lecture_8_(2)lscm[1] - Head Scratching Notes

Modes of Transportation
• Road Transport – Trucks/Lorries other commercial
• Rail Transport – Train Wagons
• Air Transport – Aeroplanes for Cargo
• Water Transport – Large Ships
• Pipeline Transport – Constructed pipes
• Ropeways – Ropes/cables entangled to a cabin and
hauled back n forth via a pulley
Advantages and Disadvantages of modes of
transportation will be self-study
Transportation In India
Less than Truck
Load (LTL
Full Truck Load
Different Freight Traffic
Also known as Intermodal or Multi-modal
Transportation: Use of more than ONE mode of
• Piggy Back
• Fishy Back
• Birdy Back
• Land Bridge
Piggy back
Combination of rail and road
Transport materials or products over a long distance on land
Rail transport provides benefits of lower cost, higher load capacity
Final delivery is done via road
Two Types: Trailer Over Flat Car (TOFC) or Container Over Flat Car (COFC)
Fishy Back
Combination of water transport with rail/road
Suitable for international or intercontinental movement of bulk quantities at low
After reaching the destination port, the consignment is transported to the final
destination using road/rail transport
Birdy Back
• Combination of air transport with rail/road
• Advantage: Speed
• Disadvantage: Most Expensive
Land Bridge
• Combination of land transport (rail/road) to
connect two separate water ways
• A piece of land exists between two ports
• Cargo is transported by water is first unloaded
at the port and
• Re-transported to the second port by land and
loaded on another ship and transported by
water to destination
Land Bridge Example – Thailand-Laos-Vietnam
Transportation Costs
Fixed Costs
• Costs of infrastructure (ports, airports, railway tracks, yards, etc)
• Costs recovered over a period of time (10 – 20 years)
• Costs recovery can be done by Built-Operate-Transfer (BOT)
A Municipal Corporation appoints company XYZ to build roads
and collect tools from the users to recover the costs. When the
contract period ends, the company transfers the road to the
Municipal Government. Contract period is determined mutually
between Municipal Corporation and Company XZ
Transportation Costs
Variable Costs
• Costs directly related with transportation activity
• Costs directly proportional to volume of activity
Company ABC owns 25 trucks and bears the costs of maintaining
trucks, fuel, employees on job, administration and paper work,
Transportation Costs
Joint (Back-Haul) Costs
• Costs associated with the return journey of a
vehicle after delivering a consignment
Company PQR delivered a consignment from Mumbai to Pune
by truck. After delivering the consignment, the truck has to
return to Mumbai and if it returns empty then the costs cannot
be recovered. To recover the costs, this may have to be added to
the actual cost of delivering the consignment
Transportation Costs
Common Costs
• Costs of multiple smaller shipments to a
common destination are consolidated into a
single large shipment
Company LMN delivers multiple products (5 to 10 FMCG
products) via a truck to a nearby town benefiting themselves and
customers through cost-sharing. When this truck breaks down,
then it’s costs are proportionately distributed among the
Factors Affecting Transportation Costs
• Product Related Factors
• Market Related Factors
Case Study
In US, 80% of wines come from California. The wine
is transported from the (central) valley by 26
stainless tanks transporting 2.5 million gallons to
the east coast. California has small regions
producing large amount of wine to distribute
nation-wide. Wine is shipped either in bottles or in
bulk. Bulk wine is shipped by rail from west to east
coast then bottled and shipped at higher rates. Bulk
wine is also shipped by sea to bottling plants. Ship
competes with rail operations
Factors Affecting Transportation Costs
Distance and accessibility
Long distance rates
Type of product
Packaging, weight,
Seafood; time sensitive
Economies of scale
Shipment size
Container vs less than
Trade imbalance
Empty travel- “back haul
Wine ship
Quality of Surface
Natural disasters
Capacity, limitations,
operational conditions
Air cargo; rail bulk;
distance limits?
Factors Affecting Transportation Costs
Elasticity of Demand
High value versus
Low value goods
Grain vs.
Fabrication in transit
Uniform rate to capture Grain to cereal
Quality of surface
Natural disasters;
Competition and
Cost reductions to
capture traffic
Rail vs. highway
Factors Affecting Transportation Costs
Product-Related Factor
Market-Related Factors
• Product (money) value
• Product density
(weight/space ratio)
• Susceptibility to
• Special Handling
• Product Stowability
• Competition
• Inbound and
Outbound traffic
• Movement Seasonality
• Price Discrimination
Product Value
• Product’s value directly proportionate to
transportation costs (, warehousing costs,
inventory costs, packaging costs, material
handling costs)
• High transportation prices reflect risk associated
with the movement of goods
• High-valued goods carry more change of damage
which transportation provider would have to bear
• Similar explanations for other above mentioned
Product Density
• High-density: More weight than space (Cars);
Low density: More space than weight
• As density increases, transportation and
warehousing costs tend to decrease and vice
• Transportation costs are priced in terms of
weight they can transport.
Susceptibility to Damage
• Greater the risk of damage to a product,
higher the costs of transportation and
• Higher prices may be charged for the
measures taken to prevent damage
Special Handling Requirements
• Related to damage susceptibility
• Specifically designed equipment to be handled
• For eg: Refrigeration, heating equipment, etc
• Transportation costs are high
Product Stowability
• Stowability is the ability to occupy space as
completely as possible
• For e.g. sand can occupy complete space of a
truck and thus with 100% stowability
• Product with higher degree of stowability,
utilizes space better and transport is
• Concept also applied in packaging
Factors Affecting Transportation Costs
(Market Related)
Market areas are carved out of space by interactions between supply and demand
If product is standardized each market point will buy from production center that can
supply it most inexpensively
Market areas are shaped by cheap or limited access routes which might expand market
Example: Inter-coastal trade via Panama Canal- producers located on either coast can ship
to the other coast more cost-effectively than rivals inland. This route is also subject to port
Geographical Price Discrimination –
– Extra costs of long distance distribution not reflected in price of commodity
– Seller will profit by adjusting or taking control of delivered prices not in accord with
transfer rates
– Push down price where competition is high and demand is elastic
– Push price upwards where competition is low and demand is inelastic
Freight Absorption –
– Discriminate against near buyers so sellers assume transport costs to distant markets
– Sellers often has more intense competition in remote market than at home
– Freight absorption usually takes form of uniform price over large areas: toothpaste
Modal competition
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