TRANSPORTATION COST ELEMENTS

There are 4 basic cost elements in transportation. Knowledge of these costs enables a shipper to get a better price by selecting the right skipping mode:

- Line haul,

- Pickup and delivery, - Terminal handling, - Billing and collecting.

Goods move either directly from the shipper to the consignee or through a terminal. In the latter, they are picked up in some vehicle suitable for short-haul local travel. They are then delivered to a terminal where they are sorted according to destination and loaded onto highway vehicles for travel to a destination terminal.

There they are again sorted, loaded on local delivery trucks and taken to the consignee.

C

Line-haul costs

When goods are shipped, they are sent in a moving container that has a weight and a volume capacity. The carrier has basic costs to move this container, which exit whether the container is full or not. These costs vary with the distance travelled, not the weight carried. For example, if for a given commodity, the line-haul costs is $3 per mile and the distance is 100 miles, the total line-haul cost is $300. if the shipper sends 50,000 pounds the total line-haul is the same as if 10,000 pounds is sent. However, the line-haul costs (LHC) per hundred weight (cwt.) is different.

LHC / cwt. = 300 / 500 (for 50,000 lb.)

= $0.60 per cwt.

LHC / cwt. = 300 / 100 (for 10,000 lb.)

= $3.00 per cwt.

Thus, the total line-haul cost varies with the cost per mile and the distance moved. However, the line-haul cost per hundred weight varies with the cost per mile, the distance moved and the weight moved.

The carrier has 2 limitations or capacity restrictions on how much can be moved on any one trip: the weight limitation and the cubic volume limitation of the vehicle. With some commodities, their density is such that the volume limitation is reached before the weight limitation. If the shipper wants to ship more, a method of increasing the density of the goods must be found. This is one reason that some products are made so they nest and others are shipped in an unassembled state.

Pickup and delivery costs

Pickup and delivery costs are similar to line-haul costs except that the cost depends more on the time spent than on the distance travelled. The carrier will charge for each pickup and the weight picked up. If a shipper is making several shipments, it will be less expensive if they are consolidated and picked up on one trip

Terminal handling costs

Terminal-handling costs depend on the number of times a shipment must be loaded, handled and unloaded. If full truckloads are shipped, the goods do not need to be handled in the terminal but can go directly to the consignee. If part loads are shipped, they must be taken to the terminal, unloaded, sorted and loaded onto a highway vehicle. At the destination, the goods must be unloaded , sorted and loaded onto a local delivery vehicle.

The basic rule for reducing terminal-handling costs is to reduce handling effort by consolidating shipments into fewer parcels.

Billing and collecting costs

Every time a shipment is made, paperwork must be done and an invoice made out. Billing and collecting costs can be reduced by consolidating shipments and reducing the pickup frequency.

Total transportation costs

The total cost of transportation consists of line-haul, pickup and delivery, terminal-handling and billing and collecting costs. To reduce shipping costs, the shipper needs to do the following:

- Decrease line-haul costs by increasing the weight shipped;

- Decrease pickup and delivery cost by reducing the number of pickups. This can be done by consolidating and increasing the weight per pickup;

- Decrease terminal-handling costs by decreasing the number of parcels by consolidating shipments;

- Decrease billing and collecting costs by consolidating shipments.

For any given shipment, the line-haul costs vary with the distance shipped.

However, the other costs are fixed. The total cost for any given shipment thus has a fixed cost and a variable cost associated with it. In the latter, the cost per mile for short distances far exceeds that for longer distances.

The rate charged by a carrier will also vary with the commodity shipped and will depend upon the following:

- Value. A carrier’s liability for damage will be greater the more valuable the item;

- Density. The more dense the item, the greater the weight that can be carried in a given vehicle;

- Perishability. Perishable goods often require special equipment and methods of handling;

- Packaging. The method of packaging influences the risk of damage and breakage.

In addition, carriers have 2 rate structures, one based on full loads called truckload (TL) or carload (CL) and one based on less than truckload (LTL) and less than carload (LCL). For any given commodity, the LTL rates can be up to 100%

higher than the TL rates. The basic reason for this differential lies in the extra pickup and delivery, terminal-handling and billing and collection costs. Truckers, airlines and water carriers accept less than full loads but usually the railways do not accept.

13.7 WAREHOUSING

This section is concerned with the role of warehouses in a physical distribution system. Warehouses include plant warehouses, regional warehouses and local warehouses. They may be owned and operated by the supplier or intermediaries such as wholesalers, or may be public warehouses. The service functions warehouses perform can be classified into 2 kinds:

- The general warehouse where goods are stored for long periods and where the prime purpose is to protect goods until they are needed. There is minimal handling, movement and relationship to transportation. It is also the type used for inventories accumulated in anticipation or seasonal sales;

- The distribution warehouse has a dynamic purpose of movement and mixing. Goods are received in large-volume uniform lots, stored briefly, and then broken down into small individual orders of different items

rather than on storage. This type of warehouse is widely used in distribution systems.

Warehouses represent an interruption in the flow of material and thus add cost to the system. Items should be warehoused only if there is an offsetting benefit gained from storing them.

Role of warehouses

Warehouses serve 3 important roles: transportation consolidation, product mixing and service.

Transportation consolidation. Transportation costs can be reduced by using warehouses. This is accomplished by consolidating small (LTL) shipments into large (TL) shipments. Consolidation can occur in both the supply and distribution systems.

Transportation consolidation in physical distribution is sometimes called break-bulk, which means the bulk (TL) shipments from factories to distribution centers are broken down into small shipments going to local markets.

Product mixing. Product mixing deals with the grouping of different items

Service. Distribution centers improve customer service by providing place utility. Goods are positioned close to markets so the markets can be serve more quickly.

Warehousing and transportation costs

The particular shipping pattern will depend largely upon the following:

- Number of customers,

- Geographic distribution of the customers, - Customer order size,

- Number and location of plants and distribution centers.

Suppliers have little or no control over the first 3 but do have some control over the last. With respect to transportation, it then becomes a question of the cost of serving customers direct from the central distribution center or from the regional distribution center.

Market boundaries

A company can now supply customers in other locations directly from the factory or through the distribution center. The question is to decide which locations should be supplied from each source. The answer is the source that can service the location at least cost.

Laid-down cost (LDC) is the delivered cost of product to a particular geographic point. The delivered cost includes all costs of moving the goods from A to

B. LDC = P + T x X

Where:

P = Product costs,

T = Transportation cost per mile, X = Distance.

The product cost includes all costs in getting the product to the supply location and storing it there (TL cost to point B, inventory cost at B,...).

Market boundary. The market boundary is the line between 2 or more supply sources where the laid-down cost is the same. There are 2 sources of supply: A and B. Y marks the market boundary between A and B, where the LDC from A is the same as B. Assume the product cost at A is $100 and product cost from B is $100 plus the TL transportation from A to B and inventory carrying costs at B ($10 per unit).

Transportation costs from either A or B are $0.40 per unit per mile:

LDCA = LDCB

100 + 0.40X = 110 + 0.40 (100-X) X = 62.5 Miles

100 Miles

X

Miles 100-X

Miles

A Y B

Effect on transportation costs of adding more warehouses

Generally, as more distribution centers are added to the system, we can expect the following:

- The cost of truckload shipments to the distribution centers to increase, - The cost of LTL shipments to customers to decrease,

- The total cost of transportation to decrease.

As expected, the major savings is from the addition of the first few distribution centers. Eventually, as more distribution are added, the saving decrease. The number of customers served by additional distribution centers decreases and the volume that can be shipped TL to the additional distribution centers is less than to the first ones.

13.8 PACKAGING

The basic role of packaging in any industrial organization is to carry the goods safely through a distribution system to the customer. The package must do the following:

- Identify the product,

- Contain and protect the product,

- Contribute to physical distribution efficiency.

For consumer products, the package may also be an important part of the marketing program. The package serves as a means of identifying the product in a way not possible from its outward appearance. The package must be robust enough to protect and contain the product through all phases of distribution.

Unitization

Unitization is the consolidation of several units into large units, called unit loads, so there is less handling. A unit load is a load made up of a number of items, or bulky material, arranged or constrained so the mass can be picked up or moved as a single unit too large for manual handling. Material handling costs decrease as the size of the unit load increases. One of the most common is the pallet. Loaded with packages, it forms a cube that is a unit load.

Thus, to get the highest cube utilization, consideration must be given to the dimensions of the product, the carton, the pallet, the vehicle and the warehouse.