Transcript Chapter 4 - WordPress.com

DSM2306
Integrated Transport and Distribution
Management in Shipping
12 Jan 2015
Voon N. L.
4. Transportation and distribution in maritime industry
4.1 Introduction to Total Distribution Costs (TDC): transportation
modes, Administration, warehouse, transport decision.
Components of Logistics Management
Type of Costs
• Transportation costs
• Inventory carrying costs
• Warehousing costs
• Lot quantity costs
• Order processing and information costs (e.g. Ordering / Receiving costs)
• Quality costs (scraps, etc.)
• Returned goods costs
• Advertising and promotion costs
• Other costs
Components of Inventory Carrying Costs
• Capital Costs
• interest bearing debt from banks, and opportunity costs of capital
• Inventory service costs
• insurance, taxes
• Storage space costs
• plant warehouses, public warehouses, rental warehouses, company-owned
warehouses
• Inventory risk costs
• obsolescence, damage, shrinkage, relocation costs
Nature of Costs
• Fixed Cost
• Fixed cost can be defined as the part of the total logistics cost which will not
fluctuate depending on kilometres travelled or payload carried.
• Fixed cost consists mainly of capital cost, admin overheads, insurance,
depreciation, license fees and driver wages.
• Variable Cost
• Variable cost can be defined as the part of the total cost which will fluctuate
depending on kilometres travelled or payload carried.
• Variable cost consists mainly of fuel, tyres, lubricants, maintenance, washing
of tankers (chemical and fuel transport), toll fees and cross border permits
(freight carried outside South Africa’s borders to near Africa countries)
Total Cost Analysis
• To minimize the total costs of logistics, including transportation,
warehousing, inventory, order processing and information systems,
purchasing and production-related lot quantity costs – while
achieving a given customer service level.
Total Cost Analysis
• To minimize the total costs of logistics, including transportation,
warehousing, inventory, order processing and information systems,
purchasing and production-related lot quantity costs – while
achieving a given customer service level.
2. The components of logistical systems
2.1 Inter-organisational distribution channels
The Effect of Trade-Off Within Distribution Function
(Total Cost Analysis)
• Integrative Approach : At a given level of customer service, total
logistics costs, rather than costs of individual activities, is minimized.
• Reduction in one cost invariably result in increases in one or more of
the others.
• Aggregating all finished goods into fewer distribution centers may minimize
warehousing costs and increase inventory turnover, but it will lead to
increased transportation expense
• Savings resulting from favourable purchase prices on large orders may be
entirely offset by greater inventory carrying costs
Cost Trade-offs Required In Marketing and Logistics
Cost Trade-offs Required In Marketing and Logistics (con’t)
• Marketing Objective: Allocate resources to the marketing mix in such
a manner as to maximize the long-term profitability of the firm.
• Logistics Objective: Minimize total costs given the customer service
objective where Total Costs = Transportation Costs + Warehousing
Costs + Order Processing and Information Costs + Lot Quantity Costs +
Inventory Carrying Cots
Factors To Consider:
• New market
• Choice of Modes of transportation
• Inventories level
• Deliveries frequency
• Distribution Center Configuration
• Echelon of inventories
• Packaging
• Order Processing System automation
4. Transportation and distribution in maritime industry
4.2 Maritime and total transportation: the legislative background
Development of Modern English Maritime Law
• the Black Book of the Admiralty (14th century)
• the Rhodian Sea Law
• the Rolls of Oleron
Modern English Maritime Law constitutes two branches
• the Common or Consuetudinary law
• the lex mercotoria or the law merchant
• the lex maritima or the law maritime.
• the Statutory Maritime Law
Nature of Maritime Administration
• Shipping and maritime activities in general are international
issues
• Government of the flag state should pass a comprehensive
legislation for the control and regulation of shipping with respect
to the registration of ships, the employment and certification of
seafarers and the safety of shipping.
• Legislation should provide for the establishment of a competent
Maritime Administration and prescribing its objects and
functions.
International Conventions
• The International Convention for the safety of Life at Sea (SOLAS)
1974.
• The International Convention for the Prevention of Pollution
from Ships 1973, as modified by the Protocol of 1978 relating
thereto (MARPOL 73, 78).
• The International Convention on Load Lines (LL) 1966.
• The International Convention on Standards of Training,
Certification and Watchkeeping for Seafarers (STCW) 1978.
The United Nations Convention on the Law of the Sea
(UNCLOS)
• UNCLOS 1982
• also called the Law of the Sea Convention or the Law of the Sea
treaty
• the international agreement that resulted from the third United
Nations Conference on the Law of the Sea (UNCLOS III), which
took place between 1973 and 1982.
• More information:
http://www.un.org/depts/los/convention_agreements/texts/uncl
os/UNCLOS-TOC.htm
4. Transportation and distribution in maritime industry
4.3 Shipping marginal social cost pricing concept: arbitrary pricing,
average cost Pricing, infrastructure costs, land and sea costs.
Types of Costs (con’t)
• Fixed Cost
• Infrastructure cost
• Land cost
• Variable Cost
• Land service cost (e.g. cranes service)
• Sea service cost (e.g. pilotage)
• Port expenses
• Total Average Cost = Fixed Cost + Variable Cost
Marginal Cost
• Marginal cost is the change in the total cost that arises when the quantity
produced has an increment by unit. That is, it is the cost of producing one
more unit of a good.
• In general terms, marginal cost at each level of production includes any
additional costs required to produce the next unit.
• For example, if producing additional vehicles requires building a new factory,
the marginal cost of the extra vehicles includes the cost of the new factory.
• At each level of production and time period being considered, marginal costs
include all costs that vary with the level of production, whereas other costs
that do not vary with production are considered fixed.
• Economies of scale are said to exist if an additional unit of output can be
produced for less than the average of all previous units— that is, if long-run
marginal cost is below long-run average cost, so the latter is falling.
Types of Costs
• Fixed Cost
• Variable Cost
• Total Average Cost
• Marginal Cost
• Video
Other Types of Costs – Private Costs
• Private costs for a producer of a good, service, or activity include the
costs the firm pays to purchase capital equipment, hire labor, and buy
materials or other inputs.
• Environmental Economics looks from the consumers’ perspective. For
example, the private costs a consumer faces when driving a car include
the fuel and oil, maintenance, depreciation, and even the drive time
experienced by the operator of the car.
• Private costs are paid by the firm or consumer and must be included in
production and consumption decisions.
• In a competitive market, considering only the private costs will lead to a
socially efficient rate of output only if there are no external costs.
Other Types of Costs – External Costs
• External costs, on the other hand, are not reflected on firms’ income
statements or in consumers’ decisions, but remain costs to society,
regardless of who pays for them.
• Consider a firm that attempts to save money by not installing water
pollution control equipment. Because of the firm’s actions, cities
located down river will have to pay to clean the water before it is fit for
drinking, the public may find that recreational use of the river is
restricted, and the fishing industry may be harmed.
• These external costs must be added to private costs to determine social
costs and to ensure that a socially efficient rate of output is generated.
• In transport infrastructure, external costs are those imposed by the
users of the infrastructure on the others. These costs may take the form
of congestion, accidents and environmental costs.
Other Types of Costs – Social Costs
• Social costs include both the private costs and any other external costs
to society arising from the production or consumption of a good or
service.
• The social costs include all these private costs (fuel, oil, maintenance,
insurance, depreciation, and operator’s driving time) and also the cost
experienced by people other than the operator who are exposed to the
congestion and air pollution resulting from the use of the car.
• The key point is that even if a firm or individual avoids paying for the
external costs arising from their actions, the costs to society as a whole
(congestion, pollution, environmental clean up, visual degradation,
wildlife impacts, etc.) remain. Those external costs must be included in
the social costs to ensure that society operates at a socially efficient
rate of output.
Other Types of Costs
• Private Costs + External Costs = Social Costs
• If external costs > 0, then private costs < social costs.
• Then society tends to:
• Price the good or service too low
• Produces or consumes too much of the good or service.
4. Transportation and distribution in maritime industry
In the graphic illustration, the intersection of the demand curve and marginal cost
curve represents the socially efficient rate of output in a competitive market
4. Transportation and distribution in maritime industry
4.4 Sea and land transport policy: transport policy white paper
Types pf Pricing Principles
• Full-Cost Pricing
• Marginal cost pricing
• Average Cost Pricing
Full-Cost Pricing
• Full-cost or fully distributed cost pricing includes a share of all business costs
in the final price.
• If a small business owner makes three types of scented candle, the most basic
way to calculate a reasonable price for the candles is to calculate how much
each candle costs to produce and then add a certain percentage as profit or
do without a profit temporarily to break into the market.
• If the business owner stopped making one of her three scented candle
varieties but kept making the other two, the rent on the table would remain
the same.
• If she added four additional types of candles, the rent on the table would
remain the same.
• Because the decision to make one particular type of candle has no effect on
the cost of the table, can cause it to be priced incorrectly for the market.
Marginal cost pricing
• Marginal-cost pricing strategies aim recover not only the cost of making the
product, but enough extra to make one more of the same product.
• In a marginal-cost pricing system, the cost of the product does not include
fixed costs that are not specific to that product.
• The cost of the table rent is not considered part of the cost of the candle.
• Instead, the owner calculates the costs for producing that particular candle
and then adds a margin equal to the cost of making one more candle.
• The margin can be used to help the business owner pay for the table rent if
she chooses, but doesn't put an equal share of the rental cost on a candle that
may prove less profitable.
• Particularly relevant in transport where fixed costs may be relatively high.
Marginal cost pricing (con’t)
Example
• Aircraft flying from Bristol to Edinburgh – Total cost (including
normal profit) = £15,000 of which £13,000 is fixed cost
• Number of seats = 160, average price = (£15,000/160) = £93.75
• MC of each passenger = £2000/160 = £12.50
• If flight not full, better to offer passengers chance of flying at
£12.50 and fill the seat than not fill it at all!
Marginal Cost Pricing In Ports
• Marginal Cost Pricing (MCP) is efficient and fair from an economic
view and the methods of costs recovery.
• Most ports are public goods, like road infrastructure, and that
users should pay for the marginal social cost (MSC).
• The efficiency of maritime transportation is heavily dependent on
the smooth operation of land transportation.
• The ease of cargo handling and swift modal transfers are keys to
successful intermodal operations.
Marginal Cost Pricing In Ports (con’t)
• Port congestion poses a serious problem for handling firms and
can be sometimes too expensive for them.
• This cost can come back in terms of more elevated rates of freight,
a congestion of the traffic associated with the handling operations,
a decrease in the level of security and a loss in terms of
competitiveness in the whole region.
• Port authorities can prevent such problems by changing prices to
adapt the supply to the demand, so by imposing congestion
charges.
Marginal Cost Pricing In Ports (con’t)
• Externality is congestion. The capacity is rarely optimal and the port
must always face quay and hangar congestion. If port capacity is not
optimal, port authorities may levy a congestion charge to eliminate the
excess of demand.
• Bennathan and Walters (1979) show, supposing that port activity is
monopolized, that it is more advantageous for the port authorities to
increase the prices once the demand exceeds the supply.
• First, it constitutes an opportunity to appropriate the surplus caused by the
growth of the demand.
• Secondly, these resources can constitute a self-financing for future investments.
• Thirdly, congestion taxes encourage a more efficient use of the infrastructure.
Average Cost Pricing
• One of the ways government regulate a monopoly market.
• Monopolists tend to produce less than the optimal quantity
pushing the prices up.
• Government may use average cost pricing as a tool to regulate
prices monopolists may charge.
• Average cost pricing forces monopolists to reduce price to where
the firm's average total cost (ATC) intersects the market demand
curve.
Average Cost Pricing (con’t)
The effect on the market
would be:
• Increase production and
decrease price.
• Increase social welfare
(efficient resource
allocation).
• Generate a normal profit for
monopolist (Price = ATC)
Transport White Paper 2011: Towards A Competitive and
Resource Efficient Transport System
• The European Commission adopted a comprehensive strategy
(Transport 2050) for a competitive transport system that will
increase mobility, remove major barriers in key areas and fuel
growth and employment.
Transport White Paper 2011: Towards A Competitive and
Resource Efficient Transport System (con’t)
• By 2050, key goals will include:
• No more conventionally-fuelled cars in cities.
• 40% use of sustainable low carbon fuels in aviation; at least 40% cut in
shipping emissions.
• A 50% shift of medium distance intercity passenger and freight journeys
from road to rail and waterborne transport.
• All of which will contribute to a 60% cut in transport (carbon) emissions by
the middle of the century.
Transport White Paper 2011: towards a competitive and
resource efficient transport system
• The aim is to create a Single European Transport Area with more
competition and a fully integrated transport network which links the
different modes and allows for a profound shift in transport patterns for
passengers and freight.
• The Transport 2050 roadmap sets different goals for different types of
journey - within cities, between cities, and long distance.
1.
For intercity travel: 50% of all medium-distance passenger and freight
transport should shift off the roads and onto rail and waterborne transport.
2.
For long-distance travel and intercontinental freight, air travel and ships will
continue to dominate. New engines, fuels and traffic management systems
will increase efficiency and reduce emissions.
3.
For urban transport, a big shift to cleaner cars and cleaner fuels. 50% shift
away from conventionally fuelled cars by 2030, phasing them out in cities by
2050.
Major Challenges
• Oil will become scarcer in future decades, sourced increasingly from
unstable parts of the world. Oil prices are projected to more than
double between 2005 levels and 2050 (59 $/barrel in 2005). Current
events show the extreme volatility of oil prices.
• Transport has become more energy-efficient but still depends on oil for
96% of its energy needs.
• Congestion costs Europe about 1% of gross domestic product (GDP)
each year.
• There is the need to drastically reduce world greenhouse gas emissions,
with the goal of limiting climate change to 2ºC. Overall, by 2050, the EU
needs to reduce emissions by 80–95% below 1990 levels in order to
reach this goal.
Major Challenges
• Congestion, both on the roads and in the sky, is a major concern.
Freight transport activity is projected to increase, with respect to
2005, by around 40% in 2030 and by little over 80% by 2050.
Passenger traffic would grow slightly less than freight transport:
34% by 2030 and 51% by 2050.
• Infrastructure is unequally developed in the eastern and western
parts of the EU. In the new Member States there are currently only
around 4 800 km of motorways and no purpose-built high-speed
rail lines; the conventional railway lines are often in poor
condition.
• The EU’s transport sector faces growing competition in fast
developing world transport markets.
Key Measures – Short term
• A major overhaul of the regulatory framework for rail
• At the heart of the Transport 2050 roadmap is the need for a
transformation in the rail sector so that it becomes more attractive and
succeeds in carrying a very significantly increased share of the market for
passenger and freight over middle distances (>300 km) by 2050.
• At the same time the aim is to triple the length of the current high-speed
rail network by 2030.
• All this will require major changes to the regulatory framework for rail
including: opening the market for domestic passenger services;
introducing single management structures for rail freight corridors; a
structural separation of infrastructure managers and service providers;
improvements in the regulatory environment to make rail more attractive
for private sector investment.
Key Measures – Short term (con’t)
• A core network of strategic infrastructure is essential for the
creation of a real Single European Transport Area.
• The Commission will bring forward new proposals for a core European
"multi-modal" network in 2011 with publication of TEN-T (trans-European
transport network) guidelines, maps and financing proposals.
Key Measures – Short term (con’t)
• To create a fully functioning multi-modal transport system requires
removing bottlenecks and barriers in other parts of the network,
namely with an airport package to improve the efficiency and
capacity of airports (2011), a communication on inland waterway
transport (2011) to remove barriers and improve efficiency inland
waterways, as well as the e-maritime initiative (2011) for
paperless and intelligent shipping — as part of the drive to create
a real "Blue Belt" area, without barriers, for shipping. The
Commission will also work to remove restrictions to road cabotage
(2012/2013).
Key Measures – Short term (con’t)
• To create a fair financial environment: a new approach to
transport charges.
• Transport charges must be restructured in the direction of a wider
application of the "polluter pays" and "user pays" principle.
Transport White Paper 2011: Towards A Competitive and
Resource Efficient Transport System (con’t)
• More information:
http://ec.europa.eu/transport/themes/strategies/2011_white_pape
r_en.htm
• Video
4. Transportation and distribution in maritime industry
4.5 Sea transport: Movement costs, containerisation, cargo
handling, port Expenses, freight
Transport Costs
• Transport costs are a monetary measure of what the transport
provider must pay to produce transportation services.
• They come as fixed (infrastructure) and variable (operating) costs,
depending on a variety of conditions related to geography,
infrastructure, administrative barriers, energy, and on how
passengers and freight are carried.
• Three major components, related to transactions, shipments and
the friction of distance, impact on transport costs.
• Empirical evidence underlines that raising transport costs by 10%
reduces trade volumes by more than 20%.
Cargo Handling Costs
• Forwarding fees
• Custom documentation
• Custom examination
• Government service fees : 6%
• SMK ( EDI )
• Container Haulage / Transport : As per Haulage association
tariff or Transport charge per destination
• If fumigation needed ( all wooden material need fumigation )
• Express Release fees
• Others
Port Expenses
• Taxes, Fees & Port Expenses, may include any and all fees, charges, tolls
and taxes imposed by governmental or quasi-governmental authorities,
as well third party fees and charges arising from a vessel’s presence in a
harbor or port.
• Taxes, Fees & Port Expenses may include U.S. Customs fees, head taxes,
Panama Canal tolls, dockage fees, wharfage fees, inspection fees,
pilotage, air taxes, hotel or VAT taxes incurred as part of a land tour,
immigration and naturalization fees, and Internal Revenue Service fees,
as well as fees paid to third parties for navigation, berthing,
stevedoring, baggage handling/storage and security services.
• Taxes, Fees & Port Expenses may be assessed per passenger, per berth,
per ton or per vessel.
Containerisation Cost
• Container Service Charges
• Full container load (FCL)
• Less than container load (LCL)
• Reefer container
• Dangerous Goods
Freight
• Advance Freight
• Payable in advance, before delivery of actual goods
• Lump sum freight
• Amount payable for use of the whole or portion of a ship
• Back freight
• When goods have been desptached to a certain port, and on arrival are
refused. The freight charged for the return of the goods constitutes back
freight
• Pro-rata freight
• When cargo has been carried only part of the way and circumstance make
it impossible to continue the voyage further.
• Others