TRANSPORTATION ECONOMICS & PRICING

Transportation economics and pricing are driven by multiple factors that influence rates. The primary factors are distance, weight, and density. These important factors are discussed from a shipper’s perspective.

                              Economy of Distance

Distance is a major influence on transportation cost since it directly contributes to variable expense, such as labor, fuel, and maintenance .The general relationship between distance and transportation cost. Two important points are illustrated. First, the cost curve does not begin at zero because there are fixed costs associated with shipment pickup and delivery regardless of distance. Second, the cost curve increases at a decreasing rate as a function of distance. This characteristic is known as the tapering principle.

Economy of Weight

A second factor is shipment weight. Similar to other logistics activities, scale economies exist for most transportation movements. This relationship , indicates that transport cost per unit of weight decreases as load size increases. This occurs because the fixed costs of pickup, delivery, and administration are spread over incremental weight. This relationship is limited by the size of the transportation vehicle. The managerial implication is that small loads should be consolidated into larger loads to maximize scale economies.

Economy of Density

A third factor is product density. Density is the combination of weight and volume. Weight and volume are important since transportation cost for any movement is usually quoted in ringgit Malaysia per unit of weight. Transport charges are commonly quoted per hundredweight (CWT). In terms of weight and volume, vehicles are typically more constrained by cubic capacity than by weight. Higher-density products allow fixed transport cost to be spread across more weight. As a result, higher density products are typically assessed lower transport cost per unit of weigh. The relationship of declining transportation cost per unit of weight as product density increases. In general, traffic managers seek to improve product density so that trailer cubic capacity can be fully utilized.