Depending on the types of goods being moved, transportation may account for 30 percent of the total purchase cost of the item, especially for low value and bulky items such as construction materials. In case the goods are high value and low weight such as electronic components, transport cost may be less than one percent of total purchase costs. It is common in many companies to find that a significant percent of their purchase expenditures are spent for transportation costs.
It is not so simple to reduce transportation cost. For example, a company situated in Penang may purchase an item from United States. Due to urgent requirement to meet a production schedule, the buyer will have to use air shipment, which is very much expensive compared with sea shipment. The reason being sea shipment will have transit time of 30 days compared with 3 days transit time of air shipment. Thus, the buyer should weigh the speed of shipment against the shipment cost in order to make the right decision. Alternatively, the buyer should decide whether to delay customer delivery or to save on transportation cost. Even for air shipment, the buyer could base on shipment size and weight to decide either to use normal airfreight forwarders or to use courier service provider such as FedEx, UPS or DHL. The advantage of courier service provider is door-to-door delivery. Thus, the total airfreight cost may vary among the different service providers.
On top of this, JIT inventory management system makes transportation decision become more challenging. With JIT, deliveries must be on time and no damage to the items is allowed because minimal inventories are kept. In this case, saving on inventory carrying cost should offset the additional transportation cost of having faster and reliable delivery. With global sourcing, there would be more and more shipments from any part of world, which make the transportation decisions become very crucial.