennai to rest of India for Vegetables and Fruits

•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

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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

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