Transport Fundamentals
The focus is on the facilities and services that make up the transportation system and on the rates [costs] and performance of various transport service that a manager might select. Spefcifically, we wish to examine the characteristics of the transportation service alternatives that lead to optimal performance. It is performance that the user buys from the transportation service.
Importance of an Effective Transportation System
One needs only to contrast the economies of developed nation with those of a developing one to see the part that transportation plays in creating a high level of economic activity. It is typical in the developing nation that production and consumption take place in close proximity, much of the labour force is engaged in agricultural production and a low proportion of the total population lives in urban areas.
With the advent of inexpensive and readily available transportation services, the entire structure of the economy changes towards that of developed nations. Large cities result from the migration of the population to the urban centres, geographical areas limit production to a narrow range of products and the economic standard of living for an average citizen usually rises.
More specifically, an efficient and inexpensive transportation system contributes to greater competition in the market place, greater economies of scale in production and reduced prices for goods.
Greater Competition
With a poorly developed transportation system, the extent of the market is limited to the areas immediately surrounding the point of production. Unless production costs are extremely low compared with those at a second production point, that is the production cost difference offsets the transportation costs of serving the second market, not much competition is likely to take place. However, with the improvements in the transportation system, the landed costs for products in distant markets can be competitive with other products selling in the same markets.
In addition to encouraging direct competition, inexpensive, high quality transportation also encourages an indirect form of competition by making goods available to a market that normally could not withstand the cost of transportation. Sales can actually be increased through market penetration normally unavailable to certain products. The goods from outside of a region ave a stabilizing effect on prices of all similar goods in the market place.
Application
In many markets, fresh fruits, vegetables and other perishable products can be available at only certain times of the year due to seasonal growing patterns and lack of good growing conditions. Yet, many such products are in season at any time during the year somewhere in the world. Rapid shipment at reasonable price places these perishable products in markets that would not otherwise have the products available.
For example, bananas from South America are available in New York in January, live New England lobsters are served in Kansas City restaurants throughout the year and Hawaiian orchids are plentiful in the eastern of United States in April. An efficient and effective transportation system makes this possible.
Economies of Scale
Wider markets can result in lower production costs. With the greater volume provided in these market, more intense utilization can be made of production facilities and specialization of labour usually follows. In addition, inexpensive transportation also permits decoupling of markets and production sites. This provides a degree of freedom in selecting production sites so that production can be located where there is a geographic advantage.
Observation
Auto parts manufactured in such places as Taiwan, Indonesia, South Korea and Mexico are used in assembly operations in the United States and are sold in the US market place. Low labour costs and high quality production are the attractions to manufacturer in these foreign locations. However, without inexpensive and reliable transportation, the cost of placing parts throughout the United States would be too high to compete with domestic production.
Reduced Prices
Inexpensive transportation also contributes to reduced product prices. This occurs not only because of the increased competition in the marketplace but also because transportation is a component cost along with production, selling and other distribution costs that make up the aggregate production cost. As transportation becomes more efficient, as well as offering improved performance, society benefits through a higher standard of living.
Observation
Crude oil can be obtained from domestic sources or it can also be imported. Oil reserves in the Middle East are more accessible than they are domestically and oil can be produced at a lower cost. With the use of large supertankers, oil can be transported to markets around the world and sold at lower prices than locally produced crude oil, if it is available at all.
