OTHER PRICING FACTORS

Several other factors have importance to transportation economics. Four of the more important factors are discussed. Stowability refers to how product dimensions fit into transportation equipment. Odd package sizes and shapes, as well as excessive size or length, may not fit well in transportation equipment, resulting in wasted cubic capacity. Although density and stowability are similar, it is possible to have items with similar densities that stow very differently. Items having rectangular shapes are much easier to stow than odd-shaped items. For example, while steel blocks and rods may have the same physical density, rods are far more difficult to stow than blocks because of their length and shape. Stowability is also influenced by other aspects of size, since large numbers of items may be nested in shipments whereas they may be difficult to stow in small quantities. For example, it is possible to accomplish significant nesting for a truckload of trash cans while a single can is difficult to stow.

Handling

Special handling equipment may be required to load and unload trucks, rail cars, or ships. In addition to special handling equipment, the manner in which products are physically grouped together in boxes or on pallets for transport and storage impacts handling cost.

Liability

Liability includes product characteristics that can result in damage. Carriers must either have insurance to protect against potential damage or accept financial responsibility. Shippers can reduce their risk, and ultimately transportation cost, by improved packaging or reducing susceptibility to loss or damage.

Market

Finally, market factors such as lane volume and balance influence transportation cost. A transport lane refers to movements between origin and destination points. Since transportation vehicles and drivers typically return to their origin, either they must find a back-haul load or the vehicle is returned or dead headed empty. When empty return movements occur, labor, fuel, and maintenance costs must be charged against the original front-haul movement. Thus, the ideal situation is to achieve two-way or balanced movement of loads. However, this is rarely the case because of demand imbalances in manufacturing and consumption locations. Demand location and seasonality result in transport rates that change with direction and season. Logistics system design must take such factors into account to achieve back-haul economies whenever possible.

Costing Freight

The second dimension of transport economics and pricing concerns the criteria used to allocate cost. Cost allocation is primarily a carrier concern, but since cost structure influences negotiating ability, the shipper’s perspective is important as well. Transportation costs are classified into a number of categories.

Variable

Costs that change in a predictable, direct manner in relation to some level of activity are labeled variable costs. Variable costs include direct carrier costs associated with movement of each load. These expenses are generally measured as a cost per mile or per unit of weight. Typical variable cost components include labor, fuel, and maintenance.

Fixed

Expenses that do not change in the short run and must be paid even when a company is not operating, such as during a holiday or a strike, are fixed costs. The fixed category includes costs not directly influenced by shipment volume. For transportation firms, fixed components include vehicles, terminals, rights-of-way, information systems, and support equipment. In the short term, expenses associated with fixed assets must be covered by contribution above variable costs on a per shipment basis.

Joint

Expenses created by the decision to provide a particular service are called joint costs. For example, when a carrier elects to haul a truckload from point A to point B, there is an implicit decision to incur a joint cost for the back-haul from point B to point A. The joint cost must be covered by the original shipper from A to B or a back-haul shipper must be found. Joint costs have significant impact on transportation charges because carrier quotations must include implied joint costs based on assessment of back-haul recovery.

Common

This category includes carrier costs that are incurred on behalf of all or selected shippers. Common costs, such as terminal or management expenses, are characterized as overhead. These are often allocated to a shipper according to a level of activity like the number of shipments or delivery appointments handled.

Pricing Freight

This section presents the traditional pricing mechanics used by carriers. This discussion applies specifically to common carriers, although contract carriers follow a similar approach.

Class Rates

In transportation terminology, the price in ringgit Malaysia and cents per hundredweight to move a specific product between two locations is referred to as the rate. The rate is listed on pricing sheets or on computer files known as tariffs. The term class rate evolved from the fact that all products transported by common carriers are classified for pricing purposes. Any product legally transported in interstate commerce can be shipped via class rates.

Determination of common carrier class rates is a two-step process. The first step is to determine the classification or grouping for the product being transported. The second step is determining the rate or price based on the freight classification of the product, weight, and shipment origin/destination points.