Transportation Cost Minimization in Location Based Approaches to Local Economic Development
The transportation Cost minimization process works on the basis of considering the relative transportation costs and benefits of inputs of raw materials and outputs of finished products FOB the market for those goods. That is, there are assembly cost and distribution costs, which have to be weighed against each other. Its main use is in the manufacturing processes, which require the transportation of large amounts of materials at some point in their journey.
The types of items, which can be factored in are:
The computer program crunches these factors together against one another and comes up with an optimal location for the plant, so that total costs of transportation are minimized for the end product. For comparative purposes, the various factors are reduced to a common "ideal weight": the amount of material needed to make one unit, conveyed over one mile of transportation.
- how many locations are the raw materials coming from, and where are they?
- is there more than one destination market, and if so, where are they located?
- are the costs of production uniform over space (i.e. distance from source and market)?
- are sales volumes affected by location of the plant relative to the market?
- Are the products "transportation oriented" (i.e. they have high shipping costs of either materials or products relative to their selling price)?
- Will a mid-point location require unnecessary loading and unloading (i.e. is there or is there not a natural barrier requiring trans-shipping somewhere midway between raw materials and market which might provide an alternative location)?
- are there any long-haul rates, which could be factored in?
- Do the raw Materials gain weight in combination or lose weight in combination during manufacture?
- Is there a "dominant weight input factor?
- Are the transportation links flexible or rigid ( down a river or on rails are more rigid than across a lake or over a road network)?
- are there any other qualitative factors, which need to be factored in (hazardous materials, fragile or explosive material, etc.)?
A graphical representation of the math modeling that lies behind these computer programs can be seen in a Java script site detailing such robust indicators of location" . Three programs which do this sort of work are BOSS for warehousing location problems, winUPLAN-G for gas procurement, and a program for facilitating supply chain transorganiaational development networking.
There is a variation of this model, which is used for the optimal placement of retail and wholesale firms. In this case, it is the customer who needs to be transported to a location at an optimal distance relative to both the other customers, and the commodity being transported.
The problem is worked out by the computer by assuming that the store makes deliveries round trip to each customer (individually, one per trip). When customers are reduced to a common factor of "block trips", the computer generates a median location.
The Westman area is facing one of the biggest economic changes in its history at the present time arising from changes in freight rates for grain shipment. It is a classic case of transportation location theory in practice. The earlier Crow Rate for shipment of grain was phased out and farmers now have to pay the full cost of shipment from deep in the interior of Canada to one of the three coastal ports.Unlike the United States, Canada does not have a River like the Mississippi running up the center of it to allow for cheaper shipment of grain over water from the interior. The American farmers have this "cheapest of all methods of transportation" not only close at hand, but dredged and maintained at no extra cost to them by the millitary, an unofficial transportation subsidy. Some people feel that the Canadian Government should subsidize the railways for all transportation purposes, not just agricultural, as the railway is our equivalant of the "Mississippi River".
With this change in freight costs, farmers have moved rapidly to add value to the grain by converting it to livestock feed and shipping the higher valued meat rather than the lower valued, high bulk grain.
This is a clear example of how a change in the transportation costs of a raw material necessitates a recalculation of the transportation formula, and a re-consideration of whether to "add value" to the raw material before shipping. The economic wisdom of adding value (pig weight) close to the supply of the material (grain feed) is seen in that the pork is flown from Manitoba to Japan and sold at a profit; whereas, shipping the grain itself by rail and ship to Japan to feed pigs there would be much more expensive.
It might also be noted that Manitoba is the most inland of the three prairie provinces, and adjoins the rocky Laurentian Shield country which extends eastward over most of the eastern part of Canada. It is of greatest economic value for Manitobans to convert their grain into livestock feed, but such a conversion advantage drops of as one travels westward towards the West Coast ports. This was one of many factors, which led to the relocation of the Maple Leaf hog plant from northern Alberta to Southern Manitoba.
Sites Relevant to Transportation Cost Minimization
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