Chapter 11: Strategic Leadership Chapter 16 Transport cost structures and pricing principles

Chapter 11: Strategic Leadership

Chapter 16

Transport cost structures and pricing principles


Outline

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


Efficiency in transport

• 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.


Economies of scale

• 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 (continued)

Sub-groups of economies:– Economies of density

– Economies of scope

– Economies of distance


Competition within modes of transport• 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 (continued)

• Pipeline:– High capital costs

• Sea:– Open competition (tramp shipping) to oligopolistic cartels (liner shipping conferences)


Cost structures of transport modes

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 structure of transport modes (continued)

• Pipeline:– Fixed cost constitutes a high portion of the total cost – the highest of all modes

• Sea:– High proportion of variable costs


Proportionate increase in transport costs


Comparative road and rail costs per freight ton over distance


Comparison of salient economic features of transport modes


Cost trade-offs in transport

• 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


Least cost logistics network


Profit planning and control

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 (continued)

• 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


Tariff quoting

• Total cost pricing• Marginal cost pricing• Value-of-service pricing

Documents

Chapter 11: Strategic Leadership Chapter 16 Transport cost structures and pricing principles