Samenvatting
Transport Economics
Professoren:
Thierry Vanelslander
Katrien De Langhe
Academiejaar 2020 -2021
Seppe Van der Mast
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, Part 2 Economics of Transport Management
3. Logical Costs
3.1 The concept of business logistics
In order to make an appraisal of transportation decisions taken by the user within this broader context,
we shall need to turn an important and still evolving field: business logistics.
Business logistics = the movement, storage and related activities between the place of origin where the
company obtains its raw materials, and the place where its products are required for consumption by its
customers.
Logistics concerns itself with a whole chain of activities:
1. Supply flow of raw materials = materials management.
2. Activities within the company.
3. Distribution flow to customers = physical distribution ➔ distribution of (semi)-finished products
to customers.
Logistics offers an integrated approach. For example: the choice of transportation techniques (by boat,
train, truck, airplane…). ➔ you need to take in consideration the transportation costs, packaging costs,
speed of delivery… trade-offs! What does it yield <-> what are the costs.
A key element in the integrated logistical approach is the ‘total costs concept’.
- Transportation costs: this is not always the guttered part (grootste gedeelte).
- Freight handling costs (= goederenbehandelingskosten): any transfer of goods. E.g. 2 movements:
place a container on the quay with the crane and then move from the quay to storage. A certain
amount is requested for these two movements.
- Inventory costs: e.g. just in time: a company must ensure that despite all traffic jams, no heavy
penalties have to be paid if they deliver too late. this is often accompanied by new branches near
that company.
- Stock-out costs (= kosten van voorraadtekort): if you (often) have too little stock, the customers
go to the competitor WITH stock.
- Packaging costs
- Order processing costs: this is becoming less and less ➔ digitization.
- Administration costs
- Start-up costs (= opstartkosten/instelkosten)
- Customer service costs
- Location costs: associated with settling in a particular neighbourhood. Certain activities are
eliminated from Antwerp due to the high land costs in the port of Antwerp
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, 3.2 Transportation costs
when hiring transport services, the transport costs are equal to the
prices of the carriers. In the case of own transport, time and
distance costs must be taken into account (with fixed and variable
component)
Economies of scale are not always exploited to the maximum because of other logistical costs, which rise
rapidly with the size of the shipment. Slow or fast transport? Importance of the time factor!
E.g. With a ship you can transport a lot but is slower. with an airplane the time is much shorter but you
can load much less goods.
3.3 Handling costs (= goederenbehandelingskosten)
Transportation decisions can have an influence on the handling costs when loading and unloading, or with
the transshipment. Depending on the mode of transport, we're going to have to pay a different price for
that handling of goods.
- Unloading on barge versus truck.
- Part hinterland transport by rail/barge versus truck.
Cf. organisation of hinterland transport: barges have to wait a long time in Antwerp because they
arrive with three containers and sail through with four. in Grobbendonk there is a terminal where
extra containers are put on it so that the barges arrive full and are unloaded immediately.
In some cases the handling costs are even negligible as with flat rate price: that is a constant amount per
tonne, so then it does not matter what transport decision you are going to make.
3.4 Inventory costs
Inventory costs are closely tied to transportation decisions. The trade-off between inventory costs and
transportation costs is a key element in such modern-day trends as just-in-time delivery and zero-based
inventory systems ➔ higher transportation costs are accepted in order to cut back inventory costs.
Transport can create inventory ➔ has to do with an inventory cycle.
You have to take into account a safety stock = protect against the time factor of transport ➔ buffer.
Goods in transit (inventory during transport)
- Handling goods.
- Speculation.
Cost linked to inventories. we're going to have to look at:
- Interest cost: we need to apply the annual interest rate to our defined capital = capital that we
can no longer invest in anything else. We are going to reduce that cost with the expected price
increase of the goods. This increase will follow inflation. So we are going to use our real interest
((1+nominal interest)/(1+inflation)) – 1
E.g.: bank loan at 12% interest, with inflation at 3% one pays a real interest rate of 1.12/1.03 =
1.087 – 1 = real interest rate of 8.7%
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, - Insurance costs: protection against theft, fire, piracy. We're going to include that annual
insurance cost per unit in the cost of inventory ➔ will be quite limited. If there’s no insurance,
we're going to take a cost of risk in mind.
- Depreciation of goods:
o Physical depreciation: e.g. rotten bananas.
o Economic depreciation: depends on the economic life of the product (e.g. smartphone is
depreciated by innovation)
Some goods have zero depreciation, like iron ore.
- Warehouse costs: we can use a public or private warehouse. Suppose you have your own
warehouse ➔ depreciation costs + lighting + air conditioning... We are not going to calculate the
annual cost per unit based on the maximum capacity, but on the average inventory level.
There is a difference between warehouse costs and other cost items: no warehouse costs during
transport! However, interest and depreciation costs still apply. Insurance costs can be higher when
they are on the move than they are stored in a warehouse.
Holding costs 'h' = inventory costs of one unit of a specific good per year. This includes interest costs,
insurance/risk costs, depreciation costs and warehouse costs.
3.4.1 Cycle stock
Q = order quantity. We assume a constant consumption
and no safety stock. Average cycle stock = Q/2
Steep slope of chart = sold quickly, flat = sold slow
Choice of transport mode has consequences for cyclical
inventory costs. If one tries to save on transportation costs
by opting for greater load capacity, hence increasing the
size of consignment, one will incur additional costs on cycle
stock.
3.4.2 In-transit inventory
During transport, goods are also in stock ➔ all cost elements apply, except warehouse costs ➔ insurance
costs can be high!
Stocks during transport may exceed the cycle stock (e.g. in maritime transport).
- Cycle stock costs: incentive to small shipment.
- In-transit inventory costs: incentive to faster mode of transport.
- There is complementarity: fastest mode often carries smaller shipments.
Important: always look at the total logistics costs!
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, 3.4.3 Safety stock
= Buffer stock, stock held on top of the cycle stock, due to
uncertainty about:
- level of demand for products.
- The time between placing the order and the arriving of
the order (order lead time).
The underlying idea is to maintain a reserve for the arrival of a
new cargo of goods at the level of safety stock 'S'. Stocks are
replenished so as to avert a possible stock-out.
How can we calculate how much safety stock we need to keep? There are four elements of interest:
- Order lead time: time between ordering and arrival of the goods. The longer the delivery time
and the more uncertain it is, the greater the safety stock should be.
- Demand (plus volatility): consuming inventory. The greater the demand and the more uncertain it
is, the greater the safety stock.
- The acceptability of a stock shortage (stock-out): a manager who tolerates a high risk of inventory
shortages needs a low safety stock.
- Method of stock management or monitoring:
o Continuous: You can order immediately if the stock is below a certain level, so lower
safety stock.
o Periodically: Much more uncertainty, so higher safety stock.
Column 1: order lead time.
Column 2: level of inventory consumption during delivery time.
Column 3: Probability of these results
- e.g.: probability of a consumption level of 95 units during delivery time is 1/6: this occurs if the
delivery time is 1 day (probability 1/3) and the demand on that day is 95 units (probability 1/2)
- e.g.: probability of a consumption level of 190 units during delivery time is 1/12: this is because
the delivery time is 2 days (probability 1/3) and on each of these days the demand should be 95
units (probability 1/2 * 1/2). this probability is the same for 210 units (2 days with 105 units). but
for the 200 units the odds have doubled because there are 2 ways to achieve this (95 units on day
1 and 105 units on day 2 or vice versa).
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