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Chapter 16

Transport cost structures and pricing principles. Chapter 16. This chapter covers the following topics: Efficiency in transport Economies of scale Competition within modes of transport Cost structures of the different transport modes Cost trade-offs in transport

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Chapter 16

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  1. Transport cost structures and pricing principles Chapter 16

  2. This chapter covers the following topics: Efficiency in transport Economies of scale Competition within modes of transport Cost structures of the different transport modes Cost trade-offs in transport Profit planning and control Tariff quoting Outline

  3. Transport is not demanded in its own right. The demand for transport is a function of other activities. Efficiency has a direct effect on the competitiveness of a business. Objective: to operate at the scale or size where maximum economy is enjoyed. Economy is the optimum use of resources so that the maximum benefit is gained from any given input of resources. Efficiency in transport

  4. An expanded level or output results in reductions in the total unit cost of transport (per ton-kilometre). Three transport management strategies contribute: Increasing vehicle sizes and maximising utilisation of their capacity Increasing fleet size and maximising utilisation of its capacity Intensifing the use of indivisible facilities and infrastructure whenever these are owned Economies of scale

  5. Sub-groups of economies: Economies of density Economies of scope Economies of distance Economies of scale(continued)

  6. General: Related to cost structure, distance of haul and diversity and physical characteristics of the goods Air: Economic deregulation has led to a trend for oligopolistic market structure Rail: May enjoy a natural monopoly on a particular route Competition within modes of transport

  7. Pipeline: High capital costs Sea: Open competition (tramp shipping) to oligopolistic cartels (liner shipping conferences) Competition within modes of transport (continued)

  8. The relationship between the fixed and variable components of total cost (see Figure 16.1). Air: High initial fixed cost; majority of other costs are variable or semi-variable Road: The ratio of fixed costs to total costs is very high (see Figure 16.2). Cost structures of transport modes

  9. Pipeline: Fixed cost constitutes a high portion of the total cost – the highest of all modes Sea: High proportion of variable costs Cost structure of transport modes (continued)

  10. Proportionate increase in transport costs

  11. Comparative road and rail costs per freight ton over distance

  12. Comparison of salient economic features of transport modes

  13. Efficiency across entire supply chain achieved by minimising system-wide costs from goods flow to warehousing and keeping inventory An integrated and co-ordinated logistics approach Cost trade-offs between transport/ goods flow and operation of warehouse/production facilities Cost trade-offs in transport

  14. Least cost logistics network

  15. Crucial at operational, tactical and strategic management levels. Tactical and operational aspects: Costs not apportioned to transport because actual and perceived costs do not correlate. Continuous monitoring of all transport costs enables remedial measures. Profit planning and control

  16. Strategic aspects: A carrier must have a sound profit policy. The rate of return required by a carrier can be expressed through two values: Cost of capital for the business Current return earned by the firm Profit planning and control (continued)

  17. Total cost pricing Marginal cost pricing Value-of-service pricing Tariff quoting

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