Transportation Economics – How to Negotiate freight
Written by: – Abhishek Sadashiv CLTD ,CILT / 03/04/2021
Freight Pricing one of important aspect of discussion between all of Supply chain Leaders.Because we all Know that there is Two major cost of whole chain in supply chain cycle one is Freight Pricing and another is Inventory.
Ok, Today We will discuss on Freight Pricing ,Which is part of Transport Economics. This is one of major topic for APICS /ASCM Students. If you are doing CLTD, then this could be super HOT Topics for your Exam. For CSCP& CPIM a better understanding of Transportation Economics is mandatory.
Lets Start .. & Try to Understand Various Vectors of Transportation Economics and Freight Pricing. I am Open for any type of query and comments.
So As we Discuss transportation Economics. there are three vectors of this Economy.
Distance – Always a Major Influencer on Freight.Do you the reason because it directly contributes to a Lot of variable Expenses. Such as Labor, Fuel & Maintenance So Distance factor says as Distance is directly as Portiptional to transportation Cost . As distance will increase Freight will Increase.
Weight – If you are doing Pricing then you know that if you have more weight your freight cost got reduced. Let s figure out why .Because the fixed cost of Pick up & Delivery and other administrative cost will be spread over incremental weight.So when you are doing small shipment it is better to plan a consolidated shipment.
Density – A third economic factor is Density. It is combination of weight & Volume. Weight & Volume are important since transportation cost for any movement is usually quoted in dollars per unit of weight. High Density products are typically assessed lower transportation cost per unit of weight.So if Product density is high then transport cost will be low.
Another Dimension of Transportation Economics is Allocation of Cost . Cost allocation is carrier concern but as supply chain Personnel has to do Negotiation , So it is better to understand cost allocation.
Transportation cost are allocated in two fields.
Variable cost – Cost that change in predictable manner in relation to some activity. These are Variable cost it includes direct carrier cost with movement of load . These Expenses are measured as cost per mile/ Cost of weight. As Discussed Earlier these components are Labor, Fuel & Maintenance
Fixed Cost – Expenses that don’t change in short run. Like whether company is operating or not these expenses need to be paid. These Fixed category includes cost not influenced by shipment volume. for transportation companies, Fixed components includes vechiles , terminals, rights of ways, Information systems & Support Equipment
So Above all Factors and dimension is used to derive Transportation Cost..
This Topic we will discuss tomorrow more on type of freight rate. Different ways to negotiate Freight