A large manufacturer uses two factors to decide whether to use truck or rail for

Question

A large manufacturer uses two factors to decide whether to use truck or rail for movement of its products to market: cost and total travel time. The manufacturer uses a utility formula that rates each mode. The formula is U = 5C + 10T, where "C" is cost ($/ton) and "T" is time (hours). For a given shipment of goods, a trucking firm can deliver in 16 hours and charges $25/ton, whereas a railroad charges $17/ton and can deliver in 25 hours.

b) What other factors should the shipper take into account in making this decision?

Explanation / Answer

(a) The formula is U = 5C+10T, where C is the cost and T is time (hours).

Now calculate the value of U by putting the values of C and T,

For truck U = 5(25)+10(16) = 125+160 = 285

For rail U = 5(17)+10(25) = 85+250 = 335

Then shipper should select truck mode.

(b) Other factors, the should take into account in making a decision :

Total landed cost:

Nature of the product:(i) Perishability:

Products which are perishable in nature are distributed by employing a shorter channel of distribution so that goods could be delivered to the consumers without delay. Delay in distribution of these products will deteriorate their quality.

(ii) Size and weight of product:

Bulky and heavy products like coal and food grains etc. are directly distributed to the users involve heavy transportation costs. In order to minimise these costs a short and direct distribution channel is suitable.

(iii) Unit value of a product:

Products with lesser unit value and high turnover are distributed by employing longer channels of distribution. Household products like utensils, cloth, cosmetics etc. take longer time in reaching the consumers.. On the other hand, products like jewellery having high product value are directly sold to the consumers by the jewellers.

3. Government regulations and policies:

Government policies and regulations also influence the choice of distribution channels. The Government may impose certain restrictions on the wholesale trade of a particular product arid takeover the distribution of certain products. All these restrictions have a direct impact in selecting the channel of distribution.

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