1. Transportation and Distribution Management
Session-3

2. Transportation cost- variable n fixed costs
Transportation rate
Rate-cost=profit

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

4. 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

5. Factors Driving Costs Distance Volume Density Stowability Handling
Liability

6. Factors Driving Costs
Distance
Distance
Cost

7. 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.

8. 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.

9. 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

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

11. Factors Driving Costs
Density
Product density
Cost per Tonne

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

13. 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

14. 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

15. 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

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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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?

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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

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

30. 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