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 Ksh. 100.00. Then for a 10 Kgs shipment the cost of transporting per unit of the product becomes Ksh.10.00, while for a 1,000 Kgs shipment the cost of transporting per unit of the product Ksh.0.1. 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.
Route selection
Because transportation costs typically range between 1/3 and 2/3 of total logistics costs, improving efficiency through the maximum utilization of transportation equipment and personnel is a major concern. The length of time that goods are in transit reflects on the number of shipments that can be made with a vehicle within a given period of time and on the total transportation costs for all shipments. To reduce transportation costs and also to improve customer service, finding the best paths that a vehicle should follow through a network of roads, rail lines, shipping lanes, or air navigational routes that will minimize time or distance is a frequent decision problem.
Although there are many variations of routing problems, they can be reduced to a few basic types.
- There is the problem of finding a path through a network where the origin point is different from the destination point.
- There is a similar problem where there are multiple origin and destination points.
- And there is the problem of routing when origin and destination points are the same.
Separate and Single Origin and Destination Points
Perhaps the simplest and most straight forward of routing a vehicle through a network is the shortest route method.
Multiple Origin and Destination
When there are multiple source points that may serve multiple destination points, there is a problem of assigning destinations to sources as well as finding the best routes between them. This problem occurs when there is more than one vender, plant or warehouse to serve more than one customer for the same product. It is further complicated when the source points are restricted in amount of total customer demand that can be supplied from each location. This type of problem is frequently solved by a special class of linear programming algorithm known as the transportation method.
