Strategic Decisions in the Transportation Industry

Posted in Operations & IT Articles, Total Reads: 464 , Published on 16 June 2016
Advertisements

In this current competitive scenario, strategic role in transportation play very important role for the organization to take decision, as organization neither increase the selling price nor decrease the wages of employee. Increase in selling price would swipe the organization from the market due to huge competitive market, as other competitors will take the advantage of this the increased selling price. Also, decreasing the wages of the employee will lead to dissatisfaction towards work, which may lead to attrition of an employee.

So, the best way is to decrease cost price of the product and increase the profit margin of the organization.


Image:pixabay

How company can decrease the Cost price?

Decreasing the cost price is very difficult, as there are very few opportunities are present to make the product price down. Challenges in decreasing the cost price of the Product: -

• Unavailibity of the raw material is the biggest challenges in decreasing the price of the product. Sometime due to bidding system, an organization has to pay higher price for the price of the raw material. unavailibity of the raw material, also lead to shut down to the plant.

• Second challenge is unavailibity of skilled workforce. Most of the technical institutes focuses on the theoretical parts of the subjects and they lack practical knowledge. Due to which, when workforce enter into the organization, they find themselves unware of the technical knowledge and uncompetitive among other peer group.

• Third challenge is implementation of Information technology in the industry. Manual work in the manufacturing sector consume huge time and cost. Information technology could decrease the process and service time of the product. Also, technology could decrease lead time, which would give direct benefits to the organization.


Strategic transportation decision can lead to decrease the cost to the organization. Below are few Factor that could help the company to increase their profit margin: -

• First decision is based on the medium of transport the company is using for transporting the manufactured product. Company usually transport the product to particular hub, from that hub created by organization, product will be catered to different spoke. This Hub and spoke method not only maintain stoke of the goods at particular region, but it also helps the organization to cater in all the regions and focus on particular hub. Which in turn increase its market share and profitability.

• Due to different tax system in multiple states, India is called as 29 different countries (states) present in a single nation. So, organization prefer only those locations where there is an availability of raw material and tax will be comparatively less with comparer to other states. The main challenges to transport the product is whether to send from the truck, trailer and train based on the location.

 

In this section of strategic transportation decision, we will discuss about cement and steel industry. How these two sector can be profitable in these economic slowdown. So, the decision is based on two criteria,

• To supply goods directly to the customer point

• Customer pick finished goods from the plant.


In the First criteria discussed above, there is direct advantage of the freight cost to the organization over other. When the finished goods are supplied to the customer/retailer directly from the plant to the customer. Customer doesn’t have power to negotiate over the freight rate and they earn profit margin only over the agreed rate for the products offered by organization. In this case, customer can’t control the freight rate and so profit margin is limited. This type of strategy is adopted where market is highly competitive and product rate of other competitor in the industry is nearly same. So, Industry increase their margin only by adopting this strategy of the fright rate. Also, most of the producers specially in steel and cement sector have high negotiation with the transporter to increase overall profit for the producer. Let us understand this concept with the example. In the below example, we have assumed producer is earning same profit in both the cases. (All the prices below are assumed)

Condition

Cost of Manufacturing
(Per ton)

Freight Cost

Handing Cost

Final Cost to
producer

Cost to
Customer

Net Profit to
producer

Supply goods directly
to customer location

10000

1200(Managed
by Producer)

200(Managed
by Producer)

11400

13000

1600

Customer pick finished
goods from the plant

10000

1100(Managed
by Customer)

180(managed
by Customer)

11600

12880

1600


In the Above scenario for condition 1, Let us suppose, If the cost of manufacturing is 10000 and Producer manage to arrange the truck with the help of third party logistics. freight cost is 1200 and handling cost is 200. If the Final good is sold to customer at 13000, then producer net profit is 1600.On the other case, as discussed above, if the producer is managing to earn same profit margin on the product and customer manage to arrange their own vehicle with better negotiated rate. If producer would like to earn same profit margin as earned earlier, then in this case, customer will have direct advantage over profit margin, Here, as seen in the example if customer manage to save 100 RS on freight cost and 20 RS on handling cost. Then, cost to customer for the same product will be 120 RS cheaper as compared earlier cost. If the producer Could have managed to negotiate well with the transporter, the same profitability could be earned by producer instead of customer.

 

This article has been authored by Sharad Prakash from IIM Kashipur


Advertisements


If you are interested in writing articles for us, Submit Here