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CHAPTER 7

TRANSPORT DECISIONS

LOGISTICS III
CHAPTER 7
Transport Decisions

Department of Transport and Supply Chain Management


OVERVIEW

• Transport Mode Selection


• Principles Of Routing And Scheduling
• Routing And Scheduling Decisions
• Vehicle Operating Costs
• Charge-out Rates

LOGISTICS 3 CHAPTER 6 2
TRANSPORT SELECTION
TRANSPORT MODE SELECTION: BALLOU P 222, TABLE 7-2

An appliance manufacturer located in Pittsburgh purchases 3000 cases of plastic parts valued
at R100 per case from two suppliers. Purchases are currently divided equally between the
suppliers. A carrier earns 20% of case value shipped. Each supplier uses rail transport and
achieves the same average delivery time. However, for each day that a supplier can reduce the
average delivery time, the appliance manufacturer will shift 5 % of its total purchases, to the
supplier offering the fastest delivery service. One of the suppliers would like to consider whether
it would be beneficial to switch from rail to air or road modes. The following transportation rates
per case and average delivery times are known for each mode. Advise the supplier on the most
viable mode of transport.
TRANSPORT TRANSPORT DELIVERY
MODE RATE TIME

Rail (current mode of transport) R 3 per case 6 days

Road R 5 per case 3 days

Air R 8 per case 1 day

LOGISTICS 3 CHAPTER 6 3
Complete the Table

TRANSPORT CASES GROSS TRANSPORT NET


MODE SOLD PROFIT COST PROFIT

Rail

Road

Air

LOGISTICS 3 CHAPTER 6 4
Answer

MODE CASES GROSS TRANSPORT NET


SOLD PROFIT COST PROFIT

Rail 3000 / 2 Profit = 20% of 1500 x R3 per Revenue – Cost =


= 1500 R100 p case case Profit
1500 x (R100 x = R 4 500 R 30 000- R 4 500
20%) = R 25 500
= R 30 000
Road 1500 + (150 x 3) 1950 x(R100 x 1950 x R5 per R 39 000 - R 9 750
= 1500 + 450 20%) case = R 29 250
= 1950 = R 39 000 = R 9 750
Air 1500 + (150 x 5) 2250 x (R100 x 2250 x R8 per R 45 000- R 18 000
= 1500 + 750 20%) case = R 27 000
= 2250 = R 45 000 = R 18 000

THE MOST PROFITABLE OPTION IS ROAD TRANSPORT


LOGISTICS 3 CHAPTER 6 5
PRINCIPLES OF ROUTING AND
SCHEDULING.

The objective of routing and scheduling is to minimise distance and time


travelled by vehicles. This objective is possible through the application
of the following principles:
1. Vehicle routes should be formed around clusters of stops (delivery
points) that are nearest to each other.
2. Shipments on different days should be arranged to produce tight
delivery clusters.
3. Build routes beginning with the furthest delivery from the depot and
then work back toward the depot.
4. The sequence of stops on a truck route should form a teardrop
pattern.
5. Use the largest load capacity vehicles first if the maximum load
capacity (FTL) can be realised.
LOGISTICS 3 CHAPTER 6 6
6 Pickups should be integrated into the delivery route rather
than done at the end of routes.

7 A delivery location that is far removed from a route cluster is


a candidate for an alternative means of shipment.

8 Negotiate delivery times with customers to coincide with the


planned routing and scheduling operation.

LOGISTICS 3 CHAPTER 6 7
ROUTING AND SCHEDULING DECISIONS
Plot the delivery route on the geographical map below for a vehicle
that departs (and returns to) Cape Town, with delivery points at
Pretoria, Kimberley, East London, and Durban. Vehicle speed is
80 km/hr

LOGISTICS 3 CHAPTER 6 8
LOGISTICS 3 CHAPTER 6 9
Distance Table

LOGISTICS 3 CHAPTER 6 10
Route Table

FROM TO DISTANCE HOURS

CAPE TOWN KIMBERLEY 962


12
KIMBERLEY PRETORIA 530
7
PRETORIA DURBAN 636
8
DURBAN EAST LONDON 674
8
EAST LONDON CAPE TOWN
1099 14

TOTAL
3 901 49
LOGISTICS 3 CHAPTER 6 11
Continued

• (c) The maximum allowable continuous driving time is 5 hours


before a resting period of 0.5 hours must be taken. Determine the
total time required for the trip.
• 49/5 = 9.8 = 10 stops; 10 x 0.5 hrs = 5 hours resting time; 49 +
5 = 54 hrs total
• (d) The average fuel consumption of the vehicle is 12 km/L.
Determine the fuel required for the journey.
• 3 901 / 12 = 325 L
• (e) If the price of fuel is R10.60 per litre, determine the cost of fuel
for the journey.
• 325 L x R10.60 = R 3 445

LOGISTICS 3 CHAPTER 6 12
Vehicle Operating Costs

Operating costs is the term used to express the total expenses incurred to operate a
revenue earning vehicle.

This means that the total operational cost of a vehicle must include at least the
following cost factors of that vehicle:

Fixed costs
Variable costs
A portion of the total overhead costs which is allocated to this vehicle.

Operational or running costs of a vehicle (or anything else), is the sum of the above
cost elements, usually expressed over a period of time. A manager may consider
the replacement of an asset when the operational or running costs of an asset
becomes too expensive relative to the revenue generating capacity of the asset.

LOGISTICS 3 CHAPTER 6 13
EXAMPLE
The cost data for a vehicle is given, while other costs
must be calculated in the table below.

Costs to be calculated are:


Total fixed costs; Fuel costs; Tyre costs; Total variable costs; Total
operating costs.
FIXED OVERHEAD VARIABLE TOTAL
COSTS OPERATING
COSTS COSTS COSTS
Licenses R 1 500
Allocated per

Insurance R 20 000 Fuel


vehicle

Wages/Salaries R 58 000 Tyres


Interest R 33 000 Maintenance R 25 000
Depreciation R 40 000 Lubricants R 70 000
Totals R 15 000
Distance 180 000 km
Fuel consumption 14 L/100km Work weeks 45 Payload (Ton) 10
Fuel price R 14.00 per L Days/week 5 Deliveries/day 3
Tyre cost R 0.20 per km Hours/day 8

LOGISTICS 3 CHAPTER 6 14
Complete the template
TOTAL ANNUAL OPERATIONAL COST OF VEHICLE TOTAL
FIXED OVERHEAD VARIABLE OPERATIONAL
COSTS COSTS COSTS COST
Licenses R 1 500

e
ic l
Insurance R 20 000 Fuel R 352 800

eh
Wages/Salaries R 58 000 Tyres R 36 000

rv
pe
Interest R 33 000 Maintenance R 25 000

d
ate
Depreciation R 40 000 Lubricants R 70 000

loc
Totals R 152 500 R 15 000 R 483 800 R 651 300

Al
Distance 180 000 km
Fuel consumption 14 L/100km Work weeks 45 Payload (Ton) 10
Fuel price R 14.00 per L Days/week 5 Deliveries/day 3
Tyre cost R 0.20 per km Hours/day 8
Fuel: From the table, the fuel consumption was 14 Litre per 100 km for a distance of 180 000 km and the
cost of fuel was R 14.00.
There are 180 000 km = 1 800 sections of 100 km each using 14 L
100 km of fuel.
1 800 sections x 14 L = 25 200 L of fuel
25 200 x R 14.00 per litre = R 352 800
Tyres: From the table, the cost of tyre wear was R 0.20 per km over a distance of 180 000 km.
The cost of tyres over this distance can now be recorded in the table as 180 000 km x R0.20
= R 36 000.
LOGISTICS 3 CHAPTER 6 15
While it is handy to know what the operational cost of a vehicle is over a
period of a year, for costing and pricing exercises, it is necessary to break
down these figures to a practical unit of measurement such as cost per
kilometre or cost per ton. The following template will assist in achieving
this.

COST CALCULATION ANSWER

OPERATING COST PER ANNUM

OPERATING COST PER WEEK

OPERATING COST PER DAY

OPERATING COST PER HOUR

FIXED+ OVERHEAD COST PER DAY

FIXED+ OVERHEAD COST PER HOUR

VARIABLE COST PER DAY

VARIABLE COST PER HOUR

TOTAL OPERATING COST PER KM

TOTAL OPERATING COST PER TON

LOGISTICS 3 CHAPTER 6 16
COST CALCULATION ANSWER
R 152 500
OPERATING COST PER ANNUM R 15 000 R 651 300
R 483 800
R 651 300
OPERATING COST PER WEEK 45 R 14 473.33

R 14 473
OPERATING COST PER DAY 5 R 2 894.67

R 2 894.67
OPERATING COST PER HOUR 8 R 361.83

R 167 500
FIXED+ OVERHEAD COST PER DAY 225 R 744.44

R 744.44
FIXED+ OVERHEAD COST PER HOUR 8 R 93.06

R 483 800
VARIABLE COST PER DAY 225 R 2 150.22

R 2 150.22
VARIABLE COST PER HOUR 8 R 268.78

R 651 300
TOTAL OPERATING COST PER KM 180 000 R 3.62

R 651 300
TOTAL OPERATING COST PER TON 6 750 R 96.49
LOGISTICS 3 CHAPTER 6 17
CHARGE-OUT RATES

• In order to determine transport charge-out rates (prices) and


compile quotations for customers, the Transport Manager will
assume that the short-term overhead cost is fixed and that the
vehicle running cost is variable. From this basis, a fairly accurate
foundation can be established for determining a profitable fee for
transport services.

• The process of cost recovery and making a profit is explained in


the following example. This is a process of detailing budgeted
overhead costs for a specific period and then calculating the cost
of capital employed, as well as the inclusion of the desired return
on capital.
• Totals are then divided by projected working hours in order to
determine a charge-out rate per hour.

LOGISTICS 3 CHAPTER 6 18
PROJECTED OVERHEAD AND CAPITAL EXPENDITURE
Capital employed (book value):
Vehicles R750 000
Trailers R100 000
Loading/off-loading equipment R 70 000
TOTAL R920 000

Operating hours per year: 15 000 hours


Kilometres travelled per year 80 000 km

EXPENDITURE

Salaries R65 000


Wages R30 000
Bonus R13 000
Stationery R 5 000
Inventory R20 000
Administrative expenditure R10 000
Vehicles R25 000
Rentals R10 000
TOTAL: R178 000

LOGISTICS 3 CHAPTER 6 19
Example:

CAPITAL COSTS:

Cost of capital @ 14 % p.a. R128 800


(R920 000 x 14 %)

Return on owner's equity @ 15% per annum R138 000


(What return do you require on your capital
investment of R920 000) _________
TOTAL: R266 000

LOGISTICS 3 CHAPTER 6 20
TOTAL COST OF SALES

Expenditure R178 000


Capital cost R266 000
TOTAL R444 000

CHARGE-OUT RATE

Expenditure: R444 000


Projected working hours 15 000 hours

CHARGE-OUT RATEPER HOUR R444 000


15 000 hrs

= R29.60 per hour

CHARGE-OUT RATEPER KILOMETRE R444 000


80 000 km

= R5.55 per km

LOGISTICS 3 CHAPTER 6 21