8 – Transportation

Introduction

The transportation system is the physical link that connects a company to its consumers, raw material suppliers, facilities, warehouses, and distribution channel members. It’s worth noting that all of these aspects of the logistic system are fixed, with transportation serving as the connecting medium. The better the transportation system’s performance and efficiency, the better the organization’s performance in terms of cost and customer satisfaction. Understanding logistics and transportation is critical to the operation of any firm. Transportation adds value to products by providing time and place utility, ensuring that items are available when and where needed. Because of economies of scale and mass production, specialisation of labour, infrastructural infrastructure, and other factors, most enterprises have a geographical dispersion between the source and market of commodities produced. The linking link is transportation.

Logistics management is essential in any organisation manufacturing or producing goods and services. Appropriate planning, implementation, and management of the flow of commodities, their storage, and the efficiency with which many operations follow, from the point of origin to the end of consumption, plays a vital role in modern business. The logistics role includes sourcing, procurement, production planning, scheduling, packing, assembly, and customer support. Each of these acts is essential. Transportation and communication advancements are resulting in the emergence of global supply chains and logistical operations. Technology has an impact on logistics management as well.

8.1 Transportation Infrastructure

Transportation infrastructure can be divided into two categories: hardware and software. Hardware comprises tangible assets such as terminals, storage facilities, mobility rights, and vehicles/equipment. Maintenance, operations, and value-added services are the primary components of software, which is effectively the service superstructure.

The infrastructure structure also affects various economic and legal aspects for each mode or inter-modal (multimodal) system. A mode denotes the fundamental mode of transportation. Bulk items are often shipped in significant quantities. As a result, specific trucks and specialised modes of transportation and handling are essential. Industrial items have a high monetary value and are frequently vital. As a result, faster goods transportation is required. These characteristics are used to choose a form of transportation.

Transportation infrastructure includes rights-of-way, vehicles, and carrier organisations that provide for-hire or internal transportation services. The infrastructure’s type also determines a number of economic and legal aspects for each mode or multimodal system. A mode denotes the fundamental mode of transportation.

8.1.1 Modal Characteristics

Rail, highways, water, pipelines, and air are the five primary forms of transportation. System distance, traffic volume, revenue, and traffic composition can calculate each mode’s relative importance. These metrics address each mode.

Rail Network

Historically, railroads handled the most significant number of ton miles throughout the continent. Railroads dominated intercity freight tonnage until after World War II because they created a comprehensive rail network early on, connecting practically all cities and towns. This early advantage arose from railroads’ capacity to move huge shipments economically and provide frequent service, giving them a monopoly position. However, with the introduction of real motor carrier competition following World War II, railroads’ share of revenues and ton-miles began to drop.

Railroads continue to handle enormous intercity traffic and revenue due to their capacity to efficiently convey large cargo over long distances. Railroad operations have significant fixed costs due to the high cost of equipment, right of way (railroads must maintain their track), switching yards, and terminals. Rail, on the other hand, has comparatively low variable operational expenses. The substitution of diesel power for steam reduced the railroads’ variable cost per ton-mile, and electrification could cut it much further.

Motor Carriers

Highway traffic has increased since the end of World War II. The rapid growth of the motor carrier sector is primarily due to door-to-door operating flexibility and the rapidity of interstate travel.

Motor carriers have many options because they can drive on all types of roads. Unlike railroads, motor carriers have comparatively few fixed investments in terminal facilities and operate on publicly maintained highways. Although license fees, user fees, and tolls are significant, these costs are directly proportional to the number of over-the-road units and miles driven. Because each trailer or combination of tandem trailers requires a separate power unit and driver, the variable cost per mile for motor carriers is considerable. Because of driving safety regulations and the need for extensive dock labour, labour needs are also high.

Motor carriers favour manufacturing and distribution trades, short distances, and high-value products. They have made substantial gains in medium and light manufacturing rail traffic. Because of their delivery flexibility, they have captured practically all freight going from wholesalers or warehouses to retail retailers. The potential of retaining a constant market share in highway transportation remains promising.

The biggest challenges include rising costs for equipment replacement, maintenance, driver wages, and platform and dock expenses. Although rising labour costs affect all types of transportation, motor carriers are more labour-intensive, making higher salaries a fundamental problem. To combat this trend, carriers have focused heavily on enhanced line-haul scheduling that avoids terminals, computerised billing systems, mechanised terminals, tandem operations that pull two or three trailers with a single power unit, and the use of coordinated intermodal networks. These improvements lower labour intensity and, as a result, cost.

Package carriers such as Federal Express and United Parcel Service are examples of speciality carriers. These businesses concentrate on specialised markets or product requirements. Despite the issues above, highway transportation will remain the backbone of logistical operations for the foreseeable future.

Water Transport 

The oldest means of transportation is by water. Steamboats replaced the original sailing vessels in the early 1800s, and diesel power replaced it in the 1920s. Deep-water and passable inland water transport are commonly distinguished.

The primary advantage of water transportation is the ability to transport enormously large shipments. Two types of vessels are used in water transport. Deep-water vessels, primarily constructed in the ocean and extensive lakes, can only reach deep-water ports. Diesel-towed barges often operate on rivers and canals and provide significantly more flexibility.

Regarding fixed costs, water transport ranks between rail and motor carriers. Although water carriers must create and run their terminals, the government develops and maintains the right-of-way, resulting in lower fixed costs than rail and roadways.

Water’s capacity to carry vast tonnage at low variable cost makes it a popular mode of transport when cheap freight rates are required, and transit speed is a secondary issue.

Mining and essential bulk goods such as chemicals, cement, and selected agricultural items are typical examples of inland water freight. Aside from the limitations of navigable waterways, terminal facilities for bulk and dry cargo storage and load-unload mechanisms limit the flexibility of water transport. Labour constraints on dock loading and unloading cause operational issues and tend to limit the potential range of available traffic. Finally, a highly competitive scenario has developed between railroads and inland water carriers in locations where parallel lines exist.

Pipelines

Only commodity turnover and maintenance prevent it from operating around the clock, seven days a week. Unlike other modes, there is no need to return an empty “container” or “vehicle.” Pipelines have the highest fixed cost and the lowest variable cost of any mode of transportation. The right-of-way, construction and need for control stations and pumping capacity all result in high fixed expenditures. Because pipelines do not require a lot of labour, the variable running cost is relatively cheap once the pipeline is built. One clear disadvantage is that pipelines are rigid and limited in terms of commodities that can be conveyed: only items in the form of gas, liquid, or slurry may be transferred.

Air Transportation 

Air freight is the most recent but least used means of transportation. The speed with which a package may be moved is a considerable advantage. Compared to other forms of transportation, coast-to-coast cargo by air takes only a few hours. The high expense of flying travel is one impediment. However, this can be exchanged for high speed, allowing other aspects of logistical design, such as warehousing or inventory, to be lowered or removed.

Air transportation is still more of a possibility than a reality. Even though the mileage is nearly limitless, airfreight accounts for fewer than 1% of all intercity ton-miles. Lift capacity (i.e., load size limits) and aircraft availability limit air transport capability. Historically, scheduled passenger flights were used for most intercity airfreight. While this method was cost-effective, it reduced capacity and flexibility.

Premium air carriers like Federal Express and United Parcel Service offer a dedicated global freight service. While this premium service was first intended for papers, it has grown to include larger parcels.

For example, United Parcel Service and Federal Express have expanded their air freight services to include overnight delivery from a centralised distribution centre located at their air hub. This service is excellent for companies with many high-value products and time-sensitive servicing needs.

Air transport has a lower fixed cost than rail, river, and pipeline transportation. Regarding low fixed costs, air transport is second only to roadways. The majority of airlines and airports are built and maintained with public cash. In a similar vein, local governments typically maintain terminals. The fixed expenses of airfreight are related to the acquisition of aircraft and the need for specific handling equipment and cargo containers. Air freight variable costs, on the other hand, are highly high due to fuel, maintenance, and the labour intensity of both in-flight and ground employees.

8.2 Transport  Functionality & Principles

Transportation functionality has two essential purposes:

1. Product Movement: Whether the product is in materials, components, assemblies, work in process, or finished goods, transportation is required to move it to the next step of the manufacturing process or to get it physically closer to the end user. Product movement up and down the value chain is a fundamental transportation function. Because transportation consumes time, money, and the environment, products must be transported only when they add value to the product.

2. Product Preservation: Temporary storage is a less common transportation function. Vehicles are pretty pricey storage options. However, if the in-transit goods require storage but will be moved again soon (e.g., in a few days), the cost of unloading and reloading the product at a warehouse may exceed the product’s price. Diversion is a second strategy for achieving temporary product storage. This happens when a shipment’s original destination changes while the delivery is in transit. The telephone has always been used to direct distraction techniques. Satellite communication between corporate headquarters and cars now handles information more efficiently.

To summarise, while vehicle product storage can be expensive, it may be justified from a total cost or performance standpoint when loading or unloading expenses, capacity constraints, or the possibility of lengthening lead times are considered.

8.2.1 Principles

Two main ideas guide transportation management and operations. They are scale economy and distance economy.

Economy of Scale

It refers to the cost of transportation per unit of weight lowering as the size of the shipment grows.

For example, truckload (TL) shipments (those that use the entire vehicle’s capacity) cost less per pound than less-than-truckload (LTT) shipments (i.e., shipments that use a portion of vehicle capacity).

Furthermore, more excellent capacity vehicles such as rail or water are often less expensive per unit of weight than lesser capacity vehicles such as motors or air. Transportation economies of scale exist because fixed costs connected with moving a load can be spread over the weight of the load. As a result, a more significant load allows costs to be “spread out,” resulting in lower costs per unit of weight. Administrative charges for taking the transportation order, time to position the truck for loading or unloading, invoicing, and equipment costs are all fixed expenses. Because these costs do not fluctuate with shipping volume, they are considered fixed.

Economy of Distance 

It refers to the fact that the cost of transportation per unit of distance lowers as the distance rises.

For example, a shipment of 800 miles will cost less than two shipments of 400 miles (with the same aggregate weight).

Because rates or charges taper with distance, the transportation economy of distance is also known as the tapering concept. The logic behind distance economies is similar to that of scale economies. The relatively fixed cost of loading and unloading the truck, in particular, must be divided over the variable cost per unit of distance. Longer distances spread the fixed expense over more miles, resulting in cheaper per-mile charges.

These concepts should be considered when examining alternate transportation plans or operational procedures. The goal is to maximise the amount of the load and the distance it travels while still fulfilling customer expectations.

8.3 Participants

Five parties frequently impact transportation transactions: the shipper (the original party), the consignee (destination party or receiver), the carrier, the government, and the public.

Participants in Transportation

8.3.1 Relationship between The Shipper, Consignee, and Public

In other cases, they may be tied by ownership, such as when company-owned trucks move items between two business locations. However, in many circumstances, the parties are independently owned and operated. To comprehend the complexities of the transportation environment, it is vital to examine each party’s position and perspective.

Shippers and Consignees

The shipper and consignee share the goal of transporting products from origin to destination in the shortest amount of time at the lowest possible cost. Services include stated collection and delivery times, predictable transit periods, zero loss and damage, and accurate and timely information sharing and billing.

Carriers

The carrier, as the intermediate, has a slightly different point of view. Carriers want to maximise the income connected with the transaction while lowering the costs required. According to this viewpoint, an airline tries to charge the most significant rate the shipper (or consignee) will take while minimising labour, fuel, and vehicle costs. To accomplish this goal, the carrier seeks flexibility in pickup and delivery periods to aggregate individual cargo into economic moves.

Government

Because of the economic significance of transportation, the government maintains a high level of interest in the transaction. The government desires a stable and efficient transportation environment to sustain economic growth. Transportation allows for the efficient transfer of items to markets around the country, promoting product availability at a fair cost. The scenario in the Soviet Union before its disintegration exemplifies the impact of an insufficient transportation system. Although not the main reason, the transportation infrastructure played a role in the Soviet economy’s inability to supply food to the market despite adequate output.

A stable and effective business economy necessitates that carriers provide competitive services while successfully operating. Many governments are more involved in airline operations and practices than commercial firms. Regulation, promotion, or ownership can all be forms of involvement. Governments control carriers by limiting the markets they can serve or by imposing price caps. Governments encourage carriers by funding R&D or granting rights-of-way such as highways or air traffic control systems. Some airlines in nations like the United Kingdom and Germany are controlled by the government, which maintains complete control over markets, services, and tariffs. This level of authority allows the government to significantly impact the economic performance of regions, industries, or companies.

Public

As the last participant, the public is concerned about transportation accessibility, cost, efficacy, and environmental and safety regulations. Ultimately, the public defines the necessity for transportation by requiring commodities from all over the world at acceptable costs. While consumers value low transportation costs, the trade-offs connected with environmental and safety regulations must also be considered. Despite great progress in pollution reduction and consumer safety over the last two decades, the effects of air pollution and oil spills continue to be a significant transportation issue. The cost of lowering the danger of environmental or vehicular accidents is passed on to consumers, who must jointly decide how much safety is required.

Because of the interaction between the parties, the transportation connection is complex. As a result, there are regular disputes between parties with micro interests — shippers, consignees, and carriers – and parties with macro interests – the government and the public. These disputes have resulted in transportation service duplication, regulation, and restrictions.

8.3.2 Transport Infrastructure 

Transportation infrastructure includes rights-of-way, vehicles, and carrier organisations that provide for-hire or internal transportation services. The infrastructure’s type also determines a number of economic and legal aspects for each mode or multimodal system. A mode denotes the fundamental mode of transportation.

8.4 Regulations in Transportation

Various documents are developed and filed to ensure the smooth flow of products from one country to another. This unit will teach you about exporting import documents’ many views, types, and functions. You will also learn about the documentation required to meet an exporter’s and importer’s commercial duties and the numerous legal and other documents involved in the export-import trade. Because transportation significantly impacts both internal and international trade, the government has historically taken a keen interest in managing and encouraging transportation. Federal and state government regulations and various administrative and judicial administrations exercise control. The federal government began defending the public interest in transportation performance and provision by passing the Act to Regulate Interstate Commerce on February 4, 1887.

8.4.1 Types of Regulation

The government regulates transportation in two categories: economic regulation, safety regulation, and social regulation. Historically, regulatory measures have been centred on economic reasons; however, modern regulatory initiatives have been increasingly focused on safety and social issues.

Economic Regulations

The oldest form of government control is the regulation of corporate practices. Federal and state governments have actively participated in economic regulation to ensure dependable transportation services and promote economic development. For more than a century, government regulation has attempted to make transportation equally accessible and affordable to all without prejudice. Regulatory policy has sought to promote competition among privately held transportation businesses. The government invested in public infrastructure like motorways, airports, rivers, and deep-water ports to stimulate affordable and widespread transportation. However, the government maintained and regulated a network of privately owned for-hire carriers to provide transportation.

Safety and Social Regulations

In contrast to decreased transportation regulation, another trend in the 1970s and 1980s was increased safety and social control. Since its founding in 1966, the federal Department of Transportation (DOT) has actively regulated the transport and handling of hazardous materials and rules governing maximum driver hours and safety. The Transportation Safety Act of 1974, which formally created safety and social regulation as a governmental endeavour, codified this type of regulation. During the next three decades, significant laws affecting logistical performance were enacted. The Hazardous Materials Transportation Uniform Safety Act of 1990 took precedence over state and municipal environmental standards by granting the federal government control over equipment design, hazardous material classification, packing, and handling. Due to environmental and liability issues, there is a greater emphasis on transportation safety.

8.4.2 Rationale for Documentation

Export documentation is the most complex and challenging aspect of international marketing. You may have come across such remarks, which tend to deter people from entering the export business. As a result, it is crucial to underline that documentation is just as significant as the completion and fulfilment of an export order.

What is the purpose of paperwork in the export business? The nature of the business relationships between the exporter and the importer, who operate from two nations, provides the solution. If one conducts domestic business, one knows or has easy access to the commercial practices that bind the buyer and seller. Similarly, the likelihood of commercial disputes is minimised because both the buyer and seller are familiar with or may quickly become acquainted with the laws governing contracts. However, the commercial practices and legal systems differ when the customer and seller are based in separate nations. As a result, some documentary formalities are required to safeguard the buyer’s and seller’s respective interests.

Similarly, each country has its regulations governing imports and exports. As a result, the exporter must comply with local legislation through official documentation. Simultaneously, he must deliver specific paperwork to the importer, allowing him to take ownership of the items after obtaining permission from the relevant government department (i.e., the customs authorities). Another purpose for paperwork in the export trade is that this documentation is linked to the allegation of export incentives provided by practically every country on the planet. Because most of these incentives must be claimed after shipment, the exporter must provide documentary proof of shipment.

Documentation is required for the importer to receive the contractual products, for the exporter to receive the selling value, and to secure export incentives. In other words, export documentation is required to meet commercial, legal, and incentive requirements.

8.4.3 Standardized Document

• Invoice (Commercial Invoice, Proforma Invoice)
• Packing list
• Originality Certificate
• bill of lading
• Order for Shipping
• Receipt from Mate
• Bill of Lading
• Port Trust Document
• Marine Insurance
• Form
• Declaration
• Certificate of Marine Insurance
• Airline Bill
• Postal Parcel Receipt
• Bill of Exchange
• Bill of Entry

Using the appropriate mask, each document can be duplicated from the same master. Reproduced signatures on individual papers may pose some issues in the long run. Unless all parties agree on their acceptability, masking the signature column on the master and manually signing the individual documents will be required. Furthermore, because all copies of the duplicated documents will have the same impression, mainly when the spirit duplicator is used, it will be impossible to differentiate the original from the duplicates of the document. This, however, is not a severe issue that may be remedied by a general understanding that unless the document is labelled ‘Copy,’ it will be viewed as original. It is undeniably convenient to provide dates on documents in numerical format. However, the exporter should ensure that such dates are interpreted the same way as in the United States.

8.5 Transportation Structure

The freight transportation structure comprises rights-of-way, vehicles, and carriers operating in five primary modes. A mode denotes a fundamental way of transportation: rail, highway, water, pipeline, and air. In the United States, the relative importance of each method of transportation is measured in terms of system mileage, traffic volume, revenue, and the type of freight moved.

Railroads have historically handled the most significant ton-miles within the continental United States. A ton-mile is a typical freight activity measurement that combines weight and distance. Railroads dominated intercity freight tonnage until after World War II because of the early creation of a comprehensive rail network connecting practically all cities and towns. This early advantage arose from railroads’ capacity to move huge shipments economically and provide frequent service, giving them a monopoly position. However, with the introduction of significant motor carrier competition following World War II, railroads’ share of revenues and ton-miles fell. Railroads used to be the most popular means of transportation in terms of total miles travelled. Following World War II, the substantial development of roads and highways to accommodate the rise of automobiles and trucks changed this ranking. In 1970, the United States had 206,265 miles of rail track. Due to severe abandonment, track mileage had dropped to 128,730 miles by 1998. Track distance has levelled off in recent years.

Railroads continue to handle enormous intercity cargo due to their ability to efficiently transport large tonnage over long distances. Railroad operations have significant fixed expenses because of the high cost of equipment, right-of-way and tracks, switching yards, and terminals. Rail, on the other hand, has comparatively low variable operational expenses. The emergence of diesel power decreased the variable cost per ton of railroads, and electrification gives additional savings. Modified labour agreements have reduced the need for human resources, resulting in variable cost savings.

Due to deregulation and concentrated company development, rail traffic has shifted from transporting diverse commodities to specific freight. Most railroad tonnage originates from raw material-extractive enterprises far from improved waterways and items such as automobiles, farm equipment, and machinery. For long-distance transfers, the rail fixed-variable cost structure provides a competitive advantage. Railroads began segmenting the transportation industry in the mid-1970s, focusing on carload, intermodal, and container traffic. Following the passing of the Staggers Rail Act, the marketing emphasis became even more specialised. In contrast to conventional boxcar service, railroads became more responsive to unique customer needs by prioritising bulk industries and heavy manufacturing. By developing alliances and acquiring motor carrier ownership, intermodal operations were increased.

For example, United Parcel Transit, a multifunctional motor carrier, is the largest user of rail service in the United States to transport trailers.

The transport sector in India is large and diverse, serving the demands of 1.1 billion people. The industry generated around 5.5 percent of the nation’s GDP in 2007, with road transportation accounting for the lion’s share. Economic growth requires good physical connectivity in both urban and rural locations. Since the early 1990s, the developing Indian economy has seen increased demand for transportation infrastructure and services. However, the sector has been unable to keep up with expanding demand and has become a drag on the economy. Significant changes in the industry are required to enable the country’s continued economic growth and poverty reduction.

Railways: Indian Railways is one of the major railways in the world managed by a single entity. In 2007, it carried 17 million passengers and 2 million tonnes of freight daily, making it one of the world’s top employers. The railways are essential in transporting passengers and cargo across India’s colossal geography. However, most of its key corridors are capacity-constrained, necessitating capacity improvement measures.

Roads: Today, roads are India’s most common means of transportation. They transport about 90% of the country’s passenger traffic and 65% of its freight. At 0.66 km of highway per square kilometre of land, India’s highway network density is comparable to that of the United States (0.65) and far higher than that of China (0.16) or Brazil (0.20).

However, most Indian highways are tiny and congested, with poor surface quality, and 40% of India’s villages lack access to all-weather roadways.

Ports: Along its 7,500-kilometer coastline, India has 12 major ports and 187 minor and intermediate ports. These ports support the country’s rising overseas trade in petroleum products, iron ore, and coal and increased container transit. Despite India’s 14,000 kilometres of navigable rivers and canals, inland water transportation remains undeveloped.

Aviation: India has 125 airports, 11 of which are international. In 2006–2007, Indian airports handled 96 million people and 1.5 million metric tons of cargo, representing a 31.4 percent increase in passenger traffic and a 10.6 percent rise in cargo traffic over the previous year. The massive growth in aviation traffic in recent years, both for passengers and freight, has significantly strained the country’s major airports.

India’s transportation infrastructure is more developed in the country’s south and southwest.

While the Bank will continue to fund the country’s road and highway upgrades and development, it wants to expand its engagement in railways and urban transportation.

8.6 Transportation Services

Integrating the capabilities of numerous modalities allows for the provision of transportation services. Before deregulation, government policy required carriers to operate in only one mode. Such restrictive ownership aimed to promote competition among modes while limiting the possibility of monopoly actions. Following deregulation, carriers were able to develop integrated modal services to satisfy consumers’ needs more efficiently and effectively. The following section examines the variety of services various carriers provide. In addition, the description includes carrier samples from each category.

The selection of an appropriate mode of transportation to deliver an adequate transport service to the customer is an integral part of transportation operations. The modes and specific operations of transporting passengers are investigated, as well as the logistics of passenger tickets, passenger belongings, and claims and refunds to passengers, to ensure the smooth performance of all activities and safe operations when dealing with passenger transportation.

8.6.1 Traditional Carriers

The most basic carrier type is a transportation company that only uses one of the five fundamental modes of transportation. A carrier’s focus on a single operational mode makes it highly specialised. Although single-mode operators can provide exceptionally efficient transportation, such specialisation causes challenges for shippers seeking intermodal transportation solutions because it necessitates negotiation and business planning with several carriers.

Example: Airlines are a single-mode carrier that provides both freight and passenger transportation, often limited to airport-to-airport service. Since deregulation, most carriers have developed services that promote multimodal integration.

8.6.2 Package Service

Over the last several decades, there has been a severe problem with the availability of small freight transportation. Because of the overhead costs associated with terminal and linehaul operations, common carriers found it impossible to provide economically priced small-shipment service. This overhead compelled motor transporters to charge a flat fee. The minimum was usually at the $100 level, regardless of package size or location.

Enterprises providing specialised services could enter the small-shipment or package-service sector because of the low minimum price and a lack of competitors.

Package services are a significant aspect of logistics, and carriers’ impact in this market is growing due to their scale and intermodal capabilities. With the emergence of e-commerce and the necessity for consumer-direct fulfilment, the demand for package delivery has skyrocketed. While package services are growing in popularity, the services required do not fit neatly into the standard modal classification scheme. Packages are routinely transported using rail, motor, and airline-haul services. Package services include both standard and premium services.

8.6.3 Intermodal Transportation

Intermodal transportation combines two or more modes to use each mode’s inherent efficiencies and provide an integrated service at a reduced total cost. Many efforts have been undertaken over the years to integrate various means of transportation. Initial attempts at modal coordination date back to the early 1920s, although collaboration was hampered by regulatory limits aimed to minimizing monopoly tactics. With integrated rail and motor transportation, generally called piggyback service, intermodal offerings developed more successfully during the 1950s. This standard intermodal configuration combines the flexibility of a motor for short routes with the low line-haul cost of rail for longer distances.

8.6.4 Non-operational Intermediaries

The transportation sector also comprises various businesses that do not own or operate equipment. These non-operating intermediaries act as brokers for the services of other companies. In a market channel, a transportation broker is similar to a wholesaler. Non-operating intermediates make their job economically viable by offering shippers lower prices for movement between two sites than would be possible through direct shipping via a common carrier. Because of differences in the common-carrier pricing structure, such as minimum freight charges, surcharges, and less-than-volume rates, non-operating intermediaries can help shippers save money.

Surprisingly, there are instances where non-operating intermediates charge more significant fees than carriers. The possibility of arranging for quicker delivery and more comprehensive service justifies the higher costs. Freight forwarders, shipper associations, and brokers are the key intermediates.

8.6.5 Transport Economics and Pricing

Physical distribution concerns the movement of a finished product to clients. In physical distribution, the consumer is the final destination of a marketing route. Customer service becomes a vital aspect of marketing through physical distribution, connecting marketing channels with their clients.

Order transmission, processing, selection, transportation, and customer delivery comprise a typical physical distribution performance cycle.

Physical Distribution Cycle Activities

This cycle connects the vendor and buyer. We will focus on one aspect of this cycle: transportation. Transportation decisions should be based on reasonable economics. One must first understand the transportation environment, distinct from many commercial organisations, to comprehend transportation economics.

The Players: The shipper (originating party), the consignee (destination party or receiver), the carrier, the government, and the public all impact transportation transactions. The figure depicts the link. To comprehend the complexities of the transportation environment, it is vital to examine each party’s position and perspective.

Physical Distribution Cycle Activities

The shipper and consignee share the goal of transporting products from origin to destination in the shortest amount of time at the lowest possible cost. As the intermediary, carriers strive to charge the most significant rate that the shipper (or consignee) will allow while minimising labour, fuel, and vehicle costs. To accomplish this goal, the airline seeks flexibility in pickup and delivery periods to aggregate individual cargo into economic moves.

Because the government is the primary investor in infrastructure, it is keenly interested in the economic impact of transportation. The government provides roads, ports, airports, and air traffic control systems. The government becomes involved in regulation, promotion, or ownership. As the monopoly owner with complete control over markets, services, and rates, the government can regulate carriers by limiting the markets they serve or regulating the price they charge.

Indian Railways is an example of a government monopoly.

As the last participant, the public is concerned about transportation accessibility, cost, efficacy, and environmental and safety regulations. The public ultimately establishes the need for transportation by requiring products and services and judging the value of such services. The evolution of the airfreight industry demonstrates that consumers may choose speed and service over cost. Cost, environmental, and safety norms are frequently related to trade-offs.

Because of the interaction between the parties, the transportation connection is complex. As a result, there are regular confrontations between parties with a micro interest—shippers, consignees, and carriers – and parties with a macro interest—the government and the general public.

8.6.6 Transport Economics

Transportation economics and pricing focus on the factors determining transportation costs and rates. Seven elements influence transportation economics, and these considerations are critical for establishing transportation rates. The specific elements are explored more below.

Distance significantly impacts transportation costs because it directly adds to variable expenses such as labour, fuel, and maintenance. The cost-distance curve reflects this. The cost curve does not begin at the origin because constant expenses are connected with shipment collection and delivery, regardless of distance.

Relationship between Distance and Transportation Cost

Volume: The load volume connection represents transportation activity economies of scale. The curve shows that as load volume increases, transport costs per unit of weight fall. The relationship is restricted to the vehicle’s maximum size. Economic transportation necessitates consolidating small loads into more oversized loads to maximise scale efficiencies.

Relationship between Weight and Transportation Cost

Density: The product’s volume and density determine its weight. If the product is light, increasing the amount transported is impossible if the space consideration has been met. Once a vehicle is complete, actual labour and fuel costs are not significantly different because of the weight and space restrictions. Higher-density products generally have cheaper transport costs per unit of weight since their capacity is effectively utilised.

Stowability: Stowability refers to utilising vehicle space as reflected by product dimensions. Odd proportions, shapes, and excess weight or length do not pack neatly and often take up too much space.

Steel blocks and rods, for example, have the same density, but rods are more difficult to store due to their length and shape. Large numbers of goods that would ordinarily be difficult to pack in small quantities can sometimes be ‘nested,’ improving stability. Products that are easy to pack command reduced transportation costs.

Handling: Loading and unloading trucks, railway carriages, or ships may necessitate specialised handling equipment. Grouping goods for transportation and storage, such as taping, boxing, or palletizing goods, can lower handling costs.

Liability: Susceptibility to damage, property damage to freight, perishability, susceptibility to theft, susceptibility to spontaneous combustion or explosion, and worth per kilogramme are all examples of liability. Carriers ensure their cargoes to protect themselves against claims or to take liability for any harm. Shippers can lower their risk, and thus their shipping costs, by improving protective packing or reducing susceptibility to loss or damage.

Market Factors: Because vehicles and drivers must return to their origin, they must either locate a load to bring back (“back-haul”) or return the car empty (“deadhead”). When deadhead movements occur, the shipper must bear the costs of labour, fuel, and maintenance. A “balanced” migration, where the volume is equal in both directions, is uncommon due to demand mismatches in manufacturing and consuming areas, seasonality, etc.

For instance, the movement of fruits and vegetables corresponds to the growing season. As a result, transportation charges vary depending on direction and season.

This aspect must be considered when designing a logistics system, and back-haul movement should be included whenever practical.

8.6.7 Total Transportation Costs 

Aside from the essential cost of moving goods, the overall transportation cost includes various other factors, such as transit time, obsolescence and deterioration prices, protective packaging expenses, transit insurance costs, and so on. These elements are described further below.

Transit Time Cost: This factor reflects transportation’s temporal cost. The cost of inventory in transit is a vital part of total logistics expenses. The longer the travel time of a given method of transport, the less accessible the inventory is to the user. This increases the safety stock the company must keep on hand and the required working capital. The transportation cost must account for the fact that if inventory is available after a longer time, the overall cost will be higher.

Obsolescence and Deterioration Costs: Certain items are perishable and sensitive, and their physical features deteriorate with time, progressively resulting in product devaluation. Vegetables, for example, are carried from Punjab to Delhi; delays in transportation or inadequate stowing may force marketers to offer them at a lower-than-desired price. This type of expense is categorised as obsolescence and deterioration costs during transit.

Protective Packaging Costs: Many products may require specialised packaging, which is included in the overall transportation cost. For example, if a product is shipped in a container, it may require less protective packing than a truck. Another example is given later in the rating system for goods transportation for glass shipping.

Insurance Cost: Goods in Transit Insurance protects property from loss or damage in transit or stored during a voyage. This insurance can cover items distributed in the company’s vehicle or by a third-party carrier both domestically and internationally. The policy frequently specifies the mode of transportation to be employed, which may include the postal service.

Class Rates: In transportation terminology, the rate is the price per kilogramme to move a given commodity between two places. The tariff is another name for the rate. The classification does not specify the cost of moving a commodity. It relates to the transportation characteristics of a commodity in contrast to other commodities.

Individual product classification is based on a relative percentage index of 100. Class 100 is the average product class, whereas other classes range from 500 to 35. Each product is issued an item number and, subsequently, a classification rating for listing purposes. Generally, the higher the class rating, the greater the product’s transportation cost.

Products are also rated differently based on their packaging. Glass may have a different rating when shipped loose, in crates, or in boxes than when shipped in protective packaging that has been wrapped. Packaging changes frequently affect product density, stowability, and liability. The same product may be classified differently based on where it is transported, shipment size, mode of transit, and product packaging.

Other Costs: Common costs, such as terminal or management fees, are frequently allocated to a shipper based on activity level, such as the number of shipments handled. Other charges may include local taxes, octroi, toll levies, etc. In the case of road transportation, they are generally applicable.

Joint Costs: Joint costs are necessary to supply a specific service.

When a carrier transports a truckload from point A to point B, an implicit decision is made to incur a ‘joint’ cost for the back-haul from point B to point A. The original shipper from A to B must cover the expense or a back-haul shipper must be found.

These costs significantly impact transportation charges because the original shipper must pay for an empty trip in the absence of a suitable backhaul shipper.

For many years, transportation has been acknowledged as one of the most significant operations in the physical distribution function. In a single market, the shipper’s transportation option can be viewed as a cost model offering the entire transportation and inventory costs associated with each option. There is a link between the amount of money spent and the chosen transportation form.

Strategic transportation considerations include method of conveyance (rail, truck, air, ship) and carriage type (standard, contract, private). Other considerations may include the size of shipments (or the frequency of shipments) and the assignment of goods to vehicles. Models are commonly used to make these decisions.

8.7 Transportation Administration and Documentation

While traffic managers are in charge of a variety of tasks, they are primarily in charge of:

1. Operations Management: Traffic operations management in large enterprises entails various administrative obligations. Key operational components of transportation management include equipment scheduling, load planning, routing, and carrier administration.

2. Freight Consolidation: Some shipping companies offer freight consolidation as a service to reduce total shipping costs and boost transportation security. It is also known as cargo consolidation, assembly service, and consolidation service. Freight prices are directly related to shipment size and trip duration, which puts a premium on freight consolidation. From an operational standpoint, freight consolidation approaches can be classified as reactive or proactive. Consolidation of any kind is critical to increasing transportation efficiency.

3. Rate Negotiation: The traffic department must secure the lowest possible rate consistent with service criteria for any shipment. Tariffs determine the current price for each mode of transportation: rail, air, motor, pipeline, water, and so on.

4. Freight Control: Tracing and expediting are two other crucial transportation management roles. Tracing is a method of locating lost or delayed shipments. Expediting is when a shipper notifies a carrier that a particular shipment needs to move through the carrier’s system as quickly and without delays.

5. Auditing and Claim Administration: Shippers can seek reimbursement when transportation services or charges are not provided as promised. Claims are often divided into loss and damage and overcharge/undercharge. The traffic department’s critical job is to audit freight bills to verify invoicing correctness.

6. Logistical Integration: During any operation period, traffic management is supposed to provide the necessary transportation services at the budgeted cost. It is also the role of traffic management to look for alternate ways to deploy vehicles to lower total logistical costs.

Successful businesses have realised that there is no such thing as inexpensive transportation. Operational expectations have become more exact, order-to-delivery performance cycles have become more compressed, and margins for error have been lowered to near zero. Procurement, production, and customer service performance will fall short unless transportation is managed effectively and efficiently.

Documentation

A transportation service necessitates well-defined documentation. Products are typically sold between the shipper and the consignee, except for private transfers inside the bounds of a single organisation. Bills of lading, freight bills, and shipment manifests are the three main types of transport documents.

1. Bill of Lading: The bill is the fundamental document for purchasing transportation services. It acts as a receipt and records the products and quantities shipped. The bill of lading specifies carrier liability terms and conditions and documents responsibilities for all possible causes of loss or damage except those defined as acts of God.

2. Freight Bill: A freight bill is a carrier’s way of billing for transportation services rendered. It is created using information from the bill of lading. The freight bill can be prepaid or collected.

3. Shipment Manifest: The shipment manifest lists individual stops or consignees when multiple shipments are loaded onto a single vehicle. A bill of lading is required for each shipment. Each shipment’s manifest includes the stop, bill of lading, weight, and case count. The manifest’s goal is to provide a single document that defines the overall contents of the shipment without the need for multiple bills of lading to be reviewed. The manifest is the same as the bill of lading for single-stop shipments.

A transportation service necessitates well-defined documentation. Products are typically sold when transported, except for private transfers inside the bounds of a single corporation. Thus, the legal ownership title is established during the transportation service’s performance. When for-hire carriers transport passengers, the transaction must clearly define the legal duty for all parties involved. Students must remember that the fundamental aim of transportation documentation is to protect all parties involved in the transaction’s execution.

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