Chapter 11: Strategic Leadership Chapter 16 Transport cost structures and pricing principles

Chapter 11: Strategic Leadership Outline This chapter covers the following topics: Efficiency in transport Economies of scale Competition within modes of transport Cost structures of the different transport modes Cost trade-offs in transport Profit planning and control Tariff quoting

Chapter 11: Strategic Leadership Efficiency in transport Transport is not demanded in its own right. The demand for transport is a function of other activities. Efficiency has a direct effect on the competitiveness of a business. Objective: to operate at the scale or size where maximum economy is enjoyed. Economy is the optimum use of resources so that the maximum benefit is gained from any given input of resources.

Chapter 11: Strategic Leadership Economies of scale An expanded level or output results in reductions in the total unit cost of transport (per ton-kilometre). Three transport management strategies contribute: Increasing vehicle sizes and maximising utilisation of their capacity Increasing fleet size and maximising utilisation of its capacity Intensifing the use of indivisible facilities and infrastructure whenever these are owned

Chapter 11: Strategic Leadership Economies of scale (continued) Sub-groups of economies: – Economies of density – Economies of scope – Economies of distance

Chapter 11: Strategic Leadership Competition within modes of transport General: – Related to cost structure, distance of haul and diversity and physical characteristics of the goods Air: – Economic deregulation has led to a trend for oligopolistic market structure Rail: – May enjoy a natural monopoly on a particular route

Chapter 11: Strategic Leadership Competition within modes of transport (continued) Pipeline: – High capital costs Sea: – Open competition (tramp shipping) to oligopolistic cartels (liner shipping conferences)

Chapter 11: Strategic Leadership Cost structures of transport modes The relationship between the fixed and variable components of total cost (see Figure 16.1). Air: – High initial fixed cost; majority of other costs are variable or semi-variable Road: – The ratio of fixed costs to total costs is very high (see Figure 16.2).

Chapter 11: Strategic Leadership Cost structure of transport modes (continued) Pipeline: – Fixed cost constitutes a high portion of the total cost – the highest of all modes Sea: – High proportion of variable costs

Chapter 11: Strategic Leadership Proportionate increase in transport costs

Chapter 11: Strategic Leadership Comparative road and rail costs per freight ton over distance

Chapter 11: Strategic Leadership Comparison of salient economic features of transport modes

Chapter 11: Strategic Leadership Cost trade-offs in transport Efficiency across entire supply chain achieved by minimising system-wide costs from goods flow to warehousing and keeping inventory An integrated and co-ordinated logistics approach Cost trade-offs between transport/ goods flow and operation of warehouse/production facilities

Chapter 11: Strategic Leadership Least cost logistics network

Chapter 11: Strategic Leadership Profit planning and control Crucial at operational, tactical and strategic management levels. Tactical and operational aspects: – Costs not apportioned to transport because actual and perceived costs do not correlate. – Continuous monitoring of all transport costs enables remedial measures.

Chapter 11: Strategic Leadership Profit planning and control (continued) Strategic aspects : – A carrier must have a sound profit policy. – The rate of return required by a carrier can be expressed through two values: Cost of capital for the business Current return earned by the firm

Chapter 11: Strategic Leadership Tariff quoting Total cost pricing Marginal cost pricing Value-of-service pricing