Transportation

Simple Outline:
1. Explain what Transportation is.
2. The impact of transportation on logistics cost.
3. The impact of transportation on customer satisfaction.

First explaining what transportation is:

Brief history of transportation:

As far as the history records, the goods that people wanted were not produced where
they wanted to consume them or these goods were not accessible where people
wanted to consume them. Food and other commodities were widely dispersed and
were only available in abundance at certain times of the year. Early peoples had the
choice of consuming the goods at their immediate location or moving the goods to a
preferred site and storing them for later use. However, because no well developed
transportation and storage systems ye existed, the movement of goods was limited to
what an individual could personally move and storage of perishable commodities was
possible only for a short time.

Transportation defined:
Simply we can say that transportation “permeates the whole civilized life, like the
arteries and veins”1
The role of transportation in Supply Chain is referred to as “the movement of product
from one location to another as it makes its way from the beginning of a supply chain
to the customer. Transportation is an important supply chain driver because rarely
produced and consumed in the same place”2
An efficient and inexpensive transportation system contributes to greater competition
in the marketplace, greater economies of scale in production, and reduced prices for
goods.
Reasons why transport is needed:
1. Trade
Transport is essential to enable the trading process to take place, supplying the
physical means to achieve the transfer of products and services. Better transport
methods for example increased speed and refrigerated vehicles, allowed what was
once only locally sold products to be marketed world wide or at least over a wider
area.
Transportation is very important for countries that depend mostly on importing large
quantities of supplies; one of the most prominent examples is Japan which imports
huge quantities to fuel up its industrial development.

2. The Linkage with market place

It is no longer necessary to have factories producing in every region. Industrial
companies can now site their plants where production is most efficient1 and with
efficient transportation system to connect the factory with the market place,
companies can benefit from economies of scale.

A good transportation system must:

1. Relax the distance constraint of production and consumption locations.
2. Improve penetration into remote markets.
3. Enable greater competition, direct competition of products of different
origins.
4. Enable economies of scale and reduce product price.

Modes of transport:
There are five modes of transport:
1. Rail,
2. Road,
3. Air,
4. Water,
5. Pipeline, and
6. Intermodal (which is the use of two or more of the later modes)

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Each mode has different cost and service characteristics. These determine which
method is appropriate for the type of goods to be moved. Certain types of traffic are
simply more logically moved within one mode than they are on another.

Performance Characteristics of each mode:

In this table 1 is the highest while 5 is the lowest.

Second: the impact of transportation on logistics cost

There is no agreement on a precise definition of logistics costs, but mainly they are
the costs related to transport, customs, standards, inventory, storage, etc.

Transport cost characteristics:

Variable and fixed cost:

A transportation service incurs a number of costs, such as labour, fuel, maintenance,
terminal, roadway, administrative and others. This cost mix can be randomly divided
into those costs that vary with service and volume (variable costs) and those that do
not (fixed costs). For purpose of transport pricing, however, it is useful to consider
costs that are constant over “normal” operating volume of the carrier as fixed costs.
All other costs are treated as variable.

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Specifically, fixed costs ate those for roadway acquisition and maintenance, terminal
facilities, transport equipment, and carrier administration. Variable costs usually
include line-haul costs such as fuel and labour, equipment maintenance, handling and
pickup and delivery.

This is not a precise cost allocation between fixed and variable costs, as there are a
significant cost differences between transportation modes, and there are different
allocation depending on the dimension being examined. All costs are partially fixed
and partially variable, and allocation of cost elements into one class or the other is a
matter of individual perspective.

Common or Joint Costs

In general, difficult to determine the actual cost for a particular shipment because of
indivisible transportation cost and pooling of shipment of different sizes in the same
haul. Carriers can perfectly balance the traffic between the forward movement and the
return (back haul) movement. Forward haul is the heavy traffic direction and the back
haul is the light traffic direction.3 Shipments in the back haul may be allocated their
fare share of total costs of producing the back haul. This makes the cost per shipment
higher than that of the forward haul. The back haul may be treated as a by-product of
the forward haul because it is produced from the forward haul. All or most of the
costs are then considered zero, or assigned only the direct costs to move a shipment in
the back haul direction.

Cost characteristics by mode:

1. Rail:
Railroad has a fixed costs and relatively low variable costs. Loading, unloading,
billing and collecting, etc. contribute to high terminal costs for rail. Increased per-
shipment volume and its effect on reducing terminal costs result in economies of
scale. Railways are then best for large bulky volumes of goods over long distances.4

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 This figure shows that the
distribution of costs over greater
volume generally reduces the per
unit costs

Figure 1: Generalized surface carrier cost structure based on

2. Road:
Their fixed costs are the lowest of any carrier because motor carriers do not own the
roadway over which they operate and terminal operations do not require expensive
equipments. Trucking costs are divided into terminal expanses and line-haul expenses.
Terminal expenses include pickup and delivery, platform handling, and billing and
collecting, which represents from 15 to 25 percent. There is a reduction of costs on
larger volumes that that of small volumes. Line-haul costs are 50 to 60 percents of
total costs.
3. Water:
The major capital investment is that a water carrier makes is in transport equipment
and to some extent, terminal facilities. Fixed costs are associated with terminal
operations. Variable costs are associated with operating the transport equipment.
Water is one of the least expensive carriers of bulk commodities over long distances
and in substantial volume because of the high terminal costs and the low line-haul
costs.
4. Air:
It has many of the characteristics as the road and water in that air line companies does
not own the air on which they operate nor the air terminals. Combined fixed and
variable costs make air transportation a premium service especially for short
distances; however, distribution of terminal expanses and other fixed charges over
increased volume offer some reduction in per unit costs which come from long
distance operations.

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5. pipelines:
It parallels the railroad costs in its characteristics. It has the highest ratio of fixed cost
to total cost of any mode. Cost per ton-mile decrease with larger pipes. There are also
diminishing returns to scale if too large a volume is forced through pipe of a given
size; this is showed in the following figure.

Figure 2: Generalized pipeline costs as functions of pipe diameter

and throughput volume. Source: 3

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Third: The impact of transportation on customer satisfaction
When a product is ready for use, the clock starts to count down how long it will take
to complete the cycle from completing the manufacturing of a product to the
consumption of that product. The longer it takes to get the item into the hands of the
consumer, the more upset the customer is and subsequently more money the company
loses.
One responsibility of logistics is to find the most cost-effective means of
transportation. Obtaining freight rate quotes and striving to keep these rates as low as
possible is a key factor to a successful logistics operation and later a happy customer.

This figure shows the relation between lost sales cost and service cost and its affect on
total cost. In our case; transportation the higher the service of transportation the higher
the total costs and subsequently low lost sales.

Transportation is responsible for delivering the goods or services to that certain

customer with the least cost possible, using the most suitable mode or combined
modes; otherwise the cost of transportation will be high affecting the price of the
goods being transported. Transportation represents from 30 to 60 percent of the
distribution costs.

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1
Managing Transport Operations, Gubbins, Edmund J. 2004
2
Supply chain management, Chopra, Sunil and Meindl, 2007
3
Business Logistics/ Supply Chain Management, Ballou, Ronald H. 2004
4
Introduction to Materials Management, Arnold, tony J.R. and Chapman, Stephen N. 2004