Chapter 1

Overview of
Transportation
Logistics
Overview of transportation logistics

What is transportation logistics?

• It is the process of obtaining raw materials, material handling, and

distributing products from the point of origin to the point of
consumption with the help of transportation.
• Logistics is a subset and an integral part of supply chain systems.

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Logistics goals and strategies
Some important logistics goals/objectives include:
1. Quick response to changes in the market and customer orders
2. Minimize variances in logistics service
3. Minimize inventory to reduce expense
4. Combine product movement by grouping shipments
5. Uphold high quality and engage in constant enhancement
6. Support the entire product life cycle and the reverse logistics supply
chain

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Transportation processes
• The transportation process consists of the following components

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Logistics costs
The total cost of logistics includes five major components

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Elements associated with transportation costs
• Line haul is the process in which goods are transported to their destination with any mode of
transportation.
• The pickup and delivery services can also impact the cost of transportation. The different routes
and stops need to be taken into consideration.
• Handling costs include loading, unloading, sorting, and packaging.
• The storage cost is the amount charged to store goods in transit at the point of origin, destination,
and ports of entry during the transport.
• Inventory carrying costs include the cost of warehousing unsold items, financial costs, and inventory
costs.
• Warehousing costs include costs of rent, depreciation, taxes, utilities, and salaries.
• Financial costs include opportunity costs whereas costs related to perishability, pilferage, shrinkage,
and insurance are included in inventory costs.
• Order processing costs are the expenses incurred to create and process an order. Includes the
determination of the lot quantity for an order.
• Lot quantity costs include setup costs, costs associated with wait time, scrap and operating
inefficiencies, and the opportunity cost of lost capacity.
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Factors to consider when transporting goods
• Type of goods (perishable, nonperishable, fragile, irregular size,
• dangerous)
• Availability of goods and time needed to source them
• Existing transportation infrastructures and equipment
• Access to suppliers and logistics providers
• Time needed to deliver goods to the client
• Customs requirements
• Volume of shipment
• Modes of transportation

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Transportation modes

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Practical implications
• Phantom cost is a shipping charge imposed upon a customer more
than the true shipping cost incurred by the seller.
• Absorption cost is a geographic pricing strategy in which a seller
absorbs a part of the shipping cost in delivering the goods to capture
the business.
• Single zone pricing refers to charging the same price to all customers
regardless of their geographical locations.
• Multiple zone pricing refers to charging different prices to customers
based on their geographical locations.

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Example
• Logistics Company A is located in Topeka, Kansas. This company ships custom-made ergonomic
chairs from its manufacturing plant in Topeka, KS to its customers across the United States.
Company A adopted the single zone pricing approach for its business. Company A charges a fixed
shipping cost of $49 for standard shipping per custom-made chair to any customer anywhere in
the United States. Recently, the company calculated the actual cost of shipping per chair in three
different zones for their customers. The following table shows the actual cost of shipping for zone
A, zone B, and zone C. The table also shows the price difference for different types of shipping
methods.

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Example

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Example

• If a customer from Oklahoma City, Oklahoma orders two custom-

made chairs using standard shipping from Company A,
1. What is the phantom cost for this customer (if any) or what is the
freight absorption cost for Company A (if any)?
2. What would be the phantom cost for the same order, but if the
customer is located in Columbus, Ohio? Is there any freight
absorption cost for Company A for this new scenario?
3. In which zone or zones does Company A need to absorb shipping
costs?

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Solution 1
• In the first scenario, the customer is within zone A. Thus the following
information is known
• Standard shipping charge: $49.00 per chair
• Actual cost incurred to ship to Oklahoma City: $37.25 per chair
The total shipping cost charged to the customer:
2 X $ 49= $ 98
Actual shipping cost incurred to Company A to ship the order:
2 X $ 37.25 = $ 74.50
Company A charged more than the actual cost of shipping. Hence, the
customer from Oklahoma City will see a phantom cost.
The phantom cost in this scenario is $98.00-$74.50=$23.50

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Solution 2
• The customer is from Columbus, OH, which is within zone B. Thus following
information is known
• Standard shipping charge: $49.00 per chair
• Actual cost incurred to ship to Columbus: $49.00 per chair
The total shipping cost charged to the customer:
2 X $ 49= $ 98
Actual shipping cost incurred to Company A to ship the order:
2 X $ 49= $ 98
• Company A charged the same amount as the actual cost of shipping.
• Hence, the customer from Columbus will not see a phantom cost nor will
Company A have to absorb any shipping cost.
The phantom cost or the absorption in this scenario is
$98- $98= $0
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Solution 3
• Among all three zones Company A will have to absorb a part of the
shipping cost in Zone C. In this zone, the actual cost of shipping
incurred to Company A is higher than the shipping cost charged to the
customer.

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The end

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