In the early 60’s there was a Chicago television program entitled, “Does Transportation Cost Too Much?”, which featured a panel discussion that included a railroad president, the VP of Quaker Oats, and the NY Herald Tribune business editor. (Source: trade magazine from 1963.)
“Transportation costs too much” was a complaint of rail shippers in the 1960’s; it was a complaint of rail shippers 100 years ago; and It is a complaint of rail shippers today.
No doubt as long as there are railroads, it will be the perennial complaint of the rail customer.
If transportation doesn’t add value, then perhaps I should stick to drinking American-grown coffee and buying Fords built at the Torrence Avenue plant in my old neighborhood. Transportation adds value indirectly, it allows a product to be sold where it is demanded, even if the demand is halfway across the country.
Nope, the product is worth no more when it’s loaded onto the transport mode than when it’s unloaded, hence no value is added.
No such thing as indirect added value.
The transportation does add value. It enables the product to maximize it’s revenue at the location it is consumed. Transportation gets it there.
Another point…look at the value added by air transportation. Next day and second day deliveries have become a huge market, based on the reduction of inventories.
I agree with Ed. If you had a widget factory in town x then without transportation town x would be saturated with cheap widgets. Transporting those widgets to town Y that doesn’t have a widget factory makes the product more valuable (added value). The question is- is the value added more then the cost of transportation.
Well, Hugh, you’re wrong. If transportation added no value then people wouldn’t pay to ship things around, now would they?
It’s called “time and place utility”. No product is worth anything unless it’s where the consumer can use it when the consumer wants/needs to use it.
Think of a banana. A banana is of absolutely no value to me or you on the banana plantation in the Honduras. We can’t eat it if it’s in the Honduras. To be of any value to us it has to be transported to a grocery store where we can get it.
It has to be moved to an accessable point. That certainly adds value to the banana. Which is why Chiquita and Dole have those banana boats. You don’t think they’d spend the money on the boats if the boats weren’t adding value, do you?
Maybe Hugh likes driving all over the country, using $3 a gallon gas, to buy thing directly from the factory. No way he ever foes to K-Mart, Wal-Mart, Sears, etc, they don’t have products that were manufactured in the store, just things that were transported there that didn’t have any value added to them.
Hugh has a rather interesting point – however, as some of the others have, I beg to differ. But on slightly different grounds.
Value has two components: what is spent to create something, e.g. the materials, labour, and overhead costs which go into a widget (or Ford!) and what the market will pay. The former is presumably a hard number (although one might note that the materials cost is not, in reality, a hard number at all, but a market price). The latter is certainly not a hard number. Transportation of the finished widget does not, it is quite true, add anything to the cost of creating the widget. However, it may make it possible to sell the widget at a higher price, or sell more (or any!) of them at any price.
It is possible to argue that the transportation cost is not value added, in the sense that it does not affect the cost of producing the product. However, since it affects the selling price – market price – whether it is value added or not is immaterial.
On the other hand, the transportation cost has to be subtracted (along with a lot of other things) from the market price to arrive at the return to the maker. Since most makers want more money than anything else, most makers are going to complain – always – about transportation costs.
Transportation absolutely does affect the cost of producing a product. Why do you think that so many steel mills were located at Pittsburgh, Birmingham, Bethlehem, etc. It was so that they could be close the the sources of the raw materials needed to produce the steel. It is far less expensive to pay for shipping for one ton of steel than it is to pay for the shipping of twenty tons of ore, five tons of flux, and 5 tons of coke. Those mills that located around the great lakes did so because of very inexpensive shipping available with the lake boats and so elected to be close to the customers.
The same is true for oil refineries. The majority of them are in Texas and Louisiana because that is where much of the crude oil is produced. One gallon of crude makes significanly less than one gallon of gasoline, diesel or any other product. It is less expensive to ship the smaller amounts of the finished product than the crude that went into them. Those refineries that are on the East and West Coasts are either near smaller fields of crude production or are located at deep sea ports to use supertankers which deliver very inexpensively.
Transportation is another consumable just like electricity, natural gas, or waste disposal that must be carefully managed to keep the costs in control. Any manufacturer that does not pay close attention to thier transportation costs will be out of business very quickly.
Transportation, like warehousing, may be a necessary evil, but it does nothing to make a 2 dollar widget worth any more than 2 dollars, although the price may have to go up to 3 dollars to cover the cost of shipping it’s still the same 2 dollar widget. So there is no value added.
Back to the original topic-Does transportation cost too much?:
To a shipper, yes. But then, to every businessman, his raw materials, labor,utilities and overhead all cost too much. The only thing that is too low is his competitors selling prices. An old hand salesman taught me a long time ago not to take it personally when a customer tried to beat down a price by complaining that it was “too high”. It’s simply part of the customer’s job, to get as much as he can for as little as he can get by paying for it. We all do it. In a consumer economy, we’re all hard-wired to think like that.
Does transportation cost too much? Compared to what?
I have always held that utility companies do not charge too much for electricity. That view has always raised a few eyebrows, but my reasoning goes as follows:
I cannot produce electricity cheaper than the utility.
I cannot distribute my electriciy as efficienty as the utility.
I cannot do it safer than the utility.
Hence, I pay my monthly bill and dont complain.
Ditto for transportation. I am choosing this summer to drive 1000 miles, actually 995 miles door to door to North Carolina so I can spend a week listening to the waves break at night and enjoy the surroundings. I could take public transportation and then rent a vehicle…for me the choice is simple, the driving is cheaper and more convenient.
However, going to Arizona for a week in the spring is a no brainer. Fly. The 1800 mile drive (one way) wouldnt be worth it.
So, I guess we all make choices about how we spend our resources.
Does transportation cost too much? If you have to ask the question, then yes, it probably does.
The relevent issue is the comparative costs of transportation, competitive vs noncompetitive. This is the issue that raises the hackles of rail shippers. Captive Shipper A sees Noncaptive Shipper B getting a lower rate, even though Shipper A is closer to market. Like most folks, there is an inherent belief that transportation costs more the longer the distance traveled, and this is based on the logical observation that longer distances require more fuel, time, ect. So why does the longer higher cost corridor result in lower rates than the shorter lower cost corridor?
The only conclusion one could draw from this is that the lack of intramodal competition results in higher rates. That’s where the complaints focus, not on a general gripe about transportation.
BTW, when was the last time anyone heard of a non-captive shipper complaining about rail rates?[;)]
I must diagree. A products only value is what it can be sold for. Sitting at the plant or in its warehouse it has no value at all. It only has value when it can be delivered to a paying customer. The operative word is delivered. Transportation only cost “too much” when it drives the price above what people are willing to pay. Sitting at the plant no product has any value . Without some one who is willing to buy it and ship it then it is just excess inventory. Other companies sell their products FOB (freight on board). This is the price to pick it up at their dock. The cost of shipping is on top of the cost of the product however you want it shipped. They will arrange shipping for an additional fee. [2c] As always ENJOY.
Futuremodal,
The first post in this thread states that the high cost of rail transportation was the subject of a debate that took place in the year 1963.
Regulation was the order of the day in 1963.
Think that over before you type up another programmed response.