Explain the factors influencing Transportation Costs

Transportation cost elements / Factors Influencing Transportation costs:

The following are some of the important elements that are included in the cost of transportation:

a) Mode of transport

For an organization, the decision regarding selecting the particular mode or modes of transport for distributing its finished products is very critical. In the case of distribution of its products, the company has to think of

1. The transit time, or the time lapse between the production of goods and its ultimate sale.
2. The amount of transportation costs involved.

Normally speaking there is an inverse relationship between the transit and transportation cost i.e. lower the transit time, higher is the transportation cost. This is because to cut down on transit time. The company would like to transport its goods faster by possibly a combination of various modes of transport. This would definitely increase its cost of transportation. But as stated this need not be a generalization. E.g.: If a company decides on slower transit time to reduce transportation costs then unsold inventory would pile. Thus there would be higher inventory cost for the organization.

b)  Transit Capital

When goods are in transit, the capital of the company (i.e. money) is locked up. The company would like to convert goods into cash as quickly as possible so that the cash (i.e. capital) so generated can be put to profitable use. Hence the company must ensure that the transit time of goods is kept to minimum level. Here an effective and planned transportation should be evolved within the company’s logistical system so that the overall transit time is kept at the minimum level.

c)  Obsolescence

            When a company is tied down to a slow or say an erratic mode of transport (E.g.: Roadways in monsoons) it is necessary for the company to maintain a higher level of inventory at depots/ware houses/distributors. This required so that  the customer can be assured of continuous and uninterrupted supply of company’s products. However in case the designs of the products change rapidly or the wants/desires of the customers change, the goods of the company will remain unsold which may become time –barred and obsolete (E.g.. medicines and drugs). Again, rapid changes and innovations in technology (E.g.: electronic items and computers) will be the technical obsolescence of the goods. Any goods in the process of manufacture or, which are in transit to the depots/warehouses, will realize a lower sales value when new models arrive. Hence, with proper coordination and planning involving logistics the company has to decide on swifter more efficient modes of transport to avoid possible obsolescence of goods/products.

d) Packaging

Packaging can be considered as an inevitable factors which needs due consideration before goods are transported from one place to another. The mode of transport (apart from the type of the product) very often influences the type of packaging required. E.g.: Long distance transport by road will require different sort of packaging for a product, as compared to the same product being transported by air. Hence, the mode of transport determines the type of packaging required. This can increase the cost of the product since packaging costs have to be incorporated in profitability calculations. Also, more the packaging means more weight and volume, which will increase the cost of transportation. Hence, design of packaging has become very important in logistical planning.

e)  Insurance

Insurance risks are based on the modes of transport, transit time as well as on the possibility of damage to the goods on route. In case the transit time for the goods is smaller and the handling of the goods by the transport companies is skilful there will possibly be no damage to the goods. Proper management of the goods in transit by efficient staff is also essential. Insurance premiums paid would be lower since less or no damage to the goods is expected.

f)  Breakages

The cost of the breakages of the products during transport has to be considered by any company while calculating cost incurred on goods transported. Insurance companies do cover damages, cost to the goods due to breakages during transport. The company cannot overlook this cost. Apart from the high premiums paid during transport (called transit insurance), the delay in, establishing and receiving claims, the cost involved in making replacements, and consequent loss of established customers and market will prove very expensive to the company.

Hence, the logistic manager must select that mode of transport which will reduce or eliminate the loss due to breakages in transit. The firm must ensure that handling systems are sophisticated during transit, also if possible special containers should be used to safeguard products from breaking. If direct door to door delivery is possible by the transport company, it would ensure less multiple handling thereby safeguarding the goods from breakage:

g)  Pilferage

            The Problem of pilferage of goods during transport-whether it be rail, truck or water, is very common in our country. The cost involved due to loss suffered because of pilferage is enormous, especially when the products are expensive. Practically speaking, the problem of pilferage is difficult to be eliminated from our country. But is can be attempted to be reduced by proper storage containers that are pilter proof, adequate security arrangements during transit, etc. But the loss due to pilferage during transit is real and has to be taken into account during cost benefit calculations.

h)  Deterioration

Many goods that are transported over long distance by rail, water and truck get deteriorated due to various reasons. First, the goods may not have been protected against adverse weather conditions like heavy rains or scorching sun. Second, the roads may be extremely bad making it difficult for the truck to move smoothly, the rough seas may make water transport dangerous, long waiting times at railway yards can be a cause of concern about the conditions of the goods. Deterioration during transport can prove to be expensive. Again, to avoid losses due to deterioration in terms of special packages, conditioning, etc. may add to the cost of the goods, making them expensive.