The transportation industry is a complex of institution that includes not only the carriers themselves (the ocean shipping companies, airlines, and truckers), but also the supporting terminal operators, freight forwarders, customhouse brokers, ship brokers, financial houses, insurance firms, and engineering and manufacturing concerns, There is also an array of governmental agencies, that oversee the operations of the industry and control the rates charged and services provided. Changes in any of these institutions or their foreign counterparts have ramifications on the rest of the industry and affect the service provided to the shipper of goods in international trade.
Physical distribution managers have an array of alternative methods or modes of transportation for the movement of goods across borders and within countries. Various forms of sea, air, and land transportation may be available for use singly or in combination. The manager’s choice is influenced by the specific product and market characteristics. Large, bulky, low-unit-value items and basic commodities may not be capable of economically using some forms, such as air transport, except for special shipments. On the other hand, fresh flowers and perishable foods may require either fast shipment or special storage facilities. High-value items such as jewellery may be shipped by a variety of methods, but their margins permit movement by high cost rapid transportation and at less risk of theft.
Market Location and Transport Systems
The market location affects the types of transportation that are available. Contiguous markets frequently can be efficiently serviced by truck or rail as might be the case for US manufactures shipping to Canada or Mexico, or for most European producers selling to other continental companies. The location and size of the market and its physical facilities may limits its access by ocean freight. Air transportation is increasingly making markets such as Japan and India quickly which are accessible for products that can economically employ that mode.
In order to achieve efficient movement of goods at low cost, the manger of physical distribution needs to evaluate the viable alternatives. This analysis involves investigation of not only transportation rate structures, but also the effect of transportation on the other distribution costs: warehousing, inventory, packing, and communication. Frequently, trade-offs must be made among these various distribution functions in order to obtain the lowest total cost for the system as a whole. Some of the possible trade-offs within the physical distribution system itself will become apparent in subsequent sections; however, the trade-offs also involve broader marketing considerations. The performance of the distribution functions can affect a company’s sales. Buyers of industrial goods require assurance that supplies, component parts, and raw materials will be available to meet projected production schedules. Retailers also need assurance that products will be available in saleable condition in time to conform the scheduled promotions. For both retailers and industrial buyers, quick access to nearby inventories may be important in planning their own inventory levels and assortments.
Transportation Systems Choice Criteria
Achievement of the firm’s physical distribution objectives requires knowledge of all available alternatives. When selecting an appropriate mode of transportation and the particular carrier to be used, managers evaluate the alternatives on several criteria in addition to the interaction noted above. Commonly used criteria include consideration of each method of transportation on the basis of speed, cost, dependability of performance, and services.
- Speed: Rapid transportation may be obvious factors for perishable products, but it is also significant for other products because of its effect on inventory. Rapid transportation enables a firm to maintain a minimum inventory. Rapid transportation enables a firm to maintain a minimum inventory in float, i.e., the movement process. Since inventory carrying charges are a significant cost factor, the reduction of float lowers the firm’s investment while still providing satisfactory service. Speed also tends to lesson the losses due to spoilage and theft. Rapid delivery shortens the period for which demand forecasts must be made. It makes possible rapid filling of customer orders, thereby lowering the inventory that a buyer must carry.
- Cost: Unfortunately, the use of rapid transportation modes results in a high transportation cost. The higher freight rates associated with rapid transportation lead to high transportation costs per ton per kilometer. This high transportation cost may be partially or wholly offset by savings in packing, inventory, or other costs. Air freight, for example, does not require the packing needed to protect ocean freight and also will reduce the time in transit. The rate structure for international movement is complex and cost comparisons need to be made for specific shipments based on applicable rates for the product and shipping and receiving points.
- Dependability: Dependability of delivery and safe carriage of goods can easily be as important as cost and speed in the transportation decision. Of prime importance to the buyer is the assurance that goods will be available when promised and in saleable or usable condition. The buyer who can depend on delivery schedules can plan promotions and production. Schedules to achieve maximum sales impact and coordination of production and marketing. Dependability of transportation aids the seller in making realistic delivery promises and aids the buyer by permitting close scheduling with attendant inventory and warehouse savings.
- Services: Each of the transportation modes has its own unique characteristics. In addition, each has developed a variety of service options to attract customers. Some arrange for pickup and delivery, permit diversion of freight to a second market, allow shipments to move, or provide other services to meet a customer’s requirements. A firm’s foreign freight forwarder can aid shippers in the selection of the most advantageous services.
Credit: Logistics and Supply Chain Management-MGU