SCM 373 Lecture Notes - Lecture 5: Liability Insurance, Profit Margin, Comparative Advantage

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6 Feb 2017
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Transportation Operations
Economic Importance of Transportation
1. Allows for geographic specialization
Different regions can specialize in producing products for which they
have a comparative advantage vis-à-vis other regions
2. Enables large-scale production
Allows product to be produced in one region and transported to
another
3. Increased competition
Other producers in different regions can now compete for the
market
4. Increased value of land
Areas previously of little value now have substantial value because
they can serve distant markets
Transportation Economics & Pricing
An effective logistics strategy must understand four interrelated topics
A. Economic Drivers that influence rates
B. Costing Methods to allocate costs
C. Carrier Pricing Strategy used to set rates
D. Rates and Rate Making mechanics used by carriers
Transportation Operations
7 Economic Drivers influence rates:
1. Distance
2. Weight
3. Density
4. Stowability
5. Handling
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6. Liability
7. Market
Economic Drivers Distance
Economic Drivers Weight
Second major factor for most transportation costs
Cost per pound decreases as weight increases until the carrier vehicle
is full
Relationship starts again for the next vehicle load
Small loads should be consolidated into larger loads to maximize
scale economies
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Economic Drivers Density
Weight to Volume Ratio
Volume is important because vehicles are typically constrained more by
cubic capacity than by weight loaded
Would rather weigh out than cube out, take advantage of all the limits of
the truck
Like sucking the air out of a pillow
Can store more pillows
Economic Drivers Stowability
Cube Utilization. Determines how product dimensions fit into
transportation equipment
Odd package shapes and sizes can waste cubic capacity
Items with rectangular shapes are easier to stow
Nesting refers to ability of product to be placed in itself or collapsed
for better stowability
Economic Drivers Handling
Special equipment may be needed to load and unload trucks, railcars, or
ships
How products are grouped together in boxes or pallets will also impact
handling cost
Economic Drivers Liability
Carriers must pay for liability insurance or accept financial responsibility
Shippers can reduce their risk by
Improved packaging and loading
For example - pneumatic dunnage bags
Reducing susceptibility to
loss from theft/pilferage or
damage
Economic Drivers Market Factors
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