Logistics, Transportation, and Distribution
This domain tests modal selection, Incoterms 2020, landed cost build-up and distribution network design trade-offs.
Modal choice
Road offers door-to-door speed and flexibility at high unit cost; rail is cheap for heavy, long-haul bulk but slow and terminal-bound; water is cheapest per ton-mile for international bulk with long transit; air is fastest and most expensive, justified by high value density or urgency; pipeline suits liquids and gases. Intermodal combines modes under one contract. Less-than-truckload costs more per unit than truckload but avoids paying for unused capacity; parcel rates depend on billed weight, which is the greater of actual and dimensional weight. Consolidation, milk runs and cross-docking raise vehicle fill without adding inventory.
Incoterms 2020
Rules define cost, risk and obligation, not payment terms or title. EXW minimises seller duty; FCA is preferred to EXW for containerised export because the seller can clear export and hand over to the carrier; FOB, CFR and CIF are sea and inland waterway only; CPT and CIP suit any mode, with CIP now requiring all-risks insurance; DAP means delivered with duty unpaid; DPU replaces DAT and requires unloading by the seller; DDP places duty and import clearance on the seller. The critical split: the place where risk transfers is not always where cost transfers.
Network design
More distribution centres shorten delivery and cut outbound transport distance, but raise inbound transport, warehouse cost and total inventory. The total logistics cost curve has a minimum. Centre-of-gravity analysis locates a single facility by weighting coordinates by volume or tonnage.
Worked example: landed cost
EXW value $40,000, inland haulage $800, export clearance $300, ocean freight $3,500, insurance $250, port and terminal $450, final delivery $600, duty 6% assessed on the CIF value.
- CIF value = 40,000 + 800 + 300 + 3,500 + 250 = $44,850.
- Duty = 6% x 44,850 = $2,691.
- Landed cost = 44,850 + 2,691 + 450 + 600 = $48,591, or 21.5% above EXW value. Note that duty is charged on freight too, so a freight saving of $1,000 also saves about $60 of duty.
Traps that cost marks
Treating CIF as risk transfer at destination. Confusing DAP with DDP. Using FOB for air or rail shipments. Optimising freight rate while ignoring duty, inventory and service. Assuming Incoterms set payment terms. Using actual weight for parcel when dimensional weight applies.