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Value to weight ratio



The value to weight ratio of a product is a measure of the monetary value a product has per kilogram or pound. This is an important measure used in supply chain design and strategy. It is one of the most important factors that determine how a product will be shipped to its market and consumers, inventory holding costs is the other major factor. It can also influence how and where products will be built and warehoused.

An example of different value to weight ratios is between diamonds and coal. Both are forms of carbon, but have very different value to weight ratios. A kilogram of coal is only worth a few cents, but one full kilogram of Diamonds can be worth tens of millions of dollars depending on the diamond grade.
In order to determine which of the major forms of transportation, Air, rail, sea, or road fright should be used to transport both coal and Diamonds, its producers would use value to weight ratio economics to make their choice. For diamonds it may be well justified to transport them by air or private jet charter depending on the size of the shipment and value, but for coal this measure

Value to weight ratio in transport economics

When deciding if to ship goods by sea, which takes longer, than by air, usually the shortest, the cost savings in total inventory holding costs must be compared to the cost savings from using the cheaper method of transport.

For example if an item has an inventory holding cost of 25% per year and the difference between transporting one kilogram of goods by road and air is $20 and the time saving is 10 days, then the value to weight ratio(x) to justify transporting goods by air instead of road in this scenario should be :

Holding costs= 0.25*(x)*10 / 365
Freight differential=20(1)

Holding costs=Freight differential

Value to weight ratio(x) = 365*20 / 0.25*10
Value to weight ratio(x) = $2920 p/kilo

Therefore the value to weight ratio must be above $2920 per kilogram in this scenario for air transport to be justifiable.



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