a)
Economy of scale
It is common knowledge that per unit transportation cost comes down as the bulk of the items transported increases. Hence in order to gain benefits in terms of reduction in transportation costs logistician tries to consolidate the bulk and then ship the consignment rather than shipping half truck loads or half container loads. This benefit is Economy of scale. The fixed costs in transportation includes administrative costs of taking the transportation order, time to position the vehicle for loading and unloading, invoicing and equipment cost. These do not vary with the volume of shipment. The administrative cost of shipping 1 kg of goods and 1000 kg of goods is same. When scale increases, the economies in scale are achieved because fixed expenses associated with moving a load are spread out, thereby decreasing costs per unit of weight. E.g. suppose the cost to administer a shipment is $ 10.00. Then the 1-pound shipment has per a unit of weight cost of $10.00, while the 1,000 pound shipment has per a unit of weight cost of $0.01. Thus, it can be said that an economy of scale exists for the 1000-pound shipment.
b)
Economy of distance
The transportation cost per kilometer comes down as the distance moved increases. Hence transportation is planned in a single long lap rather than number of short laps to reach the destination. The fixed costs and costs like overheads of loading and unloading are spread over the distance through which the load is moved. E.g. a shipment of 1000 miles will cost less than two shipments (of the same combined weight) of 500 miles. Transportation economy of distance is also referred to as Tapering principle since rates or charges taper with distance. The rationale of distance economies is similar to that for economies of scale. Longer distances allow the fixed expenses to be spread over more miles, resulting in lower overall per mile charge. When alternate transportation strategies are evaluated to meet customer service expectation, economy of scale and economy of distance are fundamental. Participants & transportation Normal commercial transaction has limited number of parties to the business decision. They are seller, buyer and directly or indirectly government. But a transportation decision has number of parties to the decision. These parties have