How the transportation costs of the materials are measured?
‘Factories which utilize and transform materials from a variety of sources to create products for one or more markets incur transportation costs.’
Transportation costs are made up of procurement costs (‘the cost of transporting materials from sources of supply to the factory’) and distribution costs (‘the cost of transporting the manufactured product to the market’). They can depend heavily on the distance the good is traveling and the physical features of the good for example, weight, volume and lifetime. Other factors can include the value of the goods – higher value goods are more expensive to transport due to there typically being lower demand for them meaningless is transported. Lower quality goods can benefit from economies of scale as general levels of production are higher, and they can also be transported in universal carriers that would allow for the exploitation of economies of scale. The niche, higher value goods also are more likely to need specific transportation instructions which could increase the prices massively. The mode of transportation would also heavily affect this, for example transporting goods by air is more expensive than the road as there are higher costs involved in fuel and labor.
However, transportation costs usually refer to the total costs of transportation which will normally increase with distance, volume and weight. A better measure of transportation costs is with relation to freight costs – the average cost per good being transported. This will nearly always decrease with distance and volume due to economies of scale. This might suggest that the further away the manufacturing plant is to your business, the lower freight costs you will incur. However, being far away is not always the best option. While it may lower your average costs, it will increase your totals costs and also may cause problems with delivery times, especially when operating a just in time (JIT) delivery system like Toyota’s Kanban system which is the most effective way of ordering products to minimize waste. This may be due to traffic problems or other external factors which interrupt your products getting to you in the time frame needed. Also, longer distances can lead to less effective communications between you and your supplier – this could affect your business heavily.