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The problems and potential for air freight on the west coast of British Columbia Collier, Allan Wilfred 1972

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t' THE PROBLEMS AND POTENTIAL FOR AIR FREIGHT ON THE WEST COAST OF BRITISH COLUMBIA iby ALLAN WILFRED COLLIER B.A., University of British Columbia, 1965 A; THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION Faculty of Commerce and Business Administration We accept this thesis as conforming to the. required standard THE UNIVERSITY OF BRITISH COLUMBIA May 1972 In present ing th i s thes is in p a r t i a l f u l f i l m e n t of the requirements for an advanced degree at the Un i ve r s i t y of B r i t i s h Columbia, I agree that the L ibrary sha l l make i t f r e e l y ava i l ab l e for reference and Study. I fur ther agree that permission for extens ive copying of th is thes i s for s cho l a r l y purposes may be granted by the Head of my Department or by his representat ives . It is understood that copying or pub l i c a t i on of th i s thes.is for f i n a n c i a l gain sha l l not be allowed without my wr i t ten permiss ion. Department of CcmmFftCfc Anft ftttS.AlES£ flDamKTttffftori The Un i ve r s i t y of B r i t i s h Columbia Vancouver 8, Canada ABSTRACT This paper has been undertaken for B. C. Airlines, a small regional a i r carrier located in Vancouver. This Airline i s performing primarily a passenger feeder operation from relatively small and inaccessable communities and towns to major areas such as Campbell River and Vancouver. This firm i s facing financial d i f f i c u l t y because of decreasing revenues and increasing costs. B. C. Airlines feel that their greatest potential source of revenue i s a i r freight. The objectives of this paper are to determine: the potential demand for a i r freight on a regular basi now and in the near future, the rates that firms can pay for these services, the competitive advantages that a i r freight can provide, and the extent to which these can be realized, the potential for backhaul including investigation of the fishing industry, and the non cost problems related to a i r freight demand. The paper begins by reviewing several methods used pre-viously by other researchers to determine a i r freight potential. The advantages and disadvantages of each and their application to the West Coast of B. C. i s considered. The investigation i n this paper i s based on the total distribution cost concept. This concept suggests that a l l factors and costs influenced by distribution should be considered when selecting a transportation mode. Hence the cost of transportation which i s usually the determining factor, now becomes only one of several important considerations. A detailed discussion on the potential advantages of using a i r freight i s undertaken. Within the context of the Total Distribution Cost Concept the investigation of these advantages i s the basis for the f i e l d interviews with each firm. The costs, the characteristics, the advantages, and the disadvantages between surface transportation alternatives and bet-ween a i r freight are compared for specific firms and specific industries in selected areas. These factors are considered within the bounds of the operations and markets of the firm and area being analyzed. The cost analysis performed for each firm measures the increased cost involved in using a i r freight, and the extent to which inventory and related cost factors can be reduced to recover these costs. The remaining variables which are not quantifiable are discussed in detail for each firm to determine their effect on the cost analysis and the Total Distribution Cost Decision. The determination of the potential for backhaul freight involves a detailed analysis of the West Coast Fishing Industry, B.C. Airlines, and specific firms and industries i n each area studied. In each case subjective evaluation as well as s t a t i s t i c a l data i s used to determine whether or not air freight i s a suitable alternative to existing transportation modes for freight moving to Vancouver from outlying areas. The most significant conclusion i s that the additional cost of using existing air freight services, w i l l not be offset by competitive or intangible advantages, or cost savings, that may be realized by a i r freight use. Generally, this same conclusion i s i i i . v alid even i f air freight rates could be reduced by one half. Hence there i s no large potential demand for a i r freight capacity, A second conclusion i s that B. C. Airlines should not reduce: their freight rates in an attempt to increase business. In fact they should increase their rates because those firms pre-sently using a i r freight w i l l pay more for their service. The third conclusion i s that because of airplane size, route structure, and most important, primary resource locations, the potential backhaul for air freight i s very small. It i s un-li k e l y that this situation w i l l change in the near future. i v . T A B L E , O F C O N T E N T S CHAPTER I. INTRODUCTION Objectives ••• 1 Methodology . 3 Limitations • 5 II. ATTRIBUTES OF AIR FREIGHT GROWTH Total Distribution Cost Concept 8 Advantages to be Realized with Air Freight ••• 1 3 —use of speed to reduce time in transit 14 —use of speed to reduce costs of holding goods in inventory 1 6 —use of a i r freight because of superior conditions of carriage 17 The Changing Technology In Air Freight 20 --quick change aircraft • 22 —containerization 22 --ground handling •••• 2 3 — c o n t r o l and paperwork •••• 24 III. SUMMARY OF PREVIOUS METHODS OF ESTIMATING POTENTIAL Sealy and Herdson 26 Economic Intelligence Unit• 31 How to Identify Potential Users of Air Freight 35 IV. ANALYSIS - SURFACE TRANSPORTATION VERSUS AIR TRANS-PORTATION Selection of Area and Towns 40 Air Versus Surface Transportation: Some Introductory Comments 42 — D i r e c t Costs 46 — I n d i r e c t Costs 47 — Intangible factors 49 Tofino-Ucluelet Area 51 Ucluelet and Tofino 55 Summary of Pertinant Information and Results for Tofino and Ucluelet 57 Tahsis and Area. , 62 Summary of Pertinant Information and Results for Tahsis.. 65 Bella Coola and Area - Summary and Results 68 V . CHAPTER V. OTHER FACTORS INFLUENCING POTENTIAL OF AIR FREIGHT PAGE The Existing Air Freight Situation. 72 Potential for Air Freight » 7£ Reliability 80 Attitude of Merchants 32 Assignment of Costs go Advantages of Air Freight - Theoretical or Realized 35 VI. BACKHAUL AND CONTRIBUTION THEORY 89 90 90 90 90 Introduction 87 Backhaul Potential from each town 87 — Ucluelet • —Tofino — Tahsis — Bella Coola Advantages of Air Freight - Backhaul Situation The Fishing Situation - South Coast Area....... Problems involved In hauling f i s h by aircraft Procurement Costs for Fish - Surface versus Air Air Freight Costs and Rates 206 VII. SUMMARY CONCLUSIONS AND RECOMMENDATIONS H 3 Summary and Conclusions 113 Recommendations 118 BIBLIOGRAPHY 121 APPENDICES 126 v i . LIST OF TABLES Table Page 2 : 1 Ton Miles of Air Freight Carried by Domestic 7 U.S. Carriers in 19^7.1963.1966. 2 : 2 Selected Aircraft Specifications and Operating 22 Costs by Type. 4:1 Economic Data for Tofino-Long Beach-Ucluelet 52 area in late 1965* 4 :2 Transportation Characteristics, By Boat, Truck, 58 Airplane and Mail from Vancouver to Tofino, Ucluelet in 1968. 4:3 A Summary for Each Firm Studied in Tofino and Ucluelet, of the Cost of Existing Transportation, The Estimated Cost of Air Freight Transportation, and The Percentage Decrease in Inventory Required 61 to Realize the Necessary Cost Savings. 4:4 Transportation Characteristics to Tahsis for 67 Various Modes of Transport. 4:5 Comparison of Aircraft and Boat Characteristics to 70 Bella Coola. 5 : 1 Weight Carried in Pounds by carrier type to each 73 town during 1967* 5:2 Analysis of Air Freight Shipments made to Coastal 7k Towns in 1967. 5 : 3 Estimated Air Freight Potential in pounds for One Year from Firm Interviewed in each Area i f the Air Freight rates are Reduced by One Third or One Half 78 the Existing rates. 6:1 Fish Landing by Million Pounds by Species for a l l Coastal Areas of B.C. in 1967.1966, 1963. 93 6:2 Fish Landed by Area and by Species as a Percentage 94 of Total Landings in 1967. 6:3 Fish Landings by Month by Species for South Coast 95 Area in 00 Pounds in I967. 6:4 Fish Landings by Species, by Area, and Percentage 96 of Total for South Coast in C.W.T. in 1967. Troll Salmon Landed by month in 00 pounds, and as a percentage of a l l salmon landed for the South Coast Area in 196?. Total and Variable Aircraft Operating Costs Assuming a one hundred per cent Load Factor. Total and Variable Aircraft Operating Costs Assuming a sixty per cent Load Factor. Cost per one hundred pounds of freight from each town to Vancouver assuming a one hund-red per cent load factor with a Mallard Airplane. Cost per one hundred pounds of freight from each town to Vancouver assuming a sixty per cent load factor with a Mallard Airplane. v l i i LIST OF FIGURES Figure Page 2:1 Organization Chart Showing a lack of Coordination 12 between Departments in trying to Achieve Physical Distribution Objectives. 2:2 Organization Chart which would Facilitate a Total 13 Distribution Cost Approach to Transportation 3:1 The Distribution of Fixed and Variable Aircraft 33 Costs between Passengers and Freight when both are Flown Together. 3:2 Classification of Air Freight Usage by Reason for 38 Use and Type of Situation. 5:1 Hypothetical Demand Curve for Air Freight assuming 79 a l l Customers began Using Air Freight when Air and Surface rates are the same. 5:2 Hypothetical Demand Curve for Air Freight assuming 80 improved knowledge by Potential Users about the Total Distribution Cost Concept. 6:1 Department of Fisheries Statistical Map showing 99 Areas of Catch for British Columbia Waters. (Southern Half) 6:2 Department of Fisheries Statistical Map showing 100 Areas of Catch for British Columbia Waters. (Northern Half). 1 CHAPTER I I N T R O D U C T I O N OBJECTIVES The stimulus for this paper has been provided by B. C. Airlines. This i s a relatively small regional a i r car-r i e r with head offices in Vancouver. They serve many smaller communities on Vancouver Island, the South and West Coasts of the mainland, and the Queen Charlotte Islands. Their a i r -craft consist of one Twin Otter capable of carrying sixteen passengers, three Mallards which carry ten to twelve passengers, two Grummin Goose which carry eight to nine passengers, and approximately twenty-five smaller single engined aircraft ca-pable of carrying two to six passengers. This company i s primarily a passenger carrier, transporting people to and from various types of communities. Some are remote with aircraft being the only available trans-portation, others are accessible only by sea and air, while others are accessible by road, air and sea. The communities served vary from small villages and camps to thriving towns. The a i r l i n e i s primarily performing a feeder operation because they are not licensed to serve Vancouver from any of the major towns such as Victoria, Alberni, Campbell River, Powell River or Prince Rupert. They do, however, connect each of these towns to the surrounding area and smaller communities. 2. The route structures, the geography of the land, the existing demand for a i r l i n e service, and the financial position of B. C. Airlines, a l l demand that certain types of equipment be used in certain circumstances. These factors have created problems for B. C. Airlines, and are reflected in marginal financial statements. They hope that the answers to the f o l -lowing questions or even the methodology used can provide some solutions to their problems. The answers to these questions form the basic objectives of this paper. — What potential at present and in the near future exists for a i r freight as a normal and accepted mode of transportation in the communities serviced by B. C. Airlines? — What rates would firms be able and be willing to pay for a i r freight service? — What are the competitive advantages of a i r freight over surface transportation for specific firms? Can the theoretical advantages be realized? — What potential exists for backhaul from these areas and what are the related problems? — Can fi s h be carried as backhaul economically? — What are some of the non cost problems related to increased demand for air freight? 3 METHODOLOGY The approach taken In this paper Involves a com-parison between surface transportation and a i r freight. The rates, advantages, disadvantages, and characteristics of each are evaluated in terms of the requirements of those firms which use or could use the freight services available. The bulk of the paper, i s built on the framework of the total distribution cost concept. This concept i s discussed f u l l y in Chapter Two. In addition, Chapter Two discusses at length some of the many potential advantages of using a i r freight. The Chapter concludes with a discus-sion on the rapidly advancing technology of a i r freight dis-tribution. The intention of the discussion i s to emphasize the available technology and the existing scope for reducing costs. This does not suggest that small regional carriers should try to attain these levels of technology and efficiency. It does, however, point out the direction in which the smaller airlines should be striving. Chapter Three discusses several approaches which have been used to estimate or discuss a i r freight potential in various areas. The methodology of each study i s discussed briefly, and the applicability of each study to this study on the West Coast i s evaluated. Chapter Four i s founded almost entirely on f i e l d interviews, conducted in selected towns, with as many firms 4. as was practical. The analysis involves a comparison bet-ween surface freight carriers and a i r freight. The total distribution costs, as well as the advantages and disadvantages of each mode of transport, are applied to the particular situa-tion of each firm. This involves a rather detailed investi-gation of each firm's operations and markets in an attempt to determine what mode of transport offers them the best service for the least cost. In other words the aim i s to show whether and how a i r freight can provide advantages for the individual firm above those presently offered. If i t can be shown that a i r freight does offer sufficient advantage to offset i t s higher transportation charges then i t appears reasonable to conclude that there i s some potential for a i r freight. The size of this potential w i l l depend on the type and number of firms which w i l l benefit from using a i r freight. Chapter Five discusses the present a i r freight situa-tion in terms of who i s using a i r freight, and where increases in the use of a i r freight are l i k e l y to come from. Brief dis-cussions on topics such as consumer attitudes, a i r freight r e l i a b i l i t y , market sizes and composition, and the ela s t i c i t y of demand for a i r freight are included so as to provide insight into some of the problems involved In determining and realizing potential. Discussion on the potential for backhaul freight to Vancouver from each area investigated i s included in Chapter Six. The fishing situation for the South Coast Area 5. specifically i s investigated and some of the problems that would be involved in carrying f i s h by aircraft are discussed. A brief discussion on aircraft costs and rates i s undertaken to determine just how low air freight rates could be reduced, particularly for backhaul, and whether these reduced rates can compete with surface transportation rates for backhaul freight. Chapter Seven provides brief comments and conclusions. These are based on interviews and research conducted and are the expressions of the author. LIMITATIONS There are many shortcomings and limitations in a paper of this nature. The following comments explain the more serious of these limitations. The cost analysis undertaken for each firm should ideally involve a thorough analysis of their distribution and/or procurement systems. Most of the small firms however, maintain no records or at best inadequate records. Only one firm uses a system of detailed inventory control. In other words inventory holding costs; packing costs, pilferage, insurance charges, freight weights, and most other data re-quired in precise form i s simply not available. This neces-sitated a change in methodology. Instead of showing how the use of a i r freight could reduce inventory levels and related costs, the amount by which inventory and related costs must be reduced i f air freight i s to be used, are indicated. 6. Discussion on such topics as attitudes, r e l i a b i l i t y , e l a s t i c i t y of demand, backhaul, and contribution theory are dealt with only superficially. Although each of these topics could be greatly expanded, the time and space constraints of this paper do not permit this. The brief discussion present-ed however does contribute to the general objective of explain-ing a i r freight potential. An inherent assumption in the total distribution cost concept i s that the decisions of each firm are based on economic considerations. This may or may not be true, however, such factors as status and prestige can influence a firm's decision to use a i r freight. These non-economic variables are not dealt with in this paper. Lastly, a number of changes in the transportation systems studied have taken place since the commencement of this paper. Air and truck freight rates have both been i n -creased since April 1, 1968. Improved a i r freight service to some existing routes, and development of new routes, have also taken place. Any or a l l of these changes alter the trans-portation picture for a given firm. These changes have not been considered in this paper. 7 CHAPTER II ATTRIBUTES OF AIR FREIGHT GROWTH The u t i l i z a t i o n of air freight throughout the world has increased very rapidly, especially since the introduction of the jet aircraft. The magnitude of this increase i s i l -lustrated in Table 2:1 below. Table 2:1 Ton Miles of Freight Carried by Domestic U. S. Carriers in 1947, 1963, 1966" 19^7 1 9 6 3 1 9 6 6 36 Million Ton Miles 645 Million Ton Miles 1 2 5 0 Million Ton Miles Source: M. Sadler, The Air Freight Industry Commercial and Financial Chronicle, July 2 7 , 1 9 6 7 P. 3 There are many reasons for this growth, among them the general increase in movement of goods throughout the world. This chapter discusses briefly three aspects of the growth of air freight. The f i r s t i s the comprehensive approach being taken toward distribution, which has reduced the relative im-portance of the emphasis on freight rates. This i s called the Total Distribution Cost concept and i s the basis for the analysis in this paper. The second aspect i s a discussion or a l i s t of the many reasons for using air freight. In other words, in what types of situations can a i r freight provide a superior service? The third i s a brief discussion on the history of a i r freight, the development of air freight tech-nology, and some explanations as to why the cost of air freight 8. has decreased while the cost of other forms of transportation has increased. Each of these areas of discussion provides background information. A rather apt introductory comment has been made by Mr. Jack MIsselhom, Director of United Airlines. He stated, "In this era of increasing costs and decreasing profit margins, most authorities agree that the last frontier for cost reduction i s the physical movement of goods through channels of procure-ment and distribution. Distribution by a i r w i l l be the answer for many companies. To those who analyze a i r transportation opportunities care-f u l l y and find i t can improve their marketing effectiveness, we welcome them aboard. 1 1 1 TOTAL DISTRIBUTION COST CONCEPT During the past decade there has been a revolution in business education and in industry concerning what physical distribution really i s , what i t involves, and what i t costs. Parker explains the reasons for this revolution in the follow-ing maner. After the war, the demand for goods and services exceeded supply. Business firms thus concentrated their efforts on improving production efficiency and increasing output. Dis-tribution was not considered a problem. With time, efficiency and production levels increased greatly, and the problem focus 1 Jack Misselhorn, "How Important i s Air Freight Likely to Be-come," Factory, 125 (Spring I 9 6 7 ) , p. 14. ^ Donald 0. Parker, "Air Freight as a Tool of Marketing Manage-ment" (an ar t i c l e prepared for Canadair Ltd. and Flying Tiger Lines Inc. on the Air Cargo Industry) p. 1. 9 changed. Business firms were s t i l l concerned with maintaining efficient production, as well as with selling and distributing their excess supply of goods and services over demand in a manner which was more efficient. This i s one reason why so many firms suddenly became interested in consumer research, market testing, advertising effectiveness, and channels of distribution. This change i s referred to in marketing texts as the change from a production orientation to a marketing orientation. Although somewhat later than some of the above areas, the meaning of physical distribution and what i t involves changed during the i n i t i a l stages of the marketing orientation. The old concept looked at physical distribution as simply the actual physical movement of goods. The only costs i t considered were transportation and sometimes warehousing. The new concept of physical distribution i s called the "Total Distribution Cost" Concept. It suggests very simply that the distribution of goods includes a l l the functions and costs involved in moving the goods from producer to seller to consumer. These costs include the following: — Primary and secondary transportation by private or public carrier. — Warehousing. — Order handling and processing. — Packing and crating. — Inventory insurance. 10 — Inventory taxes. — Inventory handling. — Inventory obsolescence and deterioration. — Interest charges on capital invested in inventory. — Damage and theft in transit. — Interest on capital in transit. — Customer satisfaction. — Reliability. This concept suggests that each of these costs i s variable depending upon what i s desired. The important factor, however, i s that when one of the preceding variables i s altered then some other variable(s) must also be altered i f the firm wishes to maintain the same level of service at the same cost. For example, various types of transportation can be used. If air freight i s used, then procurement time i s reduced and in -ventory levels could be reduced by some amount and s t i l l main-tain some defined level of service. To do this would increase the cost of transportation. However, i t could also decrease the cost of carrying inventory. The aim, then, i s to evaluate each factor in the light of i t s contribution and cost to the total distribution function. The focus i s on the total cost of getting the goods distributed at a given level of service, rather than on the individual costs such as transportation. The significance of this change to the a i r freight industry i s that no longer are people looking at only the transport cost which is/lalMoisir always higher for air freight. 11. This change in perspective i s also important because i t allows for large cost reductions and improved profits simply by increasing the efficient interaction of the various cost elements. When one considers that between seven and thirty-five per cent of the selling price of most goods i s absorbed by physical distribution,3 then the room for improvement i s worth investigating. It should be mentioned at this point that although this concept appears relatively simple and straightforward i t i s ut i l i z e d by only a very small percentage of business firms. This i s not because they do not understand i t but because the organi-zational structure of the firm does not co-ordinate a l l of the distribution functions and costs under one body. The result i s that a number of departments in a firm are a l l working toward the goal of minimum costs, but are opposing each other in the process. The organization shown in Figure 2:1 Page 7 explains this problem. In other words, rather than each department working together to reduce total distribution costs, improve service and maximize profits, three separate departments are trying to reduce each of their costs as low as possible regardless of the effect i t has on other costs. This i s precisely the problem that was discovered by this writer and most other researchers 3 Canadian Institute of Traffic and Transportation Certificate Course. See Chapter One. Figure 2:1 Organization Chart Showing a Lack of Co-ordination Between Department In Trying  to Achieve Physical Distribution Objectives. I MARKETING PRESIDENT r J  FINANCE & ACCOUNTING 1 MANUFACTURING Responsibility D i s t r i b u t i o n Channels Customer Service Inventory Obsolescence Communi cations Order & Data Processing Carrying Inventory Production & Supply Warehouse Transportation Objectives More Inventory 4 Frequent Short Runs Fast Order Process i— Fast Delivery 4-F i e l d Warehouses Less Inventory -> Cheap Order Process Less Warehouses Long Production Runs Cheapest Routing Factory Warehouses Source: John F. Stolle,i "How to Manage Physical D i s t r i b u t i o n , " Harvard Business Review, 45 ( 1 9 6 7 ) , 9 3 - 1 0 0 . 13 when attempting to consolidate data on the total cost of dis-tribution. A more desirable organizational structure and one which i s incomplete, butfdoes emphasize the point, i s figure 2:2 below. Figure 2:2 An Organization CForm, which would Facilitate a Total Distribution Cost Approach to Transportation. PRESIDENT  PHYSICAL1 DISTRIBUTION MARKETING FINANCE "PRODUCTION MANAGER 1 1 1 ORDER PROCESSING INVENTORY WAREHOUSING TRANSPORTATION MANAGER MANAGER AND SHIPPING MANAGER MANAGER Source: John F. Stolle, "How to Manage Physical Distribution " t Harvard Business Review. 45 (1967), 93-100. ADVANTAGES TO BE REALIZED WITH AIR FREIGHT The a b i l i t y to use air freight advantageously depends specifically on the company, the product(s), the market, and the inherent characteristics of each of these. There are, how-ever, a number of advantages or reasons for using air freight. These advantages amount to changes in one or more variables in the distribution function which usually offsets the higher trans-portation charges for using air freight. For example, air freight can often be used to reduce costly downtime for a manufacturing or production unit. 14. Probably the most complete summary of advantages in using a i r freight i s provided by J. E. Gorham. He suggests three general reasons for using a i r freight, and expands each into several subheadings with specific situations.^ — The use of speed to reduce time in transit — The use of speed to reduce costs of holding goods in inventory — The use of superior conditions of carriage by s i r to reduce risks and costs associated with alter-native transportation. Use of Speed to Reduce Time in Transit Under this heading Gorham suggests there are four specific reasons for using a i r freight, each with several sped-f i c situations. The f i r s t reason i s the use of air freight to increase sales or improve service in time limited situations. For example, a i r freight can be advantageous: — Where demand i s time limited in a market for time or style dated commodities such as fad items. — Where demand i s time limited in a premium priced market such as fresh f r u i t at the beginning of the season. — Where demand i s time limited in a seasonal or holiday market such as the sale of Christmas decorations. — Where the market for perishable commodities such as produce can be extended i n time. — Where the market for perishable commodities such as fresh flowers can be extended geo-graphically. 4 James E. Gorham, "How to Identify Potential Users of Air Freight" (a paper prepared for Emery Air Freight Corporation, Wilton Connecticut by Southern California Laboratories of Standford Research Institute 1 9 6 3 ) t P« 9 2 . 15 The second advantage of speed i s to increase the u t i l i -zation of production f a c i l i t i e s and equipment. This increases the effectiveness of the production function by reducing the time that goods and materials spend In transportation. For example, air freight can be advantageous: — When the u t i l i z a t i o n of a production unit or mach-ine can be increased by reducing the time required for new or replacement parts to arrive. — Where util i z a t i o n and often efficiency can be i n -creased for a fixed f a c i l i t y by extending supply and market area, and hence increasing sales and/or reducing costs. — Where uti l i z a t i o n can be increased for a mobile production f a c i l i t y or equipment by reducing the time spent moving between jobs. The third advantage of speed i s to reduce company or customer investment in goods in transit. Reduced transportation time reduces the unproductive investment period, depending on the length of time the goods are held after a r r i v a l . The amount of the saving i s a function of the time difference, the size of the investment, and the interest rate applied. For example, air freight i s advantageous when a company desires to speed up i n -vestment turnover of commodities which can be used as soon as received. The fourth advantage of speed with a i r freight i s to meet unpredictable demands and emergencies. Uncertainty exists for every firm to some degree, either unforeseen or foreseen, but normally unpredictable. Air freight can be advantageous in any situation where i t w i l l meet a c r i t i c a l requirement for the the shortest possible transit time. 16 Use of Speed to Reduce Costs of Holding Goods In Inventory  While Maintaining or Improving Service. As suggested in the Total Distribution Cost Concept the cost of holding inventory i s a major cost element in the distribution process. Gorham suggests four specific reasons for using a i r freight with regard to i t s influence on inven-tory. 5 The f i r s t advantage of air freight i s that i t s use frequently allows a reduction in inventory investment and in the cost of holding this unproductive investment. For example, i t can be advantageous where Inventory i s used specifically to service production and/or sales requirements because demand i s unpredictable in terms of time and quantity. If the re-order lead time can be reduced then the level of inventory can often be reduced. The second advantage of air freight i s that i t s use frequently reduces the risk of inventory loss, obsolescence or deterioration. Firms can reduce their inventory to a minimum level and meet unexpected demand quickly by using a i r freight. Air freight usage can be advantageous where inventory used to service production and/or sales i s physically, technologically, or style perishable and where demand i s not predictable. This really does not reduce the risk but simply transfers i t to the supplier or manufacturer. Ibid., p. 102 17 The third advantage of a i r freight i s when i t s use allows a reduction in investment and operating expenses assoc-iated with inventory f a c i l i t i e s and services. For example, the use of air freight can be advantageous: — Where the reduction or elimination of inventory permits reducing inventory servicing costs even without reducing the f a c i l i t i e s : i.e. the temp-erature and humidity requirements of fresh produce. — Where inventory can be centralized to permit a reduction in total f a c i l i t i e s and servicing costs even without reducing total inventory. The fourth advantage of a i r freight i s to reduce costs incurred by having jobbers or wholesalers perform the inventory function. The use of a i r freight often eliminates the need for a middleman by reducing the need for decentralized inventories. This assumes that the firm can, in addition, perform the other duties of the middleman adequately. Use of Air Freight Because of Superior Conditions of Carriage. This advantage i s simply that a i r transportation re-duces the risk of damage and theft, f i r s t l y because the condi-tions of carriage are superior, and secondly because the goods are subjected to these risks for a shorter period of time. The result Is that insurance premiums are lower and damage claims are fewer. Gorham suggests five specific advantages.^ — Alternative means of transport usually have a higher incidence of stolen or lost goods than Ibid., p. 108 18 a i r freight. Although the loss i s covered by insurance, lost sales, lost goodwill, and delays cannot be repaired. Increased insurance claims also create premium increases which must reflect in cost increases. — Alternative means of transport have a higher rate of damage than a i r freight. The problem again i s inconvenience. This i s despite the fact that other means of transportation usually require more costly packaging and crating for protection. — Alternative means of transport have a higher i n -cidence of spoiled and deteriorated commodities because the goods are often subjected to rougher handling and delays. A second specific advantage of a i r freight i s that i t s use tends to reduce costs and time over which provisions for pre-serving or protecting goods in transit are required. Air freight reduces protection costs with simpler and lighter packaging and less expensive environmental control. Air freight also reduces the time in transit and hence the risk of exposure and time of protection are reduced. Items that normally require attention while in transit require either very l i t t l e or no attention with a i r freight because the time span i s so short. A third specific advantage of a i r freight i s to enhance the control or management of goods in transit. Alternative means of transport often require extra handling and greater d i f f i c u l t y in co-ordination and documentation, especially on long distance moves. The use of a i r freight simplifies the control and man-agement of even small shipments, particularly with large a i r carriers. A fourth specific advantage of a i r freight i s that i t s 19 use allows reduced duty on international movement because duty i s assessed sometimes on the basis of gross weight which i n -cludes packaging. A f i f t h specific advantage of a i r freight i s that i t expedites handling of small lots. Air shipments often offer more frequent schedules and better route connections than sur-face carriers. Air freight also offers volume rate breaks which often require less volume than those offered by surface transportation. This discussion on the advantages of air freight i s necessary as background information, so that the reader under-stands when a i r freight can be used and what types of variables i n the distribution process i t i s l i k e l y to effect. It should be pointed out as well that in most instances the use of a i r freight by a firm w i l l u t i l i z e several of the advantages to be gained through i t s use, and not just a single advantage as may be suggested by the manner in which the advan-tages of a i r freight are discussed. It should also be noted that some of the advantages of a i r freight discussed are advantageous only to goods which are shipped a long distance either in terms of time or miles. The advantages of air freight relative to surface transportation depend on the distance and character of the journey, the avail-able alternate forms of transport and their characteristics, and the difference in time required to make the journey by air and by surface. Hence many of the advantages usually attributed 20 to a i r freight usage do not necessarily apply to the analysis being undertaken in this paper. This i s so because of the types of aircraft, distances to be travelled, airport f a c i l i t i e s available, market situations, and the characteristics of the firms and alternate forms of transport. THE CHANGING TECHNOLOGY IN AIR FREIGHT. This paper i s interested primarily in a regional or trunk li n e a i r carrier. It i s useful from the standpoint of comparison, however, to look briefly at the large relatively efficient national a i r carriers and their operations, tech-nology and costs. This i s done to emphasize the fact that we cannot compare B.C. Airline's operation with that of Air Canada's operation. Each has problems which are unique but they often have some general similarities. A look at the past, present and future of the large airlines could provide Information and clues as to where B.C. Airlines i s going and how they w i l l get there. In a i r freight history the f i r s t item of freight was two bolts of s i l k weighing.;; 1 0 0 pounds, valued at # 8 0 0 . 0 0 , flown sixty-five miles in sixty-five minutes in the year 1 9 1 0 . In 1 9 ^ 4 American Airlines f i l e d the f i r s t Air Freight Tariff. They used DC-3's and by 1 9 4 6 the demand was such that the load capacity was tripled by using DC-4's. These planes were f o l -lowed by progressively larger and faster DC-6's, DC-7's, Con-stellations, Viscounts and Vanguards. From 1 9 4 7 to 1 9 5 3 United States a i r ton miles increased eighteen fold. This growth was 21 not profitable however because the airplanes were piston driven passenger-craft, the carrying of freight was not efficient, and the loading, unloading, and ground handling costs were very high. Tariffs, on the other hand, were minimized so as to be competi-tive. The result, as stated, was lost profits. Passenger re-venue kept the airlines operational in terms of profit.? By 1964 the jet aircraft freighter had arrived. These planes were capable of carrying huge payloads (three times a DC-7) at speeds which cut the coast to coast travel time in half. These new aircraft reduced appreciably the ton mile costs of operation. They also emphasized the need for proper handling f a c i l i t i e s . By early 1970's the huge Boeing 7^ 7 w i l l be operable. This w i l l reduce operating costs again by as much as one-third, as well as create even more hardship on ground handling f a c i -l i t i e s . These aircraft w i l l have a capacity of two and two-ninths times that of a DC-8F or Boeing 707, and nearly twelve times that which a DC-4 carries. Table 2:2 Page 22 indicates the effect of the changing technology of aircraft. As the capacity and/or speed increases the operating costs are reduced. 7 Marian Sadler, "The Air Freight Industry- Past, Present, and Future," The Commercial and Financial Chronicle, July 27, 1967 p. 3. 22 Table 2:2 Selected Aircraft Specifications and Operating Costs Aircraft Type Load Capacity In Pounds Speed Operation Cost Per Ton Mile L 500 (1971)(Military) 818.000 (est) N.A. 2.255* (est) Boeing 7^7 200,000 625 2.75-3-00s* (est) Boeing 707-320C 96,000 555 3.68$* Douglas DC-8F 95,000 550 3.64s* Boeing 737 QC 40,000 550 N.A. CL-44 66,000 390 6.71J* DC-7 N.A. N.A. 10.06s* DC-6 28,000 282 N.A. DC-4 17.000 220 N.A. Mallard 2,500 130 80.0s* Source: Various Periodicals and Field Research. Quick Change Aircraft Another recent change which improves the usage of a i r -craft i s the combination passenger-freight aircraft such as the Boeing 727 QC (quick change) and the DC-9C. These aircraft have permanent r o l l e r bearings on the floor. Ten carpeted seat pal-lets and one palleted galley unit are removed in twenty to thirty minutes, and eight pallets of freight weighing 40,000 pounds are loaded in another twenty to thirty minutes. This increases the aircraft u t i l i z a t i o n factor and reduces handling costs. Containeri zation Major advances have also been made in the area of con-tainerlzation. This i s a technique of using a box-like or other device in which a number of packages are stored, protected and handled as a single unit in transit. This procedure saves'time 2 3 . and manpower(and double handling) in ground handling and achieves better u t i l i z a t i o n of cubic capacity in the aircraft. The shipper benefits in terms of lower rates and less pilferage. Just recently aircraft went into service which are capable of carrying intermodal ( r a i l , truck, boat, air) con-tainers up to forty feet in length, ten fet wide and nine feet Q high, with a total weight of f i f t y thousand pounds. Ground Handling Generally speaking, in the past, problems involved in handling freight were on the gound. The handling of thousands of small packages created enormous costs. Containerization and other ground handling improvements have reduced some costs, how-ever, a great deal of future savings are s t i l l l i k e l y to come from this area. American Airlines, for example, developed the Astro-Loader. 9 This mechanized ground handling system i s able to unload ninety thousand pounds from an aircraft in twenty minutes, and re-load i t in another twenty minutes. This job takes six hours by hand. A l l of the major airlines are rapidly building huge mec-hanized freight terminals often controlled by computers in most major c i t i e s . As the number of packages increases, this type of mechanization becomes mandatory from a cost point of view. 8 Allen Van Cranebrock, "Larger L i f t for Air Shippers," Traffic Management, (August I966), 62. 9 Sadler, op_. c i t . , p. 2 6 . 24 Control and Paperwork Another major problem involved in shipping many small packages i s that of paperwork and control. An air waybill in-cludes information for the airline , the consignee, describes the commodity, and computes the charges, etc. This w i l l soon be done by computer which w i l l reduce costs and errors. The computer w i l l also improve control on a l l packages. In fact in February of 1968 Airborne Freight Corporation introduced the f i r s t com-pletely integrated computer-communications system for a i r freight control connected to every Airborne terminal across the country. This system gives Airborne shippers and consignees information on each shipment with speed, accuracy and dependability. It i s the use of this type of system which w i l l probably become i n -creasingly popular in the future and improve a i r freight r e l i a -b i l i t y and reduce costs even further. In conclusion then, the increased demand for a i r freight has been partially the result of higher speed aircraft with larger capacities, lower operating costs, and improved ground handling procedures, a l l of which have resulted in reduced rates. The ut i l i z a t i o n of existing aircraft capacity, length and direction of haul, and number of stops are other cost influencing variables. For example, "direct operating costs were reduced f i f t y per cent by jet aircraft over the most efficient piston driven engine, and the jumbo jets can be expected to reduce the costs a fur-ther thirty to thirty-five per cent. Use of modern mec-hanized and automated terminals moving large volumes of freight has reduced ground handling costs by sixty to eighty per cent." 1 0 1 0 Stanley H. Brewer, Complexities of Air Cargo Pricing (Seattle: Faculty Publications University of Washington, 1967), p. 6. 25. The point to be emphasized i s that the smaller, re-latively inefficient regional carriers must watch closely what the potential demand for air freight w i l l be at various reduced rates, which could be feasible i f any of these improved t e c h — niques can be ut i l i z e d . It seems to be a question, then, of which comes f i r s t , the increased demand, or the improvement of f a c i l i t i e s based on expected demand increases which consequently reduce the rates as ut i l i z a t i o n increases and cost advantages are realized? These discussions on the advantages to be gained through a i r freight usage and the Total Distribution Cost Concept are really just background material which i s required to analyze the specific situation of B.C. Airlines. Both of these discussions, however, show how a i r freight can improve the total distribution situation for a given firm, and why the cost of using a i r freight i s really not as high as the d i f f e r -ence in t a r i f f s suggests. The last section on technology ex-plained briefly why a i r freight rates have been decreasing when many surface modes' rates are increasing. The discussion also indicated the areas in which smaller airlines could investigate po s s i b i l i t i e s to reduce costs and Increase revenue. 26 CHAPTER III SUMMARY OF PREVIOUS METHODS OF ESTIMATING POTENTIAL Estimating the potential for a i r freight continues to be an important economic consideration of airplane manu-facturers, large and small airlines, and firms interested in expanding and improving their operations to be more efficient than their competitors. Several methods have been developed in an attempt to estimate this potential, as well as to aid in the realization of the potential. This chapter w i l l discuss briefly three different approaches to this problem, and In doing so. Indicate why these approaches have not been duplicated in this paper. This i s not to say, however, that different parts of each study have not been used in this paper in a modified form. Sealy and Herdson Sealy and Herdson state "The purpose of the survey i s to acquaint the manufacturing industry at large, and the a i r transport industry, with the current and future competitive position of air freight by examiningrcin detail the costs i n -volved in distribution of goods from factory to consumer, both by, a i r and surface transport." 1 1 K. R. Sealy and P. C. L. Herdson, "Air Freight and Anglo European Trade" (paper prepared for Sir W. G. Armstrong Whitworth Aircraft Ltd 1961) p. 2. 27 "A new approach has been used to evaluate the cost margins by studying the transport function as part of the whole distribution process. Total distribution costs have therefore been used as the focal point of the cost analysis since they have more relevance to demand than freight charges alone." "The survey i s limited to a study of the European Market for United Kingdom Exports, and i s confined to an exami-nation of those commodity groups which are of importance in air freight today." 2 The study begins with a discussion on background information about United Kingdom Imports/and Exports and the present role of a i r freight in this system. Quantities of specific commodities moved to specific countries are dis-cussed in detail. Sizes of shipments in air freight t r a f f i c are discussed. They found that thirty-seven per cent of a l l shipments are less than eleven pounds. This i s important because ground handling and documentation costs are based on the number of packages, not the weight. This explains to some extent why forty-nine per cent of the consignments account for nine per cent of the revenue and fifty-one percent account for ninety-one per cent of the revenue.3 Information on size of shipments i s not uti l i z e d in this paper because at present, large consignments (over 2 , 5 0 0 pounds) cannot be carried and any one consignment seldom exceeds one hundred pounds. Similar figures for revenue as a function of consignments w i l l s t i l l probably apply to some degree, however, and the greater profit would come from the heavier; consignments. 2 Ibid., p. 6 . 3 .Ibid., p. 1 0 . 28 Part II of Sealy and Herdson* s study involves the f i e l d survey and analysis of the demand for air freight. Their methodology involves an analysis of distribution, comparing a i r transport to surface transport. They define distribution as "activities involved in physically handling a product both in procurement and in distribution."^ Using this approach they have gathered cost data on primary and secondary transport, packing, insurance, documentation, and other duties. They do not attempt to determine cost savings from reductions in i n -ventory holding costs, warehousing costs, and interest on goods in transit. This writer feels that much of the cost savings Involved in using air freight are found in these lat t e r func-tions, and hence this present paper attempts to gether Infor-mations on these function. Heskett agrees with this when he suggests that inventory holding costs account for thirty-six per cent of a l l the total physical distribution costs.^ These costs are of greater importance, possibly, in this study, where-as in Sealy and Herdson1s study the differences are less, and therefore smaller cost savings are sufficient to equalize surface and a i r freight costs. Sealy and Herdson also deal primarily with large firms who were u t i l i z i n g a i r freight at Ibifl . t P» 35 ^ H. Freybe and G. Rees, "The Changing Environment of Canadian Transportation" (Course paper University of British Columbia, 1 9 6 7 ) p. 3 . 6 This i s an average representing primary transportation t a r i f f s only. 29 present and who had the necessary data on reduced packing, insurance, and documentation charges. The firms analyzed in the present study are relatively small establishments; not presently using a i r freight and not aware of these types of costs on an individual consignment basis. Sealy and Herdson's analysis validates their assump-tion that packing and transport costs are the source of greatest differences in distribution costs. In surface transport they find that "packing costs range from ten point four per cent to seventy-eight point seven per cent of the total cost, while freight charges range from nine point four per cent to sixty-two point four per cent."'' These percentages w i l l be substan-t i a l l y lower, however, i f inventory and warehousing costs are included in their definition for total cost of distribution. By using air freight, they find packing costs reduced substan-t i a l l y and freight charges frequently exceeding eighty per cent of the total. Again this percentage w i l l be reduced i f a l l distribution costs are considered. Sealy and Herdson then, using transportation charges and packing costs as representative of total distribution costs, proceed to show the existing a i r rates, and the level to which these have to be reduced to equalize either surface and a i r freight rates, or surface and air total distribution Sealy and Herdson, op_. c i t . , p. 39' 30. costs. In most cases the difference between current a i r rates and those required to equalize surface and a i r freight costs are greater than those required to equalize surface and air total distribution costs. They then proceed to calculate the increases in a i r freight usage resulting from ten per cent interval decreases in a i r freight t a r i f f s . The switch from sur-face to air transport i s assumed as soon as Air Total Distribution Cost i s equal to Surface Total Distribution Cost. Hence they are able to construct a demand curve for air freight with a factor indicating the approximate ela s t i c i t y . The f i n a l chapter in Sealy and Herdson's paper dis-cusses the f e a s i b i l i t y of an a l l freighter aircraft operation. They deal with large specialized aircraft and hence further discussion i s of limited value to this paper. The approach taken by Sealy and Herdson i s basically the same approach used in this paper. The primary difference i s , that, whereas Sealy and Herdson ignore inventory holding costs, warehousing costs, and return on Invested capital in transit, this paper attempts to look at the connection between these factors and air freight. Secondly, Sealy and Herdson, using only transportation costs and packaging costs, construct a demand curve which they purport to be accurate. They make hardly any mention of the total interdependency between a l l the functions and their related costs in the distribution process. This i s not a criticism of their attempt to fore-cast potential demand, for that, ultimately, i s the aim of 31 this paper. It i s however, a criticism of their leaving the unknowing reader with the impression that their demand curve considers most of the variables when, in fact, i t has consid-ered only a few. Their study, then, i s useful in design and one which this writer has u t i l i z e d . Economic Intelligence Unit The most recent attempt to analyze potential demand for a i r freight was conducted by the Economic Intelligence Unit (E.I.U.)8 Their aim was to determine the f e a s i b i l i t y , in terms of cost related to potential demand, of providing an a i r freight service between Newfoundland and the mainland. The E.I.U. begin by presenting Dominion Bureau of Statistics data for the years i960 to 1965 indicating the changes in t r a f f i c flow that had taken place. They indicate yearly percentage increases in a i r freight carried of about twenty-eight per cent. They also show that this s t i l l amountss to less than one per cent of the total cargo tonnage. Besides this, the data indicates the problem of directional imbalance to be c r i t i c a l . Approximately ninety per cent of the cargo moved via any form of transportation i s in an easterly direc-tion. This leaves only ten per cent for the return leg of the journey. Data showing this directional imbalance for Vancouver 0 Ottawa, Economic Intelligence Unit, Atlantic Provinces  Transportation; A Potential Air Cargo Service (Ottawa: Queens Printer, 1967) 32 Island's West Coast Is not available. However, simple obser-vation and personal interviews indicate that this ninety per cent - ten per cent figure i s not unrealistic. E. I. U. then discuss the advantages of using air freight from a theoretical point of view, and the application of some of these principles. They show, in particular, that the shorter transit time (two days versus five to twenty-one days),reduced pilferage and damage, and lower total distribution costs are often sufficient reason for using air freight. Firms accepting this, however, were the exception rather than the rule. "It i s not unusual to find firms in Newfoundland, whose inventory costs exceed a similar firm in Central Canada by one hundred per cent....These firms in many cases have become adapted to a situation where they expect and work with two week delivery times."9 i t i s d i f f i c u l t to persuade these firms to upset the status quo in favour of possible lower costs and better service. The E. I. U. discussion on freight rates provides some food for thought with regard to air freight rates of B.C. Airlines. They suggest that i f an aircraft i s carrying pas-sengers and freight in the "belly", then the cost of carrying this freight i s only marginally greater than the cost of flying the aircraft without the freight on board. What they are saying, then, i s that (see f i g . 3:1 page 33 ) fixed or direct costs and the Indirect or variable passenger costs are a l l 9 Ibid*» p. 10. 33 charged to the passenger1 tickets. If freight i s carried, the variable costs increase slightly but most of the extra costs i s in ground handling. Pig. 3:1 The Distribution of Fixed and Variable Aircraft Costs Between Passengers and Freight When Both are Flown Together. Variable Freight Costs Variable Costs Fixed Costs Total > Cost Passengers Total Cost ^ Freight And Passengers Therefore, conceivably, a i r freight t a r i f f s could be substantially reduced, except that a i r l i n e management sets the costs as though freight has to absorb i t s share of the direct costs. Their aim i s to obtain maximum cargo loads for passen-ger planes at the maximum rates, compatible with this objective. This observation i s discussed briefly in the latter stages of this paper. In their discussion on air freight and i t s competi-tors, the E. I. U. emphasize that the advantages realized by ai r transportation are only relative to time, rate, frequency, and quality of service offered by surface carriers. This type of information i s c r i t i c a l and i s supplied in the present paper for each area studied. Weather and resulting disruptions in 1 0 Ibid*, p. 10 34. the form of delays and cancellations also create bad w i l l and increased operating costs. They conclude this section with the comment that air freight must provide good service and be reliable i f i t i s to demand and get the prices i t requires. E. I. U. 's last section discusses the future pros-pects for Air Cargo Operations. They suggest that rate reduc-tions can increase t r a f f i c flows by a i r but they make no attempt to predict this in any detail. They suggest that i t would probably be more advantageous at the present time to educate the consumer on the advantages of a i r freight. "Today only a small proportion of the business concerns which could usefully use a i r freight are actually doing so". "As suggested earlier there i s s t i l l a major job to be done in New-foundland in explaining to industry the economic implications of the alternative modes of trans-port and increasing the rate of acceptance of air transport". 1 1 With regard to outgoing t r a f f i c from Newfoundland they suggest that there i s a lack of commodities available which are capable of absorbing a i r transport costs and u t i l i -zing the advantages of a i r transport. They discuss briefly the f e a s i b i l i t y of carrying fis h as well as blueberries to Eastern Markets. Problems of seasonal supply, packaging, low margins, and competitive modes of transport are discussed. These same problems are important in this present study and are dealt with in some detail. In the last section the E. I. U. paper makes a 1 1 I old., p. 16. 35. number of generalizations each of which apply equally well to this study in British Columbia. They suggest that some kind of directional balance i s only possible i f goods are carried which are unable to afford present rates. This means increases in t r a f f i c with less than proportionate increases in revenue. They note that some surface carriers are presently receiving subsidies and hence their charges do not truly re-f l e c t their c o s t s . 1 2 Air carriers do not presently receive any subsidies. Rapid economic development in an area could provide increased willingness to use and a b i l i t y to pay for a i r freight. Economic indicators should be watched carefully to point this out in any specific area so that action can be taken. Again several procedures and subjects dealt with in this Newfoundland study are directly applicable to this study on the West Coast and are considered appropriately. How to Identify Potential Users of Air Freight An ambitious approach to determining a i r freight potential has been taken by J. E. Gorham.1^ He was aware of the problems involved in estimating potential by using the 1 2 The author found no evidence to support this statement on the West Coast of British Columbia. However, a general feeling among many West Coast Businessmen suggested this situation did exist. 1 3 Gorham, op. c i t . 3 6 . total distribution cost approach discussed by Sealy and Herd-son1^" and as used i n this paper. Gorham chose instead to "develop analytical tools to be used in examining the procure-ment, production, and distribution characteristics of a company to identify probably situations offering opportunities for the use of a i r freight".1 5 He suggest that a firm must follow two stages in an attempt to determine i f a i r freight can be used advantageously. First they must collect a l i s t of characteristics of the company1s products and markets which suggest that a i r freight could be advantageous. Second they must conduct a total distribution cost analysis for a i r transport and surface trans-port to determine i f a i r freight usage results i n a net gain. Gorham's purpose was to help firms conduct the f i r s t stage be-cause the data i s more easily accessible and the cost of the f i r s t stage i s less than the second. Negative conclusions in stage one usually suggest that stage two not be undertaken, and a cost saving would be realized. Gorham begins by developing a comprehensive l i s t of the present reasons for using a ir freight. These are discussed in detail in Chapter Two of this paper1** and are shown i n Figure 3 : 2 Page 3 8 . He then identifies combinations of characteristics related to procurement, pro-^ Sealy and Herdson, 0 £ . c i t . 15 Gorham, op. c i t . , p. 3» 1 ^ See Figure 3 : 2 Page 38 for a Summary. 37. duction and distribution for a given company, i t s products, and markets, which are required for a company to be able to use air freight advantageously in a particular type of situation. These characteristics are identified by examining case his-tories of actual users of a i r freight at the time of the study. In other words there are several advantages to using air transportation. In order for a company to realize some gain from any specific advantage there are certain product, market, or distribution characteristics which the company must possess. There are other product, market, distribution or procurement characteristics which a company does not require but which i f available would increase the amount to be gained by using air transportation. The Situation Classification Sheet (Fig 7:1 Appendix I Page 127 ) shows which product, market and distribution characteristics apply to each specific reason for using a i r freight. Appendix A provides an example of how to use the Situation Classification Sheet. Gorham, then, with this Situation Classification Sheet has provided an analytical tool which can be applied by a firm to determine whether the characteristics of their company are such that they could use a i r freight advantageously for the specific reason suggested in the Classification 'Sheet. Gorham then proceeds to apply this Situation Classi-fication Sheet to actual cases of successful users of a i r freight. He discusses these in great detail in the study, l i s t i n g several types of firms for each specific reason for , T a b i c I C L A S S I F I C A T I O N * O F A I R F R E I G H T U S A G E B Y R E A S O N F O R U S E A . N D T Y P E O F SlTUA'rlC/H C C D C T B I U s e C l a s s U s e o f s p e e d t o r e d u c e timt i n t r a n s i t S p e c i f i c U s e C l a s s ( r e a n o n ) INCREASE SALES OR IMPROVE SERV-ICE IN TIME-LIMITED SITUATIONS A.2. INCREASE UTILIZATION OF PRODUCTION fACJLITIES AND EQUIPMENT REDUCE COMPANY OR CUSTOMER INVEST-MENT IN GOODS IN TRANSIT MEET UNPREDICTABLE DEMANDS AND EMERGENCIES S i t u a t i o n Iff* A . l . Demand Is t l n e - 1 i n l t e d : a . In a market f o r time- o r s t y l e - d a t e d commodities b. In a premium-price market c. In » s e a s o n a l o r h o l i d a y market Market f o r p e r i s h a b l e commodities can be extended: d . In time e. G e o g r a p h i c a l l y A.2. U t i l i z a t i o n c a n be I n c r e a s e d f o r : a . A p r o d u c t i o n u n i t by r e d u c i n g time l o s t w h i l e w a i t i n g f o r p a r t s o r m a t e r i a l s b. A f i x e d f a c i l i t y by e x t e n d i n g supply o r market area c. A mobile p r o d u c t i o n f a c i l i t y o r equipment by r e d u c i n g time spent i n moving between j o b s A.3. The company d e s i r e s to speed up investment t u r n o v e r i n commodities which can be u s e d as soon as r e c e i v e d A.4. Any s i t u a t i o n i n which a i r f r e i g h t w i l l meet a c r i t i c a l r e q u i r e m e n t f o r the s h o r t e s t p o s s i b l e t r a n s i t time B.I. REDUCE INVENTORY INVESTMENT B . l . Inventory i s used s p e c i f i c a l l y to s e r v i c e p r o d u c t i o n and s a l e s r e q u i r e m e n t s because demand I s u n p r e d i c t a b l e as to time, l o c a t i o n , or v a r i e t y U s e o f s p e e d t o r e d u c e c o a t s o f h o l d i n g g o o d s i n i a r e n t o r y w h i l e Qoin-l a i n i o g o r i o p r o v i n g .2. REDUCE RISK OF INVENTORY LOSS OR OBSOLESCENCE B.2. Inventory used to s e r v i c e p r o d u c t i o n and s a l e s i s p h y s i c a l l y , t e c h n o l o g i c a l l y , o r s t y l e p e r i s h a b l e and demand i s u n p r e d i c t a b l e REDUCE INVESTMENT AND OPERATING EXPENSES ASSOCIATED WITHINVEN-TOflY FACILITIES AND SERVICES s e r v i c e B.3. Reduction or e l i m i n a t i o n o l i n v e n t o r y w i l l p e r mit r e d u c i n g : a. S i z e o r c o m p l e t e l y e l i m i n a t i n g an i n v e n t o r y f a c i l i t y a t one o r more l o c a t i o n s b. Inventory s e r v i c i n g c o s t s even w i t h o u t r e d u c i n g warehouse f a c i l i t i e s B.3. c. i n v e n t o r y can be c e n t r a l i z e d to permit a r e d u c t i o n In t o t a l f a c i l i t i e s and s e r v i c i n g c o s t s even w i t h o u t r e d u c i n g t o t a l i n v e n t o r y .4. REDUCE COSTS INCURRED BY HAVING JOBBERS OR WHOLESALERS PERFORM INVENTORY FUNCTION B.4. A company's procurement o r d i s t r i b u t i o n p r o c e s s e s w i l l p e r m i t b y p a s s i n g Jobbers o r w h o l e s a l e r s REDUCE RISK OF HAVING COMMODlTIES LOST. STOLEN, DAMAGED, OR SPOILED" IN TRANS IT C . l . A l t e r n a t i v e means o f t r a n s p o r t have: a. A high i n c i d e n c e o f s t o l e n o r l o s t commodities b. A h i g h r a t e of p h y s i c a l damage c. A high i n c i d e n c e o f s p o i l e d o r d e t e r i o r a t e d commodities U s e o f a i r f r e i g h t b e c a u s e o f s u p e r i o r c o n d i t i o n s o f c a r r i a g e REDUCE COSTS AND TIME OVER WHICH PROVISIONS FOR PRESERVING OR PROTECTING GOODS IN TRANSIT ARE REOUIRED C.2. A l t e r n a t i v e o f t r a n s p o r t i n c u r : C o s t l y g u a r d i n g a g a i n s t t h e f t o r d i s a p p e a r a n c e H e a v i e r o r more c o s t l y packaging C o s t l y environmental c o n t r o l S p e c i a l s e r v i c e s o r s p e c i a l h a n d l i n g Higher i n s u r a n c e c o s t s C-3. ENHANCE CONTROL OR MANAGEMENT OF GOODS IN TRANSIT C.3. E x p e d i t i n g through movements by a l t e r n a t i v e means of t r a n s p o r t c h a r a c t e r i s t i c a l l y r e q u i r e s premium h a n d l i n g and g r e a t e r d i f -f i c u l t y In c o o r d i n a t i o n and documentation C-4. REDUCE DUTIES IN INTERNATIONAL MOVEMENTS C.4. Duty i s a s s e s s e d on a g r o s s weight b a s i s , which by d e f i n i t i o n I n c l u d e s packaging C 5 . EXPEDITE HANDLING OF SMALL LOTS C.5. a. Departure o r a r r i v a l times o r the r o u t e c o n n e c t i o n s r e q u i r e d by a l t e r n a t i v e forms o f t r a n s p o r t a r c not c o n v e n i e n t o r , p r e d i c t a b l e b. Volunc to be moved i s s u f f i c i e n t to take advantage o f r a t e b r e a k s o f f e r e d by s i r c a r r i e r s but not s u f f i c i e n t to take advantage o f r a t e breaks o f f e r e d by o t h e r forms of t r a n s p o r t Source: S t a n f o r d Research I n s t i t u t e . James E. Gorham. "How to Identify Potential Users of Air Freight" (a paper prepared for Emery Air Freight Corporation, Wilton Connecticut by Southern California Laboratories of Stanford Research Institute 1963), p. 9. 39 air freight usage. This study hy Gorham does provide a useful technique. It allows for selective use of a i r freight for specific situa-tions while at the same time i t points out situations in which a i r freight would probably not be advantageous. It also pro-vides a rather comprehensive l i s t of the advantages of a i r freight as well as types of situations or company characte-r i s t i c s which would suggest a closer examination. It does not, however, indicate that a i r freight w i l l definitely result in a net cost saving over surface transport in any particular situa-tion. The procedure followed by Gorham has not been used in this paper for several reasons. F i r s t l y , he deals only with large firms shipping via major airlines, in many cases to a l l parts of the world. This paper i s concerned with small firms in small towns with very limited markets. It i s questionable whether Gorham's Classification Sheet could apply in this type of situation. Secondly, the author found no specific applica-tion of Gorham's technique to test i t s validity. Lastly, one of the purposes of this paper i s to deal with a i r freight ta-r i f f s and the question of ela s t i c i t y . This necessitates dis-cussion on costs and hence we are forced to begin in what Gorham considers the second stage of the analysis. 40. CHAPTER IV ANALYSIS - SURFACE TRANSPORTATION VERSUS AIR TRANSPORTATION Selection of Area and Towns This analysis focuses on the southern part of the West Coast, primarily on Vancouver Island. This i s done for three reasons. First, a time constraint exists, and i t has been decided that a thorough analysis of the southern section w i l l be more useful than a sketchy analysis of the north and south. Second, most of the problems and situations discussed in the southern areas can be applied to the northern areas. Third, i t has been suggested by B. C. Airlines that the focus of the study be changed to deal only with the southern area. Specifically, three areas and four towns have been selected as samples for this study. These have been selected in consultation with B. C. Airlines' o f f i c i a l s , with the aim in mind of sampling towns with various characteristics in terms of accessibility, types of industry, location, and competitive atmosphere. These towns and surrounding areas include Tahsis, Bella-Coola, and Tofino-Long Beach-Ucluelet. Bella Coola i s situated on the mainland and the others are on Western Van-couver Island. Details etcetera are discussed in the analysis of each area to follow. A wide variety of firms are interviewed, ranging from grocery stores, clothing stores, gas stations, fishing companies, and sawmills, to a newspaper and printing shop. The situation, 41. demands, and problems are different for each firm, and an attempt i s made to discuss these as thoroughly as possible. Any discussion on backhaul, contribution theory, demand elastic i t y and the writer's observations and comments are re-served for later chapters. This chapter points out what the role of a i r freight could and should be in each area. This involves i t s effect on the Internal functions and costs of each firm, the competitive situation, and the ultimate consumer. In other words how w i l l good air freight service influence the marketing atmosphere of the town. Although i t would be desirable to divorce this analysis from the existing a i r freight situations, so as to reduce positive or negative bias on behalf of the firms interviewed and the inter-viewer, this i s not possible. Such factors as past and present r e l i a b i l i t y , freight t a r i f f s , schedules, and freight capacity have structured the thinking of people in each of these towns. These attitudes are considered during the analysis and in more detail in Chapter Five. The detailed examination of each firm in each area i s exhaustive, and the material presented very repetitious. For these reasons this information i s presented in Appendices IX,X, XI and XII. A summary for each town and area of the particular problems, the important analytical information, the results of the cost and characteristic analysis, and the potential for air freight for each area i s discussed in this chapter. 42. A i r Versus Surface Transportation: Some Introductory Comments. Before proceeding to the analysis of i n d i v i d u a l firms i n each area, i t w i l l be helpful to c l a r i f y our approach and explain i n general terms some of the problems. As discussed e a r l i e r , the purpose of t h i s analysis i s to compare physical d i s t r i b u t i o n costs, advantages, and problems between the use of a i r and/or surface transportation. Naturally a i r f r e i g h t charges a premium rate and t h i s extra cost must be j u s t i f i e d either by extra benefits or by associated reduced costs i n another function. A change i n the mode of transportation used by a firm can have f a r reaching influences. These influences can be i n -creases or decreases i n variables associated with d i s t r i b u t i o n , some of which can be measured i n terms of d o l l a r s , and others which cannot be measured accurately. The variables found to be quantifiable during the f i e l d work i n t h i s study vary between firms. The l a r g e r firms are more sophisticated and had more data a v a i l a b l e . Willingness of management to divulge cost data also presented a b a r r i e r , but only i n a few cases. The objective has been to consider as many quantifiable variables as were available, and discuss the remainder subjectively. The emphasis i n t h i s study i s placed on the effect of a change i n transportation mode on inventory and related variables. This i s done fo r several reasons. F i r s t l y , t h i s i s the area i n which some information, although scarce, was available from almost a l l firms. Secondly, t h i s i s the area, 43. which i s most often affected by a change i n transportation mode. It Is most important both i n terms of the amount of money spent on i t and the management and organizational problems involved. Thirdly, an i n v e s t i g a t i o n of inventory w i l l indicate the kind of detailed analysis that must be employed, and would be, i f a l l the inventory and cost data were obtainable. This i s not to say that only inventory and associated costs are considered, but rather that the emphasis i n the cost analysis i i s placed here. Many other variables are discussed subjectively based on the f i e l d interviews. This emphasis on a change i n Inventory i s based on the assumption that the use of a i r transport can reduce inven-tory l e v e l s and many rela t e d costs. It i s important that t h i s point be c l a r i f i e d . Lewis states, "The claim i s frequently made that high speed trans-portation allows a company to carry smaller inven-t o r i e s and reduce costs thereby. Our research i n -dicates that at t h i s time i t i s almost impossible to test the general v a l i d i t y of t h i s claim through the use of empirical data c o l l e c t e d from a number of i n d i v i d u a l f i r m s . " 2 He gives three reasons f o r t h i s statement, and these have been found to be quite v a l i d i n t h i s paper's analysis. F i r s t , almost every company1s inventory contains some items which are not l i k e l y now or i n the future to be 1 Other variables are also discussed quantitatively whenever a v a i l a b l e . 2 H. T. Lewis, J. W. C u l l i t o n , J . D. Steele, "The Role of A i r Freight i n Physical D i s t r i b u t i o n " (Boston: Harvard University, 1956)! p. 58. 44. transported by a i r . These include low value per weight items, and items purchased a r e l a t i v e l y short distance from the firm«s l o c a t i o n . Second, the wide variati o n s i n types of inventory c a r r i e d even by one firm, and the r e s u l t i n g complexity of the inventory picture of the area as a whole, make i t impossible to generalize. Third, data on the cost of carrying inventories i s almost completely lacking. Firms seem to accept the cost of carrying Inventory as a necessary e v i l , and hence do not bother to estimate what i t may cost. Estimated costs ranged from nine per cent to t h i r t y per cent.^ Despite these comments by Lewis which appear v a l i d , Heitmeyer and Groenewege suggest that i n most cases a reduction i n inventory and associated costs can be expected when a i r 4 f r e i g h t Is used. The approach used i n t h i s paper i s to agree with the l a t t e r comments when analyzing the data, make explana-tory assumptions where required, and make subjective and ob-j e c t i v e comments based on f i e l d interviews to explain the act-ual s i t u a t i o n more c l e a r l y . A b r i e f comment on most of the variables that are considered when analyzing each firm w i l l help the reader under-stand what i s being done. These variables are separated into J Lewis, C u l l i t o n , Steele, op_. c i t . , p. 58. 4 A. D. Groenewege and R. Heitmeyer A i r Freight Key to Greater  P r o f i t (Middlesex England: Aerad P r i n t e r 1964). 45 d i r e c t costs or those d i r e c t l y associated with shipping, i n -d i r e c t costs, or those variables affected by the c h a r a c t e r i s t i c s of the transportation method used, and intangible factors which l i k e many i n d i r e c t costs very often do not lend themselves to a quantifiable change. 46 DIRECT COSTS Primary Transportation Costs include the cost of the primary method of transportation. These charges are calculated ac-cording to the t a r i f f s as so much per one hundred pounds or cubic feet whichever i s greater. These charges include handl-ing, documentation, and insurance charges while in transit. Air freight charges are usually higher and no specific commodity rates exist. This i s not so for boat and truck transportation on the coast. Secondary Transportation Costs include the cost of getting the merchandise from the consignor to the origin of the primary transportation and from the destination of the primary trans-portation to the consignee. These charges include handling and documentation charges and usually insurance. Packing and Crating Costs include the materials and time required to package or crate goods for shipment. Air shipments often have an advantage because they usually require less protection. This i s because of smoother handling and ride, shorter transit times and low pilferage rates. Packing for air freight i s no more expensive than for local distribution by road. Less pack-ing material also results in a lower gross weight which means additional savings in airlines transportation charges. Less packing also saves the consignee time in unpacking. Insurance Premiums for a i r freight are much lower than those for most surface transport because of smoother handling and shorter travel times resulting in less risk of breakage and pilferage. 47. This i s not applicable in this analysis because the trucking firms and airlines had insurance charges built into their rates. B. C. Airlines did not charge for items over maximum value. Coastal shipping did not offer insurance for goods in transit and often refused responsibility for breakage and theft.5 This i s an exception to general shipping practices. Interest on Capital Invested in Transit includes the cost to the firm of having capital tied up in goods which are in transit. Faster transportation results in faster capital turnover and less interest charges because goods become productive faster. Often trade discounts can be realized by fast capital turnover. These charges are not too important in this study because the consignee in most cases did not take ownership of the goods until they were delivered to him. Hence the consignor absorbed this cost, and could pass i t on to the consignee who in most cases stipulated what method of transportation to use. Other direct costs such as transfer charges, transit warehousing and wharfage, customs clearance costs, etc. apply primarily to international shipments and are not relevant to this study. INDIRECT COSTS Interest Charges on Capital Invested In Inventory fluctuate with the rate of interst charged and the value of the Inventory. If 5- This i s the feeling of several merchants in each town and i s not substantiated by fact. 4 8 we assume that a i r freight allows a reduction in inventory-levels then this cost w i l l be reduced. The interest rate used depends upon each firm and their "cost of capital". The value of the Inventory depends on the method used by the firm to value inventory. Both of these facts are stated for each firm when possible in the following analysis, however neither i s neces-sarily accurate. Taxes on increased inventory value result i f the inventory value appreciates and results in a paper profit. To the extent that inventory levels are lower through the use of air freight these costs are reduced. For the sake of this analysis these costs are not analyzed because for most firms inventory values were not sufficiently accurate. Osbolescenoe and Deterioration Costs w i l l fluctuate with the kinds of goods in inventory and the quantity of them. Produce for example i s very perishable and loses i t s saleability very quickly. Fashion goods on the other hand do not deteriorate but they become obsolete. The same i s true with automotive and electrical repair parts. To the extent that the general level of inventory i s reduced and particularly those types of goods which are most susceptable to deterioration and obsolescence are reduced, then these costs can be reduced. Maintenance of Inventory includes several costs which are a l l closely interrelated. If inventory levels are kept lower by the use of air freight, then cost savings can be realized from reduced space requirements, reduced maintenance of smaller 49. inventory and a reduction in personnel. On the other hand a reduction in inventory requires better control procedures to prevent costly stockouts. Smaller inventory requires more frequent orders and these can be costly in terms of paper, cl e r i c a l time, bookkeeping, lost discounts and higher freight rates because of smaller and lighter orders. Smaller inven-tory means more frequent receivings and this may increase hand-l i n g costs because more staff would be needed. These types of costs are m:entioned frequently in this analysis. Insurance Charges for Inventory and Buildings are very real and fluctuate with the value of the inventory. Most firms inter-viewed however, carry comprehensive policies which do not allow a cost breakdown according to inventory value. INTANGIBLE FACTORS These include the following: door to door delivery time, punctuality, r e l i a b i l i t y , frequency of arrivals and departures, competitive advantage, better service and greater customer satisfaction, and f l e x i b i l i t y in adapting to changing demand. To the extent that a i r freight can provide these services better than surface transport then they offer the user a definite advantage, even though i t cannot be expressed In dollars. These factors are discussed in the analysis where applicable. In the cost analysis for each firm which i s under-taken several costs are grouped into the cost of carrying 50 inventory. These costs include i n t e r e s t on invested c a p i t a l , taxes, obsolescence, deterioration, insurance, s t a f f and or-dering. It i s assumed they w i l l fluctuate as the l e v e l of inventory fluctuates. This i s done, as previously noted be-cause these costs are not available on an i n d i v i d u a l basis, and because inventory control data i s not available to allow an estimate of how much the use of a i r f r e i g h t w i l l allow Inventory to be reduced. 51 Tofino - Ucluelet Area Tofino and Ucluelet are separate towns, situated on the southern part of the West Coast of Vancouver Island. They are almost due West of Vancouver and just North of Barclay Sound. A paved road twenty-six miles long separates the two towns. Between these two towns we find Long Beach which i s a sparsley populated settlement but which possesses a beautiful ten mile long sandy beach on the open sea. The distance from Ucluelet to Albemi i s sixty-eight miles and another forty-seven miles to Nanaimo. If reasonable connections are made with the ferry, the tri p by road from Vancouver to Ucluelet i s between six to nine hours. The time factor i s high because forty-eight miles of the road on the Ucluelet side i s gravel, narrow, rocky, and f u l l of pot holes. Local residents drive across i t only when necessary, and tour-ist s usually do not want to drive their cars back. There are several forms of transportation to Tofino-Ucluelet. A reasonably accessible highway exists as mentioned above. Boat service, for freight primarily, operates from Al-bemi and from Vancouver. The boat t r i p from Vancouver via the Tahsis Prince takes approximately four days around the northern tip of the Island. A large airport, in terms of size of a i r -craft which can land, i s situated between Tofino and Ucluelet. Air water bases are located at both Tofino and Ucluelet. The present scheduled flying time from Vancouver to the Long Beach airport i s just less than one hour. It i s then approximately 52 thirteen miles to either Tofino or Ucluelet. Both of these towns exist to support several i n -dustries in the area. Table 4:1 below summarizes these. Table 4:1 Economic Data for Toflno-Long Beach-Ucluelet Area in Late 19&5 Industry Number of people employed Annual Payroll Value of Production or Sales Fishing 600 #4 , 8 0 0 , 0 0 0 # 1 9 . 1 3 5 . 0 0 0 Logging 259 #1,864,000 # 7 . 5 0 0 , 0 0 0 Mining 175 # 1 , 0 5 0 , 0 0 0 # 6 , 8 2 5 , 0 0 0 Hotel, Motel Resorts 33 N.A. # 410 ,000 General Merchants 29 N.A. # 1 , 3 9 5 . 0 0 0 Miscellaneous Sales 35 N.A. # 646 ,000 Source: An Economic Study submitted by the Town Council to the Government of British Columbia in late 1 9 6 5 . Obtained from the Ucluelet Chamber of Commerce. Commercial fishing i s the most important factor in the economy. It employs six hundred men on five hundred t r o l -lers during the fishing season. Some of these men and their families l i v e in the area during the off season as well. Log-ging i s the second most important industry in the area, employ-ing about two hundred and sixty men on nearly a year-round basis. MacMillan Bloedel Ltd. and Canadian Forest Products are the biggest operations, but several smaller logging operations 5 3 exist as wel l . Mining has been important i n the past, however the i r o n mine was closed permanently as of March 3 1 t 1 9 6 8 . Tourism i s an industry i n the neophyte stage at present. It i s a r a p i d l y growing industry i n t h i s area and future growth i n the area w i l l probably r e s u l t from t h i s . Drive-in restaurants, motels and t o u r i s t f a c i l i t i e s and services appear ready to develop as soon as the paved road to Alberni i s completed and the beach f a c i l i t i e s and scenery receive the p u b l i c i t y they deserve. This area, including Long Beach, appears to be on the threshold of a t o u r i s t explosion. The only other business i n the area includes r e t a i l stores, service companies and s o c i a l organizations. Table 4 : 1 Page 5 2 indicates the extent of these f a c i l i t i e s . Only primary industry exists with no secondary manufacturing f a c i l i -t i e s present. The population of the area i n 1 9 6 5 was estimated to be 2 , 0 0 0 people plus over 1 , 2 0 0 Indians on reserves.^ In 1 9 6 7 the population of Tofino alone was 5 0 5 persons and 1,080 i n Ucluelet. There were 5 6 0 students i n schools i n the area i n 1 9 6 7 - 6 8 . A t o t a l of 5 0 0 cars are li c e n s e d i n the area.''' ^ B r i t i s h Columbia, Bureau of Economics and S t a t i s t i c s , Depart-ment of In d u s t r i a l Development, Trade and Commerce, Regional Index of B r i t i s h Columbia, ( V i c t o r i a : Province of B r i t i s h Columbia Press 1966), p. 3 3 7 . ? Information obtained during an interview with Mrs Karpoff, Manager Ucluelet Chamber of Commerce March 2 8 , 1 9 6 8 . 54. The competitive situation in the Tofino-Ucluelet area does not approach that of a city or large town, however i t i s certainly much more prevalent than in a town such as Tahsis, or Bella Coola. Consumers in the area have a choice of buying their merchandise in Tofino or Ucluelet, travelling to Alberni, Nanaimo or Vancouver, or mail order from Alberni, Victoria, Nanaimo or Vancouver. This mail order competition i s very real because the assortments are much larger, the prices lower and several large department stores in Vancouver, Victoria, Nanaimo and Alberni w i l l deliver to the Tofino-Ucluelet area free of charge. Competition between outlets in Ucluelet and in Tofino does exist, particularly for food. This w i l l be discussed more specifically for each firm. This In town com-petition appears to be somewhat more relaxed and congenial than competition as i t i s usually known. The important point, how-ever, i s that the consumer does have a choice of where to shop for food, clothing, housewares, etc. in both Tofino and Ucluelet. This choice does not exist within the town of Tahsis. Also of note i s that the towns of Tofino and Ucluelet do not act as the hub of activity for the surrounding area to the same extent as i s true of Tahsis. Most of the freight brought into this area i s purchased here and not redistributed to a multitude of small camps, as i s true of Tahsis. Also of note i s the fact that this area i s much more active during the summer fishing and tourist months than in the winter. 55 Ucluelet and Tofino The criterea used to sample firms In Ucluelet and Tofino i s twofold* Firstly, firm types similar to those in other towns are sampled to allow some comparison. Secondly, as many different types of firms as possible are sampled. The firms sampled include-two general stores, a clothing and g i f t shop, a shoe store, a drug store, a printing shop, a r e t a i l electronics and repair shop, a Government Liquor store, a school board, and two food stores. These firms represented about sixty per cent of the r e t a i l stores in the towns. It should be mentioned that Tofino i s somewhat smaller, less active, less progressive and less competitive than Ucluelet. The people In the area have been receptive to the Q idea of an air freight study. This attitude exists because the only trucking firm which transported goods into the towns has in the past provided very good service. Recently, however, their service has been deteriorating and the rates increasing. This situation i s probably temporary because no backhaul exists. In the fishing season this same firm carries most of the fish out of the area to Vancouver, and hence the service into Uclue-let and Tofino improves. The townspeople s t i l l feel they are being taken advantage of however because they are at the outer-most point of Vancouver Island routes. They appear willing to accept any alternate kind of transportation which i s reliable and less costly, (or the same). 8. The author found most people Interviewed co-operative and positive in their attitude toward a i r freight usage. 5 6 . Most owners seem to appreciate the aim of the study, but none understand or at least accept the concept of total distribution cost analysis. The reasons for this doubt become obvious as each firm i s analyzed in greater detail and some of the problems become evident. One last problem i s significant. None of these firms with the exception of Firm A maintain any kind of inventory con-tr o l system, or monthly expense statements. Data such as amount of weight shipped in from Vancouver, cost of holding inventory, and inventory level, rate of sales, etc. for single items i s simply not available. These firms do not generate or use this type of data. They may do so intuitively on the job, but the information i s not available to the interviewer except as e s t i -mates and approximations. Since the detailed cost data desired i s not available, the available data w i l l be gathered and certain assumptions made so as to generate some idea of a cost comparison between using surface transport and air freight. Most of the cost factors are expressed subjectively, based on the comments made by the firms 1 owners or managers during the interviews. 5 7 . Summary of Pertinent Information and Results for Tofino-Ucluelet This summary9 groups the findings for a l l firms in the Tofino-Ucluelet Area into a general statement about the area. This provides the reader with an overview of the advantages and shortcomings of using air freight as a substitute for the present transportation method. Table 4 : 2 Page 58 provides a comparison for each form of transportation, of charges, weight limits, frequency, and time required for transportation. Of particular note i s the higher cost of air freight, the small weight capacities, and the small difference in travelling time between truck and aircraft. For each firm in Tofino and Ucluelet the primary transportation cost i f air freight i s used, far exceeds the cost of present transportation methods. Estimated cost increases range from two to eight times the present transportation cost. In addition, a i r freight usage requires secondary transportation in Vancouver and in Tofino-Ucuelet. This addi-tional cost for six months ranges from a low of $ 1 0 3 * 0 0 for the smallest firm to a high of $ 4 , 2 2 1 . 0 0 . Present methods of trans-portation do not require secondary transportation. The short travelling distance by road as well as the additional handling required for air freight means that the packing and crating costs are very nearly identical by either method. Most goods travel in the original cartons no matter which method they are shipped by. 9. As previously noted detailed analysis and discussion of each firm i s provided in the Appendix. 58. Table 4:2 TRANSPORTATION CHARACTERISTICS BY BOAT, TRUCK, AIRPLANE AND  MAIL FROM VANCOUVER TO TOFINO OR UCLUELET IN 1968 Primary Charge Per Pound in $ Secondary Charge Per Pound in # Mini-mum Charge in $ Maxi-mum Weight Fre-quency per week Time in Transit Door to Door Delivery Time Air Freight .10 .0015 .02 (1) $3.00 2100 M W F 1 hour plus 1 - 3 hours Boat .014 .0015 .0015 $1.40 710, 000 Tues-day 4 days 4 - 5 days Truck (Public) .046 (2 N i l $4.60 710, 000 M W F 6 - 9 hours over-night 7 - 1 0 hours Mail See table 9:7 Page 156 Nil • 35 25 Daily 6 - 8 hours Not applic-able Truck Contract Co-op .014 Nil $1.40 710, 000 M W F 6 - 9 hours over-night 7 - 1 0 hours NOTE: 1. The 2 cents per pound charge from the Tofino airport to Tofino or Ucluelet i s unnecessarily high and would probably decrease substantially i f the freight volume increased and competitive forces became operative. At present i t i s a losing proposition even at this rate. 2. Rate for general merchandise. Many commodities more or less costly. Source: Data collected during f i e l d interviews and from various rate sheets not labeled. 5 9 . The cost of insuring the merchandise while i n t r a n s i t i s not available from any firm including the transportation com-panies Involved. The merchandise i s insured, however the cost i s b u i l t into the t a r i f f . It i s not possible to conclude that a i r f r e i g h t allowed lower insurance premiums. Theoretically a i r f r e i g h t has a lower r i s k of theft or damage to goods i n t r a n s i t . In t h i s instance however the t r a v e l l i n g time by truck i s very short and a i r f r e i g h t requires addi t i o n a l handling and secondary truck transportation. The re s u l t i s that both transportation methods carry very l i t t l e r i s k of damage or theft while i n t r a n s i t . Some firms f e e l that a i r f r e i g h t i s s l i g h t l y safer however, perishables such as produce or flowers are the only goods which d e f i n i t e l y increase i n worth when shipped by a i r . The cost of owning the merchandise while i n t r a n s i t applies to only two firms. These firms pay f o r the merchandise p r i o r to shipping i t . This cost i s l e s s when a i r f r e i g h t i s used, however, the saving i s minimal because door to door d e l i -very times are so s i m i l a r f o r a i r f r e i g h t and truck transporta-t i o n . The value of the goods i n t r a n s i t i s also very small and hence i n t e r e s t charges are n e g l i g i b l e . Each firm states that the use of a i r f r e i g h t w i l l not allow any reduction i n the value of inventory. Most firms f e e l t h i s way because the difference i n t r a v e l l i n g times i s small, the frequency and r e l i a b i l i t y of a i r f r e i g h t are not i d e a l , and because they considered themselves good managers and as such 60. held inventory at the lowest level while s t i l l trying to maximize sales. Many firms have only their shelf stock. Hence, any savings that can be realized by a reduction in the cost of hold-ing excess inventory w i l l be very small. The significance of this i s pointed out in the cost analysis discussion. The maintenance of inventory and the corresponding costs w i l l increase for any firm using a i r freight even though the inventory may be less. This i s caused by increased ordering and receiving of merchandise, and by more accurate and more fre-quent counting of inventory. No accurate estimate of increased cost i s arrived at but most firms feel that this cost i s an im-portant consideration. Most firms feel that a i r freight service would be some-what less reliable than the present transportation method. They also feel that a i r freight usuage could provide a competitive advantage i f such a market existed and also i t could at times increase customer satisfaction. The cost analysis conducted for each firm 1 0 quantifies, the additional cost of a i r freight over the present transportation method, the estimated cost of holding the present inventory, and the amount that the present inventory must be reduced by i f suf-fic i e n t cost savings are to be realized to offset the higher cost of a i r transport. 10. See Appendices IX and X Pages 135 and I87. 6 1 . Table 4 : 3 A Summary for each Firm studied in Tofino and Ucluelet  of the Cost of Existing Transportation, the Estimated Cost of Air Freight Transportation and the percentage Decrease in Inventory required to realize the Necessary  Cost Savings. Truck Air % Decrease of Inventory Firm A Ucluelet Sundry Goods only $ 1,167.00 $ 8,626.00 63# Firm A Ucluelet Produce only $ 2,749.00 $ 23.858.00 N.A. Firm A Ucluelet Groceries $ 12,635.00 $ 109.66l.00 N.A. Firm B Ucluelet $ 220.00 $ 583.00 Firm C Ucluelet $ 378.00 $ 972.00 32# Firm D Ucluelet $ 717.00 $ 1,895-00 39# Firm E Ucluelet $ 239.00 $ 632.00 10# Firm A Tofino Hardware $ 359.00 $ 3.667.00 71% Firm A Tofino Dry Goods $ 186.00 $ 1,611.00 54# Firm C Tofino $ 276.00 $ 729.00 50% Source: Analysis of data collected during interviews. The percentage decreases in inventory, and resulting costs savings required to offset the higher a i r freight t a r i f f s are very large. This together with the previous comments of owners that inventories were at minimum levels clearly suggests that the use of air freight from an economic point of view i s 62. very unlikely. Even i f we assume a f i f t y per cent reduction in a i r freight rates only one firm could economically use i t without reducing inventories. Summarily the firm by firm analysis in Tofino-Ucluelet indicates that a i r freight usage would increase costs substan-t i a l l y but provide very l i t t l e cost savings or competitive ad-vantage over existing transportation methods. Tahsis and Area 1 1 Tahsis i s located at the head of Tahsis Inlet, Nootka Sound on the North West portion of Vancouver Island. It i s accessible only by water or a i r because no road of any descrip-tion exists. The town i s owned and operated by the Tahsis Com-pany which employs most of the people in the town. The popula-tion of Tahsis i s about eleven hundred people, and the total population including the surrounding camps, villages and towns totals approximately four thousand.x Logging i s the largest single Industry, with sixteen logging operations in the area. The largest i s in Tahsis where a recent expansion to the sawmill was just completed. As a re-sult of this and the new pulp mill at Gold River, "Considerable 1 1 The area surrounding Tahsis includes Zeballos, Esperanza, Fair Harbour, Kyoquot, Plumper Harbour, Kendrick Arm, Gold River, Greens Camp, Blow Hole Bay, Sandpoint, Amai Inlet, F r i e l l Lake, O'Hara's Camp, Queens Cove, Head Bay, Friendly Cove, Grand Bay, Chamlss Camp, Mooyaha Bay and Kauwlnch River. 1 2 British Columbia, Bureau of Economics and Statistics, Depart-ment of Industrial Development, Trade and Commerce, Regional  Index of British Columbia, (Victoria: Province of British Columbia Press 1966), p. 355 • 6 3 expansion of forestry activity i s foreseen, in logging a c t i -vity through harvesting of smaller materials, in lumber manu-facture, and in the new f i e l d of pulp production. 1 , 1 3 Other industry Includes the fleet of one hundred fishing vessels based in the area, primarily around Kyuguot and an iron mine located at Zeballos. The region i s not access-ible to general tourist t r a f f i c , however with new and improved highways and other types of transportation, and new tourist catering f a c i l i t i e s , increased tourist volume could be expected. Tahsis i s the focal point of the discussion in this section, however i t i s significant that there are about twenty towns, villages and communities surrounding Tahsis. Each of these i s serviced either by aircraft, boat, or both, often from Tahsis. Each of these communities supports some type of a c t i -vity such as fishing, mining or lumbering. Transportation to Tahsis i s by boat, air, or combina-tion truck and boat. The f i r s t alternative i s on Northland Navigation's boat "Tahsis Prince". This boat leaves Vancouver on Monday and stops at every small town along the coast on i t s northward journey. It usually arrives in Tahsis Friday morning. The second alternative i s to take the road from Vancouver to Campbell River and across to Gold River: The "Uchuck" leaves Gold River each Wednesday P.M. and arrives in Tahsis Thursday morning. The total journey takes about two days. The last 1 3 Ibid., p. 356 6k alternative i s a daily a i r service from Vancouver. This f l i g h t takes just over one hour and leaves Vancouver at 9 A.Mis. It returns in the early afternoon. Connecting fligh t s are provided to a l l smaller communities in the area. A fli g h t i s also avail-able from Campbell River on a daily basis. The atmosphere in Tahsis i s very relaxed. It i s a small town, and a large mixture of racial origins can be found amongst the townspeople. Firms In the town include a general store, a bank, a credit union, a laundry, a barber shop and beauty salon, a small hotel with lounge and restaurant, a post office, a gas station and marina, and a movie theatre. Competi-tion between firms in the town i s non-existant for obvious rea-sons. The only competition facing firms, particularly the gen-eral store, i s large department stores in Campbell River and Vancouver, because some of these deliver free to any area in British Columbia. For the most part, people in the town have a membership12* with the general store and they patronize i t quite f a i t h f u l l y . A detailed analysis has been performed on only two companies in Tahsis.1-' These include the B.C. Co-op Store and the warehouse at the Tahsis Company Sawmill. Before discussing these firms, however, brief comments are made about each of the other firms to indicate what goods they transport and how. Ik. This i s a B. C. Co-operative Store and hence the people do have some say in i t s operation. 15. See Appendix X Page I87 for a detailed analysis of both Companies. 65. Most of the firms in Tahsis provide only a service and consequently they do not ship goods on a regular basis. The Toronto-Dominion Bank and the Credit Union frequently have money shipped from Vancouver by a i r freight. The barber shop, beauty salon and the laundry infrequently have parcels shipped from Vancouver and these do not travel by any particular means. The movie theatre has a l l films sent in by mail. A l l mail into the area from Vancouver i s delivered by a i r freight from Campbell River. The combination service station and marina use a i r freight quite frequently, particularly for rush orders. Their inventory i s not large, because for breakdowns most people accept the fact that they are in an isolated area, and also most cars in the town are of one kind because the Tahsis Company must authorize a l l vehicles coming into town. This reduces the required inventory to a minimum and makes predicting of needs much easier. Summary of Pertinant Information and Results for Tahsis Table 4:4 Page 67 provides a comparison for each form of transportation to Tahsis of the cost per one hundred pounds; the weight limits, the frequency of travel, the travelling time needed, and the cost of any necessary transportation. Of parti-cular note i s the high cost and low load factor for air freight and the substantial difference in travelling time. In summary both firms analyzed in Tahsis w i l l pay freight charges between six and seven times what they presently do i f they use a i r freight on a regular basis. In return they 66 w i l l benefit from reduced packing and crating costs; better insurance coverage f o r goods while i n t r a n s i t , reduced inven-tory, lower r i s k of damage, theft, or spoilage, and more f r e -quent delivery. They would also r e a l i z e c e r t a i n disadvantages such as increased costs of more frequent ordering and receiving goods, and the increased r i s k of stockouts i f the inventory l e v e l i s reduced. Both firms analyzed agree that using a i r f r e i g h t f o r some goods could d e f i n i t e l y prove advantageous from a custo-mers point of view, however, the analysis of each merchandise c l a s s i f i c a t i o n f o r each firm indicates that the required cost savings needed to o f f s e t higher transportation charges are just not possible. For example i t i s not possible to reduce the dry goods inventory by f i f t e e n per cent, hardware by seven-teen per cent, and groceries by over one hundred per cent, i n an attempt to j u s t i f y a i r f r e i g h t usage by reducing inventory charges. Table 4 : 4 Transportation Characteristics to Tahsis for Various Modes of Transport, Travelling Time Frequency of Service Maximum Weight Pounds Primary Transportation Bate per one hundred pounds Secondary Transportation Rate per one hundred pounds Boat 3 - 4 days Once weekly 7 1 0 , 0 0 0 $ 2 . 1 2 $ . 1 5 . 5 0 Air 70 minutes Daily 2 , 4 0 0 $ 1 5 . 0 0 $ . 1 5 . 5 0 Truck & Boat 1 4 - 2 Once weekly 7 1 0 , 0 0 0 $ 2 . 5 0 1 $ 4 . 8 0 $ . 5 0 NOTE: Private Trucker to Gold River charges $ 1 . 4 0 per CWT. Common Trucker to Gold River charges $ 3 . 7 0 per CWT. ON 6 8 . Bella Coola and Area 1 6^ Bella Coola i s located on the mainland, north of Powell River and east of Ocean Palls. It i s in Queen's Sound at the head of Burke Channel. Other towns in the area include Ocean Falls, Namu, Bella Bella and Hogensburg. The Ocean Falls-Bella Coola area covers nine thou-sand six hundred and forty-eight square miles. The population In 1 9 6 1 was four thousand seven hundred and seventy-one people and the estimated 1 9 6 5 population was five thousand. This did not include one thousand five hundred and seventy-six Indians on reserves. The 1 9 6 1 population of Bella Coola was three hun-dred and forty-five people.1"'' The pulp and paper mi l l at Ocean F a l l s . i s the main-stay of the economy for the area. Logging i s carried out a l l along the coast while the wood operations for the pulp mill are centred at South Bentinck and Bella Coola. A number of indepen-dent logging contractors operate i n the area to supply the m i l l as well. While employment in pulp and paper w i l l decrease further i n the future, due to the technological change, i t i s expected that the increasing raw material requirements of the coast forest industry w i l l result in expansion of logging a c t i -vity. There i s room for considerable growth in logging activity, 16 Area means surrounding fis h camps and small logging camps. !7 British Columbia, Bureau of Economics and Statistics, Depart-ment of Industrial Development, Trade and Commerce, Regional  Index of British Columbia, (Victoria: Province of British Columbia Press 1966), p. 411. 6 9 . both within the existing standards of utilization, and through increased u t i l i z a t i o n of smaller material. In 1963 there was a total of one thousand four hundred and f i f t y people employed 1 ft in forestry In this area. The only other significant industry in the area i s commercial fishing. In 1964 there were two hundred and seventy commercial fishing Vessels employing three hundred persons. British Columbia Packers Ltd. i s located at Bella Bella and Namu. A cannery and f i s h reduction plant Is located at the latte r location. This provides considerable employment during the fishing season. Tourism could be a potential industry, however the area i s not easily accessible and i s distant from centres of population. There are several means of transportation into Bella Coola. Highway twenty stretches two hundred and ninety-eight miles west from Williams Lake to end at Bella Coola* This road i s in very poor condition and attempts to ship goods by this route have failed. Northland Navigation provides once weekly service from Vancouver for passengers and freight. B.C. Air-lines provides thrice weekly service from Vancouver. Table 4 : 5 Page 70 summarizes the transportation characteristics. Bella Coola i s a small town with a general store, bowling alley, movie theatre, small motel and a hospital. There i s no direct competition In the town, however Ocean Palls with 1 8 Ibid., p. 411 70. a population of over three thousand people i s located nearby and Is accessible by a i r or water. Until recently a Hudsons Bay Company Store was located there. Competition can also come from outside the area such as Powell River and Williams Lake. The town i s somewhat similar to Tahsis in i t s competitive envi-ronment . Much of the activity in Bella Coola i s in support of the smaller logging operations and some fishboats. Hence a good proportion of the freight that enters Bella Coola i s provisions for these operations, and not for support of the town i t s e l f . In this respect this town i s more similar to Tahsis than to Tofino or Ucluelet. This also makes the problem of estimating the po-tential for a i r freight more d i f f i c u l t . This i s discussed in detail in Chapter Five. Only one firm has been analyzed in Bella Coola. This i s the general store which i s called Firm A and i s a branch of the B. C. Co-operative Society. Table 4 : 5 Comparison of Aircraft and Boat Characteristics to  Bella Coola. Primary Secondary Minimum Maximum Travelling Frequency Charges Charges Charge Weight Time of Per Per Per On Service 100 100 Shipment Average Per Pounds Pounds In Week Pounds Air Freight $22.00 .15 $3.00 2400 1.5 hours Tuesday Thursday Saturday Boat $2.20 .15 $2.69 10,000 19 hours Tuesday 71 A complete analysis discussing the advantages and dis-advantages of this firm using a i r freight i s provided In Appendix XI Page 212 Summarily i t states that the advantages to be r e a l i -zed when a i r freight i s used do not provide sufficient cost sav-ings to offset the higher cost of using a i r freight. For example inventory holding costs would have to be reduced by kk% for dry goods inventory and 175$ for hardware inventory If the additional cost of using a i r freight i s to be compensated for by reducing the cost of holding inventory. This i s considered the most important advantage of using a i r freight however reductions of this magnitude are not possible. 19 19« In an interview with the Sales Manager he stated that inventory levels could not be reduced sub-stantially because they carried basically only shelf stock. 7 2 . CHAPTER V OTHER FACTORS INFLUENCING POTENTIAL OF AIR FREIGHT The Existing Air Freight Situation The amount of freight presently carried by B. C. Air-lines into each of these four towns discussed i s very small r e l -ative to that carried by other modes and as a percentage of the total. The weight carried by each mode to each town i s presented in Table 5 : 1 Page 7 3 . A sampling of air freight waybills was analyzed for each town and i s presented in Table 5 * 2 Page 7^. The weight shipped by aircraft each month i s separated into Industrial and Domestic goods. Industrial goods include industrial, mechanical and electrical parts and supplies. Domestic shipments include personal effects, dry goods and paper goods etcetera. Industrial goods account for between seventyaone per cent and ninety-one per cent of a l l freight presently carried by B. C. Airlines to each of these four towns. In most cases this freight i s consigned to lumber camps, exploration teams, fishing or mining companies, construction camps, pulp or paper mills and sometimes to individuals. These firms use a i r freight for emergency and once-only shipments, on a regular but not pre-dictable or scheduled basis. For these firms, speed and service are the key factors in their demand for air freight. The higher cost of a i r freight i s small indeed compared to lost revenue i f a necessary spare part i s delayed and downtime must be paid. These types of firms have not been analyzed (except Firm B in Table fi:l Weight C a r r i e d i n Pounds by C a r r i e r Type to Each Town d u r i n g 196? Contract Truck Common Truck P r i v a t e Truck B o a t 1 P l a n e 2 TOTAL T o f i n o 924,575 6 , 0 0 0 1 , 3 2 8 , 0 0 0 N.A. 5 , 7 6 0 U c l u e l e t 1 , 2 0 2 , 6 7 3 38,400 N.A. N.A. 2 , 5 6 8 TOTAL 2,127 ,248 6 . 6 0 0 . 0 0 0 6 1 , 3 2 8 , 0 0 0 1 , 0 0 0 , 0 0 0 8 , 3 2 8 1 1 . 0 6 3 . 5 7 6 3 T a h s i s N.A. N.A. N.A. 5 , 2 0 0 , 0 0 0 9 2 , 9 0 4 5 , 2 9 2 , 9 0 4 4 B e l l a Coola N.A. N.A. N.A. 1 2 , 8 0 0 0 , 0 0 0 19,488 12,819 ,488-5 NOTES: 1 . These weights i n c l u d e f r e i g h t i n and out durin g I 9 6 7 v i a Northland N a v i g a t i o n . F i g u r e s estimated by T o t a l Revenue _ Average r a t e per pound ~ W E L S N T 2 . These weights c a l c u l a t e d by m u l t i p l y i n g monthly average by 1 2 . 3 . Unable to measure o t h e r f r e i g h t c a r r i e d p r i v a t e l y by tr u c k and boat v i a Port A l b e r n i . 4 . Excludes weight c a r r i e d by boat-truck from Gold R i v e r 5» Excludes truck t r a n s p o r t a t i o n from W i l l i a m s Lake. 6 . T h i s t o t a l f i g u r e was pro v i d e d by Johnston Terminals and i s double a s i x month f i g u r e * See Appendix V I I I . Source: A n a l y s i s o f Waybi l l s f o r B.C. A i r l i n e s and B.C. Co-operative S o c i e t y , and i n f o r m a t i o n obtained from Johnson Terminals and Northwest N a v i g a t i o n . 74. Table 5:2 Analysis of Air Freight Shipments made to Coastal Towns  l n 1 9 6 7 Air versus surface departures per week Air Freight Carri ed in pounds Air freight as a % of total freight Monthly Aver-age weight carried by air freight in pounds Industrial Goods as a % of a i r freight TOTAL Tahsis 5:1 6 months 46,452 1.7% 7742 11% Tofino 3:3 8 months 3.843 .075% 480 80$ 8 months .075% Ucluelet 3:3 1.714 214 91% Bella Coola 3:1 8 months 12,993 .15% 1624 79% NOTE: A breakdown of a i r freight carried by town, by month, and by class, i s presented in Appendices II to VI. Source: Detailed analysis of B. C. Airlines waybills to each area.> Tahsis) because they do not ship freight regularly, they were not easily accessible, and they use a i r freight to a large degree at present. Domestic goods presently account for between nine per cent and twenty-nine per cent of a l l freight shipped to these four towns by B.C. Airlines. The freight charges for these goods in most cases are very important relative to service in determining demand for a i r freight. This i s because the consignee i s more able to plan his needs, and by establishing an inventory he i s able to 7 5 . avoid paying the high freight charges. In other words the re-t a i l store can usually forecast demand to some extent and in this way choose between high inventory and low freight charges or low inventory and higher freight charges. Because many of the costs Involved in holding inventory are opportunity costs and others are hidden, most merchants chose to hold higher i n -ventories and reduce the very real freight charges. Most firms discussed in Chapter Four have been p r i -marily non-users of a i r freight. Comments in the preceeding paragraph would be applicable to these firms. These same firms, however, ship freight into these areas on a regular and planned basis. The firms are relatively permanent in the community, easily accessible, and they are aware of the distribution pro-blems. It i s for these reasons that these types of firms were analyzed. The amount of weight carried by B. C. Airlines to each town expressed as a percentage of the total weight carried, increased as the travelling time by surface transport increased. Table 5:2 Page 7k shows B. C. Airlines carried one point seven per cent of a l l freight to Tahsis but only point one five per cent to Tofino and Ucluelet. The percentage of domestic goods carried by B. C. Airlines also increased as a function of the total air freight carried as the travelling time by surface modes to each town increased. Domestic air freight to Tahsis rep-resented twenty-nine per cent of the total a i r freight, whereas domestic a i r freight to Tofino represented twenty-per cent of the total and Ucluelet represented only nine per cent. Hence Table 5:2 Page 7k shows that as the difference between 76 travelling time, and between frequency of trips per week for surface and a i r transport increases, the use of a i r freight as a percentage of the total freight carried as well as the amount of domestic goods, as a percentage of a l l a i r freight carried has increased. The total volume of a i r freight car-ried to each town i s also influenced by the difference in travelling time and frequency between air and surface transport. Potential for Air Freight Air freight potential exists in three segments. The f i r s t i s new firms and camps opening in the future which have not established a procurement procedure. The second i s to i n -crease the u t i l i z a t i o n of air freight by industrial operations, or construction, lumber, and fishing camps, particularly in those areas where the advantages of a i r freight are marginal and many firms are using surface transportation. The third i s to encourage domestic firms such as those discussed in Chapter Four to use a i r freight more frequently. It i s not the intention of this paper to t e l l how this potential can be realized, but rather to t e l l i f i t can be rea-l i z e d . Two methods however appear useful in attempting to realize potential. The f i r s t i s an attempt to educate the po-tential user concerning the potential advantages of a i r freight and the Total Distribution Cost Concept. The second i s to lower the freight rates charged for a i r transportation. In reality some combination of these two appears desirable. The effe c t i -veness of either of these in realizing potential freight i s d i f f i c u l t to estimate. A reduction in a i r freight rates w i l l 77. l i k e l y not result in a major increase of industrial goods shipped by a i r because service i s more important than freight charges. Education or advertising could be useful to empha-size the advantages and service provided hy a i r freight. As-suming that a i r freight can maintain or increase i t s advan-tages relative to surface transportation, then there i s reason to believe that as the number of industrail firms and primary operations increase, this w i l l create additional demand for a i r freight services. Reduced air freight rates, in conjunction with the application of the Total Distribution Cost Concept as applied to the firms discussed in Chapter Four could influence their use of a i r freight. The word could i s used because each mer-chant stated that using air freight would not permit any re-duction of incentory. The cost of carrying inventory was as-sumed to be the primary cost saving realized from using air freight in the Chapter Four analysis. Despite these problems, for the purpose of the present analysis, i t has been assumed that any firm in the Chapter Four analysis which requires only a twenty-five per cent or less reduction in inventory and re-lated costs so as to compensate for the additional freight char-ges, w i l l use air freight for a l l of their freight shipment. It has also been assumed that produce goods would travel by a i r freight provided the extra cost did not exceed 1500.00 for the year. These assumptions are applied as the rates are reduced from their present level to one-half and one-third of the pre-sent l e v e l . Table 5*3 Page 78 indicates the increase in a i r freight usage i f the previous assumptions and analysis are ac-cepted by the merchants. 78. Table 5:3 Estimated Air Freight Potential in Pounds for One Year  from Firms Interviewed in Each Area i f the Air Rates  are Reduced by One-third or one-half existing rates. Full Air Freight Rate One-half ai r rate One-third a i r rate Total per Town Tofino 6,000 128,103 134,103 Ucluelet 10,000 219.970 88,159 318,129 1 Tahsis 16.200 2 244,513 260,713 Bella Coola 22,386 22,386 3 TOTAL 26,200 492,869 216,262 NOTES: 1. High because many firms were analyzed. 2. Weights provided not accurate and hence analysis favourable toward air freight. 3« Only one firm analyzed. 4. Assumptions underlying Table 5s3 are found on the previous page. If, however, the merchants are correct and no reduction of inventory and related costs are realizable from using air freight then the merchants w i l l not use air freight until i t s total cost Is as low as that provided by the surface carrier. If a l l mer-chants began using a i r freight at the point where i t s rate equal-led the surface carrier's freight rate, then the demand curve would be perfectly inelastic at existing rates and perfectly e l -astic at the point of equalization between air and surface total freight costs. 79 Figure 5 s i below illustrates this point. Figure 5•! Hypothetical Demand Curve for Air Freight Assuming  A l l Customers Began Using Air Freight when Air and Surface Bates were the Same. Rate in Present Air Rate Present Surface Rate Quantity of Present Air Freight Carried Freight by Air Educating the merchants so that they understand the real advantages of air freight, and take advantage of them, may allow the air freight rates to remain at a high l e v e l . It i s up to each firm's owner or manager to assess his particular situa-tion carefully and thoroughly and determine how much cost ad-vantages can be realized by using air freight, and then decide at what a i r freight rate he w i l l benefit by using a i r freight. The result could be that different firms would begin to use air freight at rates higher than the present surface rates be-cause they had come to realize that cost advantages offset to some extent the higher freight rates. Figure 5 : 2 Page 80 illustrates that the demand curve would change gradually from being nearly perfectly inelastic to nearly perfectly elastic. 80 Figure 5•2 Hypothetical Demand Curve for Air Freight Assuming •Improved Knowledge by Potential Users About the Total Distribution Cost Concept. Rate in $ Present Air Rate Present Surface Rate Air. Freight weight .Air Freight Quantity of At Present Weight With Freight Car-Reduced Rate ried by Air Two factors w i l l influence the realization of the above by B. C. A i r l i n e s . The f i r s t i s whether or not merchants in the area are willing to accept this rather new idea of business think-ing and change the status quo. The second i s that the surface carriers w i l l not stand by and watch B. C. Airlines take a part of their business away. Probably they w i l l offer improved ser-vice. This w i l l simply Involve improving the road to Tofino, Ucluelet, increasing the frequency of boat service to Bella Coola, and/or making daily trips from Gold River to Tahsis so that truck service i s available on a daily basis. Any of these tactics w i l l reduce substantially the arguments for using air freight. Reliability The question of air freight r e l i a b i l i t y i s raised fre-quently during the f i e l d interviews. Most merchants suggested that air freight was a good deal more costly and in return they should receive better service than 81. from truck or boat transportation. They argued that i f they used air freight on a regular basis, and reduced inventory accordingly, air freight would have to be perfectly reliable and predicable.. They saw no point in paying a premium rate to procure emergency goods quickly, i f the fl i g h t was to be delayed or cancelled for some reason. It i s obvious from these types of general comments that the townspeople did not consider a i r freight to be reliable at present. This i s particularly true of merchants in Tofino and Ucluelet and to a lesser degree in Tahsis. Statistics may show that in fact aircraft arrival and departures were on schedule most of the time. 1 This i s not impor-tant to the user however. They w i l l usually remember a single incident often far in the past where air freight service l e t them down. They tend to forget that the other ninety-nine per cent of the time they got perfectly dependable service. When queried by the interviewer most merchants had some unfortunate story to t e l l , while some just said that when i t was cloudy and windy the planes did not land, and that i t rains and blows a l l winter. When some explanation was presented by the interviewer the merchants1 responses were either, "how do you know-you do not l i v e here," or "we do not care about the reasons— only the results,*" The fact i s that i t matters not what the real 1. B.C. Airlines did a study in late I 9 6 7 which suggested that air t r a f f i c r e l i a b i l i t y to the West Coast was normally very high. 82 situation i s because the demand for a i r freight i s based on what the potential customers think i s true, not what i s in fact true. The most common complaints were errors in handling, resulting in goods going to the wrong destination, air freights low priority after passengers, luggage and mail, and the fact that just because these towns are on the West Coast they received second class service. To some extent the problem of r e l i a b i l i t y for many mer-chants in Tahsis, Tofino and Ucluelet, i s based less on a business decision than on an egotistic attitude. In other words, some mer-chants, and possibly quite a few, feel that they receive second class service from their suppliers, the transportation companies, the government, and the telephone company, just to mention a few. They express the view, that they want service and price equal to those i n Vancouver. This r e l i a b i l i t y problem i s an expression of this feeling, because in most cases the merchants stated that their customers were willing to wait for merchandise i f i t wasn't in stock or did not arrive immediately. The demand for r e l i a b i l i t y i s much more important for industrial goods and the preceeding comments are not applicable. Perishable goods require r e l i a b i l i t y as well. Attitude of Merchants The problems of r e l i a b i l i t y and attitude are very closely related. Aircraft r e l i a b i l i t y , the local air freight agents, the service offered by other forms of transportation, price, past ex-perience and many other variables influence the attitude of the potential air freight user. 83 With the exception of one merchant in Tofino, there was no animosity expressed or suggested toward B.C. Airlines. Most merchants interviewed expressed a positive attitude toward a i r freight, and many were enthusiastic about the possibility of im-proved service. This latter comment applies particularly to Uc-luelet. While a positive attitude did exist, a l l merchants stipulated that B.C. Airlines must reduce i t s rates equal to those of truck, and improve i t s r e l i a b i l i t y as well. Tofino,-*-Ucluelet merchants stated that existing truck freight rates were too high and they certainly would not pay more. At the same time most merchants stated that they would use a i r freight i f these condi-tions were met. Each grocery operator took the opposing view because at present, and probably in the near future, aircraft could not carry sufficient weight. They were, however, interested in a i r freight to carry perishables, particularly in the summer months. Despite these rather positive and receptive attitudes, there i s s t i l l no guarantee that i f rates are reduced, larger aircraft used, and r e l i a b i l i t y improved, merchants w i l l use a i r freight service on a regular basis. Assignment of Costs Every freight shipment represents costs of distribution for the consignor and procurement costs for the consignee. These costs are related and any decision to use or not use a i r freight would Ideally consider the situation, characteristics, and costs of both firms. The allocation of costs and the willingness of 84 firms to work together i s the primary problem. The opportunity costs of capital invested in goods in transit should be accounted for by either the consignor or the consignee. The use of a i r freight can reduce this cost, as well as provide faster capital turnover for the consignee. For nearly every firm analyzed in Chapter Four, however, this cost was ex-cluded as an advantage of using air freight in the cost analysis. This i s not quite accurate, because the use of a i r freight did provide a cost saving only i t was realized by the consignor in most cases rather than the consignee who paid the freight b i l l . The same situation i s true of additional packaging costs. The usual comment was that packing costs did not di f f e r between a i r freight and truck transport. In fact, i f a consignor realizes that a consignee uses a i r freight on a regular basis, and that a i r freight presents less danger of damage and theft, than surface transport, then packaging costs can be reduced below their present l e v e l . This cost saving can be realized by the consignor. The point i s that there are cost savings realized by using a i r freight, however these are often not realized by the firm which makes the decision to use a i r freight and pays the premium rates. Frequently i f the consignor and the consignee worked together, then they could benefit mutually from using a i r freight. This possibility would be particularly applicable to Firms A discussed in this paper because they are closely re-lated to their suppliers in Vancouver. 85 Advantages of A i r F r e i g h t : T h e o r e t i c a l o r R e a l i z e d I t should be emphasized that t h e o r e t i c a l l y the use o f a i r f r e i g h t can p r o v i d e many advantages. The r e a l i z a t i o n o f these advantages to the user however i s the r e a l c r i t e r e a o f whether a i r f r e i g h t can be used or n o t . The product, the f i r m , the market, the atmosphere, and the a l t e r n a t i v e t r a n s p o r t a t i o n c h o i c e s , are a l l i n t e r r e l a t e d v a r i a b l e s determining whether a g i v e n f i r m can r e a l i z e the advantages o f f e r e d by a i r f r e i g h t . In t h i s study s e v e r a l f a c t o r s are working a g a i n s t the r e a l i z a t i o n of advantages of a i r f r e i g h t use. The d i s t a n c e by a i r to each area d i s c u s s e d i n t h i s paper i s r e l a t i v e l y s h o r t . No p o i n t s e r v i c e d from Vancouver exceeds t h r e e hundred a i r m i l e s . T h i s means t h a t the primary advantage o f a i r c r a f t , speed, i s not as f u l l y r e a l i z e d , as i t would be w i t h g r e a t e r d i s t a n c e s . The r e s u l t i s t h a t door to door d e l i v e r y times f o r a i r f r e i g h t are o n l y m a r g i n a l l y g r e a t e r than s u r f a c e t r a n s p o r t f o r some a r e a s . The b e s t example i s T o f i n o and U c l u e l e t where the d i f f e r e n c e can be as l i t t l e as f i v e to seven hours. For B e l l a Coola the d i f f e r e n c e i s o n l y twenty hours. In many cases however, speed i n c o n j u n c t i o n w i t h a i r c r a f t f l e x i b i l i t y i s the prime con-s i d e r a t i o n . An a i r c r a f t can reach a remote l o g g i n g camp not a c c e s s i b l e by normal s u r f a c e t r a n s p o r t a t i o n . A i r c r a f t a l s o , be-cause o f t h e i r speed, can have more frequent d e p a r t u r e s . T h i s i s p a r t i c u l a r l y important where the d i f f e r e n c e i n t r a v e l l i n g time i s s m a l l . However, a f r e i g h t shipment which missed the Monday noon f l i g h t to T o f i n o , U c l u e l e t , would a r r i v e sooner i f shipped by 86 truck anytime before early Wednesday morning, because the next fl i g h t does not arrive until early Wednesday afternoon. Daily flights to Tofino, Ucluelet, i f feasible, would reduce the desir-a b i l i t y of using truck transportation. Frequent flights also increase the freight capacity to a given area which offsets the small payload of present aircraft. Another major deterrent i s the lack of competition with-in each area. In most cases each area was not large enough to sup-port several firms of the same type. This lack of competitive atmosphere means that many of the potential advantages of air freight cannot be realized. The disposable income and the number of people i n each area are relatively constant. They increase very slowly except when new industry develops such as at Gold River. Improved service, better assortment, faster delivery on special orders, and small price decreases are not l i k e l y to increase a r e t a i l firm's sales volume or customer count to any large extent. These advantages can only be f u l l y realized in a competitive situa-tion where the customer makes a decision on what store to shop at by considering assortment, service and price at several stores. 87 CHAPTER VI BACKHAUL AND CONTRIBUTION THEORY  INTRODUCTION As stated previously the quantity of freight moving out of Vancouver exceeds greatly the amount of freight returning to Vancouver. This shortage of backhaul freight means that the freight rates for goods leaving Vancouver must be high enough to cover or attempt to cover the fixed and variable costs of the re-turn f l i g h t rather than the one way f l i g h t . The realization of some regular backhaul even at reduced rates w i l l improve the average load factor, and eventually lead to reduced freight rates in both directions. This chapter discusses the potential for backhaul freight from each town investigated, as well as a brief investigation of how low a i r freight rates can be reduced to encourage companies to use a i r freight, particularly for freight returning to Vancouver. The f e a s i b i l i t y of hauling fis h to Vancouver i s also investigated briefly. BACKHAUL POTENTIAL FROM EACH TOWN The four towns investigated, as well as others serviced by B. C. Airlines, are service centres supporting one and some-times two primary industries. Tofino and Ucluelet are Important fishing ports, as well as centres for logging activity and until recently mining. Tahsis and Gold River support a lumber mi l l and pulp mill respectively. Bella Coola i s in the midst of the lum-ber and fishing industries. These towns have no significant secon-88 dary industry. The goods and materials going into these areas supply the primary industries, as well as those firms which provide goods and services for the workers and townspeople, most of whom work in the primary industry. The goods coming out of these areas i n -clude some goods returned to Vancouver, but primarily the output i s from the primary producers. These products include fis h , lum-ber, pulp, raw and finished paper and some ore. The commodities are generally very heavy, very bulky, and of low relative value per pound. Most of the products are destined for the lower mainland or other coastal points. Some of the lumber and paper products however are shipped directly to foreign points. The problems of backhaul exist for most firms in the transportation industry on the west coast. Excess capacity nearly always exists for the return t r i p to Vancouver.1 From Tofino-Ucluelet, for example, Northland Navigation, West Coast Freight, private truckers, and B. C. Airlines are a l l trying to obtain backhaul freight. Northland Navigation and West Coast Freight have attacked this problem by entering into private contracts with individual firms and then reducing the rates. Northland 1. Mr. D. Dunlop from Johnston Terminals Ltd. (owners of West Coast Freight) explained during an interview with the writer that backhaul from the West Coast always presents a major problem. 89 Navigation i s charging eighty-four cents per one hundred pounds for empty propane tanks from Tahsis, and one and one half to two cents per pound for f i s h from the Bella Coola area to Vancouver. West Coast Freight i s hauling fis h from Tofino and Ucluelet, door o to door in Vancouver for two cents per pound. The firms examined in Chapter Four were questioned re-garding the amount of goods they shipped to Vancouver, when and by what means. Ucluelet None of the firms interviewed in Ucluelet have any reg-ular freight shipments moving to Vancouver. Firm A returns damaged and un-ordered goods to their warehouse in Vancouver. These are carried by their contract trucker whenever necessary. Firm B re-turns small parcels to suppliers periodically, and these travel by mail. Remnant bolts of clothing material on consignment are returned twice each year. These are carried by West Coast Freight and are paid for by the supplier. Firm C seldom has any freight moving to Vancouver, and what there i s usually goes by mail. Firm D carries their returned goods in their private car during trips to Vancouver two or three times yearly. Small parcels are sent by mail. Firm E has infrequent freight being returned and this a l l moves through the mail to Courtenay and not to Vancouver. Firm E has no freight going to Vancouver. 2. This i s a contract rate and hence i t i s not public knowledge, and i s l i a b l e to fluctuate at anytime. 90 Tofino Firm A i s in much the same situation as Firm A in Ucluelet. The only freight to Vancouver i s damaged or un-ordered goods and these are carried by their contract trucker as backhaul. Firm B sends nothing to Vancouver and only damaged and un-ordered goods to Alberni. These goods are carried in their private truck. Firm C sends return and exchange parts to Vancouver on a regular basis. He was not able to estimate this weight, however i t was small and shipments were widely spaced in time. Tahsis Firm A in Tahsis i s in the same situation as Firms A in Tofino and Ucluelet. Such things as damaged goods and empty pro-pane tanks are returned to Vancouver via Northland Navigation. Firm B sends a considerable amount of freight to Vancouver. The average weekly shipment i s 6,000 pounds and i s made up of repair parts, error shipments, empty fuel drums and empty 0£ cylinders to mention a few. Bella Coola The only firm discussed in Bella Coola has no regular freight shipments to Vancouver. Damaged and un-ordered goods are returned to their Vancouver warehouse as required. The goods are shipped via Northland Navigation. Advantages of Air Freight - Backhaul Situation Theoretically any of the advantages of a i r freight over surface transportation as discussed in Chapter IV, should apply to the backhaul situation as well. There are, however, several factors 91 which prevent backhaul freight from realizing these advantages. First, the output of the primary industries cannot be carried economically in existing aircraft of any size. These goods are simply too heavy, too bulky, and of low value per weight. These goods must be carried in large transportation f a c i l i t i e s which car-ry these types of goods economically, allow easy loading and unload-ing, and carry sufficient quantities. The exception to this state-ment may be fresh fis h and this w i l l be investigated. Second, goods returning to Vancouver from r e t a i l firms do not carry any sense of urgency. The intangible advantages of a i r freight are not significant. Third, the goods being returned to Vancouver by the firms in each town are being carried in some firm's inventory. These goods would, however, represent such a small proportion of total inventory, that the inventory holding costs would not be a l -tered significantly, i f the goods being returned were held for a slightly longer time. The same would apply to the interest charges on goods in transit. Fourth, with the air freight rates unchanged, and sur-face transport offering reduced backhaul rates, the onus on a i r freight to provide substantial savings in packaging, insurance, inventory charges, and opportunity costs i s even more evident than the analysis in Chapter Four indicated. 92. THE FISHING SITUATION - SOUTH COAST AREA The only primary resource which appears even remotely suitable for a i r freight travel i s fresh f i s h . The intention i s to investigate from a cost and logistics standpoint the f e a s i b i l i t y of carrying fresh f i s h from West and Northwest coastal areas to Vancouver. The analysis has involved the present operations of the;, two largest fishing companies on the West Coast. British Columbia Packers operates a cannery at Namu, as well as at Vancouver and Steveston. Fish from the North Coast area go primarily to Namu. Fish caught in the South Coast and Fraser River areas, as well as some fi s h from the lower North Coast area, go to Vancouver and Steveston. The Canadian Fishing Company transports a l l f i s h from the lower North Coast area, the South Coast area and the Fraser River area to Vancouver. Although some fish go to other ports i t i s estimated that ninety-five per cent of a l l f i s h caught in the South Coast area are shipped to Vancouver.-^ There are many kinds of fish that could be considered. The six species of salmon, and two species of shellfish have been selected for this analysis. A l l salmon caught by Seine and Gillnet are canned, wheras the salmon caught by t r o l l are canned or sold fresh or frozen. Shellfish (crab and shrimp) are either canned or sold fresh or frozen. Troll salmon are shipped dressed with the head on. This 3. Russel, D., Manager, Procurement, B.C. Packers Company Limited, Interview with the author, April I 9 6 8 93 gives them a higher value per pound when delivered than Seine or Gillnet salmon which are valued at round weight (not dressed, head and t a i l on). This may suggest that t r o l l fish which yield a higher value per pound may absorb a i r freight rates easier. It i s necessary that the reader have some idea about the magnitude of the fishing industry. Table 6:1 below, indicates the total weight of a l l f i s h landed by Canadian fishermen on the West Coast. A comparison by total indicates the relatively small catch during 1967. This table emphasizes the logistics and cost problems involved in handling these weights, particularly because the cat-ches are seasonal. Table 6:1 Fish Landing by Million Pounds by Species for a l l Coastal Areas of British Columbia in the Years 1965, 196,0 and 1967. 1967 1963 1965 Salmon 138.9 123.6 169.6 Halibut 26.2 37.3 32.0 Herring 116.7 572.2 307.6 Crab 5.3 3-4 4.5 Shrimp 1.7 1.8 1.7 Other TOTAL 329.8 772.9 574.7 Source: Canada, Department of Fisheries of Canada, British Columbia Catch Statistics (Ottawa: Queens Printer 1968) 9 4 . This paper i s interested primarily in backhaul to Vancou-ver and hence stati s t i c s w i l l be limited to the South Coast area. Fish landed in the Fraser area would not require much transporta-tion and those landed in the Northern Coast area are processed primarily at Prince Rupert or Namu. Table 6:2 below, indicates the percentage of the landed total caught in each of the three areas for the f i s h types considered: Table 6:2 Fish Landed by Area and by Species as a % of Total Landings  in 1967. North Coast South Coast Fraser TOTAL Salmon 35% 57% 8% 1 0 0 $ Shrimp 10.. 9# 70.5% 18.6% 100% Clams 3.7% 96.3% — 100% Source: Canada, Department of Fisheries of Canada, British Columbia  Catch Statistics (Ottawa: Queens Printer 1 9 6 8 ) Salmon fishing by t r o l l i n g begins on April 1 5 t h and ends on October 1 5 t h . Seine and Gillnetters can fis h for salmon from June 1 5 t h to September 1 5 t h . Shellfish can be caught any-time during the year. Table 6 : 3 Page 95 indicates that the"bulk of the salmon i s landed during the three month period of July, August and September. The catch of shellfish Is spread out more evenly throughout the entire year. 95 Table 6:3 Fish Landings by Month by Species for South Coast  Area inlOO Pounds in 1967. Salmon Shrimp Crabs January — 175 5 3 0 February 132 447 6 9 8 March 170 579 909 April 9 790 1 5^2 973 May 10 256 1 369 429 June 31 220 794 482 July 113 243 366 187 August 400 844 247 110 September 188 668 1 859 297 October 12 290 2 299 668 November 39 1 830 734 December — 462 245 Source: Canada, Department of Fisheries of Canada, British Columbia  Catch Statistics (Ottawa: Queens Printer 1968) The bulk of the fis h landed in the South Coast area was caught in specific areas. The South Coast area i s separated into eighteen geographical areas. The catches In the five best areas amounted to eighty-seven point seven per cent, eighty-nine point six per cent and ninety-five point five per cent of the total catches for salmon, crab, and shrimp respectively. This suggests that these geographical areas present the best potential for air freight u t i l i z a t i o n . Maps showing the breakdown of the West Coast into geographical areas are in Figures 6:1 and 6:2 Pages 99 and 100 Table 6:4 Page 96 indicates the catch by area, by species, and as a percentage of the total. 9 6 . Table 6 : 4 Fish Landings by Species, by Area, and Percentage of  Total for South Coast in loo Pounds in 196T Area Salmon % of Total Pound in Shell Crabs % of Total Green Cut Shrimp % of Total 11 9 3 2 8 1 . 2 — — — — 12 249 221 3 2 . 7 486 7 . 9 9 5 0 7 . 9 1 3 6 9 , 2 7 8 9.1 17 •3 198 1 . 7 14 4,, 202 • 5 20 • 3 351 2 . 9 15 1 157 .15 — — — — 16 2 5 6 5 • 33 — 32 • 3 17 2 5 4 4 • 3 3 202 3 . 3 5 204 4 3 . 5 18 1 - 7 1 3 . 2 2 110 1 . 8 301 2 . 5 19 58 . 0 0 7 86 1 . 4 4 . 0 3 20 2 2 7 - 5 4 3 29.9 484 7 . 8 1 295 1 0 . 8 C 1 8 , 8 7 6 2 . 4 — — — — 21 10 4 5 2 1 . 3 92 1-5 — — 23 80 432 10.6 73 1 . 2 3 6 3 4 3 0 . 4 24 40,998 5 . 4 3 493 5 6 . 6 — 25 9 5 7 6 1 . 2 649 10.5 — — 26 14 004 1 . 8 — — 27 18 8 9 3 2 . 5 419 6 . 8 — — 22 — — 45 . 7 — Source: Canada, Departmentcof:Flsherles of Canada, British Columbia  Catch Statistics (Ottawa: Queens Printer 1 9 6 8 ) 97 The next topic dealing with problems involved in trans-porting fi s h by aircraft, indicates that aircraft i s capable of carrying only a small percentage of the total salmon catch. It was also stated previously in Chapter Six that t r o l l salmon com-manded a higher price than others. Table 6 :5 Page 97 indicated that t r o l l salmon are caught during ten months of the year in the South Coast area, and for six months of the year they repre-sent over eighty-nine per cent of the salmon landed. Table 6:5 Troll Salmon Landed by Month, InlOO Pounds, and as a  Percentage of a l l Salmon Landed for the South Coast  Area in 1967. Jan. • Feb. Mar. Apr. May June July Aug. Sept. Oct. Nove. Dec. -- 1 2 7 162 8 9 5 1 1 0 0 1 9 27972 7 1 2 8 7 1 0 1 2 7 4 31796 5 5 0 39 0 — 9 6 ^ 95% 91% 97% 89% 63% 63% 17% k% 100% 0 Source: Canada, Department of Fisheries of Canada, British Columbia  Catch Statistics (Ottawa: Queens Printer I 9 6 8 ) The preceeding comments then have indicated five factors. First, the magnitude of handling and processing as much as seven hundred seventy-two million pounds of fis h presents great prob-lems and any deviation from the status quo must be introduced slowly and cautiously. Second, the South Coast area which delivers most of the catch to Vancouver represents a good percentage of the total landings for the province Third, the bulk of the South Coast salmon are caught during a three month period, however the landings of shellfish are more evenly distributed throughout the 98 year. Fourth, the majority of salmon and s h e l l f i s h are caught i n areas 12, 1?, 20, 23, 2k and 25. Last, the t r o l l salmon which supply the fresh and frozen f i s h market, and demand the highest price, represent a large proportion of the t o t a l salmon catch per month except during July to October. The a p p l i c a b i l i t y of these conclusions w i l l vary from year to year but the idea behind each w i l l p r e v a i l . REAP CAREFULLY I PIN UP IN WHEELHOUSE. ~2.~WHEN-DELIVERING-" YOUR CATCM7 GIVE TALLY MAN THE MAP NUMBER, OR NUMBERS SHOWING THE AREA IN WHICH YOUR FISH WERE CAUGHT. 3. ACCURATE CATCH REPORTS WILL HELP PRESERVE YOUR FISHERIES. • KINGCOME "Cape Scott C.Russell P^ORT HARO^/ L *«UATSINO©.><" STATISTICAL AREAS ARE DIVIDED BY REO LINES. SALMON FISHING WITH NETS OF AMY KINO IS NOT PERMITTED OUTSIDE OF THAT IS SEAWARD OF THE HEAVY BLACK LINE. O E T A I L S CONSULT A-A 'S B R I T I S H yCO ' .UAdlA ^ P I S H E . 5 T Y REGULATIONS DEPARTMENT OF FISHERIES STATISTICAL MAP .•V . ALER SHOWING AREAS OF CATCH FOR BRITISH COLUMBIA WATERS (SOUTHERN HALF) 13 © 4 DEPARTMENT OF FISHERIES OFFICES "> 5EVMOUR X NAKBOWJ IF J Z E B A L L O S CAMPBELL\< * •JfJ-' \*£jrr ••'/' RIVER ®N._) X'! W -ktZ-" A J ' O i f / 1 & « V C O U R T E N A Y ^ _ y 14 % 16] WESTvtEW r- lyv £ ;'.\ <^C\> SQUAMISH^  'HOWE 17 RT AL8ERNL f-.O SOUND Yk) 28 ©NOIJ VANCC VANCOUVER ESTMINSTER NANAIMO MISSION INSERT MAP'Ef / •V >C-'> Air s vLAOYSMITH "Point Roberts DUNCAN E / R ^ jfort Son juon 20 \ USA. ^//R~S>BELUNGHAM A - f Cape FOR ALL FISH CAUGHT OFF THE COAST OF THE J STATE OF WASHINGTON \ SOUTH OF CAPE FLATTERY! REPORT AS AREA "C" > -49^ 4 T H id D t O l f l O N : J O H | H 5 T (00. D E P A R T M E N T O F F I S H E R I E S S T A T I S T I C A L M A P SHOWING AREAS OF CATCH FOR BRITISH COLUMBIA WATERS (NORTHERN HALF) <B - OCPARTMCNT 0>" PISHfmCS Off K.C i . k/r HT30N9 LANOINQ Cape Scott d f ^ V A N C O U V E R ^ - ^ ' f TsLAND Vfc s- j & ^ j f e ^ 4IRp ItMHON JUHfl ^ 101 PROBLEMS INVOLVED IN HAULING FISH BY AIRCRAFT The most obvious problem Is that of weight. According to both fishing companies,^ existing float equipped aircraft cap-able of carrying a maximum of twenty-four hundred pounds i s not large enough. The validity of this statement i s r a t i f i e d by the following. A single forty foot fishing boat i s capable of car-rying seven to eight thousand pounds of f i s h . In the Bella Bella area of the Tofino-Ucluelet area there may be as many as forty §r f i f t y boats fishing for one company at the same time. Each of these boats brings in their catch at the same time, and this could represent as much as three hundred and f i f t y thousand pounds. Can-adian Fishing Company frequently has as many as eight fis h packers capable of carrying up to three hundred and thirty thousand pounds each in the Bella Bella area. The conclusion to be drawn from this i s that aircraft cannot handle the bulk of the fish landings, how-ever, they may be useful for specific types of f i s h . Fish are presently shipped to Vancouver in brine tanks which simulate the ocean water, packed in ice, or flash frozen. Each of these methods reduces the shrinkage of the fish, even though they may be in transit for as long as two or three days. Depending on location, distance, and aircraft type, f i s h shipped by aircraft could take between one and one half to five hours. 4. Watson, B., Head, West Coast Trol l Camp, Canadian Fishing Company: and Russel, D., Manager, Procurement B.C. Packers Company Limited, Interviews with the author, April, 1968. 102. from the time they enter the aircraft until they are processed (out of water time). This increases the shrinkage factor, how-ever limited space, weight restrictions, and high per pound rates suggest that the use of ice with aircraft i s undesirable. The use of the same aircraft to carry passengers and freight outbound from Vancouver and to carry f i s h inbound also presents several problems. The f i r s t i s equating passenger des-tinations with the supply source of f i s h . In other words the volume and destination of the passengers would have to correspond to some degree with the volume and supply location of the fi s h products destined for Vancouver. Second, both fishing companies suggested that elimination of any smell from carrying f i s h was practically impossible. Specially designed containers could re-duce this problem however the containers themselves would present other problems. They would have to be of the self stacking type and be carried on the return f l i g h t out of Vancouver. This would reduce the pay load out of Vancouver, or increase the cost of ship ping by a i r . Third, the aircraft seats on the backhaul would have to be removed or relocated to maximize the amount of f i s h carried. This, together with the smell problem, would reduce the desira-b i l i t y of returning passengers to Vancouver on these same planes. The scheduling of aircraft to carry f i s h would also pre-sent problems. First, the fishing season i s seasonal and even more important, the number of fishing days per week cannot be pre-determined. This means that one week may contain five fishing days and the following week only two days. Second, because of the 103 perishable nature of the product, r e l i a b i l i t y must be assured. Fishing companies question the fac t that a i r c r a f t could provide the r e l i a b i l i t y and capacity f l e x i b i l i t y that would be required. In other words i t i s possible that a i r c r a f t could carry t r o l l salmon when the f i s h landings were regular and spread out. The problem would a r i s e when unusually large landings were made and other transportation was not available because the f i s h companies had committed themselves to a i r c r a f t . Possibly the most serious problem would be that of hand-l i n g the f i s h and the related a c t i v i t i e s . Salmon from the day-t r o l l e r s are delivered i n the evening, however because f l o a t a i r -c r a f t cannot operate at night, the f i s h must be iced down i n the holding room, and then de-iced and taken to the loading room where they would be loaded into a i r c r a f t when av a i l a b l e . The size of the a i r c r a f t doors and the e x i s t i n g loading and unloading f a c i -l i t i e s would necessitate t h a t ^ a l l loading and unloading be done manually. I f the a i r c r a f t landed at the Vancouver Airport, addi-t i o n a l handling as well as secondary transportation would be re-quired, however i f they landed on water and delivered the f i s h d i r e c t l y to the processing plants, additional f a c i l i t i e s and handling would be required because present dock f a c i l i t i e s cannot handle a i r c r a f t with t h e i r wide wing span and t h e i r low unloading p o s i t i o n i n the water. In other words the use of a i r c r a f t with the present f a c i l i t i e s would require new loading ramps and f a c i -l i t i e s , returnable containers, additional secondary transporta-t i o n and increased personnel. 104. The fis h packers also frequently take fresh supplies to the f i s h boats. This would be an additional burden on the a i r -craft . Procurement Costs for Fish - Surface versus Air The problems already mentioned could be dealt with and overcome, i f from a total cost point of view the use of aircraft could provide cheaper total procurement or distribution service. Ignoring for a moment the transportation charges, the use of air freight under the existing situations would require very high set up costs in terms of f a c i l i t i e s , containers, loading platforms, holding areas and additional staff. In addition many more man hours would be required for loading and unloading and general handling.^ The use of aircraft would reduce the travelling time depending upon the distance. If, however, the fis h are not Iced while In transit, then shrinkage of the product i s much higher. Fish out of water between four to six hours w i l l suffer from five to seven per cent shrinkage (by weight and quality).^ Fish ship-ped by packer i n ice require about two days from Bella Coola and their shrinkage i s only two per cent. Fish shipped in brine tanks experience almost no shrinkage. 5. This i s the opinion of Mr. D. Russel, Procurement Manager, B.C. Packers Company Ltd., 6. This was a statement by Mr. B. Watson, Head of West Coast Troll Camp, Canadian Fishing Company. 105. Pish delivered to Tofino or Ucluelet are shipped to Vancouver by truck. They are iced when landed, and then loaded by machine into the truck. The truck delivers the fish to the processing plant in Vancouver with no other transportation or handling. The cost of transportation from the Bella Coola area by Northland Navigation for fresh fis h i s between one and one half to two cents per pound to Vancouver. From Tofino or Ucluelet the cost i s two cents per pound door to door. These are the costs which the fishing companies (B.C. Packers and Canadian Fishing) are paying at present and which they would not exceed. The cost by packer can be considerably less. The cost per pound from Sella Coola by Packer varies depending on the total weight because the costs are generally fixed. The cost of a six man boat capable of carrying three hundred thousand pounds i s $ 347.24. This includes the charter cost of the boat as well as a l l wages and fringe bene-f i t s of the crew for a twenty-four hour period. When travelling, fuel costs an additional $ 20.00 per hour, and ice for the return journey costs $ 360.00 (forty tons @ $ 9 . 0 0 ) . Assuming thirty-six hours travelling in each direction, and two days waiting for the boat to be loaded, the total cost would be $ 3,883.44. If a cap-acity load of three hundred thousand pounds was carried the per pound cost would be $ .011. If the weight totalled only one hundred sixty-five thousand pounds then the per pound cost would be $ .023.7 These costs are for transportation only and exclude 7. Operating costs of the various fis h packers was provided by Mr. B. Watson, Head of the West Coast Troll Camp, Canadian Fishing Company. 106. spoilage, handling and packaging. As shown in the next section of this Chapter, the var-iable costs alone of aircraft exceed the present rates being charg-ed by other forms of transportation for backhaul freight. This fact, in addition to the capacity problems, and the huge setup costs that would be required, as well as the marginal advantages of a i r freight over surface transportation, shows that i t i s not desirable to use aircraft to haul f i s h . As suggested there may be specific extenuating circumstances which could make the use of air freight, even at these rates, desirable. AIR FREIGHT COSTS AND RATES A good deal of emphasis in this paper has been placed on the high cost of air freight. While i t was not the intention at this time to justify the rates according to the costs, i t did seem necessary to Investigate briefly the costs involved in a i r -craft flying and ground operations. The f e a s i b i l i t y of a reduc-tion i n air freight rates, particularly for backhaul freight was the ultimate aim, however as stated in Chapter Five, a reduction of air freight rates does not guarantee increased demand for a i r freight. The situation, location, type of goods, and the amount of the reduction, w i l l influence the change in demand. The rates charged by B. C. Airlines reflect their high costs. There are many reasons for this situation, the most ob-vious being their size which does not afford good economics of scale. A second cause i s that many aircraft are float equipped. 107 This i s costly, f i r s t because of damage and corrosion to the floats, and second because the use of floats reduces the maximum payload of an aircraft, A third cause i s the short leg distance between take off and landing. As the leg distance increases up to some maximum distance, the cost per mile flown decreases. Sealy suggested that no fixed wing aircraft i s economical for g distances of less than one hundred eighty to two hundred miles. Several routes services by B.C. Airlines are less than this distance. A fourth cause i s the small load factors being carried particularly on the return t r i p . These are frequently less than f i f t y per cent of load capacity. A f i f t h cause involves the uti l i z a t i o n of the aircraft over a period of one year. The grea-ter the utili z a t i o n , the less the cost Is per hour of flying. This i s due to the heavy fixed costs being spread over a greater number of flying hours. This u t i l i z a t i o n i s limited by the air -craft speed, route distances and the demand for a i r service. Existing a i r freight rates are the same as passenger rates. The freight rate per one hundred pounds i s equal to one half the f u l l passenger rate. This means that a i r freight i s being charged for both fixed and variable costs. If passenger rates have been set, taking into consideration average load fac-tors, so that a l l fixed and variable costs are covered, then freight K. R. Sealy The Geography of Air Transport (London: Hutchinson and Company 1966) p. 57« 108. could be considered as incurring only variable costs and not fixed costs. This would allow a substantial reduction of air freight rates. If this were not true then freight would have to absorb i t s share of both fixed and variable costs. It was not possible to separate total costs neatly into fixed, passenger variable, and freight variable. Table 6:6 Page 110 indicates for several types of aircraft the total cost per hour, the cost per mile, the cost per pound mile at f u l l capacity, and also the variable cost at forty, f i f t y and sixty per cent of total cost. Table 6:7 Page 111 presents the same information assuming a sixty per cent load factor. This emphasizes the influence of the average load factor on the cost per pound mile. Using the costs as per Tables 6:6 and 6:7 Pages 110 and 111 i t i s possible to calculate the one way cost of hauling freight to each area, or from each area. Tables 6:8 and 6:9 Page.1: 112 present the costs as a total cost per one hundred pounds with a f u l l load and a sixty per cent load, and also the variable costs under each situation assuming variable costs representing forty, f i f t y or sixty per cent of the total costs. 9 Table 6:9 Page 112 which i s more r e a l i s t i c in terms of existing load factors, indicates that i f air freight rates were based only on variable costs, they s t i l l exceed by a considerable amount the $ 1.50 to $ 2.00 per one hundred pounds charged by Northland Navigation and West Coast Freight from Bella Coola and 9. According to Mr. D. Hosgood, variable costs for B.C. Airlines ranged between forty and sixty per cent depending on aircraft type. 109. Tofino-Ucluelet respectively. These cost comparisons do not i n elude additional secondary transportation charges, which i n the case of Tofino and Ucluelet are substantial with a i r f r e i g h t . Table 6 : 6 Total and Variable Aircraft Operating Costs Assuming a One Hundred Per Gent Load Factor Total Cost Per Maximum Weight Carried Total Cost Per Distance Travelled Per Total Cost Per Total Cost Per one Variable cost per one hundred pounds Miles with f u l l load when variable cost as a per cent of total i s : Hour1 In Pounds2 Mile Hour^ Pound Mile Pounds for one Mile 40 50 60 4 Mallard $148.80 2400 $ . 9 9 2 150 Miles .04$* $.04 $ . 016 $.02 $.024 Goose $111.25 1800 $ . 8 9 125 Miles .055* $ . 0 5 $.02 $ . 0 2 5 $ . 0 3 Beaver $ 77.19. 1100 $.?35 105 Miles .067$* $.067 $.027 $ . 0 3 4 $.04 C-180 $ 63.91 600 $.581 110 Miles .10$* $.10 $.04 $ . 0 5 $ . 0 6 C-185 $ 6 7 . 6 7 800 $.541 125 Miles .07$* $ . 0 7 $ . 0 2 7 $ . 0 3 4 $.04 Source: Rough Data Supplied by B. C. Air Lines Accounting Department 1 9 6 7 NOTES: 1 . Taken from Profit and Loss Statement. Assumed average aircraft u t i l i z a t i o n and average length of haul. Overhead expenses pro rated according to revenue. 2. Number of passengers times two hundred pounds. Weight for Beaver i s average of float and wheeled aircraft. 3* Block speed taken from B. C. Airlines" documents. 4 . Fixed cost assumed to vary between forty and sixty of total cost. This w i l l vary for each aircraft. This percentage estimate i s based on break even charts constructed by B. C. Airlines. o Table 6:7 T o t a l and V a r i a b l e A i r c r a f t Operating Costs Assuming a S i x t y p e r cent Load F a c t o r T o t a l Cost Per Hour $ S i x t y Per Cent o f T o t a l Max-imum Weight i n Pounds T o t a l Cost Per M i l e T o t a l Cost Per Pound M i l e T o t a l Cost per one hund-r e d pounds f o r one M i l e V a r i a b l e Cost per One Hundred Pounds f o r one m i l e w i t h a s i x t y per cent l o a d when v a r i a b l e c o s t s as a per cent o f t o t a l equal 40 50 60 M a l l a r d $148.80 1440 $ . 9 9 2 .0685^ $ . 0 6 8 $.027 $ . 0 3 4 $.041 Goose $111.25 1140 $ . 8 9 .78^ $.078 $.031 $ . 0 3 9 $.047 Beaver $ 77.19 6 6 0 $.735 .lllS* $.111 $.044 $ . 0 5 6 $ . 0 6 7 C-180 $ 63.91 360 $.581 .l6ls* $.161 $.064 $.081 $ . 0 9 7 C-185 $ 6 7 . 6 7 480 $.541 .113$* $.113 $.045 $ . 0 5 7 $.068 Source: Rough Data from B. C. A i r l i n e s Accounting Department I 9 6 7 NOTES: Notes f o r Table 6 : 6 preceeding page A p p l i c a b l e here. Table 6:8 Cost per One Hundred Pounds of Freight from each Town to Vancouver Assuming a  One Hundred per cent Factor with a Mallard* Flying Time Distance in Total Cost Per one Variable cost Variable as a per one hundred pounds assuming per cent of Total Cost eauals: Minutes Miles Hundred Pounds 4 0 50 60 c Tofino 50 125 $5.00 $2.00 $2.50 $3.00 Ucluelet 50 125 15.00 $2.00 $2.50 $3.00 Tahsis 70 165 $6.60 $ 2 . 6 4 $3.30 #3.96 Bella Coola 105 260 $10 .40 $4.16 1 $5.20 $ 6 . 2 4 Table 6:9 Cost per One Hundred Pounds of Freight from Each Town to Vancouver Assuming a  sixty per cent Load Factor with a Mallard. Flying Time Distance in Total Cost per one Variable Cost variable as a per one hundred pounds assuming per cent of total cost eauals: Minutes Miles hundred pounds 4 0 50 60 Tofino 50 125 $8.50 $3.37 $4.25 $5.13 Ucluelet 50 125 $8.50 $3.37 $4.25 $5.13 Tahsis 70 165 $11.22 $4.45 $5.61 • $6.76 Bella Coola 105 260 $17.68 $7.02 $ 8 . 8 4 $10.66 113 CHAPTER VII SUMMARY, CONCLUSIONS AND RECOMMENDATIONS SUMMARY AND CONCLUSIONS The largest single problem which initiated this study and which s t i l l exists i s the high operating costs and resulting poor profits being earned by B. C. Airlines. These are the re-sult primarily of fixed factors inherent in the rate structure, and the communities being served, with their level of economic activity, their transportation f a c i l i t i e s , their lack of a com-petitive atmosphere, their service requirements and their loca-tions. This paper has concentrated on evaluating what changes could be made that would affect the variable factors determining cost. These include an investigation of economics of scale, pre-sent equipment and f a c i l i t i e s , float equipped aircraft, short leg distances between stops, poor aircraft u t i l i z a t i o n i n terms of flying hours per year, and small load factors, particularly on the return leg of the journey. No speculation has been attempted as to the results of altering the aforementioned fixed variables. As stated previously, B. C. Airlines had been primarily a passenger air l i n e , however facing the cost problems, one of the most obvious solutions i s to increase the demand for a i r l i n e ser-vice by carrying freight to and from each of the communities being served. If this could be achieved on a large enough scale then many of these problems could be quickly r e c t i f i e d . The economic f e a s i b i l i t y of regularly using a i r freight 114. for the small consumer oriented business has not been proven or disproven. This paper has shown however that the additional transportation costs 1 incurred by each firm i f they regularly used existing a i r freight services, would not be offset by competitive or intangible advantages, or cost savings, that could be realized by air freight use. This situation exists because, the route structures, the distance travelled, the atmosphere in each town, and the alternate transportation available i s such that the advantages of using aircraft such as, speed to reduce time in transit, speed to reduce cost of holding goods in inven-tory, and a i r freight's superior conditions of carriage cannot be f u l l y and in most cases even partially u t i l i z e d by the firms stu-died in this paper, much less by the domestic goods firms in the area. The conclusion then must be that under existing conditions and rates the consumer firms in each town cannot and w i l l not use air freight on a regular basis. This does not say that there i s no potential growth in the demand for a i r freight in the future, however i t does say that this growth w i l l come primarily from industrial and natural resource firms who are able to pay the high shipping charges to acquire the services that they need to operate most eff i c i e n t l y . The one factor which could change this situation would be a radical change in the economy of the areas studied. Improved 1. Depending on the alternate form of transportation chosen, ai r freight ranged between two and nine times as costly for primary transportation only. 115 transportation f a c i l i t i e s could increase the population. A large population increase could bring better airport f a c i l i t i e s to reduce costs, increased secondary industry, and also increased demand for a i r freight service. This i s however pure speculation at this point and not fact. A logical question stemming from the above i s : should B. C. Airlines reduce their freight rates in an attempt to i n -crease the volume of freight carried? The answer must be a very definite no. Any reduction in rates requires a similar increase i n volume i f present revenue i s to be maintained. A reduction of even f i f t y per cent would s t i l l not make air freight usable by the merchants in each town, even i f total distribution costs are considered. In fact most merchants stated that they would use a i r freight only when i t s rates were equal to surface transportation. This would require a rate reduction of between sixty and seventy per cent. A small decrease in rates then would not affect demand for a i r freight by consumer goods firms. Furthermore, reduced freight rates would not increase substan-t i a l l y the demand for a i r freight by industrial and primary production firms. 2 They are the ones presently using a i r freight and paying the high rates, and a rate reduction would be non-sense at this time. 2. This information was determined in a study conducted by B. C. Airlines, and i t was explained to the writer by Mr. S. Reynolds, Sales Manager of B. C. Airlines. 116 The volume of goods that could be carried as backhaul to Vancouver i s very small, and potential for the future i s no better. Each of the towns serviced by B.C. Airlines has no backhaul because they are primarily service centres for primary industry whose output i s too bulky, too heavy, and of low per pound value in most instances. In addition to this the surface carriers face the same problems and they offer substantial rate reductions to attract backhaul. B.C. Airlines i s unable to compete for backhaul because of capacity problems, and because they have l i t t l e advantage over surface transport in most cases. Even i f B.C. Airlines could haul freight, there would be no advantage to considering a reduction of rates to include coverage of only their variable costs because even these exceed substan-t i a l l y those presently being charged by surface carriers. These conclusions applied equally to the use of a i r -craft to carry fresh or frozen f i s h . The additional freight cost, the increased shrinkage, scheduling problems, the great unpredictable volume, and the large i n i t i a l capital expenditure were factors against the use of aircraft to haul this product. The slight advantages of aircraft could simply not outweigh these problems. There have been three conclusions reached: — Given the existing circumstances there w i l l be no large potential demand for a i r freight service in the near future in the area studied. — B.C. Airlines should not reduce their freight 117 rates i n an attempt to increase the volume of a i r freight. This action would reduce total revenue rather than increase i t . — The backhaul potential in these areas i s very small for a i r c r a f t . The cost of the service i s not the problem, however capacity and scheduling etc. are. It i s not economically feasible to carry fresh or frozen f i s h as backhaul to Vancouver. 118 RECOMMENDATIONS There are really two very large problems facing B. C. Airlines. The f i r s t i s that with their existing equipment on the present route structure, they are forced to operate with very high operating costs and low profit margins. The second i s that the area or towns that they presently serve and the routes connecting them are such that a i r freight as i t presently exists does not provide much advantage over surface transporta-tion for consumer goods firms. Presumably B. C. Airlines must take some form of action to solve these two situations. The f i r s t alternative i s to stay with the present routes except for those which are most unprofit-able, and attempt to solve their problems by the following: a. apply continuous pressure on the Federal Government to instal land runways in each area, or preferably in each town. This would reduce operating costs substantially. b. apply continuous pressure on the Provincial Govern-ment to improve existing roads and build new roads into each of the towns i n these areas. This would attract greater numbers of people, and this eventu-al l y attracts secondary industry and a demand for a i r freight service. c. maintain a twenty-four hour flying schedule as demand allows. Freight should be flown at night and passengers and express during the day. d. evaluate present equipment in light of the above and phase out obsolete equipment. Add new equip-ment as i t becomes profitable to do so. e. obtain a few high t r a f f i c routes such as Campbell River to Vancouver in order to offset poor routes. f. institute an immediate freight rate increase of between ten and twenty per cent. The effect of this i s discussed later. 119. The above recommendations are based on the assumption that the people in these areas are entitled to the same quality of transportation f a c i l i t i e s as are those in larger towns. In addition the development of these areas could provide large amounts of additional revenue in terms of natural resource de-velopment. If the development of air transportation in these areas i s not supported by the Federal and Provincial Governments as suggested above, then i t would seem impossible for B. C. Airlines to continue to operate in their existing situation. The second, and more probable alternative, assumes that the Federal and Provincial Governments w i l l not contribute quickly and maybe not at a l l to the development of air transportation in these areas. It assumes also that there w i l l be no rapid change in the economic activity and the population in these towns. This does not mean that in ten years time there w i l l be no radical changes, because in a l l probability there w i l l be. This alter-native suggests that in the short run an immediate freight rate increase of between ten and twenty per cent be instituted in an attempt to improve the immediate profit situation. The volume may decrease slightly but the total revenue w i l l Increase. A slight increase such as this w i l l not attract new competition, particularly in light of the information in this paper. The new rate would s t i l l be far below that at which a firm would benefit from purchasing their own aircraft. In the long run B. C. Airlines should immediately 120 search for new routes and c i t i e s Into which they can expand and make an adequate return on investment. In determining these new routes they must work through the Federal Government but they should insist on longer leg runs, areas of greater population with good potential, growing secondary industry, a l l weather twenty-four hour runways, and routes which can be co-ordinated properly. In the interim before they acquire these new routes B. C. Airlines should begin to phase out certain segments of their present route structure so that they are eventually l e f t with only those larger centres which are somewhat profitable. What i s being said then i s that most of these small towns cannot support aircraft the size of those presently flown by B.C. Airlines. These areas should be serviced by smaller a i r services who have smaller aircraft, lower overhead, and who f l y when the situation demands i t , not on a regular schedule. B. C. Airlines should begin to phase out their older and smaller equipment, such that i t i s co-ordinated with their change in route structure. These changes would require large amounts of capital to be invested in new aircraft and equipment, however i f the routes and equipment are chosen carefully, then the return on investment cannot help but improve. 121 B I B L I O G R A P H Y BOOKS Barrlger, F.C. Freight Costs In the Smaller Business. Sunnyvale California: The Barr Company, 1963. Brewer, Stanley H. Complexities of Air Cargo Pricing. Seattle: Faculty Publications, University of Washington, 1967. Brewer, S.H., F.E. Kast, and J.E. Rosenweig. The Europe-Asia Market for Air Freight. Seattle: College of Business Adminis-tration University of Washington, 1963. Gordon, M.J., and G. Shillinglaw. Accounting - A Managerial Approach. Homewood, I l l i n o i s : R.D. Irwin Inc., 1964. Groenweg, A.D., and R. Heitmeyer. Air Freight - Key to Greater Profit. Middlesex, England: Aerad Printers, 1964. Leftwich, Richard H. The Price System and Resource Allocation. Rev. ed. New York: Holt, Rlnehart and Winston, 1961. Lewis, H.T., J.W. Culliton, and J.D. Steele. The Role of Air Freight  In Physical Distribution. Boston: Harvard University, 1956. Sealy, Kenneth R. The Geography of Air Transport. London: Hutchinson and Company, 1966. GOVERNMENT PUBLICATIONS British Columbia. Bureau of Economics and Statistics, Department of Industrial Development, Trade and Commerce. Regional Index of British Columbia, Victoria: Province of British Columbia Press, 1966. Canada. Department of Fisheries. British Columbia Catch Statistics, Ottawa: Queens Printer, 1968. New York. Aviation Department. Air Travel Foroasting, by Eno Founda-tion, New York: Port of New York Authority, 195?. Ottawa. Economic Intelligence Unit. Atlantic Provinces Transporta-tion: A Potential Air Cargo Service, Ottawa: Queens Printer, I967. Ottawa. The Regional Air Carriers Problem, by K.W. Studnicki Gizbert Ottawa: Queens Printer, 1966. 1 2 2 . PERIODICALS, UNPUBLISHED PAPERS, NEWSPAPERS. "Air Freight Survey - Reliability Costs." Air Cargo (June 1 9 6 5 ) , pp 1 9 - 2 6 . "Air Freight Growth in the Next Decade." Freight Management (May 1 9 6 ? ) . Banks, Robert L. "The Relationship of Transportation To Distribution in the Social Responsibilities of Marketing." Edited by W.D. Stevens. Article presented at American Marketing Association, Winter Conference, New York. 1 9 6 1 . Brewer, S.H. and R.B. Ulvestad. "Some Aspects of Demand for Air Cargo Services" An art i c l e prepared for Canadair Ltd. and Flying Tiger Lines Inc. on the Air Cargo Industry. Canadian Institute of Traffic and Transportation, Certificate Course. Mimeographed. Cranebrock, Allen Van. "Larger L i f t for Air Shippers." Traffic Management (August 1 9 6 6 ) pp. 6 2 - 6 ? . Freybe, Henning. "Air Cargo Costs" paper presented to a Trans-portation Seminarrgroup at the University of British Columbia, November, 1 9 6 7 . Mimeographed. Gorham, James E. "How to Identify Potential Users of Air Freight" a paper prepared for Emery Air Freight Corporation, Wilton Connecticut by Southern California Laboratories of Stanford Research Institute. 1 9 6 3 . Harris, Ralph F. "The Economic Efficiency of Regional Air Carriers in the National Transportation System." An a r t i c l e presented at the Canadian Transportation Research Forum Vancouver, B.C. May, 1 9 6 8 . Magee, John F. "The Logistics of Distribution" Harvard Business Review 28 (July - August i 9 6 0 ) 8 9 - 1 0 1 . McGann, Thomas J. "Distribution Cost Analysis Procedures in Ad-vanced Marketing Efficiency" Edltedi by L.H. Stockman. Article presented at American Marketing Association Conference, New York 1 9 5 8 . McMullen, Edward. "Problems of Cost Definition and Costing in Transportation," paper presented to a Transportation Seminar group at the University of British Columbia, October, 1 9 6 7 . mimeographed• Misselhorn, Jack, W.A. Bresnahan, and Emil Seerup. "How Important i s Air Freight Likely to Become" Factory September 1 9 6 7 pp. 14-1=5. 1 2 3 . Parker, Donald D. "Air Freight as a Tool of Marketing Management." An a r t i c l e prepared for Canadair Ltd. and Flying Tiger Lines Inc. on the Air Cargo Industry. Sadler, Marion. "The Air Freight Industry - Past, Present, Future." The Commercial and Financial Chronicle, July 1 9 6 7 pp. 3 and 2 6 . Sealy K.R. and P.C.L. Herdson. "Air Freight and Anglo European Trade." A paper prepared for Sir W.G. Armstrong Whitworth Aircraft Ltd. Shutes, George M. "Air Freight From a Marketing Viewpoint." Journal of Marketing, October i 9 6 0 pp. 3 9 - 4 3 . Stewart, W.M.."Physical Distribution - Key to Improved Volume and Profits." Journal of Marketing, January 1 9 6 5 . Stolle, John F. "How to Manage Physical Distribution." Harvard  Business Review,- 45 July 1 9 6 7 9 3 - 1 0 0 . PERSONAL ENQUIRY Back, Mr. - Owner and Manager, Volkswagon Dealership and B.A. Service Station, Tofino, British Columbia, Interview with the author - March 2 7 , 1 9 6 8 . Borgerson, V., - Manager, Retail Stores, B.C. Co-operative Wholesale Society, Interviews with the author, January 8 , February 14, March 6,' 1 9 6 8 . Brooks, Mr., - Owner and Manager, Brooks Pharmacy, Ucluelet, British Columbia, Interview with the author, March 2 8 , 1 9 6 8 . Dunlop, D., - Marketing Department, West Coast Freight, (subsidiary of Johnston Terminals Limited). Letter to the author, April, 1 9 6 8 . Federal Department of Fisheries, Pacific Region, Vancouver, Inter-view between Fisheries Officer and author, April, 1 9 6 8 . Gillespie, W.L., - President, B.C. Airlines Limited, Interviews with the author, September, October, I 9 6 7 . Hillyer, Mr., - Owner and Manager, Ruth's Gift Shop, Ucluelet, British Columbia, Interview with the author, March 2 8 , 1 9 6 8 . Hosgood, D.,-Director of Finance, B.C. Airlines Limited, Inter-view with the author, March, 1 9 6 8 . Johnsrude, B., - General Manager, B.C. Co-operative Wholesale Society, Brief interview with the author, February, 1 9 6 8 . 124 PERSONAL ENQUIRY (Continued) Karpoff, Mr., - Manager, Chamber of Commerce, Ucluelet, British Columbia, Interview with the author, March 28, 1968. Mclntyre, B., - Claims Manager, B.C. Co-operative wholesale Society, Interview with the author. MacFarlane, J., - Co-Owner, Surfway Poods, Long Beach, British Columbia, Interview with the author, March 29, 1968. Monk, H., - Vice-President Production, Canadian Fishing Company, Telephone conversation with the author, March, 1968. Newson, R., - Assistant Purchasing Manager, Tahsis Company, Interview with the author, March, 1968. Poole, Miss., - Manageress, Village Shoe Store, Ucluelet, British Columbia, Interview with the author, March 28, 1968. Roddin, A., - Warehouse Manager, B.C. Co-operative Wholesale Society, Interviews with the author, March 28, 1968. Rudge, Mr., - Secretary, Tofino Ucluelet School Board, Ucluelet, British Columbia, Interview with the author, March 28, 1968. Russel, D., - Manager of Procurement, B.C. Packers Company Ltd., Interview with the author, April, 1968. Reynolds, S., - Director, Marketing and Customer Service, B.C. Airlines Limited, Interviews with the author - F a l l , 1967 and Spring, 1968. Simpson, S., - Owner and Manager, Tofino Ucluelet Press, Ucluelet, British Columbia, Interview with the author, March 28, 1968. Seymour, N., - Manager, Walter Grocery, Tofino, British Columbia, Interview with the author. Vose, R., - Owner and Manager, Island Communications, Ucluelet, British Columbia, Interview with the author, March 28, 1968. Yeremko, T., - Retail Services Manager, B.C. Co-operative Whole-sale Society, Interview with the author, March, 1968. Waldman, M., - Economics and Statistics, Northland Navigation Limited, Telephone Conversation with the author, April, 1968. 125. PERSONAL ENQUIRY (Continued) Watson, B., - Head, West Coast Troll Camp, Canadian Fishing Company, Interview with the author, April, 1968. Wilkinson, P., - Warehouse Manager, Tahsis Company, Tahsis, British Columbia, Interview with the author, January I968. Williams, G., - Manager, B.C. Co-operative Store, Tahsis, British Columbia, Interview with the author, January 1968. 126. APPENDIX I 1 Gorhams theory i f i t i s to be f u l l y understood must be applied to his table showing that i f a firm i s to use a i r freight advantageously then they require certain commodity, market, sup-ply procurement, and distribution characteristics. Some charac-te r i s t i c s are more necessary than others. For example a firm may want to use a i r freight because the demand for their product i s time limited in a market for time or style dated merchandise. This i s class and situation type A l a in Fig. 7*1 Page 127. Those characteristics marked with an R are required i f a firm i s to consider using a i r freight. Cha-racteristics 9 a , 12 and 13 must a l l be present. One characte-r i s t i c marked A and another marked B must also be present If a i r freight i s to be considered. Additional A and B characteristics w i l l strengthen the desirability of using a i r freight. Charac-te r i s t i c s 1 cd, 6 a.b.c. and 11 a.b.c. would a l l indicate that the use of a i r freight i s desirable. Characteristics marked with an M are not required but i f present they w i l l add weight to the desirability of using air freight. In our example these include characteristics 5» 14, 15 and 17« whatever reason a firm has for using air freight, Gor-hams theory can be useful. Once a firm determines i t s class and situation type then they can check to see If they possess the necessary characteristics to use a i r freight advantageously for the reason they feel they need i t . 1 James E. Gorham, "How to Identify Potential Users of Air Freight" (a paper prepared for Emery Air Freight Corporation, Wilton Connecticut by, Southern.California Laboratories of Stanford Research Institute I963)» F«5 7: | 12.7, L E 0 E N D R — Requirement A — Alternare requirement (fi car ((roup) B — Alternate requirement (s •cond group) M - Makeweight factor CHARACTERISTICS CLASS OF USK AND SITUATION TYPE Use o( Speed to Reduce Time in 1 2 3 4 1 2 3 4 I 2 3 4 5 a b c d e a b c a b c a b c a b c d e a b 1. Does commodity have a shoti useful or sales life because: ,_ a. It is physically perishable and its useful life may be furihet ~ shortened by adverse conditions o( carriage? M M M R A R R M M M M 1 a. b. c. d. 3 b. Its rate of deterioration is such that transportation time can |J limit its sales volume? W M R R A M M £ c. It is subject to rapid style or technological obsolescence? A M M A M A E d. It must be available at a particular location by a particular date or used within a specified time? A M M A 2. Is commodity valuable relative to its weight? A R R M M M M 2. 3. Is commodity purchased or sold in a variety of sizes, colors, or styles within commodity line? M M M M J. 4. Are storage or handling requirements costly because storage of commodity requires special costs for aervicingor protection? M M M R M M 4. 5. Does prohibitive eipense, perishability, obsolescence, variety of line, or high value make it unfeasible to store commodity? M M M M M M M M M 5. D A A A A M M A B A A A A 6. b. 6. Is demand for commodity unpredictable in the short-tun with K respect to: — t- a. Beginning or termination date? JU-J b. Specific geographic locations at specific limes? n A A A A M A B A A A A 5^ c - Particular sizes ot styles within lines, either in total or at S specific locations or times? B A A A A M M A B A A A A 7. Are there known seasonal variations in the quantity, type, or geographic locations of demand for this commodity? M R M M M M M 7. 8. Is the demand infrequent? \\ M M hi M H. 9. 1* the demand at the point of use or sale urgent because: a. The volume that will be sold or used can be increased by increasing the supply available for a limited period of time? R R R M M M M M 9. a. b. c. d. e. b. Premium prices ate available for a limited period of time? R >" c. The production volume al a company or its customers can be x increased by reducing time lost while waiting for this uj commodity. R a. d. The productivity of the commodity (mobile productive unit) can 3 be increased and investment requirements reduced by reducing time spent moving between jobs? R e. Investment turnover of commodities used as soon as received can be speeded up for a company or its customers by reducing time in transport ? R 10. Are (here emergency or completely unexpected and seldom occurring demands for this commodity? R <- 10. 11. Are there limitations on timely availability of this commodity or <£ its components to meet market or supply requirements because: "jO a. Its production is seasonal? B A A A M M M M M M 11. b. c. "5 b. It is produced (o order? R A A A M M M M M M j ! c. I he supply or the capacity to produce it within a given area _i is limited? B A A A A M M M M M M R R R R R R R R R R R R R R R R R R R R R R R R R R R R 12. 12. Does or can your company control or influence the choice of transportation media? (Between rail, truck, wsrer or air) 13. Would a shift to air transportation reduce total elapsed lime in transportation? R R R R R R R R R R R R R R R R M M M M M M R l i . 14. Does transportation of commodity-by alternative forms of transport characteristically exceed 24 hours? M M H M M M M M M M M M M M M M M M M M M M M M 14. 15. Is commodity supplied from or marketed overseas or internationally! M M M M M M M M M M M M M M M M M M M M M M M M M R M 16. Are schedules or toute connections offered by alternative forms of transportation less than satisfactory? M R 16. 17. Does transportation time required to reach some supply or market areas by alternative forms of transportation limit production or sales volume?. M M M M R M R 17. IS. Da you produce or disrribure from more than one location? M R M R 18. 19. la the commodity moved between dispersed company facilities in various stages of production or distribution? M R, M 1? 20. Does use of alternative forma of transportation result in a high incidence of? a. Lost or stolen commodities? R A 20. a. b. c. b. Physical damage or breakage? R A c. Spoiled or deteriorated commodities? M R A 21. Does use of alternative forms of transportation incur high costs for a. Guarding against theft or disappearance? R M 21. b. c. d. b. Heavy or special packaging? K M R c. hnvironmcntal control, such as temperature or humidity regulation? M R M d. Special services or handling, such as feeding? R M 22. Does use of alternative forms of transportation incur exceptional management or transportation costs in expediting through move-ments because of premium handling rates or difficulty io coordination or documentation? R 22. 23. Does your company ship or receive commodities in international trade on which duties are assessed on a gross weight basis? R 23. 24, Do typical shipment sizes permit taking advantage of rate breaks offered by air carriers but not rate breaka offered by alternative forms of transportation? R 24. 25, Does your company maintain supply or distribution inventories? H R R R R 25. 26. Are inventories maintained so (hat commodities are available when and where needed? R R R R R R 26. 27, If air transportation can make commodities available when and where needed, will a reduction or elimination of inventory be feasible? R R R R R 27. 28, Is the supply inventory maintained at the point of use? or. Are distribution inventories maintained at dispersed locations? R R R R R 28. 29. Will reduction or elimination of total inventory permit reducing the size or completely eliminating an inventory facility? M M R 29. 30. *it! reduction or elimination of inventory at any location permit reduction in inventory servicing costs even without reducing warehousing? M M R 30. 31. Will centralizing the inventory function, even without proportionate reduction in total inventory, permit reduction in total warehousing and service eipence? R 31. 32, Will use of air freight to reduce need for inventory permit bypassing wholesalers or jobbers? R 32. 11. Use of Speed io Reduce Costs of Holding Goods ii Inventory while Maintaining or Improving Service. Use of Air Freight Because of Superior Conditions of Carriage. SOURCE: STANFORD RESEARCH INSTITUTE. Table II COMBINATIONS OF CHARACTERISTICS REQUIRED FOR SPECIFIC T 1-1 ry i -r-r , TYPES OF SITUATIONS James E. Gorham, "How to Identify Potential Users of Air Freight1.' (a paper prepared for Emery Air Freight Corporation, Wilton Connecticut by Southern California Laboratories of Stanford Research Institute 1963), p. 11 , 128. APPENDIX II WEIGHT SHIPPED BY FIRM A TO UCLUELET IN 1966 By Month, By C l a s s i f i c a t i o n , By Truck, By Pounds • GROCERIES DRY GOODS HARDWARE BUILDING MATERIALS PRODUCE January 9 7 , 5 0 4 655 2 , 7 4 9 N.A. N.A. February 6 5 , 4 8 7 4 . 7 2 5 1 3 . 0 6 5 ( 1 ) N.A. March 7 1 . 3 8 0 3 . 3 1 2 8,243 N.A. 10,288 A p r i l 6 5 . 8 7 0 920 5 . 7 3 8 N.A. 9 . 9 5 5 May 73.042 1 . 9 3 5 6 . 9 0 5 16,045 2 6 , 6 9 6 June 8 6 , 5 8 0 797 3 . 2 5 4 2 , 1 5 0 2 3 . 9 0 9 July 9 0 , 0 6 5 791 3 . 9 6 6 N.A. 2 9 , 4 6 5 August 82 ,465 2 , 2 6 5 2 , 9 2 3 4 3 5 2 2 , 8 0 7 i September 7 4 , 0 6 4 1,884 4 , 1 1 1 750 18 , 6 5 0 i October 6 8 , 4 6 5 4 , 3 0 7 3 . 6 6 9 N.A. 2 0 , 7 6 0 November 66,857 1 , 4 8 1 2 , 1 7 4 N.A. 1 5 . 0 9 5 December 60,585 1,149 3,240 N.A. 18 , 7 4 5 ( 1 ) Included i n hardware weight Source: Analysis of Waybills to Ucluelet from B.C. Co-operative Society. 129. APPENDIX III WEIGHT SHIPPED BY FIRM A TO TOFINO IN 1966 By Month, By Classification, By Truck, By Pounds GROCERIES DRY GOODS HARDWARE BUILDING MATERIALS PRODUCE January 36,475 755 1.193 N.A. N.A. February 39.857 316 1,875 N.A. N.A. March 50,371 1 . 3 0 7 2,914 1,800 1.585 April 57.422 765 4 , 9 3 2 3.445 8,832 May 49.817 1.597 2,909 4,480 17.491 June 51.654 655 96O 6,190 14,405 July 49.306 174 1.945 6 , 5 0 4 17.587 August 37.675 821 1.437 3.770 13.670 September 41,341 1.643 4,012 24,280 12,855 October 37.183 4 , 2 9 4 1 . 7 0 3 N.A. 13.210 November 34,259 6 8 3 930 2,890 8,415 December 30,821 248 840 1.553 6,795 Source: Analysis of Waybills to Tofino from B.C. Co-operative Society. 1 3 0 . APPENDIX IV WEIGHT SHIPPED BY FIRM A TO TAHSIS IN 1 9 6 6  By Month, By C l a s s i f i c a t i o n , By Pounds GROCERY HARDWARE DRY GOODS PRODUCE BY BOAT Truck and Boat January 3 7 . 8 7 1 N.A. N.A. 1 7 . 4 8 2 February 5 3 , 4 8 5 N.A. N.A. March 3 0 , 9 1 5 N.A. N.A. 62,1-76 A p r i l 27,848 725 75 May 41 ,071 6 6 9 605 N.A. June 43,046 N.A. 170 4 4 , 7 5 2 July 29,046 N.A. 115 August 5 3 . 4 1 3 1 . 8 3 5 2 . 2 5 5 September 3 1 . 9 3 7 2,840 1 . 0 7 8 41 , 5 6 4 October 3 5 . 9 8 1 972 3 . 3 9 5 2 3 , 2 1 7 November 4 5 , 3 3 0 355 1 8 0 1 6 , 0 0 5 December 14 , 4 5 0 1 5 0 N.A. 2 5 . 3 3 5 Note: 1. Hardware and Dry Goods have frequently been included i n Grocery. 2 . Produce weight calculated by Sales = Average value per pound Source: Analysis of Waybills to Tahsis from B.C. Co-operative Society. 131. APPENDIX V WEIGHT SHIPPED BY FIRM A TO FAIR HARBOUR IN 1966  By Month, By Boat, By Pound January 2 , 7 9 2 February 8 , 8 7 8 March 6,240 April 6 , 6 5 2 May 5 . 3 9 5 June 8 , 6 6 3 July 9.047 August 8 , 0 6 2 September 5 . 7 3 2 October 6 , 6 0 7 November 6 , 5 2 8 December 5 . 1 9 6 Source: Analysis of Waybills to Fair Harbour from B.C. Cooperative Society 132 APPENDIX VI WEIGHT SHIPPED BY FIRM A TO BELLA COOLA IN 1 9 6 6  By Month, By Class, By Boat, By Pound. HARDWARE DRY GOODS GROCERY PRODUCE January 3 .472 2 8 9 2 2 , 7 7 1 9 . 1 H February 2 , 3 5 9 280 30,845 1 1 , 4 4 7 March 2 . 7 0 5 1 . 3 0 5 40,124 4 5 . 5 8 1 1 April 11 , 1 2 6 4 . 3 1 5 53 .813 May 4 , 6 6 5 1 . 7 7 0 4 7 , 8 0 3 23,400 June 6 ,070 1 , 2 0 0 71 .947 2 9 . 6 0 5 July 1 . 4 0 3 1,042 51 .376 2 0 , 2 0 5 August 2,047 2 , 7 6 1 5 0 , 3 1 7 14 ,705 September 6,816 3 .357 64 ,459 2 7 . 0 2 3 October 1 4 , 4 0 9 1 3 , 3 0 2 35.383 November 6,816 3 .357 64 ,459 1 2 , 9 1 7 December 3 .723 1 , 7 6 0 2 7 . 3 2 7 30,847 1 . 1 0 , 0 0 0 pounds building materials. Source: Analysis of Waybills to Bella Coola from B.C. Co-operative Society 133. APPENDIX VII WEIGHT BY POUND SHIPPED BY AIR, BY MONTH, BY AREA  FROM DECEMBER 1966 TO FEBRUARY 1968. I = Industrial parts, machinery, electrical D = Paper, clothing, dry goods, personal effects December 1966 TA JISIS TOFINO UCLUELET BE] _,LA COOLA I 3390 D 2465 I Not Aval D lable I Not Aval D lable I Not Avails D able March 1967 7265 2311 Not Available Not Available Not Available June 1967 4731 3019 Not Available Not Available Not Available July 1967 Not Available 568 121 379 35 3298 247 August 1967 Not Available 967 189 389 25 1999 251 September 1967 7^39 2218 453 141 105 1288 1172 October 1967 Not Available 202 65 136 40 1242 159 November 1967 Not Available 352 46 220 3 1172 333 December 1967 57^0 1634 515 225 January 1968 Not ,, Available 103 86 110 46 402 140 February 1968 4844 1396 446 104 225 1 446 104 TOTAL 6 months 46452 8 months 3843 8 months 1714 8 months 12993 Average Per Month 7742 480 214 1624 Source: Analysis by the writer of a l l B.C. Airline Waybills for 1967 to each town. 135. APPENDIX IX DETAILED DISTRIBUTION ANALYSIS BY FIRM IN UCLUELET Firm A Ucluelet This i s the largest single r e t a i l store! in Ucluelet. The store i s owned by the townspeople and sells a very broad range of merchandise including groceries, meat, produce, hard-ware, dry goods, and building materials. The store i s operated by a staff of approximately eight to fifteen people including part time help. Procurement Orders are placed one to three times weekly by mail and a l l orders are sent to their wholesale warehouse in Vancouver. One or two days i s required to f i l l the order and the travelling time i s approximately eight hours or often overnight. A l l goods are ordered in case lots which reduces the order f i l l i n g time. The size of each order ranges from a few hundred to several thousand pounds. Inventory A system of inventory control with a stock assortment l i s t was set up when the new store was built. Management admitted, how-ever, that a l l ordering was done on the basis of eyeballing and in -tuition. The inventory books, showing for each item, the number in stock, number on order, rate of sale etcetera were not main-1. This i s a B.C. Co-operative Store. Much of the infor-mation here was obtained from their head office in Vancouver. 136. i tained up to date. This meant that the writer was not able to determine the exact influence of air freight usage on specific items. The inventory was classified into four different groups. These were grocery products, including dairy, and frozen foods, meat, produce, and sundries which included dry goods, hardware and some drug items. The value of inventory was calculated on a monthly basis with physical Inventories being taken in June and January. The value of inventory i s stated at i t s r e t a i l value and this i s determined by adding to the cost a predetermined percentage markup. Specific information on inventory i s discussed under each classification. The management of this store, as with most other firms, has no idea what i t cost them to carry inventory. They stated that their inventory was not high and this argument i s d i f f i c u l t to disprove unless they reduce Inventory and see what happens to sales. In order to attempt a cost analysis I have assumed that the costs associated with holding inventory w i l l total twenty-five per cent of the inventory value. 2 This could be hypothetically made up of ten to twelve per cent interest charged on capital i n -vested in inventory, six to eight per cent charge for servicing inventory and depreciation and maintenance of the building and f a c i l i t i e s , and a six to eight per cent charge against obsoles-2. Magee, John F., in his ar t i c l e The Logistics of Distribution Page 462, suggests that the costs of holding inventory can run between twenty to thirty-five per cent of inventory value. 137. cence and/or deterioration of inventory. There are other cost factors not mentioned, however this provides a crude estimate. This cost of holding inventory i s compared to the firm's total operating costs which includes costs such as staff, depreciation and maintenance, etcetera. This provides some standard for com-pari son. It i s d i f f i c u l t to generalize a value to weight ratio for each classification of goods, because of the wide degree of variation. This information was necessary however, and the f o l -lowing formula was used to sample specific months for each clas-s i f i c a t i o n . Sales:••+ change in inventory (for a month) Weight shipped that month This formula does not give precise information because of the variance of types of goods shipped, and more importantly because for some months there was discrepancy between when goods were shipped and when the inventory and sales values were calculated. For examples, sales and inventory could be calculated on June 25th and a large shipment could be included in that month and shipped on June 27th. The results for each classification are: Table 9:1 Estimated Value Per Pound by Classification of Merchandise Shipped by B.C. Co-operative Society  during 1967. Classification Value Formula Value by Estimate Grocery $ .25 N.A. Hardware $ 2.25 $ 3.00 Dry Goods $ 3.00 $ 6.00 Produce $ .17 N.A. 138 These have been compared to subjective estimates provided by the wholesale warehouse manager. These estimates provide a rough indication of each classification's a b i l i t y to absorb higher freight charges. Transportation At present a l l freight for Firm A to Tofino and Ucluelet i s carried by a contract truck carrier. Three trips are made weekly. The freight i s picked up at the wholesale warehouse and taken directly with no transfer to the stores in Tofino and Ucluelet. Delivery time i s approximately eight hours and frequently the tri p i s made overnight. The merchandise i s loaded in case lots and no additional packing or crating costs are involved. The rate i s $1.40 per one hundred pounds for a l l goods, and there i s no res-tr i c t i o n concerning cubic displacement relative to weight. The significance of this cubic displacement factor becomes evident when boat and a i r transportation are used. The weight shipped by classification by month i s shown in Appendix II. The total weight shipped by classification in 1967 i s as follows:^ Groceries 902,564 pounds Sundries, Dry Goods, Hardware 24,222 pounds Produce 196,370 pounds Building Materials 20,380 pounds Several alternate forms of transportation could be used. 3» This data resulted from an analysis of the firms b i l l s of lading for 1967. 1 3 9 . These alternatives and some of their characteristics are shown in Table 4:2 Page 5 8 . The analysis has compared only the f e a s i b i l i t y of using a i r freight as compared to truck. Feasibility of Air Freight: Tofino and Ucluelet - Firms A The characteristics of a i r freight as compared to the common and contract truck carrier are shown in Table 4 : 2 Page 5 8 . At present the frequency of travel per week i s the same, and tra-velling time i s one hour, and seven to nine hours respectively. Air freight requires secondary transport both in Vancouver and in Ucluelet. This necessitates additional handling and increased risk of theft or damage. Air freight rates plus secondary trans-portation charges at present are equal to nearly nine times the charges by contract truck carrier. The question then i s what addi-tional advantages can a i r freight offer to compensate for these * additional charges. Packaging and crating charges by truck are not greater than those for goods travelling by a i r . Although the road between Alberni and Tofino and Ucluelet can be rough, no extra packing i s used. In fact because of the additional handling and transporta-tion i t could be argued that some merchandise travelling by a i r freight should be specially packed. Most goods, however, travel by either a i r or truck i n their original cartons. Insurance charges for goods in transit are usually lowest for goods travelling by a i r . In this instance however, insurance charges for both were included in the rates and were not comparable. The more important factor according to Firm A was the fact that 140. damage and theft was very low, almost negligible with their contract carrier. They f e l t that damage and theft would be equally low for air freight. The cost of capital tied up in goods in transit was not significant. This i s so, f i r s t because the time involved was very small, second because the goods were not owned until received in the store, and third because the firm used i t s Accounts Payable as a form of financing. For example, the Accounts Payable equaled $ 7,065.00 in January, 1967» and they were charged eight per cent for the use of this money. The point to be made, however, i s that the use of either a i r freight or truck did not influence this cost. Whether a difference in travelling time of seven to nine hours i s sufficient to allow any reduction in the level of inventory held i s a moot point. According to the management of the firms in Ucluelet and Tofino i t was not. If we accept this argument then the many costs associated with carrying inventory cannot be re-duced. This does not mean that inventory cannot be reduced, but only that any reduction cannot be wholly attributable to a i r freight usage. At present the trucks being used are not refrigerated. This means that meat, produce, and dairy products can suffer quite extensive deterioration, particularly during hot summer days. The costs and problems associated with this are discussed further with the produce Inventory. The number of orders being written and the maintenance of inventory would not change unless the frequency of delivery for a i r 141. freight or truck changed. With the existing aircraft capacity several f u l l y loaded trips could be required for each order and this would probably influence the cost of receiving the goods. If the door to door delivery time i s considered rather than the travelling time, then the advantage of air freight i s reduced even further. Whereas freight travelling by truck i s handled only twice, one to load and once to unload, the freight carried by a i r must be handled four to six times. This means that the door to door delivery time by truck w i l l be similar to the travelling time. The travel time i s influenced by the ferry sche-dule to cross the channel, by the road conditions between Alberni and Ucluelet and by highway t r a f f i c generally, however this time i s usually seven to eight hours. Air freight on the other hand has a much shorter travel time than door to door delivery time. The transportation of goods from the warehouse to the Vancouver Airport, and from the Tofino Airport to Ucluelet or Tofino, plus the additional time required to load and unload the goods w i l l easily add one to three hours to the delivery time. This approach to travelling time i s really much more important than the simple time in transit usually considered. The present air freight service relative to truck service makes i t d i f f i c u l t to generalize and say that a i r freight could provide more punctual or reliable service, a competitive advantage, or better f l e x i b i l i t y and improved customer service. In specific situations for specific goods i t may be true but not as a generali-zation. 142 Sundries Inventory This Inventory includes dry goods, hardware and building materials. The f i r s t two groups of commodities generally speaking have a value to weight ratio which could absorb air freight rates. The latt e r group however, has a low value to weight ratio. For this reason the weight of building materials shipped are excluded wherever possible, so as to reduce the effect of this on the feasi-b i l i t y of hardware and dry goods travelling by a i r . Building mate-r i a l s however were not separated from hardware in many b i l l s of lading and also building materials are included in the inventory valuation and in the sales figures. A broad assortment of merchandise was carried both in dry goods and hardware. Very few specialty items were carried and hence most goods were popular sellers. The assortment was not deep and very l i t t l e merchandise was kept in the back stockroom. This was not necessary with thrice weekly delivery service. The weights shipped per month for sundries, excluding building materials when possible, ranged from a minimum of three thousand four hundred four pounds to a maximum of seventeen thousand seven hundred ninety pounds. The total carried was eighty-three thousand three hundred fifty-nine pounds and the average per month was six thousand nine hundred forty-six pounds. Assuming twelve orders per month this was five hundred seventy-eight pounds per order. The value of inventory varied from a low of $ 32,818.00 in January to a high of $ 5 6 , 1 3 6 . 0 0 just before Christmas. The aver-age value of inventory for the twelve month period was $ 4 7 , 1 6 0 . 0 0 . 143 The cost of holding this inventory i s assumed as twenty-five per cent as discussed earlier. This represents a cost, part of which i s an opportunity cost, of $ 1 1 , 7 9 0 . 0 0 . This value appears to he very high, however while sundry goods represent f i f t y per cent of the total operating expenses of the firm, and only eight per cent of the operating expenses i f we deduct the ten per cent opportunity costs of interest on capital invested in inventory. The cost analysis compares the costs associated with using a i r freight or the contract It-ruck carrier. The weight car-ried i s assumed to be eighty-three thousand three hundred fifty-nine pounds. The cost of carrying the inventory i s $ 1 1 , 7 9 0 . 0 0 . The rates charged are $ 1 . 4 0 per one hundred pounds by truck and $ 1 0 . 0 0 plus $ 2 . 1 5 per one hundred pounds by a i r . The $ 1 0 . 0 0 a i r rate i s reduced to $ 5 . 0 0 and $ 3.34 so as to indicate the effect this might have on the comparison. 144. Table 9 : 2 Distribution Cost Analysis for Air and Surface Transport  for Firm A Sundries in Ucluelet-. TRUCK AIR FREIGHT 1/2 PRESENT AIR RATE 1 / 3 PRESENT AIR RATE Primary transpor-tation charges $ 1 , 1 6 7 . 0 0 $ 8 , 3 3 5 . 0 0 $ 4 , 1 6 7 . 0 0 $ 2 , 7 8 4 . 0 0 Secondary trans-portation charges N.A. $ 2 9 1 . 0 0 $ 2 9 1 . 0 0 $ 2 9 1 . 0 0 Inventory holding costs 111 , 7 9 0 . 0 0 $ 1 1 , 7 9 0 . 0 0 $ 1 1 , 7 9 0 . 0 0 $ 1 1 , 7 9 0 . 0 0 TOTAL COST $ 1 2 , 9 5 7 . 0 0 $ 2 0 , 4 1 6 . 0 0 $ 1 6 , 248 . 0 0 $14 , 8 6 5 . 0 0 Difference bet-ween Air and Surface NIL $ 7 , 4 5 9 . 0 0 $ 3 . 2 9 1 . 0 0 $ 1 , 9 0 8 . 0 0 Difference as a per centage of inven-tory reduction re-quired to equalize N.A. 63% 2 8 $ 16% The results show that a i r freight at the present rates costs $ 7 , 4 5 9 . 0 0 more than truck. Expressed in terms of inventory holding costs, a reduction in inventory of sixty-three per cent would be required to reduce inventory holding costs such that a i r freight and truck would have equal costs. This reduction would have to be attributable directly to a i r freight usage. If a i r freight rates are reduced by f i f t y per cent (not secondary transportation charges) then a compensating reduction of twenty-eight per cent of inventory would be required to reduce the cost of air freight usage so that i t equaled truck transport. A two thirds reduction in primary a i r freight rates would require only a sixteen per cent reduction i n inventory to equalize a i r freight and truck costs. 145. Table 9*3 Page 146 p r o v i d e s a summary of the advantages and disadvantages o f a i r f r e i g h t , expressed i n terms of the advan-tages u s u a l l y a t t r i b u t e d to a i r f r e i g h t usage. 146 Table 9s 3 Summary of Advantages and Disadvantages of Using Air  Freight Compared to Truck for Firm A Sundries i n  Ucluelet during 1967. VARIABLES CONTRACT TRUCK AIR FREIGHT Primary Transportation Charges $ 1,167.00 # 8,335.00 Secondary Transportation Charges NIL $ 291.00 Additional Packaging and Crating NIL NIL Insurance in Transit Not Available Included in rate Not Available Included in rate Risk of damage or theft i n Transit LOW LOW Interest Charges - goods in Transit N.A. N.A. Cost of Holding Inventory Unchanged Unchanged Inventory Maintenance - number orders, receiving, control Unchanged Slightly more costly Door to Door Delivery Time 7-9 hours 1-4 hours Reliability Very Good Not as Good Competitive Advantage Unchanged None - or at best marginal Frequency of Delivery Thrice weekly Thrice weekly NOTE: Parts of Table 9s3 are subjective evaluations by the writer formed during f i e l d interviews. 14?. Produce Inventory The low value per weight of produce of seventeen cents per pound suggests i n i t i a l l y that i t i s most definitely not feas-ible to use air freight. The inventory value ranged from a low of $ 5 . 0 0 to a high of $ 3,224 . 0 0 . The twelve month average was $ 1 , 0 5 4 . 0 0 . Sales for the year totalled $ 4 3 , 6 6 3 . 0 0 . The produce was a l l purchased from Slade and Stewart who are produce wholesalers. They delivered i t to Firm A 1s wholesaler at a prescribed time, so that i t could be loaded directly into the truck going to Ucluelet and Tofino. The trip in the unrefrigerated truck t r a i l e r takes at least eight hours or more. The produce does deteriorate over this period of time and especially so in hot wea-ther as already mentioned. This deterioration takes the form of a loss in weight due to water evaporation as well as reduced sale-a b i l i t y due to appearance. It i s d i f f i c u l t to establish a cost figure to assess the deterioration. It depends on the time factor, the type of produce, the temperature and the age of the produce when i t l e f t Vancouver. The store manager suggested a figure rang-ing between ten per cent and twenty per cent would probably be an accurate measure. If we assume that fresh produce could be given top prior-i t y on aircraft and for secondary transport then i t could conceiv-ably be in Ucluelet two hours after i t leaves the produce whole-saler. This means that the goods are out of the cooler for one-quarter of the time that they are by truck. If this results in a ten per cent reduction in deterioration then the store w i l l realize 148 an a d d i t i o n a l $ 4 , 3 6 6 . 0 0 o v e r t h e y e a r . I f a i r c r a f t f r e q u e n c y was i n c r e a s e d t o a d a i l y s e r v i c e t h i s d e t e r i o r a t i o n f a c t o r would p r o b -a b l y be d e c r e a s e d even f u r t h e r a l t h o u g h o r d e r i n g and r e c e i v i n g c o s t s would p r o b a b l y i n c r e a s e . D a i l y t r u c k i n g s e r v i c e c o u l d , however, reduce d e t e r i o r a t i o n as w e l l . T h i s approach makes l e s s sense when we r e a l i z e t h a t t h i s s t o r e s h i p p e d one hundred n i n e t y - s i x thousand t h r e e hundred s e v e n t y pounds o f produce l a s t y e a r . T h i s r e p r e s e n t s o v e r f o u r thousand pounds p e r week and an approximate average o f one thousand t h r e e hundred pounds p e r o r d e r . w h i l e t h e r e i s some c o s t i n v o l v e d i n h o l d i n g t h i s produce i n i n v e n t o r y , i t i s much l e s s t h a n f o r dry goods because t h e t u r n -o v e r i s h i g h . H a n d l i n g and maintenance a r e t h e most e x p e n s i v e c o s t s b e s i d e s d e t e r i o r a t i o n . The c o s t a n a l y s i s i n T a b l e 4:2 Page 58 has assumed a t o t a l weight o f one hundred n i n e t y - s i x thousand t h r e e hundred sev-e n t y pounds, and reduced d e t e r i o r a t i o n o f twenty p e r ce n t o f t h e r e t a i l s a l e s v a l u e of $ 4 3 , 6 6 3 . 0 0 , r e s u l t i n g from t h e use o f a i r f r e i g h t . T h i s i s a generous a l l o w a n c e but i t i s u s e f u l t o make the p o i n t . The t r a n s p o r t a t i o n c harges a r e as g i v e n i n T a b l e 9 : 2 Page 144. The same c a l c u l a t i o n s have been made assuming a i r f r e i g h t r a t e s c o u l d be reduced by f i f t y p e r ce n t and s i x t y - s e v e n p e r c e n t r e s p e c t i v e l y j u s t t o show t h e co m p a r i s o n s . The l a s t c a l -c u l a t i o n made was to reduce the secondary t r a n s p o r t a t i o n c o s t i n U c l u e l e t from $ 2 . 0 0 p e r one hundred pounds t o a more r e a l i s t i c f i g u r e o f $ . 5 0 p e r one hundred pounds to see how t h i s a f f e c t s t h e r e l a t i v e c o s t s . 149 Table 9^ 4 Distribution Cost Analysis for Air and Surface Transport  for Firm A Produce In Ucluelet for 1967~ CONTRACT TRUCKER AIR FREIGHT 1 / 2 PRESENT AIR RATE 1 / 3 PRESENT AIR RATE Primary Transpor-tation charges $ 2 , 7 4 9 . 0 0 $ 1 9 , 6 3 7 . 0 0 $ 9,818.00 $ 6 , 5 5 8 . 0 0 Secondary Trans-portation charges NIL $ 4 , 2 2 1 . 0 0 $ 4 , 2 2 1 . 0 0 $ 4 , 2 2 1 . 0 0 Reduced Shrinkage via Air Freight NIL $ ( 8 , 7 3 2 . 0 0 ) $ ( 8 , 7 3 2 . 0 0 ) $ ( 8 , 7 3 2 . 0 0 ) TOTAL COST $ 2 , 7 4 9 , 0 0 $ 1 5 , 1 2 6 . 0 0 $ 5 . 3 0 7 . 0 0 $ 2,047.00 Difference bet-ween Air - Truck at present rate structure N.A. $ 1 2 , 3 7 7 . 0 0 $ 2 , 5 5 8 . 0 0 $ ( 7 0 2 . 0 0 ) Reduced Secondary charges to 65i^/100 N.A. $ ( 2 , 9 4 5 . 0 0 ) $ ( 2 , 9 4 5 . 0 0 ) $ ( 2 , 9 4 5 . 0 0 ) TOTAL COST with reduced secondary transportation charges $ 2 , 7 4 9 . 0 0 $12,181.00 $ 2 , 3 6 2 . 0 0 $ 8 9 8 . 0 0 Differerence in cost between a i r freight and truck freight with re-duced secondary transportation charges N.A. $ 9 . 4 3 2 . 0 0 $ ( 3 8 7 . 0 0 ) $(3,647 .00) The results show that at the existing Primary and Secon-dary a i r freight charges, use of truck transportation costs $ 1 2 , 3 7 7 . 0 0 less. Assuming primary a i r rates were reduced by f i f t y 150 per cent then truck transportation i s s t i l l $ 2 , 5 5 8 . 0 0 less. If, however, secondary transportation by air was reduced as suggested and air freight primary charges were constant, then truck i s s t i l l $ 9 » 4 3 2 . 0 0 less. With primary air rates reduced by f i f t y per cent and secondary charges reduced then f i n a l l y a i r freight costs $ 3 8 7 . 0 0 less. This analysis accomplishes l i t t l e more than to show the large cost gap separating air and surface transport even when some of the compensating costs are considered. Factors such as a more saleable produce, customer satisfaction, and competitive advantage cannot be measured, however i t i s doubtful that they could reduce the gap sufficiently. It i s not r e a l i s t i c to expect a i r freight rates to be reduced by f i f t y per cent nor i s a twenty per cent spoilage factor reasonable with the frequent truck service that exists at present. Table 9 : 5 Page 151 provides information at a glance on the advantages and disadvantages of air freight over the present method of truck transportation for the produce department. 151 Table 9;5 Summary of Advantages and Disadvantages of Using Air  Freight Compared to Truck for Firm A Produce in Ucluelet in 1967. VARIABLES CONTRACT TRUCKER AIR FREIGHT Primary Transportation Charges $ 274-9.00 $ 1 9 , 6 3 7 . 0 0 Secondary Transportation Charges NIL # 4 , 2 2 1 . 0 0 Additional Packaging and Crating NIL NIL Insurance in Transit Not available included in rate Not available included in rate Risk of Damage or Theft In Transit LOW LOW Interest Charges on Goods in Transit N.A. N.A. Cost of Holding Goods in Inventory Unchanged Unchanged or slightly lower Deterioration or Spoilage in transit and in inventory Unchanged Reduced by amount equal to 1 0 - 2 0 $ of r e t a i l sales Inventory Maintenance Unchanged Slightly greater or unchanged Door to Door Delivery Time 7-9 hours 1-3 hours Customer Satisfaction Unchanged Greater Competitive Advantage Unchanged Marginally better More Saleable Product Unchanged Better appearance and heavier 1 5 2 G r o c e r i e s I n v e n t o r y The i n v e n t o r y c a r r i e d i n g r o c e r i e s i s p r e t t y much s e l f -e x p l a n a t o r y . I t ranges from b u l k y l i g h t w e i g h t i t e m s h i g h i n v a l u e such as c a s e s o f c i g a r e t t e s t o heavy low v a l u e canned goods. The average v a l u e p e r pound i s a p p r o x i m a t e l y t w e n t y - f i v e c e n t s . The i n v e n t o r y ranged i n v a l u e from $ 1 6 , 2 1 0 , 0 0 to $ 2 0 , 7 6 0 . 0 0 w i t h an average v a l u e f o r t w e l v e months o f $ 1 7 , 4 3 4 . 0 0 . S a l e s f o r t h e y e a r e q u a l l e d $ 3 1 2 , 6 3 3 « 0 0 and t h i s r e p r e s e n t e d ap-p r o x i m a t e l y e i g h t e e n t u r n s on t h e i r i n v e n t o r y . The t o t a l w e i g ht s h i p p e d i n by t r u c k t o t a l l e d n i n e hundred two thousand f i v e hundred s i x t y - f o u r pounds. Table 9>*6 Page 1 5 3 summarizes the t r a n s p o r t a t i o n c h a r g e s f o r t h i s w e i g h t and i f we assume a i r f r e i g h t r a t e s as c o n s t a n t t h e n t h e d i f f e r e n c e i n t r a n s p o r t a t i o n charges a l o n e i s $ 9 7 , 0 2 6 . 0 0 . I n v e n t o r y h o l d i n g c o s t s , assumed t o be t w e n t y - f i v e p e r c e n t a r e o n l y $ 4 , 3 5 8 . 0 0 . The o t h e r advantages o f a i r f r e i g h t f o r h a u l i n g g r o c e r y merchandise a r e n o t a p p l i c a b l e . 1 5 3 Table 9x6 Distribution Cost Analysis for Air and Surface Transport  f o r Firm A Groceries In Ucluelet during 196?• SURFACE AIR FREIGHT 1/2 PRESENT AIR RATE 1 / 3 PRESENT AIR RATE Primary Trans-portation char-ges # 1 2 , 6 3 5 . 0 0 $'90 ,250.00 $ 4 5 , 1 2 5 . 0 0 $ 3 0 , 0 8 3 . 0 0 Secondary Transportation charges N.A. $ 19.411.00 $19,411.00 $19,411.00 Cost of hold-ing Inventory @ twenty-five per cent $ 4 , 3 5 8 . 0 0 $ 4 , 3 5 8 . 0 0 $ 4 , 3 5 8 . 0 0 $ 4 , 3 5 8 . 0 0 TOTAL COST $ 1 6 , 9 9 3 . 0 0 $114 ,019.00 $ 6 8 , 8 9 4 . 0 0 $ 5 3 , 8 5 2 . 0 0 Difference bet-ween surface -a i r N.A. $ 9 7 , 0 2 6 . 0 0 $ 5 1 , 9 0 1 . 0 0 $ 3 6 , 8 5 9 . 0 0 154 Firm B Ucluelet This store i s operated by two women, one the owner and the other an employee. The merchandise assortment includes a wide range of ladies, teenagers,, and children's clothing and accessories, as well as g i f t items such as china, glassware, wood and metal products. Procurement A l l I n i t i a l orders are placed by the owner either during a trip to Vancouver or through a supplier's representative in Ucluelet. Re-orders on these goods and special orders are placed as needed usually through the mail. The i n i t i a l placing orders usually weigh between thirty-five and one hundred f i f t y pounds, while re-orders and specials which are much more frequent usually weigh less than twenty pounds. The method of delivery i s pre-arranged between the two parties, and the latter orders usually take two to four days, the former longer. Orders are generally placed quite frequently, sometimes two or three times per week. The cost of staff and materials to write and receive these orders was considered of l i t t l e consequence, because the staff had spare time. This opinion was expressed by most owners or managers of small firms. Inventory A physical inventory taken in December, 196?. yielded a value of $ 18,000.00 at r e t a i l . The cost of this merchandise or a figure for percentage markup was not available. The only 4. A l l information gathered for this firm was done during a personal interview with the owner. The name of the store i s Ruth's Gift Shop. 1 5 5 . method of control used for inventory was a system of periodic "eyeballing". The assortment of merchandise was quite broad but not deep. This accounts for the large number of small orders that were written. This was done quite economically because suppliers had no minimum order quantities, and because the light weight of the packages allowed them to travel by mail, thereby eliminating minimum freight charges by air, truck, or boat. The value of the inventory by weight was estimated to average four to six dollars per pound. This applied to most of the goods and hence the merchandise could be considered as able to absorb the higher cost of premium transportation. Obsolescence and deterioration were not considered a major problem or cost by the owner, however, a visual appraisal by the interviewer and comments from other townspeople suggests that some obsolete inventory existed.^ No direct competition exists in either Tofino or Ucluelet and hence the store succeeded with selling less than up to date merchandise. The customers with whom the Interviewer spoke were aware of this and purchased their clothing etc. elsewhere whenever possible. Transportation At present a l l freight from Vancouver i s shipped by truck. Packages weighing less than twenty-six pounds are car-ried through the mail, and those weighing over twenty-six pounds are carried by West Coast Freight. 5 » Shoppers complained that the merchandise was old and out of style. They shopped by mail in Vancouver for style merchandise. 1 5 6 Table 9 ? 7 Mail Charges Anywhere In British Columbia: Via Parcel P o s t 1 9 6 8; Maximum Weight 25 Pounds Pounds Dollars 1 - 2 • 35 2 - 3 .50 3 - 4 . 6 0 4 - 5 . 7 0 5 - 6 . 8 0 6 - 7 • 90 7 - 8 1 . 0 0 8 - 9 1 . 0 5 9 - 1 0 1 . 1 5 10 - 11 1 . 2 5 11 - 12 1 . 3 5 12 - 1 3 1 . 4 5 1 3 - 14 1 . 5 0 14 - 15 1 . 6 0 15 - 16 1 . 7 5 1 6 - 17 1 . 7 5 17 - 18 1 . 7 5 18 - 1 9 1 . 7 5 1 9 - 20 1 . 7 5 20 - 21 1 . 9 0 21 - 22 1 . 9 0 22 - 23 1 . 9 0 23 - 24 1 . 9 0 24 - 25 1 . 9 0 NOTE: Tofino-Ucluelet - 6 . p.m. closure in Vancouver for delivery next day at 10 a.m. Tahsis - Leave Vancouver at 6 : 3 0 p.m. daily Arrive Campbell River 12 p.m. Arrive Tahsis approximately 12 a.m. next day Bella Coola - Leave Tuesday 10 p.m. by boat once weekly Air mail service extra Source: Canada Post Office, Vancouver, B.C. 157. The owner estimated that twenty-five per cent of their freight was carried by West Coast Freight. Samples of the invoices indicated this weight would total approximately one thousand two hundred pounds per year. This leaves seventy-five per cent of the freight or three thousand six hundred pounds to travel by mail, and this i s definitely a high estimate. This would represent more than three parcels of twenty-five pounds each per week. Mail service arrived in Ucuelet each morning at 10 A.M. A l l mail posted before 6 P.M. the previous day i s included. This service i s very reliable and the costs are reasonable. They are given in Table 9'-7 Page 156. West Coast Freight provides door to door delivery service three times weekly. Travelling time i s approximately seven to nine hours, however, delivery often takes longer. Their service i s not considered too reliable especially during the winter months. The rates charged are l i s t e d in Table k:2 Page 58. They include a minimum charge of $ k.60 which would apply to a l l goods weighing less than one hundred pounds. The merchandise carried by this shop i s primarily clothing and g i f t items. The clothing requires no special packaging, and in most cases the g i f t items are s t i l l packed as they l e f t the man-ufacturer. Hence the use of truck does not require special packa-ging costs above those required by air. Influence of Air Freight There are two other alternative methods of transportation to Ucluelet and Tofino. The boat provides once weekly service, re-quires additional crating costs, and has a greater chance of theft 158. and damage. Air freight provides service three times weekly at pre-sent. The freight rates for a i r are more than double those of West Coast Freight. Travelling time i s about f i f t y minutes, how-ever, secondary transportation in Vancouver and from the Tofino airport to Ucluelet requires additional time, handling and charges. The owner stated that the inventory level could not be reduced i f air freight was used, and related to this he could not absorb the additional costs of using air freight. This statement would make sense in light of the following arguments. The large proportion of small packages presently being carried through the mail arrive as frequently and at less cost than by a i r freight. The difference in travelling time between truck and a i r -craft at present i s about six to eight hours. This i s not s u f f i -cient to induce any reduction in Inventory, nor except in the case of an emergency, i s i t worth paying a premium charge unless cost savings in some other area can be realized. The use of air freight does not reduce the packing costs for this type of merchandise, nor. are the interest charges on mer-chandise in transit lower, because the merchandise is not owned until received in Ucluelet. As stated, a i r freight requires additional secondary transportation. This additional cost i s substantial, and also the risks of damage and theft are Increased. If i t i s agreed that the use of a i r freight w i l l not lead to some reduction in inventory then inventory holding costs 1 5 9 . w i l l probably not be reduced. The cost analysis below assumed the cost of holding inventory at fifteen per cent of inventory value. This i s only an estimate and could be made up of an eight per cent charge on capital invested in inventory, a four per cent cost of maintaining inventory and a three per cent charge for deterioration and obsolescence. The freight charges are as shown in Table 4 : 2 Page 5 8 and the total weight i s assumed to be four thousand eight hundred pounds. Air freight rates have been varied to show the affect of this on the comparison. Table 9:8 Distribution Cost Analysis Firm B for Air and Truck Trans  port for Firm B in Ucluelet in 19"oT^  TRUCK AIB FREIGHT 1/2 PRESENT AIR RATE 1/3 PRESENT AIR RATE Primary Trans-portation charge $ 220.00 $ 480.00 $ 240.00 $ 159.00 Secondary Trans-portation charge i N.A. $ 103.00 # 103.00 $ 103.00 Cost of holding inventory |2700.00 |2700.00 |2700.00 $2700.00 TOTAL COST $2920.00 #3283.00 13043.00 $2962.00 Difference in cost between Air and Truck N.A. $ 363.00 $ 123.00 $ 42.00 Difference as a percentage of inventory hold-ing cost 13% 6% 2% 160. The results show that at present rates the use of a i r freight costs $ 363*00 more than truck. This would require a re-duction in Inventory of thirteen per cent resulting from the use of air freight so as to reduce inventory holding costs and equalize the procurement costs using a i r freight or truck. If the present a i r freight rate i s reduced by f i f t y per cent then inventory would have to be reduced by six per cent so as to reduce inventory hold-ing costs sufficient to equalize the procurement costs of using a i r freight or truck. If the present a i r freight i s reduced by sixty-seven per cent then inventory must be reduced by two per cent to equalize procurement costs by a i r or truck. At the present a i r freight rates, i f the secondary cost of transportation i s reduced in Ucluelet from $ 2.00 per one hund-red pounds to a more r e a l i s t i c f i f t y cents per one hundred pounds, then a reduction in inventory of only ten per cent would be required to equalize procurement costs. If the cost of holding inventory was twenty per cent instead of fifteen per cent then a lesser reduc-tion in inventory would be required. The summary chart in Table 9:9 Page l 6 l indicates at a glance the advantages and disadvantages of using a i r freight for Firm B. 161 Table 9:9 Summary of Advantages and Disadvantages of Using Air  Freight Compared to Truck Transport for Firm B In Ucluelet during 1967. COMMON TRUCKER AIR FREIGHT Primary Transportation Charges #220.00 $480.00 Secondary Transportation Charges NIL $103.00 Additional Packaging and Crating NIL NIL Insurance Costs in Transit Not available included in rate Not available included in rate Risk of damage or theft in transit LOW Low or slightly higher Interest charges on goods in transit N.A. N.A. Cost of Holding Goods in Inventory Unchanged Unchanged or slightly lower Inventory Maintenance Unchanged Unchanged or slightly higher Door to Door Delivery Time 7-10 hours 1-3 hours Reliability Good As good or slightly lower Competitive Advantage Unchanged None - or at best marginal Frequency of delivery three times per week three times per week Customer Satisfaction Unchanged Greater 162 Firm C Ucluelet This shop^ i s operated by an owner and one employee. It i s a r e t a i l store selling television sets, radios, sound equipment and miscellaneous electrical equipment, as well as repairing elec-t r i c a l and communications equipment. Inventory consists of new mer-chandise and repair parts as above. Inventory and Procurement No formal Inventory control system exists, and "eyeballing" and stockouts are used to i n i t i a t e orders. A l l merchandise i s pur-chased in Vancouver, and orders are mailed or telephoned. Telephone i s used to expedite orders and to select alternate merchandise when required. Delivery method i s pre-arranged by the two parties to minimize charges and i s stated by the consignee in the case of em-ergency goods. Delivery time i s three to four days. The value of inventory i s an estimate by the owner. It i s valued at r e t a i l , with parts totalling $ 3 , 0 0 0 . 0 0 to $ 4 , 0 0 0 . 0 0 , and new merchandise equal to $ 8 , 0 0 0 . 0 0 to $ 1 0 , 0 0 0 . 0 0 . The average value per weight of the inventory was estimated at | 5 * 0 0 to $ 1 0 . 0 0 per pound, and this i s normally high enough to absorb the additional cost of a i r freight. The assortment carried was neither broad nor deep, however part of the merchandise was of high value. This means that orders were quite frequent, usually one or two per week. 6 . Information on Island Communications was provided by the owner manager, Mr. R. Vose during an interview with the writer. 163. The owner had no idea what i t cost him to carry his inven-tory, however he agreed that interest charges on invested capital would be between eight and ten per cent, and that costs such as obsolescence, insurance, theft, breakage and maintenance could easily total five to ten per cent. It i s from these estimates that I have assumed the cost of holding Inventory to be fifteen per cent of the value of the inventory. The owner also expressed the opinion that given the exist-ing transportation services, competition and customer attitude his inventory was at i t s lowest possible level. Transportation At present the same transportation systems are used as for Firm B. No estimate was available on the weight or charges of mer-chandise shipped by mail. The freight charges for 1967 from West Coast Freight totalled $ 360.00^. This represents a maximum weight of eight thousand pounds i f we assume a l l packages weighed a mini-mum of one hundred pounds. Probably this total weight could be much less, because many orders would weigh less than one hundred pounds. Most repair parts are small and l i g h t . They require very l i t t l e additional packing i f any, and travel quickly and safely through the mail. The larger items such as television and radio sets are pre-packed at the factory and require no additional packing costs when shipped by truck. Theft and damage are almost negligible 7. This figure was determined by an analysis of Firm C s invoices for 1967. 164 through the mail or by truck. The interest charges for goods in transit do not apply because the store assumes ownership upon arrival of the goods. The rates, frequency and travelling time for each transportation alter-native are the same as for Firm A and found in Table 4:2 Page 58. Influence of Air Freight Air freight service for this firm on a regular basis can-not improve on the mail service for small packages. For larger packages weighing over twenty-five pounds, a i r freight could not show a reduction in packing costs, insurance charges for goods in transit, interest on goods in transit, and theft and damage of goods in transit. In fact a i r freight, because i t requires additional handling and secondary transportation, could increase costs of pack-ing, theft and damage. Given the alternate transportation services and the pos-s i b i l i t y that they may improve, i t i s d i f f i c u l t to forecast that the use of a i r freight could result in a reduction of the level of inven-tory. The difference in travelling time as discussed with Firm A i s not sufficient. This being the case, no reduction in inventory hold-ing costs could be directly attributable to the use of a i r freight and hence there would be no cost savings to compensate for the i n -creased cost of using a i r freight. Intangible advantages usually associated with a i r freight are not important. Door to door delivery time i s marginally faster, however frequency of arrival, r e l i a b i l i t y and punctuality of a i r freight are not significantly different from truck transportation. 165 Competitive advantage and better customer service are not too im-portant because there i s no competition and customers are condi-tioned to waiting. The real potential for a i r freight involves specialized parts for Radar, Sonar, and radio equipment for the fishing boats during the summer months. These parts cannot be carried in inven-tory and are ordered from Vancouver as necessary. Past reliable transportation i s required, and cost i s really no consideration be-cause downtime for a fisherman i s very costly. At present mall i s used for small parts and large parts are trucked i n . If daily a ir freight service existed the owner would use i t on a regular basis for these emergency type parts and equipment. Some competition exists for this service because the fishing companies provide the same service. Hence the intangible factors of door to door d e l i -very time, r e l i a b i l i t y , better customer service and f l e x i b i l i t y in meeting demand, become of primary importance. In these emergency situations the customer absorbs the additional cost, and therefore g compensating costs for the firm are not important. The use of a i r freight would not influence the number of orders written and the time spent in receiving goods because the frequency of arrivals i s the same as at present. Insurance charges for goods in transit are not affected because these are included in the t a r i f f s for a i r freight and truc-king . The preceeding comments applied to the regular Inventory. 8. This i s the same type of situation which affects the pulp and lumber firms, mining companies and exploration teams when they use air freight regularly. 166 These parts are used to service the townspeople who are willing to wait for parts when necessary. These parts are more standarized and interchangeable, besides nobody else in town provides this service. Cost Analysis Although no precise data was available, i t i s s t i l l use-ful to gather the available data and estimate how much savings in inventory holding costs or some other area, would be required to offset the additional costs of using air freight. Several assump-tions would be required. These include: — Value of inventory at r e t a i l i s # 12,500.00 Because i t i s valued at r e t a i l this w i l l yield a higher inventory holding cost than inventory valued at cost, and this w i l l be advantageous to the use of a i r freight. — Weight shipped i s assumed to equal eight thousand pounds. — Cost of holding inventory i s calculated at fifteen per cent and twenty per cent. — The cost of secondary transportation in Ucluelet i s $ 2.00 per one hundred pounds. This i s very high, and i f the volume of freight increased i t would probably be reduced because of competition. — Freight charges are as stated in Table 4:2 Page 58. — No other costs except inventory holding costs and transportation costs have been included 167 Table 9:10 D i s t r i b u t i o n Cost Analysis f o r A i r and Truck Transport  f o r Firm C i n Ucluelet during 19671 ' TRUCK AIR FREIGHT 1/2 PRESENT AIR RATE 1/3 PRESENT AIR RATE Primary Transpor-tat i o n charge $ 378.00 $ 800.00 $ 400.00 $ 266.00 Secondary Trans-portation charge NIL $ 172.00 $ 172.00 $ 172.00 Inventory Holding costs $1875.00 $1875.00 $1875.00 $1875.00 TOTAL COSTS $2243.00 $2847.00 $2447.00 $2313.00 Difference between A i r and Truck N.A. $ 604.00 $ 204.00 $ 70.00 Difference as per-centage of inven-tory reduction re-quired to equalize 32% 11% k% The r e s u l t s show that at the present f r e i g h t rates, a i r fr e i g h t i s $ 604.00 more costly than truck f r e i g h t . A reduction i n inventory of thirty-two per cent, and the associated reduction i n inventory holding costs, would be required to compensate f o r the difference i n f r e i g h t charges. If the a i r fr e i g h t rates were re-duced by f i f t y per cent or sixty-seven per cent then reductions i n inventory of eleven per cent and four per cent respectively would be required to equalize procurement costs f o r a i r or truck f r e i g h t . If inventory holding costs were twenty per cent of inven-168. tory value then at present rates inventory would have to be reduced by only twenty-four per cent as a r e s u l t of using a i r fre i g h t so as to equalize procurement cost for truck or a i r f r e i g h t . Table 9:11 Page 169 indicates the advantages and disadvantages of a i r f r e i g h t i n summary form f o r Firm C. 169. Table 9 t i l Summary of Advantages and Disadvantages of Using Air Freight Compared to Truck Transport for Firm C i n Ucluelet during 1967* VARIABLES COMMON TRUCKER AIR FREIGHT Primary Transportation Charges $ 378.00 $ 800.00 Secondary Transportation Charges NIL $ 172.00 Additional Packaging and Crating NIL NIL Insurance Costs in Transit Not available included in rate Not available included in rate Risk of damage or theft in transit LOW Low or slightly higher Interest Charges on goods in transit N.A. N.A. Cost of Holding Goods inllnventory Unchanged Unchanged or slightly lower Inventory Maintenance Unchanged Unchanged or slightly higher Door to Door Delivery Time 7-10 hours 1-3 hours Frequency of delivery three times per week three times per week Competitive Advantage Unchanged Yes, for emergency parts Customer Satisfaction Unchanged Unchanged or marginally better \ \ 170 Firm D Ucluelet This drug store? i s the only one in Ucluelet or Tofino. It i s owned and operated by a druggist, his wife, and one employee. They s e l l drugs, g i f t items, toys, cosmetics and magazines, etc. just l i k e a normal drug store. Procurement A s with each of these small stores, the inventory i s "eye-balled." Merchandise i s ordered from Vancouver through the mail. Telephone was considered too expensive. Delivery time depends on how long i t takes the supplier to f i l l the order, but this i s usually four to five days. Regular orders come by truck, and those weighing less than twenty-five pounds and a l l emergency drug orders are sent by parcel post. These delivery instructions are issued by the drug-gist as required. Orders are normally placed only once per week except in the case of required drugs which are considered as emer-gency orders. Inventory The value of the inventory at cost was $ 20,000.00 This was a physical evaluation and no average markup was available. Some inventory was kept in a stockroom, but most was on the shelves. The inventory appeared to be very clean, insofar as most items appeared fresh and new. A very broad assortment of merchandise was carried which together with the drugs, accounts for the inventory value. The owner was very definite about the fact that his 9. Information for Brooks Pharmacy was provided by Mr. Brooks who was the owner operator, during an inter-view with the writer. 171 inventory was at the lowest possible level, and that this was man-datory in a town this size i f you wanted to stay in business. Most orders for goods were less than the optimum order quantity, but this was necessary to keep inventory low and reduce holding costs of i n -ventory. According to the owner the inventory contained ten thou-sand to fifteen thousand different items, and the whole inventory turned between four and five times yearly. This means that sales would total about $ 100,000.00 yearly. The value per weight of inventory would vary from $ 1.00 to $ 10.00 per pound depending on the merchandise. While the owner had no idea what i t cost to hold his i n -ventory, he agreed that ten to twenty per cent was l i k e l y an accu-rate f i g u r e . 1 0 The interest charges would be eight to ten per cent, and other costs would total two to ten per cent. For the purposes of this paper we have assumed a rough estimate of fifteen per cent. Transportation This firm, l i k e most others in Tofino and Ucluelet, uses parcel post for a l l packages under twenty-five pounds and West Coast Freight for a l l larger packages. The estimated average shipment was three hundred to four hundred pounds per week. This was made up of one-half drugs and one-half miscellaneous goods. This volume was estimated to be f a i r l y constant because when the townspeople go on holidays during the summer, the fishermen take their place to keep sales quite constant. 10. The owner really was not aware of a l l the costs involved in holding inventory. 172. According to the owner a i r freight i s not used even for emergency orders because truck provides as good service as a i r freight and the mail i s much faster and reliable for emergency and small packages. Both are cheaper than a i r freight and more reliable as stated. No additional packing costs were required for this mer-chandise and the goods were not owned until receipt of same in Ucluelet. A l l charges were paid by the store but no record was kept, because they were paid out of petty cash. Use of Air Freight The owner was most definite about the fact that the inven-tory level could not be reduced by using air freight. The argument i s the same as that put forth by Firm A and B, the time and service differential i s just not large enough. Because of this, inventory holding costs would not be reduced, and i f no intangible advantages can be realized then there i s no reason to incur the additional costs of a i r freight. It does not seem necessary to keep repeating the reasons why a i r freight would not be advantageous. These have been discussed earlier with Firms A, B and C, and would apply equally well to most other firms of this size i n the same area. Other types of firms and their problems w i l l be discussed briefly however. A comparison of procurement costs using a i r freight or truck has been performed. The inventory value i s $> 20,000.00 at cost and handling charges are assumed to be fifteen per cent. The total weight ship-ped i s fifteen thousand six hundred pounds. This does not include merchandise shipped by mail. 173 Table 9;12 Distribution Cost Analysis for Air and Truck Transport  for Firm D i n Ucluelet during 1967* TRUCK AIR FREIGHT 1/2 PRESENT AIR RATE 1/3 PRESENT AIR RATE Primary transpor-tation charges $ 717.00 $1560.00 $ 780.00 $ 520.00 Secondary trans-portation charges NIL $ 335.00 $ 335.00 $ 335.00 Cost of holding inventory $3000.00 $3000.00 $3000.00 $3000.00 TOTAL COST $3717.00 $4895.00 $4115.00 $3855.00 Difference between Air and Surface N.A. $1178.00 $ 398.00 $ 138.00 Difference as a percentage of i n -ventory reduction required to equal-ize N.A. 39% 13% 3% The results indicate that at present rates the use of a i r freight would cost $ 1,168.00 more than truck transportation. To compensate for this extra cost the use of a i r freight would have to allow a thirty-nine per cent reduction in inventory and related holding costs. With the same conditions but with inventory holding costs assumed at twenty per cent, the required reduction of inven-tory would be only twenty-nine per cent. If the present a i r freight rates were reduced by f i f t y per cent and sixty-seven per cent then the reduction i n inventory value required to compensate for the extra costs would be thirteen per cent and three per cent respec-t i v e l y . Although the i n t e r e s t charges on goods i n t r a n s i t were not applicable to t h i s firm, they amounted to $ 181 .00. This was calculated by assuming a difference i n t r a v e l l i n g time of seven hours between a i r f r e i g h t and truck at an i n t e r e s t rate of f i v e per cent. The t o t a l value of goods i n t r a n s i t was estimated at $ 85,000.00. Table 9:13 Page 175 summarizes the advantages and d i s -advantages of using a i r f r e i g h t f o r t h i s firm generally. 175. Table 9:13 Summary of the Advantages and Disadvantages of Using  Air Freight Compared to Truck Transport for Firm D in  Ucluelet during 196?. VARIABLES COMMON TRUCKER AIR FREIGHT Primary Transportation Charges $ 717.00 $ 1560.00 Secondary Transportation Charges NIL $ 335.00 Additional Packaging and Crating NIL NIL Insurance Costs i n Transit Not available included in rate Not available included in rate Risk of Damage or Theft in Transit LOW Low or slightly higher Interest charges on goods in transit N.A. N.A. Cost of holding goods in inventory Unchanged Unchanged or slightly lower Inventory Maintenance Unchanges Unchanged or slightly higher Door to Door delivery time 7-10 hours 1-3 hours Frequency of delivery three times per week three times per week Competitive Advantage Unchanged No-because there i s no competition Customer Satisfaction Unchanged Unchanged or maybe better 1 7 6 Firm E Ucluelet This s t o r e 1 1 i s a branch ou t l e t f o r a firm i n Courtenay. It i s operated by one woman, whose husband owns the adjacent r e a l t y firm. The inventory i s made up e n t i r e l y of mens, l a d i e s , and c h i l d -ren's shoes. Procurement and Inventory A s p e c i f i c inventory i s maintained, so that c e r t a i n sizes i n each type of shoe are c a r r i e d . Orders are placed once a week through Courtenay to Vancouver by mail. They usually a r r i v e four to f i v e days l a t e r depending where the merchandise comes from, and how f a s t the order i s f i l l e d . Special orders are telephoned i n and normally a r r i v e the next day by mail. The inventory i s on consignment and a commission i s paid f o r each sale, however the analysis w i l l continue as though the i n -ventory were owned. The value of the inventory was # 1 5 , 0 0 0 . 0 0 at r e t a i l . The average value per weight was estimated to be $ 9»00 per pound depend-ing on the type of shoe. The inventory appeared to be very clean, however t h i s could be explained by the f a c t that a l l slow s e l l e r s , i n f e r i o r shoes, etc. were returned to the main store. This i s not to say that these should not be charged as costs of holding t h i s inventory i n Ucluelet. The manageress had no Idea about the costs included i n holding inventory, of writing and receiving orders and of the i n t e r e s t 1 1 . Information f o r The V i l l a g e Shoe Store was provided by the Manageress during an interview with the writer. 177. charges on invested capital. Based on the charges applied to other firms i t i s assumed that ten to fifteen per cent would be a reason-able figure. The manageress in this store, as those in the other stores, stated that inventory was at the minimum level. The primary argu-ment was that from a merchandising point of view a minimum width and depth of assortment must be carried in inventory, i f the cus-tomer i s to be kept happy. These same comments were expressed by other merchants and there seems to be some validity in this argu-ment. Transportation At present a l l freight i s shipped via West Coast Freight, except special orders which as mentioned previously are sent by par-cel post. The average weekly shipment i s about one hundred pounds which totals five thousand two hundred pounds per year. These cha-rges are paid by the main store in Courtenay. Shoes require no special packing no matter how they are shipped, and they do not deteriorate. They are subject to theft, however this does not present a problem because trucking firms are responsible for what they transport and i t s condition. For this particular store the goods are usually owned in transit because they are shipped to Courtenay f i r s t and then to Ucluelet. If we assume an interest charge of eight per cent, and the value of the yearly shipment as $ 46,800.00 (calculated by weight times average value), and that the difference in transit time between truck and air i s seven hours per shipment, then this cost w i l l be $ I65.OO. This seems very small, however when we 178. consider that the t o t a l transportation b i l l was only $ 2 3 9 . 0 0 : I 2 i t i s a considerable amount. A i r Freight Analysis The use of a i r f r e i g h t by t h i s store instead of truck, would provide few advantages and/or cost savings. Granted a i r f r e i g h t i s much faster, however because of the required secondary transportation and increased handling, and the short distance that i s t r a v e l l e d , the advantages of a i r f r e i g h t to reduce the time i n t r a n s i t , and to reduce the costs of holding goods i n inventory, cannot t r u l y be r e a l i z e d . A difference i n delivery time of s i x to eight hours r e a l l y means nothing when i t takes the supplier two or three days to f i l l the order. Relatively speaking the time d i f f -erence i s i n s i g n i f i c a n t . Advantages to be gained through superior conditions of carriage are also small because truck transport i s probably not rougher or more r i s k y than the combinations of trans-portation and handling that a i r f r e i g h t must use. Again the small time difference does not provide s i g n i f i c a n t l y better customer ser-vice, f l e x i b i l i t y , or competitive advantage. Given these arguments the store manageress appears j u s t i -f i e d i n her comment that the use of a i r f r e i g h t would not help her to reduce costs or improve customer service, and hence she would use i t only i f i t cost the same or l e s s than the e x i s t i n g form of transportation. She was quite w i l l i n g to include i n her evaluation 1 2 . This figure appeared to be too small, however, the manageress i n s i s t e d i t was accurate. 179 of cost, items such as interest charges for goods in transit, pack-ing costs i f required and additional insurance charges i f applicable. The cost analysis for this firm uses the data given in the preceeding comments regarding weight, cost of holding inventory, inventory value, and interest charges for goods in transit: as well as the transportation charges given in Table 4:2 Page 58. The aim i s to indicate the difference in costs between truck and a i r freight, and then estimate how much of a saving in inventory holding costs would be required i f air freight were used. These figures are es t i -mates only and w i l l provide only a rough approximation, but they w i l l give some ideas as to comparability of the two forms of transport. Table 9:14 Distribution Cost Analysis for Air and Truck Transport  for Firm E in Ucluelet during 1967* TRUCK AIR FREIGHT 1/2 PRESENT AIR RATE 1/3 PRESENT AIR RATE Primary transpor-tation charges $ 239.00 $ 520.00 $ 260.00 $ 173.00 Secondary trans-portation charges NIL $ 112.00 $ 112.00 $ 112.00 Inventory Holding costs 15% $2250.00 $2250.00 $2250.00 $2250.00 TOTAL COST $2654.00 $2882.00 $2622.00 $2535.00 Difference between Air and Truck N.A. $ 228.00 ($ 32.00) ($119.00) Difference expressed as a percentage of inventory reduction required to equalize N.A. 10% (1%) (5%) 180 The r e s u l t s indicate that at the present f r e i g h t rates the procurement cost by a i r would exceed that by truck by $> 228.00. This would require a reduction of inventory of ten per cent so as to reduce inventory holding costs s u f f i c i e n t to compensate f o r the extra f r e i g h t costs. If the i n t e r e s t charges on goods i n t r a n s i t and on inventory holding costs had increased then t h i s would benefit a i r f r e i g h t usage even more. S i m i l a r i l y a decrease i n these i n -ter e s t charges or any improvement i n truck service would prove d i s -advantageous to a i r f r e i g h t . If a i r f r e i g h t rates could be reduced by f i f t y per cent or more then the procurement costs by using a i r f r e i g h t are l e s s than those of using truck transportation. The advantages and disadvant-ages of a i r f r e i g h t f o r Firm E have been summarized i n Table 9*15 Page 181. 181. Table 9:15 Summary of Advantages and Disadvantages of Using Air  Freight Compared to Truck Transport for Firm E in  Ucluelet during 1967. VARIABLES COMMON TRUCKER AIR FREIGHT Primary Transportation charges $ 239.00 $ 520.00 Secondary Transportation charges NIL $ 112.00 Additional Packaging and crating NIL NIL Insurance Costs i n Transit Not available included i n rate Not available included i n rate Risk of Damage or Theft in transit LOW Slightly lower Interest charges on goods in transit $ 165.00 NIL Cost of holding goods i n inventory LOW Low or slightly higher Inventory Maintenance Unchanged Unchanged or slightly higher Door to Door delivery time 7-10 hours 1-3 hours Frequency of delivery three times per week three times ; per week Competitive Advantage Unchanged Unchanged maybe improved Customer Satisfaction Unchanged Maybe Improved 182 Firm F Ucluelet This f i r m 1 ^ i S a printing shop and publisher of the local weekly paper. Their inventory includes printing supplies such as paper, ink, type and stationary supplies to se l l to the public. The firm i s operated by a man and his wife with part time help to print the paper one day each week. Procurement and Inventory The inventory i s small and made up of specific materials the year round. It i s controlled through a system of "eyeballing" and intuition. Orders are placed every three to four weeks by telegraph to Vancouver. He uses telegraph because his orders re-ceive better attention. The orders usually arrive seven to nine days later by West Coast Freight, however most of this time i s used by the supplier to f i l l the order. The inventory i s valued at $ 3,000.00 at cost and the average value per pound i s $ 2.00 or more. The problems of obsol-escence and deterioration are minor, but there i s a certain amount of damaged and wasted paper. Theft i s not a problem. Part of the reason for carrying inventory that last a month or more i s because his supplies must be ordered in certain minimum quantities, and also because i f he reduces his Inventory he faces the threat of stockingout and for a newspaper this can be crucial., 13 Information for the Tofino-Ucluelet Press was obtained from Mr. S. Simpson, owner and manager. 183. The cost of carrying this inventory was discussed and the owner had no idea what this would involve. He f e l t that this cost did not really exist because he had to carry i t anyway. When i t was explained to him, he accepted the ten to fifteen per cent figure suggested by the interviewer as being reasonable. Transportation At present a l l freight i s shipped by West Coast Freight. The estimated weight was four to five hundred pounds per month. No special packing costs were required and the goods were not owned until they arrived in Ucluelet. Periodic small rush shipments were sent by a i r freight, however, because the cost was so high and air freight really was not much faster, the owner stated that the mail would be used in the future. Air Freight Analysis The same arguments would apply for this store as for the previous firms. The slight advantages to be gained by using a i r freight are not sufficient to offset the additional costs. Air freight would be used regularly i f the rates were reduced such that the total cost of transportation was equal to or lower than that presently used. He was willing to accept the concept of total distribution cost, but could not see how this would help him at present because of the minimum order quantities required by the supplier. The cost analysis was the same as that done for other 184. firms. The data used i s that mentioned i n the preceeding d i s -cussion and i n Table 4 : 2 Page 5 8 . Table 9x2.6 D i s t r i b u t i o n Cost Analysis f o r A i r and Truck Transport  f o r Firm F i n Ucluelet during 196*7"I TRUCK AIR FREIGHT 1/2 PRESENT AIR RATE 1 / 3 PRESENT AIR RATE Primary Transpor-t a t i o n charges $ 2 2 0 . 0 0 $ 4 8 0 . 0 0 # 2 4 0 . 0 0 $ 1 6 0 . 0 0 Secondary Trans-portation charges NIL $ 1 0 3 . 0 0 $ 1 0 3 . 0 0 $ 1 0 3 . 0 0 Cost of holding inventory @ 1 5 $ $ 4 5 0 . 0 0 $ 4 5 0 . 0 0 $ 4 5 0 . 0 0 $ 4 5 0 . 0 0 TOTAL COST $ 6 7 0 . 0 0 1 1 0 3 3 . 0 0 $ 7 9 3 . 0 0 $ 7 1 3 . 0 0 Difference i n cost A i r - Truck N.A. $ 363.OO $ 1 2 3 . 0 0 $ 4 3 . 0 0 Difference expressed as a percentage of reduction i n inven-tory required to equalize costs N.A. 81% 27% 10% The r e s u l t s show that the use of a i r f r e i g h t at e x i s t i n g rates w i l l cost $ 3 6 3 * 0 0 more than the present method used. A re-duction of inventory and related holding costs of eighty-one per cent would be required to compensate for t h i s higher f r e i g h t charge. Under the same conditions, except for a cost of holding inventory of twenty per cent, the required inventory reduction would equal only sixty per cent. If the present a i r f r e i g h t rates were reduced 185 by f i f t y per cent or sixty-seven per cent then compensating re-ductions i n inventory of twenty-seven per cent and ten per cent respectively would be required. 186. Firm G Ucluelet This i s the Government Liquor Store for the area. The inventory i s self-explanatory, and the assortment would appear to be as good as that in a similar store in Vancouver. The total i n -ventory seemed rather large for an area this size. The value was estimated at $ 40,000.00 to $ 50,000.00 at r e t a i l , and revenues ranged between $ 100.00 to $ 1,000.00 per day. Orders were placed once per month regardless of stockouts. Excluding beer, the weight shipped per order ranged between three thousand two hundred and twenty-three thousand pounds. A l l of the freight was shipped via West Coast Freight. While the value per weight of the inventory was high, x with the existing policy regarding frequency of orders and stockouts, there appears to be no advantage in using a i r freight. If, however, these policies were changed, then i t would be reasonable to assume that a reduction in inventory holding costs, of interest charges for goods in transit, and cost of stockouts could offset the higher costs of transportation, and the increased costs of more frequent orders. A central warehouse could be located somewhere, perhaps Vancouver, to serve a l l of the smaller stores, and this would re-duce the necessity to order only case lots and would thus reduce the high inventory. No cost analysis has been undertaken because the data available was not adequate. 14. This was the opinion of the store operator, and no standards were available. 187 APPENDIX X DETAILED DISTRIBUTION ANALYSIS BY FIRM A IN TOFINO  Firm A Tofino This i s one of the two larger stores in Tofino. 1 It carries a very broad range of merchandise including groceries, meat, produce, hardware, dry goods and building materials. The store i s operated by six to twelve people including part time help. To do away with unnecessary repetition i t i s desirable to state that although this firm i s somewhat smaller than Firm A in Ucluelet, they are both operated by the same association. The procurement procedures, inventory control system, inventory holding costs, value per weight ratios, method and alternatives of transportation, and the advantages and disadvantages of a i r freight relative to truck freight, are almost exactly the same for Firm A i n Tofino and Firm A in Ucluelet. For this reason a discussion on each of these factors i s not repeated. The reader i s referred to Firm A in Ucluelet. Firm A in Tofino clas s i f i e s their inventory slightly differently than Firm A in Ucluelet. They have separated sun-dries into two separate classifications, dry goods and hardware. The latter includes building materials. The freight shipped to Firm A in both Tofino and Ucluelet 1. This i s a B.C. Co-operative Store, and most of the Information was obtained from their Vancouver Head Office. 188. travelled in the same truck. This means that the firm whose freight i s loaded in the front of the van w i l l have a slightly longer de-livery time, but this i s Included in the seven to eight hour e s t i -mate. The weight shipped by classification by month i s shown in Appendix III Page 129 . The total weight shipped for 1967 by classification i s as follows: 2 Groceries (including meat) 715,910 pounds Dry goods 13*258 pounds Hardware (excluding building materials) 25,650 pounds Produce (March - December) 114,845 pounds Building Materials March -December) 54,912 pounds Pour classifications are examined briefly to evaluate the f e a s i b i l i t y of using a i r freight. The results, especially of the cost analysis, are similar to those found for Firm A in Ucluelet. Hardware Inventory This classification includes hardware items and building materials. The former has an average value to weight ratio over $ 2.00. This suggests these items may be able to absorb premium transportation costs. Building materials on the other hand have a low value to weight ratio. For this reason, when the b i l l s of 2. This information was obtained from an investigation of B i l l s of Lading to Tofino at the B. C. Co-operative Society headquarters in Vancouver. 189. lading were examined the weight shipped for building materials was separated from hardware whenever possible. The figures for sales and Inventory for hardware are not reduced by the amount of the building materials. This minipulation has improved the position of air freight usage in the cost analysis where the weight relative to inventory value i s so important. The weight of hardware shipped per month ranged from a low of eight hundred forty pounds to a high of four thousand nine hundred fifteen pounds per week. The inventory value ranged from a low of $ 1 3 $ 0 3 1 . 0 0 in March, 196?, to a high of $ 17,546 .00 in December, 1967. The average inventory was $ 1 5 $554.0 0 . This represents two point two turns per year. The cost of holding this inventory was assumed to be twenty-five per cent. This equalled a cost of $> 3 $888 . 0 0 . This cost may appear high, however this inventory represents thirty-seven per cent of the total, whereas the total inventory holding cost, including the opportunity cost, represents only six point seven per cent of the operating costs of the firm. The cost analysis ut i l i z e d the data already presented. The freight rates are as in Table 4:2 Page 5 8 . The air freight rates have been reduced by f i f t y per cent and sixty-seven per cent to indicate the affect this w i l l have. 190. Table 10;1 Distribution Cost Analysis for Air and Surface Transport for Firm A Hardware in Tofino in 1967. CONTRACT TRUCK AIR FREIGHT 1/2 PRESENT AIR RATE 1/3 PRESENT AIR RATE Primary Transpor-tation charges $ 359-00 $3116.00 $1833.00 $1408.00 Secondary Transpor-tation charges NIL 1 551.00 $ 551.00 $ 551.00 Inventory holding costs $3888.00 $3888.00 $3888.00 $3888.00 TOTAL COSTS $4247.00 $7004.00 $5721.00 $5296.00 Difference -Truck - Air N.A. $2757.00 $1474.00 $1049.00 Difference expressed as a percentage re-duction of inventory required to equalize N.A. 71% 38% 27% The results show that with existing freight rates the additional cost of using air freight over truck i s $ 2,757*00. This requires a seventy-one per cent reduction in inventory and related holding costs in order to compensate for the additional freight charges. If a i r freight rates are reduced by f i f t y per cent or sixty-seven per cent then compensating reductions in i n -ventory resulting from the use of a i r freight would have to equal thirty-eight per cent and twenty-seven per cent respectively. If 191 the inventory holding costs were l e s s than twenty-five per cent then a la r g e r reduction i n inventory than these would be required to compensate f o r the higher f r e i g h t charges. This analysis points out the difference i n f r e i g h t costs which must be compensated f o r by advantages usually associated with a i r f r e i g h t . This analysis has not assumed that the use of a i r f r e i g h t w i l l allow a reduction of inventory nor that any other advan-tages w i l l be r e a l i z e d . It has only shown how much of a reduction would be required to o f f s e t the additional cost of a i r f r e i g h t . Table 10:2 Page 192 summarizes the advantages and d i s -advantages of using a i r f r e i g h t f o r hardware. 192 Table 10;2 Summary of Advantages and Disadvantages of Using Air Freight Compared to Truck for Firm A Hardware in  Tofino during 196T. VARIABLES CONTRACT TRUCKER AIR FREIGHT Primary transportation charges $ 359.00 $ 3.116.00 Secondary transportation charges NIL $ 551.00 Additional Packing Costs NIL NIL Insurance costs goods in transit Not available included in rate Not available included in rate Risk of damage or theft i n transit LOW Low or sligh-tly higher Interest charges goods in transit N.A. N.A. Cost of holding inventory Unchanged Unchanged or slightly lower Inventory Maintenance Unchanged Slightly higher Door to Door delivery time 7-10 hours 1-4 hours Reliability Good Not as good Competitive Advantage Unchanges Same or marginally better 1 9 3 Dry Goods Inventory Dry goods inventory contains household goods, a l l types of wearing apparel, and many gift s items. The assortment i s very broad, but not particularly deep except in specific goods. The average value to weight ratio i s $ 2 . 2 5 . This suggested i n i t i a l l y that these goods are a i r freightable. The value of the inventory at r e t a i l varied from a low of $ 8 , 8 7 0 . 0 0 to a high of $ 1 2 , 4 7 1 . 0 0 . The average value was $ 1 0 , 4 8 5 . 0 0 and this inventory turned over two point seven times. The cost of holding this inventory has been assumed at twenty-five per cent or $ 2 , 6 2 1 . 0 0 . This cost represents four point five per cent of the firm's operating costs, however i f the opportunity cost of ten per cent interest charged on capital invested in inventory was extracted then the holding costs would represent only two point seven per cent of the operating costs. Dry goods inventory i s equal to twenty-five per cent of the total value of the inventory. The total weight of a l l dry goods shipped was thirteen thousand two hundred fifty-eight pounds. This was a l l shipped by contract truck carrier and no additional packing or crating was required. This weight represents an average monthly shipment of one thousand one hundred five pounds and an average weekly ship-ment of two hundred seventy-six pounds. The cost analysis u t i l i z e s the above inventory and freight data. The rates are as given in Table 4 : 2 Page 5 8 . The a i r freight rates are assumed as well to be reduced by f i f t y per cent.and sixty-seven per cent in order to indicate the effect i t would have on the analysis. 194. Table 10:3 D i s t r i b u t i o n Cost Analysis f o r A i r and Surface Transport  fo r Firm A Dry Goods i n Tofino during 1967. TRUCK AIR FREIGHT 1/2 PRESENT AIR RATE 1/3 PRESENT AIR RATE Primary transpor-tat i o n charges $ 186.00 $1326.00 $ 663.00 $ 442.00 Secondary trans-portation charges NIL $ 285.00 $ 285.00 $ 285.00 Cost of holding i n -ventory @ 25% $2621.00 $2621.00 $2621.00 $2621.00 TOTAL COST $2807.00 $4232.00 $3569.00 $3348.00 Difference i n cost Truck - A i r N.A. $1425.00 $ 762.00 $ 541.00 Difference as a percentage re-duction of inven-tory required to equalize N.A. 54# 29% 2\% The r e s u l t s indicate that with existing f r e i g h t rates, truck i s $ 1,425.00 cheaper than a i r f r e i g h t during 1967. A re-duction of inventory and rel a t e d holding costs of f i f t y - f o u r per cent w i l l be required, as a r e s u l t of using a i r f r e i g h t , i f i t i s to compensate f o r the extra f r e i g h t charges. If the a i r fre i g h t rates were reduced by sixty per cent or sixty-seven per cent then inventory reductions of twenty-nine per cent and twenty-one per cent respectively w i l l be required to compensate f o r the higher f r e i g h t rates. If the size of the inventory was greater or the costs of holding that inventory were higher than twenty-five per 1 9 5 . cent, then a lesser reduction in inventory would he required to compensate. The advantages and disadvantages of using a i r freight for dry goods are in Table 1 0 : 4 below: Table 10:4 Summary of the Advantages and Disadvantages of Using  Air Freight Compared to Truck Transport for Firm A  Dry Goods in Tofino during 1967. VARIABLES CONTRACT TRUCKER AIR FREIGHT Primary transportation charges $ 1 8 6 . 0 0 $ 1 , 3 2 6 . 0 0 Secondary transportation charges NIL $ 2 8 5 . 0 0 Additional packing or crating costs NIL NIL Insurance charges in transit Not available included in rate Not available Included in rate Risk of damage or theft in transit LOW Low or slightly higher Interest charges goods in transit N.A. N.A. Cost of holding inventory Unchanged Slightly lower or unchanged Inventory maintenance Unchanged Slightly higher Door to door delivery time 7 - 1 0 hours 1 - 4 hours Reliability Good Not as good Competitive advantage Unchanged Same or margin-al l y better 196 Produce Inventory The content .of the produce inventory i s self-explanatory. The average value per pound i s seventeen cents. The inventory value at r e t a i l ranged from a low of $ 180.00 to a high of $ 1,159.00 for a monthly average of $ 586.00. Sales for the year represented thirty-eight turns on this average inventory. A l l produce was shipped by truck, and the monthly weight shipped ranged from six thousand seven hundred ninety-five pounds to seventeen thousand five hundred eighty-seven pounds during July. The total weight shipped from March to December, 1967* was one hundred fourteen thousand eight hundred forty-five pounds. This i s a monthly average of eleven thousand four hundred eight-five pounds. Both a i r freight and truck have thrice weekly delivery. The difference in delivery time i s approximately seven hours. The discussion concerning inventory holding costs and reduced spoilage for produce inventory for Firm A in Ucluelet applies equally well to this firm, and i s not duplicated. There i s some difference in the inventory value, weight shipped, and amount sold, however, these are brought out in the cost analysis. The cost analysis assumes a shrinkage rate of twenty per cent for produce shipped by truck as compared to that shipped by a i r freight. This i s a generous allowance but as mentioned i t does get the point across. Costs involved in holding inventory w i l l be minimal relative to the other goods because the average value of the goods in inventory at any one time i s small. Inventory maintenance costs w i l l be as high or higher than normal grocery or sundry items. 197 The cost analysis then uses the reduced spoilage as a compensating cost saving which couldibe realized i f a i r freight was used: Table 1 0 : 5 Distribution Cost Analysis for Air and Surface Transport  for Firm A Produce in Tofino during March to December  196T. TRUCK AIR FREIGHT 1/2 PRESENT AIR RATE 1/3 PRESENT AIR RATE Primary transpor-tation charges $1607.00 $11,484.00 $5742.00 $3835 . 00 Secondary transpor-tation charges NIL $ 2,469.00 $2469.00 $2469.00 Cost of Spoilage $5515 .00 N.A. N.A. N.A. TOTAL COST $7122.00 $14,313.00 $8571 .00 $6304.00 Difference in cost Air - Truck N.A. $ 7.191.00 $1449.00 $(818.00) The results show that with existing freight rates and the stated weight shipped per year, the use of ai r freight w i l l cost $ 7»191 .00 more than the use of truck, even when a twenty per cent spoilage factor i s added to the cost of shipment by truck. If these same conditions applied but the air freight rate was re-duced by f i f t y per cent or sixty-seven per cent then truck trans-port i s s t i l l $ 1,449.00 cheaper in the f i r s t instance but $ 818.00 more costly in the second instance. It should be noted that the cost of spoilage has been calculated on a years sales whereas the weight shipped was only for a ten month period. This has tended 1 9 8 . to improve the cost p o s i t i o n of a i r f r e i g h t usage r e l a t i v e to the use of truck. The advantages and disadvantages of using a i r f r e i g h t f o r produce are summarized i n Table 1 0 : 6 Page 1 9 9 * Grocery Inventory This inventory w i l l not be discussed i n any d e t a i l . The analysis would proceed the same as that f o r Firm A i n Ucluelet. The t o t a l weight shipped i n groceries was seven hundred f i f t e e n thousand nine hundred ten pounds f o r the year. The average value of inventory at r e t a i l was $ 1 5 , 3 5 3 * 0 0 and the cost of holding t h i s Inventory was $ 3 , 8 3 8 . 0 0 . The difference between transportation costs f o r a i r and truck at the present rates was | 7 6 , 9 6 1 . 0 0 . There appears to be no compensating advantages f o r using a i r f r e i g h t that could reduce t h i s extra cost s u f f i c i e n t l y . The large amount of weight car r i e d r e l a t i v e to the cost of holding the i n -ventory i s just too high. 199 Table 10:6 Summary of the Advantages and Disadvantages of Using  Air Freight Compared to Truck Transport for Firm A  Produce in Tofino during March to December 1967» VARIABLES CONTRACT TRUCK AIR FREIGHT Primary transportation charges $ 1607.00 $ 11,484.00 Secondary transportation charges NIL $ 2,469.00 Additional Packaging and crating NIL NIL Insurance costs of goods in transit Not available included in rate Not available included in rate Ridk of damage or theft of goods in transit LOW Low or slightly higher Interest charges on goods in transit N.A. N.A. Cost of holding inventory Unchanged Unchanged or slightly lower Deterioration or spoilage in transit or inventory Unchanged Reduced by amount equal 10-20 % of r e t a i l sales Door to door delivery time 7^10 hours 1-3 hours Reliability Good Not as good Competitive Advantage Unchanged Marginally better More saleable product Unchanged Better appear-ance and heavier 200 Firm B Tofino This firm^ i s the largest r e t a i l store in Tofino in terms of revenue. The inventory i s made up primarily of groceries, meat, and produce, with some hardware and dry goods. The staff includes four permanent employees and two part time employees who help re-ceive the merchandise and stock shelves. Inventory and Procurement Inventory records are not kept and "eyeballing , , of the shelves i s used to i n i t i a t e orders. A l l ordering i s done hy the store manager, and orders are sent by mail. Groceries are pur-chased from Kelly Douglas in Nanaimo, and produce, meat, dry goods and hardware are purchased from Vancouver. Orders are placed us-ually nine times per month and sometimes more frequently for meat and produce. A l l groceries are purchased in case l o t s . Inventory i s kept on the shelves and consequently there i s no backroom stock. Inventory i s not reported by classification nor are sales. The value of the total inventory at r e t a i l i s | 26,370.00 and the manager estimated that $ 2,000.00 of this i n -cludes a l l dry goods and $ 1,000.00 would be hardware. He expressed disinterest in hardware and dry goods because of the large inventory value that i s required to support the sales. The store carries only a few basic items in inventory, and the stock for these i s built up during the spring and then allowed to run down during the summer months. The manager suggested that most dry goods and hardware ex-cept the basics are purchased from major department stores through the mail. 3. Walters Grocery i s in direct competition with Firm A in Tofino and they are located next door to each other. A l l information was obtained during an interview with Mr. N. Seymour, manager. 201 He said he was not concerned with the level of inventory because i t i s something that has to be maintained anyway, and be-sides i t Is quite small. He also said that even i f a i r freight i s used, the present inventory level cannot be reduced because no back-stock i s carried and the inventory at present i s needed to keep the shelves at a minimum stock level from a merchandising point of view. When queried about the cost of carrying inventory he stated that he had no idea and did not,particularly care because of the foregoing, reasons. At least sixty per cent of purchases are made by the native population. According to the manager this reduced the assortment of goods that he carried because they purchased specific goods over and over again. Besides this they are quite willing to wait i f the store stocked out of some particular item. There i s no need to a i r freight the item in because the people do not usually go elsewhere but just wait until i t arrives, assuming the time period i s reason-able. ^  Transportation Almost a l l goods are picked up at Port Alberni with a private truck. Merchandise purchased in Vancouver i s delivered to Alberni by West Coast Freight for | 3»05 per one hundred pounds. A l l goods purchased from Kelly Douglas & Co. Ltd., in Nanaimo are delivered to Port Alberni free of charge. 4. This type of attitude i s indicative of that expressed by most r e t a i l merchants in each town studied. 202. The truck carries an eighteen thousand pound payload. During the four summer months, the nine trips carried approximately one hundred eighty thousand pounds per month. During the winter months this i s reduced to approximately seventy-six thousand pounds per month. The total weight carried for the year was one million three hundred twenty-eight thousand pounds. The majority of the merchandise carried i s groceries, meat and produce, and these travel very well in a truck except for deterioration. Produce, and to some extent meat, can deteriorate quickly i f they do not have the proper temperature and humidity re-quirements. None of these items, however, require special packaging. When the goods were picked up in Alberni Firm B took t i t l e . Consequently they did not incur an interest charge on the capital invested in goods in transit. However, to the extent that this firm used their accounts payable as a source of financing, and did not pay their accounts until the last day, this may not be true. In any case the time in transit i s very short. The manager was not aware of what insurance was in force, for the goods in transit, however, he stated that the pilferage and damage while in transit was negligible. The manager would not say, or could not say, what i t cost him per one hundred pounds to transport goods from Port Alberni. He did say that the present cost was very low, and that i t would de-crease further as soon as the road conditions improved. The primary reason that he used his own truck was because i t was the only way of assuring r e l i a b i l i t y . He was very definite about this. In order 203. to keep inventory at the lowest possible level, he stated that he must know when the merchandise would arrive after being ordered. The public transportation systems, including truck and air freight, were not, in his opinion, reliable. Feasibility of Air Freight The advantages of using air freight for this firm are certainly questionable, i f they exist at a l l . The cost of transportation using air freight would be at least four or five times as costly as using their own truck. It i s d i f f i c u l t to see where compensating advantages or cost savings can offset these freight costs. The cost of holding inventory cannot be substantially re-duced unless the level of inventory can be reduced as a result of using a i r freight. Air freight i s slightly more frequent and the travelling time i s less, but both are only marginally better than truck transportation. The risk of damage or theft i s probably not lower for air freight than for truck transportation, primarily because additional handling and secondary transportation would be required. The maintenance of inventory which includes ordering and receiving goods, and the control of inventory, would probably be-come more costly i f daily a i r freight service was ut i l i z e d . Daily service would be required i f a l l the weight was to be carried and this would be a great burden on the time of the manager. A much larger proportion of his time would be spent in eyeballing the stock, ordering and checking receipt of the goods. 204. While objec t i v e l y a i r f r e i g h t may be as r e l i a b l e as truck transportation, t h i s firm would lose some degree of control over t h e i r procurement procedure i f they were to use a public transpor-t a t i o n system. The one area where a i r f r e i g h t could pass on cost savings i s i n the transport of fresh produce, p a r t i c u l a r l y fresh f r u i t . These goods, as well as some dairy and meat products, can suffer from spoilage i n truck transportation. This spoilage f a c t o r can run as high as f i f t e e n to twenty per cent of sales according to the man-ager. To the extent that a i r f r e i g h t would reduce the t r a v e l l i n g time, and improve the temperature of the goods while i n t r a n s i t , t h i s could reduce the cost of d e t e r i o r a t i o n . In a general sense a i r f r e i g h t cannot provide better ser-vice f o r the store or f o r the customer. It can, however, i n s p e c i f i c circumstances provide a superior service. This circumstance i s one where something unexpected occurs and rapid and safe transportation i s required even though i t may cost a l i t t l e more. No cost analysis i s possible because the f r e i g h t charges are not a v a i l a b l e . Judging from the size of the inventory and the weight carried, the difference i n costs would be very large and compensation f o r them would be improbable. A summary of the advantages and disadvantages of t h i s firm using a i r f r e i g h t are provided i n Table 1 0 : ? Page 2 0 5 . 205. Table 10:7 Summary of the Advantages and Disadvantages of Using  A i r F r e i g h t Compared to Truck Transport f o r Firm B  i n T o f i n o d u r i n g 1967. VARIABLES PRIVATE TRUCK AIR FREIGHT Primary t r a n s p o r t a t i o n charges Unchanged and urilmowh Much h i g h e r Secondary t r a n s p o r t a t i o n charges NIL Higher A d d i t i o n a l Packing and c r a t i n g charges NIL NIL Insurance charges goods i n t r a n s i t Unknown Not a v a i l a b l e i n c l u d e d i n r a t e R i sk o f damage o r t h e f t i n t r a n s i t Very low except p e r i s h a b l e Very low I n c l u d i n g p e r i shable I n t e r e s t charges goods i n t r a n s i t S l i g h t l y h i g h e r Low Cost of h o l d i n g i n v e n t o r y Unchanged Unchanged o r s l i g h t reduc-t i o n of i n v e n -t o r y p o s s i b l e Inventory maintenance -number of o r d e r s and r e c e i v i n g s Unchanged Higher i f used Door to door d e l i v e r y time Unchanged F a s t e r R e l i a b i l i t y B e t t e r Not as good Competitive advantages Unchanged B e t t e r f o r some goods such as produce and p e r i s h a b l e s 206. Firm C Tofino This firm i s a combination service station and auto-mobile retailer. He sells and services the above products and equipment. The staff includes the owner and a mechanic. Inventory and Procurement The inventory i s made up entirely of spare or replacement parts for automobiles. The inventory consists of specific parts and when a part i s used i t i s placed on a wanted l i s t . Once a month these parts are ordered by mail from Vancouver. Repair parts for American cars are ordered from Port Alberni as required. People in the area are aware that a l l parts cannot be carried and hence they expect almost to be told they must wait. They have l i t t l e alter-native because there i s l i t t l e competition in the Tovino area expecially for imported vehicles. The cost of the inventory was extimated to be $ 6,000.00 by the owner. This included the transportation charges. The owner had no idea what i t costs to hold that inventory and i t i s d i f f i c u l t to assess a figure. It has been assumed that the cost i s fifteen per cent or $ 900.00 per annum. This probably i s r e a l i s t i c when a l l the costs such as interest on invested capital, insurance, handling, theft, obsolescence and at least part of the building expenses, are considered. It i s at best an estimate to f a c i l i t a t e the cost analysis. The value per weight of most small parts was estimated by the owner to be quite high, probably in the area of $ 5*00 to $ 100.00 per pound. This suggests that they may be air freightable. 5. Information on this firm was provided by both the owner and mechanic in an interview with the writer. 207. Transportation At present truck f r e i g h t i s used f o r nearly a l l shipments. The mail i s used as much as possible f o r small orders because i t i s cheapest, most frequent and most r e l i a b l e . The t o t a l monthly weight from Vancouver by truck would average eight hundred pounds. Part of t h i s t o t a l or about three hundred pounds i s prepaid by the con-signor, and the remaining f i v e hundred pounds i s paid by Firm C. Only the l a t t e r i s considered i n the cost analysis. The goods used by t h i s firm, except a few of the very heavy or bulky items, could t r a v e l equally well by a i r or truck. Additional packing i s not required regardless of whether the goods tra v e l by a i r or truck. The r i s k of theft or damage i s not s i g n i -f i c a n t l y d i f f e r e n t because both c a r r i e r s are responsible f o r the merchandise they carry. Interest charges on c a p i t a l invested i n t r a n s i t do not apply because t i t l e passes only a f t e r the goods a r r i v e i n Tofino. F e a s i b i l i t y of using A i r Freight With the present procurement procedure of ordering once monthly, i t would not be advantageous to use a i r f r e i g h t just f o r the sake of reducing delivery time by seven hours. If, however, the inventory l e v e l could be reduced, and goods ordered as required, with d a i l y a i r f r e i g h t service, then i t may be advantageous to use a i r f r e i g h t . The manager agreed that during the summer, t o u r i s t s and fishermen were frequently w i l l i n g to pay a higher charge so as to have t h e i r vehicles repaired f a s t e r . In these situations a i r f r e i g h t was u t i l i z e d . 208. The manager also stated that i f a i r freight rates were reduced so that they were equal to truck freight rates and a i r freight r e l i a b i l i t y was improved, then he would consider using air freight on a t r i a l basis. He considered air freight at present to be extremely unreliable because passengers and luggage were given top priority, and often freight could not be unloaded. Air freight i s not superior to truck freight at present with regard to less damage in transit, lower intransit insurance charges, reduced interest on capital Invested on goods in transit, better r e l i a b i l i t y , less additional packaging costs, and lower in-ventory maintenance. The advantage of using air freight may be to allow a reduction in inventory and improve customer service, but even these advantages would be marginal compared to the thrice weekly service provided by truck. The cost analysis has u t i l i z e d the weight and inventory information stated. The cost of holding inventory i s the only cost factor other than the freight charges considered. Additional ordering costs due to more frequent ordering have not been consid-ered because they cannot be quantified. Additional time and mat-erials w i l l be required to perform this service. 6 This i s a valid criticism however according to B.C.A. this seldom happened because the aircraft very seldom had a one hundred per cent payload. 2 0 9 Table 10:8 Distribution Cost Analysis for Air and Surface Transport  for Firm C in Tofino during 1967. ... TRUCK AIR FREIGHT 1/2 PRESENT AIR RATE 1 / 3 PRESENT AIR RATE Primary trans-portation char-ges $ 2 7 6 . 0 0 $ 6 0 0 . 0 0 $ 3 0 0 . 0 0 $ 2 0 0 . 0 0 Secondary tran-sportation char-ges NIL $ 1 2 9 . 0 0 $ 1 2 9 . 0 0 $ 1 2 9 . 0 0 Cost of holding inventory $ 9 0 0 . 0 0 $ 9 0 0 . 0 0 $ 9 0 0 . 0 0 $ 9 0 0 . 0 0 TOTAL COST $ 1 1 7 6 . 0 0 $ 1 6 2 9 . 0 0 $ 1 3 2 9 . 0 0 $ 1 2 2 9 . 0 0 Difference in cost Truck-Air N.A. $ 4 5 3 . 0 0 $ 1 5 3 . 0 0 $ 5 3 . 0 0 Difference ex-pressed as a percentage re-duction in in -ventory re-quired to equalize N.A. 50% 17% 6% The results show that air freight i s $ 4 5 3 . 0 0 more costly than truck freight at existing rates. A f i f t y per cent reduction of inventory and related costs i s required to compensate for this additional freight charge i f a i r freight i s used. If air freight rates were reduced by f i f t y per cent and sixty-seven per cent then a reduction of inventory and related costs resulting from the use of air freight would have to equal seventeen per cent and six per 210 cent respectively i n order to compensate f o r the added f r e i g h t charges. It should be pointed out as well that the secondary transportation charges f o r a i r f r e i g h t are very high at pre-sent. These could be reduced i f the volume of f r e i g h t was s u f f i c i e n t to at t r a c t an e f f i c i e n t operator to haul f r e i g h t between the Tofino a i r port, Ucluelet and Tofino and Long Beach. The advantages and disadvantages of using a i r f r e i g h t over truck transportation have been b r i e f l y summarized i n Table 10:9 Page 211. 211 Table 10?9 Summary of the Advantages and Disadvantages for Air and  Trucks transport for Firm C In Tofino In 1967» VARIABLES TRUCK AIR FREIGHT Primary transportation charges $ 2 7 6 . 0 0 $ 6 0 0 . 0 0 Secondary transportation charges NIL $ 1 2 9 . 0 0 Additional packaging and crating charges NIL NIL Insurance charges goods in transit Not available included in rate Not available included in rate Risk of damage or theft in transit Unchanged Unchanged or slightly higher Interest charges goods in transit N.A. N.A. Cost of holding inventory Unchanged Maybe lower inventory Inventory Maintenance Unchanged Unchanged or slightly higher Door to door delivery time 7 - 1 0 hours 1 - 3 hours Reliability Unchanged As good or slightly higher Competitive Advantage Unchanged Slightly better especially for rushed goods 212 APPENDIX XI DETAILED DISTRIBUTION ANALYSIS BY FIRM FOR TAHSIS  Firm A Tahsis This r e t a i l store 1 i s owned by the people in Tahsis and i s operated by the same association that operated Firms A in To-fino and Ucluelet. This i s the only store in Tahsis carrying a broad assortment of groceries, meat, produce, dry goods and hard-ware. The store i s operated by a staff of eight to twelve people including part time help. Procurement Orders for groceries, hardware and dry goods are mailed on Wednesday of each week to the wholesale warehouse in Vancouver. They are f i l l e d Friday and shipped Monday night by boat. They ar-rive in Tahsis early Friday morning. Therefore another order must be placed before the previous order arrives. Perishable goods are ordered by telephone Monday morning, direct to the supplier. They leave Vancouver Tuesday morning by truck and arrive in Gold River Wednesday evening in time to take the boat to Tahsis. They arrive in Tahsis late Wednesday or early Thursday. Special or rush orders are placed either by telephone or mail, and are sent through the mail. This takes at most two days. 1. Information on this store was gathered during two inter-views with the store manager, an analysis of data in the Vancouver Office, and interviews with Senior Manage-ment in the Vancouver Office. The store i s owned by the B.C. Co-operative Society. 213 Inventory "Eyeballing" i s the only method of inventory control used. The clerk in each section does this once each week just before the order i s placed on Wednesday. It i s his or her res-ponsibility to remember what has been ordered but not received from the previous order. There are no records kept on the usage rate of goods, average number in stock, and number on order. This prevented a detailed analysis by item. The inventory i s classified as grocery, meat, produce, dry goods and hardware. The value of each of these classifications i s estimated at r e t a i l value on a monthly basis. Physical inven-tory i s taken every six months to corroborate these monthly estimates. The manager was quite emphatic that the level of inven-tory although somewhat large could not be reduced. Hardware and dry goods inventory particularly was at a minimum because a l l of the inventory was on the shelf. From a merchandising point of view, there had to be a minimum amount of each item on the shelves so as to satisfy the consumer. He agreed that the ideal situation may be to display only samples and then use a i r freight to order goods as required. This however placed him in direct competition with r e t a i l stores in Campbell River and Vancouver. These stores can ship the orders just as fast and they do not charge for delivery. The r e t a i l sales manager for British Columbia suggested that the large inventory, particularly in groceries, could be explained by the fact that several different races of people l i v e in the town, and they purchase different types of goods, and a broader assortment was required to satisfy a l l customers. The larger inventory could also be explained by the eight to ten day lead time. 214 The manager admitted to not knowing what i t cost to hold his inventory. He agreed that when a l l the variables were considered i t could equal twenty-five per cent, however this i s really nothing more than an estimate. This cost could be made up of a ten to twelve per cent interest charge on capital invested in inventory, a six to eight per cent charge for servicing inventory, depreciation and maintenance of the building and f a c i l i t i e s required to carry the Inventory, and a six to eight per cent charge on obsolescence, de-terioration or theft of the inventory. For each classification the cost of holding the inventory w i l l be compared as a percentage of the total operating costs. The value to weight ratio for each classification i s iden-t i c a l to that calculated for Firm A in Ucluelet. The reader i s re-ferred to Table 9:1 Page 137 for details on how the average value to weight was arrived at. The insurance charges on the inventory are not available because a comprehensive policy existed and i t was impossible to extract them. These charges could be included in the cost of car-rying inventory. Transportation At present a l l freight to Tahsis except perishables i s carried by boat from Vancouver. Produce and some other perishables are sent by truck to Gold River and then by boat to Tahsis. Goods travelling on the boat leave Vancouver at 6 p.m. on Monday and travel north past Port Hardy around the northern tip of Vancouver Island and then down to Tahsis. They arrive in Tahsis 2 1 5 . Friday morning. The boat has a cooler and a freezer on board, and i t carries everything from a D-9 Caterpillar tractor to a crate of eggs. Northland Navigation has l i t e r a l l y hundreds of special commodity rates for goods moving to Tahsis. The rate for general merchandise in their t a r i f f sheet i s $ 1 . 2 5 per one hundred pounds or two cubic feet, whichever i s greater. The minimum charge per shipment i s $ 3 . 0 9 * The rate for goods to go in the freezer i s $ 4 . 1 3 per one hundred pounds with no volume restrictions. An analysis of the invoices of Firm A indicated that they normally paid a rate of $ 2 . 1 2 per one hundred pounds or two cubic feet. This i t the rate that has been applied to the analysis for each one hundred pounds shipped. It was impossible to consider whether the weight or voluiie rates applied because the cubic dimensions of goods were not available. This w i l l affect the validity of the freight charges. For example, a case of breakfast cereal valued at $ 1 2 . 0 0 costs approximately $ 5 * 2 5 to ship by boat to Tahsis because i t i s costed by cubic feet. The same carton would cost $ 2 . 2 5 to ship to Tahsis i f charged according to weight. Recently a l l goods shipped to Tahsis by boat are packed in cribs. These are really nothing more than wood containers used to reduce damage and pilferage. The cribs are supplied by North-land Navigation and there i s no charge. An average of four cribs i s used for each Tahsis shipment. It takes two men two hours to pack the cribs and this costs $ 1 2 . 0 0 . It also costs sixty cents to move the cribs empty from Northland Navigation to the Vancouver warehouse. 216 These are the only additional packing charges because a l l goods are ordered in case l o t s . Secondary transportation i s required both in Vancouver and in Tahsis to meet the boat. The charges are based only on weight not volume. The charges are fifteen cents per one hundred pounds and f i f t y cents per one hundred pounds in Vancouver and Tah-sis respectively. There are two alternate forms of transportation, truck and boat, and a i r . A truck can leave Vancouver Tuesday morning and tra-vel via Campbell River to Gold River in time to catch the Uchuch Wed-nesday evening to Tahsis. West Coast Freight charges $ 3*70 per one hundred pounds door to door from Vancouver to Gold River. The con-tract carrier used by Firms A in Tofino and Ucluelet has carried a few loads for $1.40 per one hundred pounds. There i s no volume re-striction with either of these. The rates on the Uchuch from Gold River to Tahsis are $ 1.10 per one hundred pounds with no volume re-strictions. The secondary charge in Tahsis would then be f i f t y cents per hundred pounds. Hence the total charge per one hundred pounds of weight i s $ 3.00 by contract carrier and $ 5.30 by West Coast Freight. The use of truck reduces damage, theft, and travelling time compared to the boat. The analysis however w i l l compare the use of air freight to the present use of boat. The reader should keep in mind that truck-boat transport does exist and by contract carrier i s not much more costly than by boat. Both can provide only once a week service. Air freight provides daily service and charges $ 15*00 per 217 one hundred pounds. The maximum load at present i s approximately two thousand pounds. The same secondary transportation charges apply as to those for boat transportation. The weights shipped to Tahsis by classification each month are in Appendix IV. The total weights shipped per year by classification are shown here. These weights are the result of an analysis of the b i l l s of lading for Northland Navigation: Grocery (January - December 1 9 6 7 ) 44,255 pounds Dry Goods (April - December I 9 6 7 ) 7 . 8 7 3 pounds Hardware (March - December 1 9 6 7 ) 8,227 pounds Produce (January - December 1 9 6 7 ) 244,513 pounds Although a l l b i l l s of lading were examined, i t i s doubt-ful i f the above weights are correct. First, the weights were frequently not broken down by classification, and the description of goods was not adequate to determine this. Consequently the weight shipped for dry goods and hardware i s l i k e l y much too low. Second, the total weight shipped for groceries appears much too low relative to the volume of sales. Third, the weight shipped for produce was not available and hence the sales volume has been divided by the average value per pound to provide an estimated weight. For the purpose of the analysis however these weights w i l l be used. As an indication of what the true weights might be the average value per weight has been divided into the sales figures for the year. These provide only estimates and should not be assumed as the correct weight: 218. Grocery 1.335t100 pounds Dry Goods 28,392 pounds Hardware 31,564 pounds The l a s t point i s that the weight of meat shipped was not available and has not been estimated. operated by the same association as Firm A, w i l l not be analyzed, the amount of weight shipped i n on a monthly basis i s i n Appendix V. The t o t a l amount shipped to F a i r Harbour by Northland Navigation f o r the year was seventy-nine thousand seven hundred ninety-two pounds. Although the F a i r Harbour Store, which i s smaller, but 219 Comparison Between Air Freight and Boat - Tahsis The differences between travelling time, rates, frequency and maximum load, between air and boat are found in Table 4:4 Page 67. The two most contrasting factors are that while air freight i s seven times more costly, i t takes only one hour travel-ling time as compared to four nights and three days by boat. The dilemma i s to weigh the advantages of shipping by air freight against the higher freight charges. Both types of transportation require secondary transpor-tation both in Vancouver and in Tahsis. The charges per one hun-dred pounds are the same. This additional handling and transpor-tation increases the risk of damage or theft. Although i t i s gen-erally thought that ai r l i n e personnel handle goods more carefully 2 than longshoremen, no data i s provided to support this. It may or may not be ture. Freight travelling by boat, often requires protective measures. Firm A has begun using cribs or containers just recently in an attempt to reduce theft and damage while in transit. While no date on the total claims last year was available this problem was considered serious. The cost of each crib i s $ 12.60 including f i l l i n g i t and the cost of transportation. Goods shipped by air freight require no additional packaging. The cost of insuring goods while in transit i s part of the t a r i f f for a i r freight.. Northland Navigation on the other hand i s not a common carrier and hence they do no automatically carry 2. A detailed explanation i s provided by Lewis, H.T. and Culliton, J.W., The Rate of Air Freight in Physical Distribution. Graduate School of Business, Harvard University, 1 9 5 6 . Pages 82 and 8 3 . 220. insurance, and can in many instances deny responsibility. Firm A has frequently had serious shortages or damage on which they have had trouble making claims.-^ They were unable to attach a dollar value to these losses, however they were serious enough to warrant a f u l l time employee to investigate them. The interest charges on goods in transit are not particu-l a r l y applicable to Firm A. They take ownership of goods F.O.B. Tahsis. They also use their accounts payable as a source of f i n -ancing. This cost could be a significant one however. The d i f f -erence in travelling time i s about eighty-one hours per week or seventy-five hours i f we assume a i r freight travels every day. In other words the interest on goods in transit by boat i s not produc-tive for just less than one-half week. This may sound t r i v i a l but when the value of the goods i s several hundred thousand dollars, and the interest rate i s ten per cent, then a half-week difference in travelling time can be significant. While the difference In travelling time has been given as three days and four nights, i t could be that i f a piece of freight was ready to leave Tuesday morning by boat, then i t would be ten days and eleven nights before that freight reached Tahsis. The maximum waiting period by a i r freight i s twenty-four hours. It i s d i f f i c u l t to understand that a difference in lead time of three to ten days cannot reduce inventory at a l l . This i s the argument pre-sented by the store manager. If we accept this argument then we can assume no reduction in inventory holding costs, attributable to a i r 3. Statement by Mr. B. Mclntyre, Claims Manager, B.C. Co-operative Wholesale Society, during an interview with the writer. 221. f r e i g h t usage. If the l e v e l of inventory cannot be reduced, then i t i s unlikely, except i n the case of perishables, that the cost of ob-solescence and deterioration of inventory w i l l decrease. The maintenance of inventory which includes ordering and receiving goods w i l l probably increase i f a i r fr e i g h t i s used on a d a i l y basis. This i s so because the number of orders and receivings w i l l increase and the costs associated such as material and manage-ment time w i l l increase as well. A reduction of inventory and the use of a i r f r e i g h t w i l l also increase the need f o r an accurate i n -ventory control system. It i s impossible to estimate costs f o r these factors however, they w i l l increase i f a i r f r e i g h t i s used. The intangible advantages of a i r f r e i g h t i n an absolute sense are more prevalent i n Tahsis than i n Ucluelet because of the more frequent a r r i v a l s and much f a s t e r t r a v e l l i n g time f o r a i r f r e i g h t as compared to boat. Relative to the business atmosphere i n Tahsis, i t i s questionable whether the fa s t e r door to door d e l i -very time, punctuality, r e l i a b i l i t y , frequency of a r r i v a l and im-proved customer service provided by a i r f r e i g h t can show Firm A an improved p r o f i t picture i n the long run. These advantages usually help a firm to i n s t i l l o y a l t y and patronage i n t h e i r customers, however because t h i s i s the only store i n town, and because most* people are shareholders i n the store, i t i s doubtful that the ad-vantage w i l l have t h i s e f f e c t . In p a r t i c u l a r instances t h i s may be true but as a generalization i t i s doubtful. If advantages such as these cannot be r e a l i z e d then a i r f r e i g h t usage i s not worth the additional cost. 222 Dry Goods Inventory This inventory includes a very large v a r i e t y of items such as housewares, stationery, china, e l e c t r i c a l appliances, clothing, shoes, sporting goods and some small f u r n i t u r e . Most of these can be ca r r i e d i n ex i s t i n g a i r c r a f t and the average value to weight r a t i o of $ 3»00 to $ 6 . 0 0 per pound suggests that most goods can absorb the higher cost of a i r f r e i g h t . The analysis of the b i l l s of lading indicated that seven thousand nine hundred seventy-three pounds were shipped by boat from March to December 1 9 6 7 . This represents an average per month shipment of seven hundred ninety-seven pounds. Relative to sales t h i s weight appears very low and the value to weight r a t i o would be $ 9.1k per pound. This weight w i l l be accepted f o r the analysis, however the reader should be aware that any Increase i n weight car-r i e d w i l l reduce the d e s i r a b i l i t y of using a i r f r e i g h t . The average value of the inventory was $ 2 6 , 6 9 0 . 0 0 at r e t a i l . The yearly sales were $ 8 5,178 . 0 0 , and t h i s represented three point two turns of the inventory. The cost of holding the i n -ventory has been assumed at twenty-five per cent as discussed pre-vio u s l y . This represents a cost of $ 6 , 6 7 2 . 0 0 or $ 5 , 5 6 0 . 0 0 f o r a ten month period. The dry goods inventory represented t h i r t y per cent of the average t o t a l inventory and the holding cost represented four point s i x per cent of the firm's t o t a l operating expenses. These operating expenses included items such as wages, insurance, maintenance, depreciation and rent. Each of these items was par-t i a l l y spent to maintain the inventory. 223 Transportation by boat requires additional c r a t i n g . One c r i b per week has been assumed necessary f o r dry goods. This i s somewhat excessive f o r the weight carried, but i t i s the smallest unit a v a i l a b l e . This w i l l cost $ 126.00 over a ten month period. The transportation charges are as shown i n Table 4:4 Page They assume that charges are made on the basis of one hundred pound parcels and not on a reducing scale as weight increases. Discussion on the subjective cost variables w i l l not be repeated, but a summary of the advantages and disadvantages of a i r f r e i g h t w i l l be shown. The cost analysis compares e x i s t i n g a i r f r e i g h t rates to those of boat rates, and also the a i r f r e i g h t rates are reduced by f i f t y per cent and sixty-seven per cent to determine what i n f l u -ence t h i s w i l l have on the r e l a t i v e p o s i t i o n of a i r f r e i g h t . 224 Table 11;1 D i s t r i b u t i o n Cost Analysis f o r A i r and Surface Transport  f o r Firm A Dry Goods In Tahsis during 1967* BOAT AIR FREIGHT 1/2 PRESENT AIR RATE 1/3 PRESENT AIR RATE Primary Transportation charges $ 167.00 $1181.00 $ 590.00 $ 379.00 Secondary Transporta-t i o n charges # 51.00 $ 51.00 $ 51.00 # 51.00 Additional Crating # 126.00 ^ NIL NIL NIL Inventory Holding Cost $5560.00 $5560.00 $5560.00 #5560.00 TOTAL COST #5904.00 $6792.00 #6201.00 #5990*00 Difference Air-Boat N.A. # 888.00 $ 297.00 # 86.00 Difference as a per-centage of reduction required to equalize f r e i g h t charges N.A. 15% 5% 1% The r e s u l t s indicate that at ex i s t i n g rates and the weights shipped, a i r i s $ 888.00 more costly than boat. A reduction i n the l e v e l of inventory and related costs of f i f t e e n per cent w i l l be required to compensate f o r these extra f r e i g h t charges. This re-duction w i l l have to be the r e s u l t of using a i r f r e i g h t . If the a i r f r e i g h t rates are reduced by f i f t y per cent and sixty-seven per cent, then reductions of inventory as a r e s u l t of using a i r f r e i g h t w i l l have to be f i v e per cent and one per cent respectively i n order to compensate f o r the additional f r e i g h t charges. As mentioned 225. previously any increase i n weight shipped w i l l increase the re-quired inventory reduction i n order to compensate f o r the higher f r e i g h t charges. A b r i e f summary of the advantages and disadvantages of moving dry goods by a i r c r a f t i s presented i n Table 11:2 belowt Table 11:2 Summary of the Advantages and Disadvantages of Using  A i r Freight Compared to Boat and Boat Truck Transport  for Firm A Dry Goods i n Tahsis during 1967. VARIABLES BOAT AIR TRUCK-BOAT Primary transportation charges per one hundred pounds $ 2.12 I 15.00 $ 2.50 Secondary transportation charges .65 .65 .50 Additional Crating or Packaging Yes No No Insurance costs i n t r a n s i t Included i n rate Included i n rate Included i n rate Risk of damage or theft i n t r a n s i t High Very low Low Interest charges goods i n t r a n s i t N.A. N.A. N.A. Cost of holding inventory Same as present S l i g h t l y lower or same Same as present Inventory Maintenance Unchanged Unchanged Unchanged Door to door delivery time Unchanged Fastest Faster R e l i a b i l i t y Not A v a i l -able Not A v a i l -able Not A v a i l -able Competitive Advantage Unchanged Better but no compet-i t i o n Unchanged Frequency of delivery Weekly Daily Weekly 226. Hardware Inventory This inventory includes such items as fasteners, e l e c t r i -c a l and manual tools, paint, building hardware, automobile access-ories and many others. Most items would f i t i n e x i s t i n g a i r c r a f t and t h e i r $ 2.00 to $ 3.00 per pound value suggest they could ab-sorb a i r f r e i g h t rates of f i f t e e n cents per pound. The t o t a l weight carried over a ten month period was eight thousand two hundred twenty-seven pounds and t h i s represents an av-erage of eight hundred twenty-three pounds per month. Relative to sales t h i s weight i s low because i t represents a value to weight r a t i o of over $ 8.00 per pound. This weight i s accepted f o r the cost analysis, however any increase i n weight would reduce the d e s i r -a b i l i t y of using a i r f r e i g h t . The inventory varied from a low of $ 23,933.00 to a high of $ 29.652.00 f o r an average of $ 25,931.00 f o r the year. The yearly sales were $ 71.020.00 and t h i s represented two point seven turns of the inventory. The cost of holding the inventory i s assumed at twenty-five per cent. This represents a ten month cost of $ 5,402.00. A higher inventory holding cost would benefit a i r f r e i g h t i n the analysis. The hardware inventory made up twenty-nine per cent of the t o t a l average inventory, and the holding costs represen-ted four point f i v e per cent of the firm's t o t a l operating expenses, some of which went to maintaining inventory. Additional packing charges f o r boat transportation t o t a l l e d $ 26.00. This Included the labour and shipping charges f o r one c r i b each week f o r ten months. The cost analysis compares f r e i g h t charges and additional 227 packing costs f o r fr e i g h t t r a v e l l i n g by a i r or boat. No further discussion on the other subjective variables i s provided however a summary comparison i s given. The applicable rates per one hund-red pounds are stated i n Table 4:4 Page 67. In addition a i r f r e i g h t rates are reduced by f i f t y per cent and sixty-seven per cent to determine what influence t h i s w i l l have on the comparability of a i r f r e i g h t to boat transport. Table 11:3 D i s t r i b u t i o n Cost Analysis f o r A i r and Surface Transport  f o r Firm A Hardware i n Tahsis f o r a Ten Month Period  During 1967. BOAT AIR FREIGHT 1/2 PRESENT AIR RATE 1/3 PRESENT AIR RATE Primary transporta-t i o n charges $ 174.00 #1234.00 $ 617.00 $ 411.00 Secondary transpor-t a t i o n charges # 53.00 $ 53.00 $ 53.00 $ 53.00 Additional packing costs # 126.00 NIL NIL NIL Inventory holding costs #5402.00 $5402.00 $5402.00 $5402.00 TOTAL COST $5755.00 $6689.00 $6072.00 $5866.00 Difference Boat-Air $ 934.00 $ 317.00 $ 111.00 Difference as a per-centage of inventory reduction needed to equalize N.A. 17% 6% 2% The r e s u l t s indicate that at ex i s t i n g rates a i r f r e i g h t i s more costly by $ 934.00. A seventeen per cent reduction of i n -ventory and rela t e d costs, as a r e s u l t of using a i r f r e i g h t , i s 228. required i n order to compensate for t h i s added cost. If a i r f r e i g h t rates are reduced hy f i f t y per cent and sixty-seven per cent then compensating reductions of inventory of six per cent and two per cent w i l l be required to o f f s e t the additional cost. An increase i n weight transported would require even l a r g e r reductions i n i n -ventory and related costs. This analysis has not assumed that inventory w i l l be re-duced i f a i r f r e i g h t i s u t i l i z e d , but only that t h i s i s one way i n which the extra f r e i g h t charges f o r a i r f r e i g h t can be compensated f o r . The other advantages are not quantifiable but they have been discussed subjectively. A b r i e f summary of the advantages and disadvantages of moving hardware by a i r c r a f t i s i d e n t i c a l to that shown f o r dry goods. The reader i s referred to Table 11:2 Page 225. Produce Inventory This inventory i s self-explanatory. The value per weight i s estimated at seventeen cents per pound. The average inventory was | 647.00 ranging from a high of $ 1,149.00 to a low of | 105.00. The t o t a l sales f o r the year were $ 48,145.00. The t o t a l weight shipped was estimated to be two hundred forty-four thousand f i v e hundred thirteen pounds. The advantage of a i r f r e i g h t i n the case of perishables i s speed and the frequency of d e l i v e r y . At present produce i s delivered once each week. The t r a v e l l i n g time i s two days. This means that produce i n Tahsis can be as much as nine days old when 4. This figure was calculated f o r the discussion on Firm A i n Ucluelet Table 9:1 Page 2 2 9 . purchased. The loss of weight and the deteriorated appearance of the product over this time period or even one third of this period reduces the value of the produce substantially. A conservative estimate would be a twenty per cent loss of r e t a i l value resulting from deterioration. The use of a i r freight to provide fresh pro-duce daily could practically eliminate this deterioration factor. This i s the major compensating cost factor for using a i r freight. Ordering and receiving costs using this method would be considerably higher but i t i s impossible to estimate this in terms of dollars and cents. This problem has been discussed more thoroughly for the produce inventory of Firm A in Ucluelet.^ The reader i s referred to that discussion for further particulars. The cost analysis has util i z e d the rates in Table 4:4 Page 67 for a common carrier and the weights and inventory value are as given. The deterioration factor of twenty per cent suggested by the store manager has been assumed correct. Table 11:4 Distribution Cost Analysis for Air and Surface Transport  for Firm A Produce in Tahsis During 1967. TRUCK AND BOAT AIR FREIGHT 1/2 PRESENT AIR RATE 1 / 3 PRESENT AIR RATE Primary trans-portation $ 1 1 , 7 3 5 . 0 0 $ 3 6 , 6 7 6 . 0 0 $18 ,338.00 $ 1 2 , 2 2 5 . 0 0 Secondary trans-portation $ 1 , 2 2 2 . 0 0 $ 1 , 5 8 9 . 0 0 $ 1 , 5 8 9 . 0 0 $ 1 , 5 8 9 . 0 0 Shrinkage $ 9 . 6 2 6 . 0 0 NIL NIL NIL TOTAL COST $ 2 2 , 5 8 3 . 0 0 $ 3 8 , 2 6 5 . 0 0 $ 1 9 , 9 2 7 . 0 0 $13,814.00 Difference air-truck N.A. $ 1 5 , 6 8 2 . 0 0 $ ( 2 , 6 5 0 . 0 0 ) $ ( 6 , 7 6 9 . 0 0 ) 5 . Appendix IX Pages 14*?-151., 230. The r e s u l t s i n dicate that the use of a i r f r e i g h t i s $ 15.682.00 more expensive than a common truck c a r r i e r t r a v e l l i n g on the "Uchuch" between Gold River and Tahsis. If a i r f r e i g h t rates could be reduced by f i f t y per cent and sixty-seven per cent then a i r f r e i g h t i s cheaper by | 2,650.00 and $ 6,769.00 respec-t i v e l y . I f a contract ruck c a r r i e r was used then the surface rates would be reduced by more than f i f t y per cent and hence a i r f r e i g h t would be at a l e s s e r advantage. A b r i e f summary of the advantages and disadvantages of a i r f r e i g h t as compared to truck-boat i s presented i n Table 11:5 Page 231. 231 Table l i t 5 Summary of Advantages and Disadvantages of Using A i r Freight Compared to Truck-Boat Transport f o r Firm A  Produce i n Tahsis during 1967~ VARIABLES AIR TRUCK-BOAT Primary transportation charges $ 36,676.00 $ 11,735.00 Secondary transportation charges $ 1,589.00 # 1,222.00 Additional Packaging and cra t i n g NIL NIL Insurance i n t r a n s i t Not available included In rate Not available included i n rate Risk of damage or theft i n t r a n s i t LOW Same or s l i g h t l y higher Interest charges goods i n t r a n s i t N.A. N.A. Cost of holding goods i n Inventory Possibly s l i g h t l y lower Unchanged Deterioration or spoilage i n t r a n s i t Less by 10-20% of r e t a i l sales value Unchanged Inventory maintenance -orders - receiving S l i g h t l y higher Unchanged Door to Door delivery time 1-3 hours Unchanged Customer s a t i s f a c t i o n Greater Unchanged Competitive advantage None-no competition Unchanged More saleable product Greater better appear-ance and better Unchanged 232 Grocery Inventory Grocery inventory includes a l l foods except meat and produce. The average inventory ca r r i e d during 19^7 was $ 3 5 i l 7 9 » 0 0 . The t o t a l r e t a i l sales were $ 3 3 3 » 7 7 5 * 0 0 and t h i s represented nine point eight turns of the average inventory. The weight shipped during January - December 1 9 6 7 accord-ing to the b i l l s of lading t o t a l l e d four hundred forty-four thousand two hundred f i f t y - f i v e pounds. This appears quite low r e l a t i v e to the year's sales, however, i t i s accepted f o r the purpose of t h i s b r i e f a nalysis. Most grocery items can be c a r r i e d In e x i s t i n g a i r -c r a f t but t h e i r bulk or high weight r e l a t i v e to value makes i t un-economical as the cost analysis w i l l point out. The cost of carrying the inventory i s assumed to be twenty-five per cent as discussed previously. This cost equals $ 8 , 7 9 4 . 0 0 and represents seven point three per cent of the t o t a l operating expenses. Grocery inventory represents t h i r t y - f i v e per cent of the t o t a l . An additional packing charge of $ 4 5 3 . 0 0 applied to a l l goods when they were transported by boat. This cost represents three c r i b s each week for the twelve months. The cost analysis assumes the rates as given i n Table 4 : 4 Page 67 f o r a i r and boat transportation. A i r f r e i g h t rates are also estimated at f i f t y per cent and th i r t y - t h r e e per cent of e x i s t i n g rates to determine what effe c t t h i s w i l l have on the d e s i r a b i l i t y of using a i r f r e i g h t . 233 Table 11;6 D i s t r i b u t i o n Cost Analysis f o r A i r and Surface Transport  f o r Firm A Groceries i n Tahsis during 1967* BOAT r AIR FREIGHT 1/2 PRESENT AIR RATE 1/3 PRESENT AIR RATE Primary Transpor-ta t i o n charges $ 9t418.00 ;$l66,638.00 $33,319.00 #22,221.00 Secondary Trans-portation charges $ 2,887.00 $ 2,887.00 $ 2,887.00 $ 2,887.00 Additional Packing charges $ 453.00 NIL NIL NIL Inventory Hold-ing costs $ 8,794.00 $ 8,794.00 $ 8,794.00 $ 8,794.00 TOTAL COST $21,552.00 $78,713.00 $45,000.00 $33,902.00 Difference i n Cost Air-Truck N.A. $56,767.00 $23,448.00 $12,350.00 Difference expres-sed as a percent-age reduction i n inventory required N.A. 645# 266^ 140$ The r e s u l t s indicate that even i f the a i r rates are re-duced by sixty-seven per cent, the cost of transporting groceries by a i r f r e i g h t exceeds the f r e i g h t cost by boat by $ 1 2 , 3 5 0 . 0 0 . If i t i s correct that the t o t a l weight of groceries shipped i s con-siderably greater, then t h i s cost d i f f e r e n t i a l w i l l be much greater. 234. Firm B Tahsis Firm B i s the Tahis Company, Sawmill, Warehouse.^ The analysis considers the e x i s t i n g procurement procedures and inven-tory p o l i c i e s f o r the warehouse i n an attempt to f i n d what advan-tages can be r e a l i z e d through the use of a i r f r e i g h t . Procurement and Inventory The inventory control system u t i l i z e s a cardex system. For each item type i n inventory a card i s maintained. Information on the card includes a part number, the maximum and minimum number of items to be held i n inventory, the rate of usage per time period, nad the normal re-order quantity. As an item i s taken from inven-tory the ex i s t i n g balance on the card i s reduced by the number of items taken. If t h i s reduces the balance to the pre-determined re-order point, then the item i s re-ordered according to the amount of the pre-determined order quantity. The orders are mailed to Vancou-ver where the purchasing agent buys and assembles the goods f o r ship-ment. Up to t h i s point normally f i v e working days are required. The transportation to Tahsis then takes from Monday p.m. to Friday a.m. The normal lead time then i s just l e s s than two weeks. This i s the lead time that has been assumed i n setting up the re-order point f o r each item. It was the intention of t h i s paper, with the existance of 6. Information on t h i s firm was gathered through interviews with Mr. P. Wilkinson, Warehouse Manager at Tahsis and Mr. R. Newson Assistant Purchasing Manager, Vancouver, as well as a close inspection of the Warehouse at Tahsis. 235 of the cardex inventory control system, to select s p e c i f i c items, and given the shorter lead time i f a i r f r e i g h t was used, to determine by how much the number of these goods ca r r i e d i n inventory could be reduced. The aim was to determine how much the cost of holding i n -ventory was reduced when a i r f r e i g h t was used, and whether t h i s along with other advantages was s u f f i c i e n t to compensate f o r the extra f r e i g h t charges of a i r freight.''' Several problems indicated that t h i s approach was l i k e l y f r u i t l e s s unless i t could be undertaken on a large scale f o r many items i n the inventory. F i r s t i t was d i f f i c u l t to attach even an estimated value f o r the cost of holding inventory to only a few selected items. Second the value of each item and i t s weight were not stated on the inventory card, and without f u l l co-operation were not e a s i l y accessible. Third, i t was not possible to analyze a few items and then generalize to draw conslusions about the remainder of the inventory. If the c l a s s i f i c a t i o n s had been more homogeneous then t h i s approach would have been more use f u l . L a s t l y t h i s approach would not provide any v a l i d conclusions. The approach taken then i s to point out the problems and advantages of using a i r f r e i g h t f o r d i f f e r e n t types of items. The inventory i s composed of seven thousand f i v e hundred d i f f e r e n t items. These ranged from many v a r i e t i e s of bearings and machine parts, to every d i f f e r e n t kind of t o o l , to e l e c t r i c a l and mechanical repair parts, to sheet s t e e l , p a l l e t s of concrete, and s t e e l pipes. 7. This d e t a i l e d analysis even i f undertaken would not i n a general sense have answered the questions asked at the beginning of t h i s paper. 2 3 6 . Any attempt to set an average value to weight r a t i o i s meaningless. Some items were very small and very expensive while others were very bulky and heavy, but of low value. The average t o t a l value of inventory i s estimated to be $ 5 0 0 , 0 0 0 . 0 0 This f i g u r e i s based on the landed cost i n Tahsis. This inventory turned s i x times during the year which means $ 3 , 0 0 0 , 0 0 0 . 0 0 worth of goods were used. The inventory i s separated into seven d i f f e r e n t c l a s s i f i c a -tions however the Assistant Purchasing Manager stated that the c l a s -s i f i c a t i o n c r i t e r e a are not such that they separate goods into groups which were more or l e s s a i r freightable i n terms of size, value to weight, and weight. He suggested that the types of goods which could be freightable were interspersed throughout the entire inven-tory. I t i s not possible to say that the use of a i r f r e i g h t f o r part of the inventory could or could not r e s u l t i n a reduction of inventory. This i s not a r e t a i l store, however, and inventory i s used only to keep a production f a c i l i t y i n operation. The aim Is to keep inventory at the lowest possible l e v e l without stocking out. A reduction of the lead time f o r some goods w i l l allow l e s s inven-tory to be held. This i s not saying however that the use of a i r f r e i g h t w i l l be more economical. Only an analysis of each item and i t s r ole i n the t o t a l d i s t r i b u t i o n system can provide t h i s answer. Transportation Almost a l l f r e i g h t i s shipped on Northland Navigation's boat "Tahsis Prince". This i s the same method used byiFlrm A just discussed. This ship leaves Vancouver each Monday evening and a r r i v e s i n Tahsis early Friday morning. The rates vary f o r each 237. item depending on what i s carried. There are special commodity rates for many goods. Secondary transportation i s required in Vancouver and Tahsis. A common carrier i s used in Vancouver and a contract carrier in Tahsis. The specific rates are not available but they are very similar to those charged to Firm A. Periodically when the use of some item in inventory i s abnormal and a stockout i s feared, a special order i s placed. Whenever possible and depending on size these are shipped by a i r freight. This was a regular occurrence and the a i r waybill analy-sis substantiated this. Additional packing charges are required for some goods travelling by boat, although no generalization i s possible. Damage and theft could be reduced from their present level i f more a i r freight were used. The average total weight shipped to Tahsis each month was between thirty and forty tons. This figure i s deceiving inso-far as this weight includes items such as pallets of concrete, twenty foot lengths of pipe, and four by eight foot sheets of steel. The point i s that only a part of this total could be carried in ex-isting aircraft because of weight and size restrictions. The freight b i l l s did not give a description in terms of part number, weight, value for each item shipped, and instead many items were grouped together. This eliminated any opportunity of estimating how much of the weight carried was a i r freightable. 8. These refer to Northland Navigation B i l l s of Lading. 238. Comparison Air Freight and Boat This discussion i s applicable only to those Items in i n -ventory which are of relatively high value per weight and can f i t in existing or somewhat larger aircraft. Fundamental to this dis-cussion as well i s the assumption that a i r freight w i l l be reliable and punctual. The present lead time for a l l orders travelling by boat i s between eleven to fourteen days. This allows five days for the order to reach Vancouver and to be processed, usually two to four non-working days on the weekend and three to four days for the goods to reach Tahsis. Air freight reduces the travelling time to one hour, and provides daily departure from Vancouver. In essence this means that the lead time i f a i r freight i s used could be reduced to a maximum of six days and probably less i f the purchasing departments are geared to use a i r freight. In any case the lead time could be reduced by approximately f i f t y per cent, and this certainly could allow a healthy reduction of inventory. Costs related to holding inventory should be reduced as well. Both a i r freight and boat transport require secondary transportation. The time consideration would be the same, but a i r freight may pay a slightly higher per pound rate depending on the weight.being carried. Rates usually decrease as the weight in-creases. Damage and theft of goods while in transit are greater for freight shipped by boat. Protective packaging i s frequently used to prevent this. The company was unable to estimate what the costs of additional packaging and damage claims might be, but they 239. were much greater than for goods shipped by a i r . In addition the air freight rates included an insurance charge, whereas the rates by boat usually did not include insurance charges and frequently responsibility for theft or damage was denied. This fluctuated depending upon the goods in question and the particular circumstances. The Tahsis Company assumed ownership of goods when the supplier delivered them, either to the boat or aircraft or to their warehouse. When these goods were held awaiting shipment and while in transit, Firm B had to pay an opportunity cost for unproductive invested capital. Air freight could reduce this cost by reducing the waiting time with daily flights and by reducing the travelling time from eighty hours to one hour. Firm B stated that their ex-pected return on invested capital was ten to twelve per cent. The total value of a l l goods shipped for one year was approximately three million dollars. This opportunity cost could amount to a considerable value. Firm B estimated their costs of obsolescence and deter-ioration of inventory to be equal to five per cent of the inventory value. Insofar as the use of air freight could reduce the amount of certain goods held in inventory, then the costs of obsolescence and deterioration could be reduced. This would depend of course on whether the goods that were reduced in inventory were also those which were subject to deterioration and obsolescence. The use of air freight would require better inventory maintenance. Firm B estimated the cost of a single order to be $ 5.00 to $ 7.00.9 9. This figure according to Mr. R. Newson was the result of an internal study recently completed by Tahsis Company. 240 This included the costs from the time of issuance u n t i l the cheque was sent to the supplier. The use of a i r f r e i g h t would necessitate smaller and more frequent purchase orders as well as more accurate control of inventory. These additional costs would tend to o f f s e t some of the previously noted advantages of a i r f r e i g h t . The purpose of t h i s inventory or warehouse Is only to keep a production process i n operation. The only competitive ad-vantage of a i r f r e i g h t then, i s i f i t can reduce inventory holding costs s u f f i c i e n t to o f f s e t higher transportation costs and higher procurement costs and r e s u l t i n a net gain which could be applied to reducing the pri c e of the product or to improving the p r o f i t p o s i t i o n . A summary of the advantages and disadvantages of using a i r f r e i g h t i s provided i n Table 11:7 Page 24l. 241 Table 11;7 Summary of the Advantages and Disadvantages of Using Air  Freight Compared to Boat Transport for Firm B In Tahsis During 1967. VARIABLES BOAT AIR Primary transportation charges Not available No average six times as great Secondary transportation charges Unchanged Slightly higher Additional packing and crating Slightly higher Not required Insurance charges goods in transit No Insurance Included rate in Risk of damage or theft in transit Much higher Lower Interest charges goods in transit Much higher Lower Inventory maintenance Unchanged Higher Reliability Unchanged Slightly lower Frequency of delivery Weekly Daily 242 APPENDIX XII DETAILED DISTRIBUTION ANALYSIS BY FIRM FOR BELLA COOLA Firm A Bella Coola This i s a general store 1 operated by the same association and using the same methods as Firms A in Ucluelet, Tofino, and Tahsis. The store employed six to twelve people including part time help. This analysis w i l l be somewhat briefer than those of Firms A in Tahsis, Ucluelet and Tofino. This analysis w i l l not ex-pand upon the operational methods of Firm A because they are simi-l a r to those for the other stores. The emphasis w i l l be on a com-parison of the advantages and disadvantages of air freight relative to other transportation alternatives. Procurement Orders are placed once a week by mail and a l l orders are sent to the wholesale warehouse in Vancouver. Several days are required to f i l l the order, and the travelling time i s eighteen hours. This means orders received in Vancouver by Monday could be in Bella Coola Wednesday night. Inventory A system of inventory control i s not being used, and orders were init i a t e d by "eyeballing" the shelves. No records were kept concerning the quantity in inventory, rate of usage, re-order point and re-order quantity for specific items and hence the influence of air freight u t i l i z a t i o n on specific items in inventory cannot be determined. 1. This i s a B.C. Co-operative Society Store. A l l i n -formation was obtained by personal interview and i n -vestigation at the Vancouver Head Office. 243. Inventory i s divided into six c l a s s i f i c a t i o n s including groceries, meat, produce, hardware, dry goods and drugs. Inven-t o r i e s are valued at r e t a i l and calculated on a monthly basis with physical inventories being taken i n August and March. Relative to the other stores, Firm A has inventory v a l -ues which are quite appropriate r e l a t i v e to sales. The manager suggested that t h i s inventory could not be reduced appreciably because a broad assortment was required. For s p e c i f i c items some redution was probably possible. Management had no idea what i t cost to hold t h e i r inven-tory because i t was assumed to be a necessary e v i l . This cost has been assumed as twenty-five per cent of the inventory value. Dis-2 cussion on t h i s assumption i s stated f o r Firm A i n Ucluelet. Transportation At present a l l f r e i g h t to B e l l a Coola i s c a r r i e d by Northland Shipping Ltd., This boat leaves Vancouver once weekly on Tuesday at 10 p.m., and arrives i n B e l l a Coola, i t s f i r s t port of c a l l , on Wednesday at 8 p.m. Secondary transportation i s required i n both Vancouver and Bella Coola. Although a l l goods are ordered i n case l o t s , a l l shipments by boat are packed i n c r i b s at the warehouse, so as to reduce theft and damage while i n t r a n s i t . A great many commodity rates applied. The rate for gen-eral freight was $ 1.10 per one hundred pounds or two cubic feet which ever was greater, with a minimum charge of $ 2.6$, The 2. See Appendix IX Page 135. 244 average rate charged to Firm A however was around $> 2 - 2 0 per one hundred pounds.3 The weight shipped hy c l a s s i f i c a t i o n by month i s shown i n Appendix VI. The weights f o r meat and drugs were not avai l a b l e and the produce shipped was calculated by d i v i d i n g sales by the average value per pound. The weights were determined by an analy-s i s of the b i l l s of lading. The t o t a l weight shipped duringj .1967 by c l a s s i f i c a t i o n was: Groceries 5 4 4 , 0 2 2 pounds Dry Goods 2 2 , 3 8 6 pounds Hardware 6 6 , 6 9 0 pounds Produce 2 3 8 , 6 0 0 pounds Comparison of A i r Freight andBoat The c h a r a c t e r i s t i c s of a i r f r e i g h t as compared to boat are shown i n Table 4 : 5 Page 7 0 . A i r f r e i g h t rates are $ 2 2 . 0 0 per one hundred pounds as compared to $ 1 . 1 0 per one hundred pounds of general merchandise t r a v e l l i n g by boat. Even Firm A's average rate of $ 2 . 2 0 by boat i s s t i l l only one tenth that charged by B.C. A i r l i n e s . The remainder of the discussion has been spent examining possible advantages of a i r f r e i g h t which could reduce t h i s f r e i g h t rate d i s p a r i t y . A l l goods t r a v e l l i n g to Be l l a Coola by boat are packed i n containers or c r i b s at the Vancouver warehouse. This costs $ 3*15 per c r i b and three to four per week are required. This i s an attempt to reduce damage i n t r a n s i t and th e f t . Although t h i s problem i s not as serious as f o r Tahsis, i t does amount to a con-3* This figure was arrived at from an investigation of the b i l l s of lading. 245 siderable cost. This cost of additional packing as well as admin-istration time required to make claims and repeat orders could not be estimated i n terms of dollars, however i t would not exist to that extent i f air freight was used. Interest charges on capital invested in goods in transit i s not significant because Firm A does not take ownership of the 4 goods until they arrive in Bella Coola. The freight rates given for boat transportation does not include the cost of marine insurance. This charge w i l l vary de-dending on the type of goods and their value. Air freight rates on the other hand include some insurance on a l l goods and additional insurance for high value items can be purchased. Secondary transportation i s required for a l l goods ship-ped by boat or a i r . This requires additional time and also i n -creases the risk of theft or damage. The charges are the same for a i r and boat freight. The difference in travelling time between aircraft and boat i s approximately seventeen to eighteen hours. Air freight travels Tuesday, Thursday and Saturday, while boat travels only Tuesday evening. The maximum delivery time for air freight then i s only two days whereas by boat i t i s eight days. It i s questio-able by how much this reduction in travelling time could allow a reduction in inventory. The manager stated that generally, i n -ventory cannot be appreciably reduced, f i r s t because the assort-ment i s broad rather than deep and secondly because from a merchan-dising point of view there must be more than one of each item on 4. B.C.. Co-operative Wholesale sells the goods to their stores and charges them F.O.B. Bella Coola. 246. the shelf. He did admit, however, that for selected items the use of air freight could possibly allow some reduction. The problem at hand now i s the large reduction of inventory required to offset the higher freight charges. The analysis performed on each inventory classification i s identical to that performed for Firms A in Tofino, Ucluelet and Tahsis. The discussion i s not repeated and only the basic: infor-mation i s provided. The discrepancy in measurable costs and a summary of the advantages and disadvantages of using air freight i s provided for each classification. Secondary transportation i s the same for both, and hence has been excluded. Dry Goods Inventory The average value of inventory was $ 3 8 , 3 1 0 . 0 0 . Retail sales for the year 1 9 6 7 totalled $ 7 8 , 9 8 9 . 0 0 and represented two point one turns of the average inventory. The cost of holding the inventory was assumed as twenty-five per cent and equalled $ 9 » 5 3 2 . 0 0 . The weight of goods transported for the year was twenty-two thou-sand three hundred eighty-six pounds. The average value per pound of the goods shipped was $ 3 * 5 0 . This i s very close to the value to weight ratio calculated for Tofino and Ucluelet. The analysis i s also calculated using air freight rates of one-half and one-third present rates so as to show the influence of this on the desirability of using air freight. 247 Table 1 2 : 1 D i s t r i b u t i o n Cost Analysis for A i r and Surface Transport  for Firm A Dry Goods i n Be l l a Coola i n 19oT. BOAT AIR FREIGHT 1/2 PRESENT AIR RATE 1 / 3 PRESENT AIR RATE Primary Trans-portation charges $ 4 9 2 . 0 0 $ 4 9 2 8 . 0 0 $ 2464.00 $ 1 6 4 1 . 0 0 Packing Charges-one c r i b per week | 1 6 3 . 0 0 NIL NIL NIL Inventory Holding Cost @ 25 per cent $ 9 5 3 2 . 0 0 $ 9 5 3 2 . 0 0 $ 9 5 3 2 . 0 0 $ 9 5 3 2 . 0 0 TOTAL COST $ 1 0 1 8 7 . 0 0 $14460.00 $ 1 1 9 9 6 . 0 0 $ 1 1 1 7 3 . 0 0 Difference - A i r -Boat NIL $ 4 2 7 3 . 0 0 $ 1 8 0 9 . 0 0 $ 9 8 6 . 0 0 Difference expres-sed as a percent-age of inventory reduction required to equalize costs 44# 18% 10% The analysis indicates that with exi s t i n g rates, a i r fr e i g h t costs $ 4,273*00 more than boat transportation. A reduc-t i o n of inventory of forty-four per cent and related costs, as a r e s u l t of using a i r f r e i g h t , would be required i f the additional f r e i g h t cost i s to be o f f s e t . The advantages and disadvantages of using a i r f r e i g h t as compared to boat transport are provided i n Table 12:2 Page 248. These same factors apply as well to hardware and grocery inventory. 248 Table 12;2 Summary of the Advantages and Disadvantages of Using  Air Freight Compared to Boat Transport for Firm A  Dry Goods in Bella Coola during 1967* VARIABLES BOAT AIR FREIGHT Primary transportation charges per one hundred pounds. $ 2.20 $ 22.00 Secondary transportation charges Same Same Additional Packing and crating charges Higher Not required Insurance charges for goods in transit Additional Included in rate Risk of damage or theft in transit Much Greater Low Interest charges on goods in transit N.A. N.A. Cost of Holding Inventory Unchanged Somewhat Lower Inventory Maintenance Unchanged Greater Door to door delivery time 20-30 hours 2-5 hours Reliability Unchanged Not quite as good Competitive Advantage Unchanged Sometimes - i f there was competition Frequency of delivery Weekly 3 times weekly 249. Hardware Inventory The average value of inventory was $ 29,700.00. Re t a i l sales f o r the year t o t a l l e d $ 75,704.00 and t h i s represented two point f i v e turns of the average inventory. The oost of holding the inventory equalled twenty-five per cent of i t s value or $ 7*425.00. The merchandise shipped during the year had a t o t a l weight of six t y -s i x thousand s i x hundred ninety pounds and the average value per pound was $ 1.14. This value per pound r a t i o i s somewhat low be-cause some building materials werexincluded. Table 12;3 D i s t r i b u t i o n Cost Analysis f o r A i r and Surface Transport  f o r Firm A Hardware i n Be l l a Coola during 1967. BOAT AIR FREIGHT 1/2 PRESENT AIR RATE 1 / 3 PRESENT AIR RATE Primary Trans-portation charge $ 1 4 6 7 . 0 0 $ 1 4 6 7 4 . 0 0 $ 7 3 3 7 . 0 0 $ 4 8 8 9 . 0 0 Packing Charges-one c r i b per week $ 1 6 3 . 0 0 NIL NIL NIL Inventory Hold-ing charges @ 25 per cent $ 7 4 2 5 . 0 0 $ 7 4 2 5 . 0 0 $ 7 4 2 5 . 0 0 $ 7 4 2 5 . 0 0 TOTAL COSTS $ 9 0 5 5 . 0 0 $ 2 2 0 9 9 . 0 0 $ 1 4 7 6 2 . 0 0 $ 1 2 3 1 4 . 0 0 Difference -Air-Boat NIL $ 1 3 0 4 4 . 0 0 $ 5 7 0 7 . 0 0 $ 3 2 5 9 . 0 0 Difference exp-ressed as a per-centage decrease of inventory re-quired to equal-i z e cost d i f f e r -ence NIL 175% 76% 43# 250 The analysis shows that with e x i s t i n g f r e i g h t rates, a i r f r e i g h t w i l l cost $ 13,044.00 more than boat. The costs of hold-ing inventory cannot be reduced s u f f i c i e n t l y to o f f s e t t h i s cost. A reduction of inventory and r e l a t e d costs of one hundred seventy-f i v e per cent w i l l be required to o f f s e t the additional f r e i g h t charges. A summary of the advantages and disadvantages of using a i r f r e i g h t f o r hardware has been provided with the dry goods i n -ventory analysis previously discussed. Grocery Inventory The average value of t h i s inventory was $ 18 ,330.00. R e t a i l sales f o r the year t o t a l l e d $ 254,200.00 and represented thirteen turns on the average inventory value. The cost of holding t h i s inventory was $ 4,583»00. The t o t a l weight shipped during the year was f i v e hundred fo r t y - f o u r thousand twenty-two pounds. The cost analysis indicates c l e a r l y the relationship between weight and Inventory. The greater the turns on inventory then the l e s s chance there i s of a i r f r e i g h t being economically f e a s i b l e . The cost analysis Indicates that with e x i s t i n g rates, as well as with greatly reduced a i r fr e i g h t rates, the difference i n costs i s astronomical. With a i r fre i g h t rates set at one-third t h e i r present value, the difference i n transportation costs w i l l s t i l l be $ 27,581.00 The advantages and disadvantages of using a i r f r e i g h t f o r groceries are the same as those stated f o r dry goods inventory on Page 248. 2 5 1 . Table 1 2 : 4 D i s t r i b u t i o n Cost Analysis f o r A i r and Surface Transport  f o r Firm A Groceries i n B e l l a Coola during 1 9 6 7 . BOAT AIR FREIGHT 1 / 2 PRESENT AIR RATE 1 / 3 PRESENT AIR RATE Primary Trans-portation charges $ 1 1 9 6 8 . 0 0 $ 1 1 9 6 8 0 . 0 0 $ 5 9 8 4 0 . 0 0 $ 3 9 8 7 5 . 0 0 Packing costs-two c r i b s per week $ 3 2 6 . 0 0 NIL NIL NIL Inventory Hold-ing costs $ 4 5 8 3 . 0 0 $ 4 5 8 3 . 0 0 $ 4 5 8 3 . 0 0 $ 4 5 8 3 . 0 0 TOTAL COSTS $ 1 6 8 7 7 . 0 0 $124263.00 $64423.00 $44458.00 Difference - A i r -Boat NIL $107386.00 $47546.00 $27581.00 Difference ex-pressed as a per-centage of inven-tory reduction re-quired to equalize costs 2 3 4 3 $ 1037# 601% 252 Produce Inventory Produce inventory has unique problems of perishability which were discussed f u l l y for Firm A in Ucluelet.5 These problems for Bella Coola are more serious, however, because while produce i s transported i n only twenty hdursein a cooler i f desired, i t must remain on the store shelves for eight days until a fresh or-der arrives. The primary advantage of a i r freight w i l l be to increase the frequency of delivery per week and therefore reduce shrinkage and increase saleability of the product. Savings resulting from these advantages have been assumed as twenty per cent of the total r e t a i l sales or $ 6,971.00. The average value of the inventory was $ 871.00. The r e t a i l sales for the year were $ 40,562.00 and the total weight carried was two hundred thirty-eight thousand six hundred eleven pounds. The analysis indicates that with existing freight rates and charging shrinkage to boat transportation, instead of deducting i t from air freight charges, a i r freight i s $ 40,109.00 more costly than boat transportation. Again the large weight being carried i s the determining factor. The advantages and disadvantages of using a i r freight are the same as for dry goods except for the perishability factor discussed. 5. See Appendix IX Page 135 253. Table 12;5 D i s t r i b u t i o n Cost Analysis f o r A i r and Surface Transport  f o r Firm A Produce In B e l l a Coola during 1967. BOAT AIR FREIGHT 1/2 PRESENT AIR RATE 1/3 PRESENT AIR RATE Primary trans-portation charges $ 5249.00 $52492.00 $26246.00 $17489.00 Packing Costs -one c r i b per week $ 163.00 NIL NIL NIL Shrinkage @ 20 per cent of sales I 6971.00 NIL NIL NIL TOTAL COSTS $12383.00 $52492.00 $26246.00 $17489.00 Difference - A i r -Boat NIL $40109.00 $13863.00 $ 5106.00 

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