Economy In Transportation

Economy In Transportation

Economy means minimization of cost per unit. There are two kinds of economies which can be achieved in transportation system:

1]Economy of Scale:

Economy of scale refers to reduction in the unit cost as the volume of shipment increases. For e.g. a transportation vehicle like truck has a maximum volume grasping of 10 Metric Tones. If full grasping is used then cost per unit volume will decrease.

It is common knowledge that per unit transportation cost comes down as the bulk of the items transported increases. Hence in order to gain benefits in terms of reduction in transportation costs logistician tries to consolidate the bulk and then ship the consignment rather than shipping half truck loads or half container loads. This benefit is economy of scale.

The fixed costs in transportation includes administrative costs of taking the transportation order, time to position the vehicle for loading and unloading, invoicing and equipment cost. These do not vary with the volume of shipment. The administrative cost of shipping 1 kg of goods and 1000 kg of goods is same. When scale are achieved because fixed expenses associated with moving a load are spread out, thereby decreasing costs per unit of weight.

2] Economy of Distance:

A transporter may fine a minimum permanent amount irrespective of the distance to be traveled and after that some way or distance the fine will be on per unit distance basis. For e.g. / k.m. Therefore, normally as the distance increases the cost per unit distance is being reduced regularly.

The transportation cost per kilometer comes down as the distance moved increases. Hence transportation is planned in a single long lap rather than number of short laps to reach the destination. The fixed costs and costs like overheads of loading and unloading are spread over the distance through which the load is moved.

E.g. a shipment of 1000 miles will cost less than two shipments (of the same combined weight) of 500 miles.

Transportation economy of distance is also referred to as tapering principle since rates or charges taper with distance. The rationale of distance economies is similar to that for economies of scale. Longer distances allow the fixed expenses to be spread over more miles, resulting in lower overall per mile charge.

Basic regulatory policy has attempted to foster competition among privately owned transportation companies. To encourage economical and wide- spread transportation supply, the government invested in public infrastructure such as highways, waterways, and deep water ports. However, to actually provide transportation service, the government supported and regulated a system of privately owned for- hire carriers.