• Introduction
• Government’s Role in Transportation
• Transport Functionality and Principles
• Participants in Transportation Decisions
• Transportation Modes
• Carrier Types
• Transportation Economics
• Understand transport functionality and principles
• Describe how managers choose transportation modes
and carriers
• Explain transportation economics
• Customer service level and geographic location play
vital role in transportation decisions
• Shipments sizes, routing and scheduling of equipment
are key in effective management of the firm’s transport
strategy
• All governments realize that a stable and efficient
transportation system is vital to economic development
Economic
Regulation
• Government controls of the entry, rates
and services provided by
transportation carriers
Safety
Regulation
• Regulation designed to ensure that
transportation carriers conduct their
activities in safe and responsible
manner
Product Movement
• Basic value provided by transportation is to move
inventory to specified destination
Product Storage
• While a product is in a transportation vehicle, it is being
stored – storage at shipment origin or destination
• Primary function is the movement up and down the
value chain
• The movement of materials should take place only when
it enhances product value
• Objectives:
a. To move product from an original location to
prescribed destination while minimizing temporal,
financial and environmental resource costs
b. To minimize expenses incurred due to loss and
damage
c. To meet customer demand regarding delivery and
shipment information availability
• Temporary storage becomes advantageous as the cost of
unloading and reloading the product in a warehouse
may exceed the daily charge of storage in transportation
vehicles
• Where the warehouse space is limited, utilizing
transportation vehicles may become a viable option
There are 2 fundamental economic principles that impact
transportation efficiency:
1. Economy of scale – is the cost per unit of weight
decreases as the size of a shipment increases
– Eg.: large capacity transportation vehicle such as rail or water
are less expensive per unit of weight than smaller capacity
vehicles such as trucks or air
2. Economy of distance – refers to decreased
transportation cost per unit of weight as distance
increase
– Eg.: a shipment of 800km will cost less to perform than 2
shipments of the same weight each moving 400km
Goods Flow
Public
Information Flow
Government
Shipper
Carrier
Consignee
Modes of Transportation
Rail
Highway
Water
Pipeline
Air
Truck
Rail
Water
Pipe
Air
Speed
2
3
4
5
1
Availability
1
2
4
5
3
Dependability
2
3
4
1
5
Capability
3
2
1
5
4
Frequency
2
4
5
1
3
Cost to
Shippers**
2
3
4
5
1
Typical Uses
medium &
light mfg.;
wholesale &
retail
distribution
heavy bulk
commodities
bulk
commodities;
agriculture
products
petroleum;
natural gas
small
shipments;
emergency
shipments
Operating
Characteristics*
* 1 = best; 5 = worst
** 1 = highest cost; 5 = lowest cost
1. Common carriers – transportation companies that
provide service to the public
2. Contract carriers – carriers that have specific contracts
with a limited number of shippers
3. Private carriers – companies that own and operate
transportation equipment to transport their own
products
• Consolidation is one of the strategy used by logistics
management to reduce transportation cost by
combining small orders or shipments into one larger
shipment.
1. Market Area Consolidation – combining several small
shipments from one shipper that are going to the same
market area into one shipment
2. Pooled Delivery Consolidation – combines small
shipments from different shippers that are going to the
same market area; normally handled by independent
transportation companies
3. Scheduled Delivery Consolidation – establishing specific
times when deliveries will be made to customers
Influenced by the following elements:
1.
2.
3.
4.
5.
6.
7.
Distance – directly contributes to variable cost such as
labour, fuel and maintenance
Volume – cost per unit of weight decreases as load volume
increase
Density – incorporates weight and space considerations; an
individual vehicle is constrained more by space than by
weight
Stowability – refers to product dimensions and impact of
the same on vehicle space utilization
Handling – special handling equipment that may require
Liability – refers to the product characteristics that affect the
risk of damage and the resulting claims
Market Factors – imbalances in manufacturing and
consumption locations
• Transportation decision involves several factors : the cost related to
transportation itself, the cost of inventory while in transit and the
service requirements related to speed, availability etc.
• To calculate transportation cost:
Total Cost = In-Transit Inventory Holding Cost + Carrier Cost
 where In-Transit Inventory Holding Cost
= (no. of days in transit / 365) x shipment value x annual inventory carrying cost percentage
• Example :
Ajib’s glass store needs to ship an order of five chandeliers to a builder
about 1000 miles away. The chandeliers cost about RM5,000 each, and Ajib
will be paid upon delivery. Ajib plans to ship the order by truck at a cost of
RM250. the delivery will take 5 days. Ajib uses a 20% annual inventory
carrying charge with an operating schedule of 365 days per year. What will
be the approximate total shipping and transit inventory cost of the
shipment?
Solution:
In-Transit Inventory Holding Cost
= (no. of days in transit / 365) x shipment value x annual inventory
carrying cost percentage
= (5 days / 365) x RM25,000 x (0.2)
= RM 68.49
So, Total Transportation Cost
= In-Transit Inventory Holding Cost + Carrier Cost
= RM 68.49 + RM 250
= RM 318.49
Exercise
• You are shipping 200 diamonds to a customer located
2,000 km away. The average value of the diamonds is
RM1,500. you can ship via air for RM500 and the
diamonds will arrive in 2 days or you can ship via a
specialty ground carrier for RM200 and the diamonds
will arrive in 6 days. You figure your inventory carrying
cost is 25%. Your customer will immediately transfer
funds to your bank account on receipt of the shipment.
What is your total cost if you use either the ground
carrier or air carrier?
Market related factors influencing transport costs:
• The degree of intra-mode and inter-mode competition
• The location of markets
• The nature and extent of government regulation
• The balance and imbalance of freight traffic in a market
• Seasonality of product movement
• Whether the product is being transported domestically
or internationally
• Economies of scale and distance offer opportunities to
lower cost through consolidation in transportation
management
• The transportation modes each have significant
advantages and disadvantages, which makes the choice
of transportation service a complete decision