Factors that Affect Transportation Costs

Factors that Affect Transportation Costs

Introduction

Businesses have a primary objective of making a profit after delivering services and goods to their customers, and transportation is critical to determining the profits freight firms make. It may not be possible to precisely state the cost of transporting cargo from one port to another because of the many unknowns. However, the freight costs are not a complete mystery; they depend on a wide range of economic conditions. Transportation needs packing materials, drivers, warehouses or storage facilities, vehicles, and movers. According to Redding and Turner (2015), the distance of travel, amount of cargo, the speed of delivery, associated insurance costs, and the weight of materials are some of the factors which directly influence the costs incurred in transportation.

Fuel Costs

There is a direct relationship between the cost of transportation and the cost of fuel. When the prices for fuel go down, the incurred expenses in moving container ships and trucks for cargo also reduce. The effect of price fluctuation for fuel continually affects logistics industries. Since the operating costs are low, the savings are transferred to the customers indirectly. The shipping service demand increases with a sharp increase in sales and profitability. The logistics companies will divert their resources from the realized profits speedy deliveries (Santén, 2017). Businesses operating with the inventory at the wholesaler, manufacturer, and retailer levels usually bear freight charges. These charges are very central to the functioning of any business. It some cases, a merchant is left in the uncertainty of what they are to pay for a shipment until the freight carrier sends them invoices several days afterward.

When the fuel prices increase, they also increase the transportation costs, which pass on to the merchants. Carriers will have to raise their rates of incurring losses. The outward domino effect takes place where the sipper pays more for transportation. The preferred transportation means may have to shift towards fuel-efficient methods like intermodal carriers. Such options will depend on the carrier’s availability to extend the transit time for some days. Multimodal options for transforms are the most effective means when shipping for over 500 miles outside significant metropolitan areas. Road trucks are highly inefficient relative to the market conditions. The product costs at the consumers’ side will include the borne fuel cost leading to inflation (Imaz et al., 2015).

Government Regulation

The government is a fundamental operator in controlling prices in the freight industry. In the United States, the federal government oversees airports, ports, and waterways and directly influences the intermodal freight system (Choe et al., 2020). Through policies and provision of infrastructure, freight operations will take shape. The government for all countries remains to be the most prominent regulator of economic barriers like taxes and other laws. A country’s administration can set the maximum fees to charge for transportation facilities or the driving hours to be followed. In New Zealand, the Emissions Trading Scheme is reported to increase the cost of transportation by several dollars for every one thousand covered kilometers.

Geopolitical Events

The freight also charges subject to international relations and political events. Rogue governments and pirates increase the risk and cost of maritime shipping internationally. When conditions in particular routes are not favorably, the cost of insurance for the freight materials and cargo increases and transfers to the shipper. The World Bank has estimated figures that global piracy and losses due to geopolitical factors totaled $18 billion in 2015 (Baracuhy, 2016). The price for everyday freight has to increase, and the trend pushes logistical companies to look for different routes of transportations and higher or more insurance premiums.

Packaging

All materials and cargo that have to be moved from one location to another always go through a unique packaging process. There are different categories of commodities that required unique packaging depending on their bulkiness, hazard level, or security demands (Albán et al., 2015). There are chemicals which must be transported at low temperatures and in individual containers. Refrigerated carriers which bear an extra cost for the energy and care given to the products. Another factor that affects packaging and ultimate transportation costs is the mode of transport. Air and road transportation requires different packaging, which will have significant variances in the freight charges. Under packaging are labor costs for trained and experienced persons in packing, labeling, categorizing, loading, unloading, and unpacking materials. The higher the labor costs in packaging, the higher the general freight costs.

Mode of transport

Logistics companies spend lots of time making decisions on the way of transport to use for transportation. They settle on the form of transport depending on the type of cargo to be ferried, the amount of freight, security conditions, hazardous risks of the merchandise, urgency of delivery, and distance to be covered (Heydari et al., 2017). When the timelines for delivery are small, and the freight needs to be in the final destination soonest, air transport will be the most favorable. Consequently, the cost of carriage will be higher. Water transport will be most appropriate for hefty cargo, like transporting a thousand containers from one port to another.  Slower transits may eventually increase incurred costs because higher transit time arguments inventory carrying costs. Items moving over longer distances demand for extra storage planning, security, and care from physical damage and climate or weather conditions, thus leading to more costs to the shipper.

The Labor Market for Commercial Drivers

Logistical companies face challenges of filling gaps of retiring drivers and those who exit their firms. The increasing competition and wages for carrier drivers escalate transportation costs because the reliable recruiting drivers and training them for the job is always tricky. A specific driving license class takes several weeks or months to obtain. Truckload (TL) drivers for long distances usually move into the market depending on the wages and hours shaped by economics. The tight labor market is not because the freight industry fails to offer attractive compensations, but due to high turnovers (Santén, 2017).

Conclusion

Many economic and geopolitical factors influence the freight charges in the market, which in turn affect the returns a company will realize. The primary factor in setting the costs is the expenses on fuel. Oil prices change all commodities and other charges like transportation, which shippers will bear. The government contributes immensely in regulating the cost of ferrying products from one point to another through policies, orders, and taxes. The path along which materials pass may be full of challenges of freedom depending on geopolitical conditions. Routes that are risky and full of state bureaucracies make costs for transportation to go up. At the shipping side, the packaging is instrumental in determining costs since security, preservation, and distances are factors to be considered. The availability and condition of the labor market for drivers direct affect the efficiency of making deliveries. When massive numbers level logistical companies, it makes firms to lose a lot of money training new ones.

References

Albán, H. M. G., Cardona, O. C. S., Argueta, C. M., & Sarmiento, A. T. (2015). A cost-efficient method to optimize package size in emerging markets. European Journal of Operational Research, 241(3), 917-926. Retrieved from https://www.researchgate.net/publication/277361513_A_cost-efficient_method_to_optimize_package_size_in_emerging_markets

Baracuhy, B. (2016). Geopolitical Risks and the International Business Environment: Challenges for Transnational Corporations and their Global Supply-Chain. Journal of Political Risk, 4(6). Retrieved from https://www.jpolrisk.com/geopolitical-risks-and-the-international-business-environment-challenges-for-transnational-corporations-and-their-global-supply-chain/

Choe, D., Oettl, A., & Seamans, R. (2020). What’s Driving Entrepreneurship and Innovation in the Transport Sector?. The Role of Innovation and Entrepreneurship in Economic Growth. University of Chicago Press. Retrieved from https://www.hbs.edu/faculty/Publication%20Files/130424-CGK-IPE_45be2057-0f20-4dc2-98d4-e422198bd55c.pdf

Heydari, J., Govindan, K., & Jafari, A. (2017). Reverse and closed-loop supply chain coordination by considering government role. Transportation Research Part D: Transport and Environment, 52, 379-398. Retrieved from https://www.researchgate.net/publication/315907838_Reverse_and_closed_loop_supply_chain_coordination_by_considering_government_role

Imaz, A., Habib, K. M. N., Shalaby, A., & Idris, A. O. (2015). Investigating the factors affecting transit user loyalty. Public Transport, 7(1), 39-60. Retrieved from https://www.worldtransitresearch.info/research/5765/

Redding, S. J., & Turner, M. A. (2015). Transportation costs and the spatial organization of economic activity. In Handbook of regional and urban economics (Vol. 5, pp. 1339-1398). Elsevier. Retrieved from https://econpapers.repec.org/RePEc:eee:regchp:5-1339

Santén, V. (2017). Towards more efficient logistics: increasing load factor in a shipper’s road transport. The International Journal of Logistics Management. Retrieved from https://www.researchgate.net/publication/316801391_Towards_more_efficient_logistics_Increasing_load_factor_in_a_shipper’s_road_transport