DSM2306 Integrated Transport and Distribution Management in Shipping

1. DSM2306 Integrated Transport and Distribution Management in Shipping

2. 4. Transportation and distribution in maritime industry 4.1 Introduction to Total Distribution Costs (TDC): transportation modes, Administration, warehouse, transport decision.

3. Components of Logistics Management

4. 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

5. 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

6. 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)

7. 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.

8. 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.

9. 2. The components of logistical systems 2.1 Inter-organisational distribution channels

10. 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

11. Cost Trade-offs Required In Marketing and Logistics

12. 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

13. 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

14. 4. Transportation and distribution in maritime industry 4.2 Maritime and total transportation: the legislative background

15. Development of Modern English Maritime Law • the Black Book of the Admiralty (14th century) • the Rhodian Sea Law • the Rolls of Oleron

16. Modern English Maritime Law constitutes two branches • the Common or Consuetudinary law • the lexmercotoria or the law merchant • the lexmaritima or the law maritime. • the Statutory Maritime Law

17. 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.

18. 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.

19. 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/unclos/UNCLOS-TOC.htm

20. 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.

21. 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

22. 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.

23. Types of Costs • Fixed Cost • Variable Cost • Total Average Cost • Marginal Cost • Video

24. 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.

25. 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.

26. 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.

27. 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.

28. 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

29. Types pf Pricing Principles • Full-Cost Pricing • Marginal cost pricing • Average Cost Pricing

30. 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.

31. 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.

32. 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!

33. 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.

34. 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.

35. 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. • Bennathanand 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.

36. 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.

37. 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)

38. 4. Transportation and distribution in maritime industry 4.4 Sea and land transport policy: transport policy white paper

39. 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.

40. 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.

41. 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. • For intercity travel: 50% of all medium-distance passenger and freight transport should shift off the roads and onto rail and waterborne transport. • 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. • 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.

42. 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.

43. 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.

44. 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.

45. 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.

46. 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).

47. 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.

48. Transport White Paper 2011: Towards ACompetitive and Resource Efficient Transport System (con’t) • More information: http://ec.europa.eu/transport/themes/strategies/2011_white_paper_en.htm • Video

49. 4. Transportation and distribution in maritime industry 4.5 Sea transport: Movement costs, containerisation, cargo handling, port Expenses, freight

50. 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%.