TRANSPORTATION MANAGEMENT Industrial Logistics (BPT 3123) Industrial Technology Management Programme Faculty of Technology

Chapter Outline Introduction Government’s Role in Transportation Transport Functionality and Principles Participants in Transportation Decisions Transportation Modes Carrier Types Transportation Economics

Lesson Outcomes Understand transport functionality and principles Describe how managers choose transportation modes and carriers Explain transportation economics

Introduction 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

Government’s Role Economic Regulation Safety Regulation Government controls of the entry, rates and services provided by transportation carriers Economic Regulation Regulation designed to ensure that transportation carriers conduct their activities in safe and responsible manner Safety Regulation

Transportation Functionality 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

Product Movement 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: To move product from an original location to prescribed destination while minimizing temporal, financial and environmental resource costs To minimize expenses incurred due to loss and damage To meet customer demand regarding delivery and shipment information availability

Product Storage 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

Principles of Transportation There are 2 fundamental economic principles that impact transportation efficiency: 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 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

Participants in Transportation Decisions Goods Flow Public Information Flow Government Shipper Carrier Consignee

Modes of Transportation Transportation Modes Modes of Transportation Rail Highway Water Pipeline Air

Operating Characteristics* Transportation Modes Operating Characteristics* Truck Rail Water Pipe Air Speed 2 3 4 5 1 Availability Dependability Capability Frequency Cost to Shippers** Typical Uses medium & light mfg.; wholesale & retail distribution heavy bulk commodities bulk commodities; agriculture products petroleum; natural gas small shipments; emergency shipments * 1 = best; 5 = worst ** 1 = highest cost; 5 = lowest cost

Carrier Types Common carriers – transportation companies that provide service to the public Contract carriers – carriers that have specific contracts with a limited number of shippers Private carriers – companies that own and operate transportation equipment to transport their own products

Transportation Economics Consolidation is one of the strategy used by logistics management to reduce transportation cost by combining small orders or shipments into one larger shipment. Market Area Consolidation – combining several small shipments from one shipper that are going to the same market area into one shipment Pooled Delivery Consolidation – combines small shipments from different shippers that are going to the same market area; normally handled by independent transportation companies Scheduled Delivery Consolidation – establishing specific times when deliveries will be made to customers

Transportation Economics Influenced by the following elements: 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 Economics 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?

Transportation Economics 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

Transportation Economics 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?

Transportation Economics 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

Summary 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