Transportation and Distribution Management

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Transportation and Distribution Management

• Session-3

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• Transportation cost- variable n fixed costs
• Transportation rate
• Rate-costprofit

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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
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Conditions Affecting Transportation
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Factors Driving Costs

• Distance
• Volume
• Density
• Stowability
• Handling
• Liability

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Factors Driving Costs

• Distance

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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.

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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 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

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Factors Driving Costs

• Volume

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Factors Driving Costs

• 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

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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

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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)

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Limits on Rates

• maximum value of service demand
• rate level
• minimum cost of service supply
• fully allocated
• average variable
• out-of-pocket

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Fixed and Operating Transport Costs
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Fixed Variable Cost N Service in Transportation
System
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

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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

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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
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Conditions Affecting Transport Costs
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Transportation Rates
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

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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

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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

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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

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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

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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