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
3

Conditions Affecting
Transportation
Condition

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

Capacity, limitations,
operational conditions

A bus compared to a car

Competition and regulation

Tariffs, restrictions, safety,

ownership

The European Union, NAFTA

4

Factors Driving Costs

Distance
Volume
Density
Stowability
Handling
Liability

Factors Driving Costs

Distance
Cost

Distance

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

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

Factors Driving Costs

Volume
Cost per Tonne

Weight of the Shipment

(tonnes)

10

Factors Driving Costs

Density
Cost per Tonne

Product density

11

Factors Driving Costs

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

12

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)

Limits on Rates
maximum
demand

value of service

rate level
minimum

cost of service
fully allocated
average variable
out-of-pocket

supply

Fixed and Operating Transport Costs

Mode
Rail or
Highway
Pipeline

Fixed/Capital
Costs
Land, Construction,
Rolling Stock
Land, Construction

Air

Land, Field &

Terminal
Construction,
Aircraft

Maritime

Land for Port

Terminals,
Cargo Handling
Equipment, Ships

Operating Costs
Maintenance,
Labor, Fuel
Maintenance,
Energy
Maintenance,
Fuel, Labor

Maintenance,
Labor, Fuel

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

18

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

Condition

Factors

Example
Long distance
rates
Seafood; time
sensitive
goods

Geography

Distance and
accessibility

Type of product

Packaging,
weight,
perishable

Economies of
scale

Shipment size

Container vs
less than
container

Trade imbalance

Empty travelback haul rates

Wine ship

Infrastructure

Quality of
Surface

Mode

Capacity,
limitations,

Natural
disasters
Air cargo; rail
bulk; distance

Conditions Affecting Transport Costs

Condition

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 Cost reductions

regulation
to capture traffic

Rail vs.
highway

Transportation Rates
Rate from Chennai to rest of India for Vegetables and Fruits
Weight(tonne) Bangalore

Trivandrum

Hyderabad

1
2
5
9
12
14

unit weight rate /per kilometer charge for FTL

Minimum charge n surcharge
Ancillary value added services

Vijaywada

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

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

14-26

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 - 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

Transportation Administration

Operation n Fleet Mgt

Freight Consolidation
Rate Negotiation
Freight Control

29

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
14-30