Page 183 - DMGT523_LOGISTICS_AND_SUPPLY_CHAIN_MANAGEMENT

Logistics and Supply Chain Management

Notes
Did u know? The major objective of transportation is to move product from an origin
location to a prescribed destination while minimizing temporal, financial, and
environmental resource costs. Loss and damage expenses must also be minimized. At
the same time, the movement must take place in a manner that meets customer demands
regarding delivery performance and shipment information availability.

2. Product Storage: A less common transportation function is temporary storage. Vehicles
make rather expensive storage facilities. However, if the in-transit product requires storage
but will be moved again shortly (e.g., in a few days), the cost of unloading and reloading
the product in a warehouse may exceed. A second method to achieve temporary product
storage is diversion. This occurs when an original shipment destination is changed while
the delivery is in transit. Traditionally, the telephone was used to direct diversion strategies.
Today, satellite communication between enterprise headquarters and vehicles more
efficiently handles the information.

In summary, although product storage in transportation vehicles can be costly, it may be justified
from a total-cost or performance perspective when loading or unloading costs, capacity constraints,
or the ability to extend lead times are considered.

8.2.1 Principles

There are two fundamental principles guiding transportation management and operations.
They are economy of scale and economy of distance.

Economy of Scale

It refers to the characteristic that transportation cost per unit of weight decreases when the size
of the shipment increases.

Example: Truckload (TL) shipments (i.e., shipments that utilize the entire vehicle’s
capacity) cost less per pound than less-than Truckload (LTT) shipments (i.e., shipments that
utilize a portion of vehicle capacity).
It is also generally true that larger capacity transportation vehicles such as rail or water are less
expensive per unit of weight than smaller capacity vehicles such as motor or air. Transportation
economies of scale exist because fixed expenses associated with moving a load can be spread
over the load’s weight. As such, a heavier load allows costs to be “spread out,” thereby decreasing
costs per unit of weight. The fixed expenses include administrative costs of taking the
transportation order, time to position the vehicle for loading or unloading, invoicing, and
equipment cost. These costs are considered fixed because they do not vary with shipment volume.

Economy of Distance

It refers to the characteristic that transportation cost per unit of distance decreases as distance
increases.

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