Logistics and Transportation

Council of Supply Chain Management Professionals (CSCMP) defines logistics as the part of supply chain management that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services and related information between the point of origin and the point of consumption in order to meet customers’ requirements.

From a traditional point of view, logistics deals with the flow and storage of goods from suppliers to customers. Returned goods originate at the point of consumption and have to flow in the reverse direction through the suppliers, this is called Reverse Logistics.

Place utility is generated by moving products where customers need them. Time utility is generated by having products when customers need them. For example, a street seller offering umbrellas on a rainy day generates both place and time utility.

Total logistics cost can be analyzed under four activities; transportation, inventory, warehousing and administration. Transportation cost has the highest share and may account up to two-thirds of the total logistics costs.

Administrative costs related with order management are fixed costs. Costs of loading and unloading goods, movement costs, inventory control and inventory management costs and packaging costs are variable costs.

Customer service level is the performance of the logistics system in meeting customers’ requirements. However, there are multiple methods to define and measure customer service level. More importantly, the customer and the company may have different understandings of customer service, and the same service may be considered at different service levels, leading to conflicts and problems between the company and the customer. Companies aim to maximize their customer service levels.

Market radius= (Price - Product Cost - Transportation System Fixed Costs)/ Transportation System Variable Cost

Market radius= (500-100-50)/1=350

The increase in the market size is faster than the reduction in the transportation cost; this phenomenon is known as the Lardner’s Law.

The amount of transportation is measured in weight-distance (i.e. ton-kilometer) for freight transportation and passenger-distance for passenger transportation.

There are five modes of freight transportation; road, rail, air, water and pipeline transport. Each transportation mode has distinct properties and is preferred in certain situations. These modes serve for several types of transportation demand with their varying characteristics, costs and area of span. In some cases, door- to-door service with a single transportation mode may not be preferred or it may not be even possible. In such cases a combination of multiple modes is utilized which is called multimodal transportation.

Cost is computed based on the type of the carrier. If shipper realizes the transportation, the cost components include the depreciation and maintenance of the vehicles, employee salaries, loading and unloading costs, fuel consumption costs and all related insurances. Based on the specific requirements of the transportation and the selected mode, additional costs can be incurred. Water is the cheapest mode of transportation, followed by pipeline, rail, road and air.

Ghiani, Laporte and Musmanno, report the modes with respect to their reliability; pipeline being the most reliable, followed by air, rail, road and water.

Air transportation offers the shortest transit time especially for long distances. However due to its high cost, it is generally used for highly valued products, perishable items and emergency cases.

Road transportation is also referred to as truck, highway or motor carriage. Road transportation plays an important role in economy and provides door-to-door services between origin and destination. Road transportation has the highest flexibility relative to other modes of transportation.