Transportation Cost Elements

Transportation is one of the most visible elements of logistics operations. Transportation provides two major functions namely product movement & product storage. The major objective is to move product from an origin location to a prescribed destination while minimizing temporal, financial and environmental resource costs. Loss and damage expenses must also be minimized. At the same time the movement must take place in such a manner that meets customer demands regarding delivery performance and shipment information availability.

Following are the essential elements of transportation to be taken into account:

1. Transport Mode – The most critical decision is the selection of appropriate mode of transport. This fixes two basic elements of distribution function:

  1. Transit time or time lapse between production and sale;
  2. Level of transportation costs.

There is an inverse relationship between transit time and transport cost – the lower the transit time, the higher the transport cost. However, a decision that takes into account only one cost factor cannot be justified. An evaluation of the effect of transit time on other costs must also be considered. Unsold production represents a high cost, and the longer the transit time, the higher the level of unsold production.

2. Inventory Costs – A first class service to clients often requires immediate delivery and, hence a higher level of inventory at the market center. Economy, on the other hand, calls for minimum inventory. The level of output held in stock is dictated by-

  1. Transit time: If the time lapse between production and sale is longer, the level of inventory becomes higher.
  2. Sales pattern: If the pattern of sales is erratic, higher inventory levels are caused.
  3. Production pattern: If the production pattern is erratic, higher inventory levels have to be maintained to prevent stock –outs.

Assuming that the sales and production patterns are largely fixed, the important variable, which can influence stock, levels in transit time. As transit time is reduced, the level of static stock can be reduced with accompanying stock reduction.

3. Transit Capital – Capital can be released by changing the proportion of the total output in transit. This can be done by adjusting the transit time. As transit time is reduced, the quantity of goods in transit can be decreased with an associated reduction in transit inventory costs. By realizing the capital cost of transit inventory and goods in transit, capital commitments can be reduced, and more capital can be available for other purposes.

4. Obsolescence – When a slow or erratic mode of transport is employed, a higher level of inventory is necessary to ensure continuous, prompt delivery to the customer. However, when designs change rapidly, obsolescence reduces the market value of the products in store. Rapid advances in technology bring about swifter technical obsolescence. Any goods in the pipeline realize a lower figure when new models are introduced by a company or it’s competitors. Air distribution can overcome this problem, and the effect of such obsolescence can be minimized.

5. Packaging – The nature of packaging of a product is often determined by the mode of it’s transport. E.g. Because of the dry conditions of carriage, short transit times and minimum handling, air cargo generally requires  much less packaging than other forms of  long distance transport. Goods dispatched by air may require only a dust cover or even no cover at all. In some cases, savings on the packaging of sophisticated products may more than pay for the actual transport charges. Less packaging may lead to other advantages too. These include lower unpacking costs and lower chargeable weight for freight.

6. Insurance – Insurance risks are based on transit time as well as the possibility of damages en route. With faster transit times, skillful handling, substantial reduction in damage and greater security in transit, insurance premiums tend to fall substantially.

7. Breakages – Cost of breakages is an important factor in any cost benefit analysis. Because breakages may be indemnified by insurance companies, the true cost of damage to cargos can easily be overlooked. In the first place, the vulnerability of various products sent by different modes is reflected in the insurance premium. To high premiums must be added the clerical work involved in establishing claims, making replacements and the loss of customer’s goodwill. The replacements themselves will be subject to the same hazards and premiums will require further documentation.

Therefore, only that mode of transport must be selected which substantially reduces real damage in transit. This calls for a selection of the routes which are more direct and which avoid transshipment. Handling equipment must also be more sophisticated. Containers can be used by shippers for door-to-door transportation, thereby avoiding all handling of goods by the carrier.

8. Pilferage – Many expensive administrative problems associated with breakages also apply to pilferage. This problem is reduced for example, when door-to-door containers are used, a fact which is again reflected in lower insurance rates.

9. Deterioration – In many surface cargos, deterioration may be avoided only by complicated and expensive packing to counteract mechanical shock, exposure to weather or unfavorable temperature etc. Some cannot be stored at all, except at great expense, and others deteriorate slowly.Deterioration can be costly in terms of packing, stock losses and expensive conditioning in store. It can only shut the door on many distant markets. A high speed of transport and the frequency of services can overcome many of these problems.

10. Transport Costs – Transport can be divided into 3 phases:

  1. Delivery to docks, airport or railway station.
  2. Transport from one terminal to another.
  3. Delivery from the terminal to the consignee’s place.

In the cost-benefit analysis of the turnaround time of a company’s delivery and collection vehicles, their man hour costs can be significant. Some customers may find this item to be more costly than the cost of the major journey.