There are four basic cost elements in transportation. Knowledge of these costs enables a shipper to get a better price by selecting the right shipping mode. The four basic costs are as follows:
- Line haul
- Pickup and delivery
- Terminal handling
- Billing and collecting
When goods are shipped, they are sent in a moving container that has a weight and volume capacity. The carrier, private or for hire, has basic costs to move this container, which exist whether the container is full or not. For a truck, these include such items as the driver’s wages and depreciation due to usage. These costs vary with the distance travelled, not the weight carried. The carrier has essentially the same basic costs whether the truck moves full or empty. If it is half full, the basic costs must be spread over only those goods in the truck.
Read also: Global Distribution
Pickup and delivery costs
Pickup and delivery costs are similar to line-haul costs except that the cost depends more on the time spent than on the distance travelled. The carrier will charge for each pickup and the weight picked up. If a shipper is making several shipments, it will be less expensive if they are consolidated and picked up on the trip.
Terminal handling costs depend on the number of times a shipment must be loaded, handled, and unloaded. If full truck loads are shipped, the goods do not need to be handled in the terminal but can go directly to the consignee. If part loads are shipped, they must be taken to the terminal, unloaded, sorted, and loaded onto a highway vehicle. At the destination, the goods must be unloaded, sorted, and loaded onto a local delivery vehicle.
Each individual parcel must be handled. A shipper who has many customers, each ordering small quantities, will expect the terminal handling costs to be high because there will be a handling charge for each package.
The basic rule for reducing terminal handling costs is to reduce handling effort by consolidating shipments into fewer parcels.
Read also: Distribution Channel
Billing and collecting
Every time a shipment is made, paperwork must be done and an invoice made out. Billing and collecting costs can be reduced by consolidating shipments and reducing the pickup frequency.
How to reduce total transportation costs
After understanding the cost elements in transportation you can reduce cost. The total transportation consists of line-haul, pickup and delivery, terminal-handling and billing and collecting costs. To reduce shipping costs, the shipper needs to do the following:
- Describe line-haul costs by increasing the weight shipped.
- Decrease pickup and delivery costs by reducing the number of pickups. This can be done by consolidating and increasing the weight per pickup.
- Decrease terminal handling costs by decreasing the number of parcels by consolidating shipments.
- Decrease billing and collecting costs by consolidating shipments.