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

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

Factors Driving Costs Distance Volume Density Stowability Handling Liability

Factors Driving Costs Distance Distance Cost

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 Different transportation modes have different cost functions. Road, rail and maritime transport have respectively a C1, C2 and C3 cost functions. While road has a lower cost function for short distances, its cost function climbs faster than rail and maritime cost functions. At a distance D1, it becomes more profitable to use railway transport than road transport while from a distance D2, maritime transport becomes more advantageous. Point D1 is generally located between 500 and 750 km of the point of departure while D2 is near 1,500 km.

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

Weight of the Shipment (tonnes) Factors Driving Costs Volume Weight of the Shipment (tonnes) Cost per Tonne

Factors Driving Costs Density 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.

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 33

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 38

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) 39

Limits on Rates maximum value of service demand rate level minimum cost of service supply fully allocated average variable out-of-pocket 40

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

Fixed & Variable Cost N Service in Transportation System Characteristic Fixed Infrastructure Variable Costs Examples Highways, 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 field 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

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

Conditions Affecting Transport Costs Factors Example Elasticity of Demand High value versus Low value goods Grain vs. Fabrication in transit Uniform rate to capture business Grain to cereal Infrastrucure Quality of surface Natural disasters; IHS Competition and regulation Cost reductions to capture traffic Rail vs. highway

Transportation Rates unit weight rate /per kilometer charge for FTL 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

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 41

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 42

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

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