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Question Answer
Economics of Transportation Transportation -Pervasive element of daily life -Impacts citizens? Economic well being Safety Social interaction Quality of physical environment Quality of daily life
Demand for Transportation Regions or areas tend to specialize in certain economic activities This specialization creates physical gap between markets and areas of production for a given good This gap creates a demand for transport Fundamental economic role of transport is to bridge this supply- demand gap
Typical measurement units -Ton-miles (freight) and passenger-miles (people)
Price Elasticity of Demand Sensitivity of demand to price change Relative measure between price change and quantity change. Measured as: % change in quantity DIVIDED % change in price
-Price elastic: demand is sensitive to price
-Price inelastic: demand is insensitive to price change
If % change in quantity < % change in price, then demand is price inelastic (insensitive to price change) -Price increase leads to revenue increase -Price reduction leads to revenue reduction
If % change in quantity > % change in price, then demand is price elastic -Price increase leads to revenue reduction -Price reduction leads to revenue increase
Definition of derived demand Demand for transport service to move a product to a given location depends upon the existence of demand to consume (use) that product at that location Remember, demand is a relationship between price and quantity demanded Aggregate demand for freight transport cannot be easily affected by individual carrier actions
Derived Demand for Freight Transportation Diagram
Landed Cost is the cost of the product at the source plus the cost to transport the product to its destination.
Transport cost is a component of landed cost Landed cost includes: Cost of production Transport cost from production point to market
Demand and landed cost diagram
Extent of market area diagram
Service Components of Freight Demand Critical service characteristics and related supply chain cost impacts Transit time Volume and cost of holding inventory Potential stockout &or safety stock costs Reliability or consistency of transit time Safety stock and/or stockout costs Accessibility:impacts transport cost&time Capability: "special" service requirements Security: safety stocks&or stockout costs
Location of Economic Activity Historically, transportation influences location of cities, particularly ports For firms, transport influences the location of manufacturing plants and distribution facilities Influences very pronounced for firms producing or marketing globally Influences are dynamic As economic activity locations shift, the pattern of transport demand also shifts and vice versa
Development of the Concept Concept evolves in three phases
Concept evolves in three phases 1960s: physical distribution concept 1980s: business logistics or integrated logistics 1990s: supply chain management concept A systems approach to analysis and decision-making is common to all three phases
Physical distribution concept Focuses on physical distribution system costs and tradeoffs Objective was to find lowest total physical distribution system cost Example: transportation mode or carrier selection Involves tradeoffs between transport, inventory, materials handling, and packaging costs
Business logistics concept Adds analysis of inbound or sourcing side to the outbound physical distribution side Development facilitated by Economic deregulation of transport in U.S. Rising degree of international or global sourcing Both create additional opportunities for cost savings through integrated management and coordination Notion that logistics contributes to customer service and revenue generation begins to emerge
Supply chain management concept Key underlying principles Systems analysis and management 3 key flows: product, information, and cash Integrated management of extended enterprise Focus on ultimate consumer of end product Transport: most direct influence on product flow Product flow is two way Growing importance of reverse logistics systems
Integrated Supply Chain Diagram
Information flow Sales trigger replenishment orders flowing upstream Traditionally, replenishment orders used by upstream supply chain members to forecast downstream demand Long intervals between orders create demand uncertainty Safety stocks used to buffer against uncertainty Magnitude of uncertainty and safety stocks amplify upstream in a phenomenon known as the bullwhip effect SC compression via improved two-way information flow reduces uncertainty and cost impact of bullwhip effect Transport carriers contribute to uncertainty reduction (reliable and fast deliveries) and improved two-way info flow (advanced shipment notices, bar codes, radio frequency tags)
Financial or cash flow Payments flowing upstream for goods ordered If order and replenishment cycles shorten (orders and product flow faster) then cash flows faster Faster cash flow reduces working capital requirements for financing operations and processes and contributes to improved profitability "free" cash flow cycle High transport service levels contribute to improved customer service and faster cash flow
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