Principles of Transportation
There are two fundamental principles guiding transportation management and operations. They are economy of scale and economy of distance.
Economy of scale
It refers to the characteristic that transportation cost per unit of weight decreases when the size of the shipment increases. It is common knowledge that larger the capacity of the transport vehicle more goods can be transported at a time which will decrease the cost per unit of transport. If smaller is the capacity of the transport vehicle then to transport a large amount of goods, more trips will have to be made which will increase the cost per unit of transport. E.g.: Rail or water transport is less expensive in case of bulk transport than smaller capacity vehicles like motor or air.
A transportation economy of scale exists because fixed expenses such as administrative costs, invoicing costs, equipment costs associated with moving goods and materials get spread over the entire weight of the load. This will help to decrease cost per unit of the goods transported.
E.g.: Suppose the cost to administer a shipment is Rs. 10.00. Then for a 10 Kgs shipment the cost of transporting per unit of the product becomes Re.1.00, while for a 1,000 Kgs shipment the cost of transporting per unit of the product Re.0.01. Thus, it can be said that an economy of scale exists for the 1000 Kgs shipment.
Economy of distance
It refers to the characteristic that transportation cost per unit of distance decreases as distance increases. Transportation economy of distance is also referred to as a tapering principle since rates or charges taper (decrease) with distance. The rationale of economies of distance 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.
These principles are important considerations when evaluating alternative transportation strategies or operating practices. The objective is to maximize the size of the load and the distance that is shipped while still meeting customer service expectations.
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