Making Transportation Decisions in a Supply Chain in Practice

1. Align transportation strategy with competitive strategy. Managers should ensure that a firm’s transportation strategy supports its competitive strategy. They should design functional incentives that help achieve this goal. Historically, the transportation function within firms has been evaluated based on the extent to which it can lower transportation costs. Such a focus leads to decisions that lower transportation costs but hurt the level of responsiveness provided to cus­tomers and may raise the firm’s total cost. If the dispatcher at a DC is evaluated based solely on the extent to which trucks are loaded, he or she is likely to delay shipments and hurt customer responsiveness to achieve a larger load. Firms should evaluate the transportation function based on total cost and the level of responsiveness achieved with customers.

2. Consider both in-house and outsourced transportation. Managers should consider an appropriate combination of company-owned and outsourced transportation to meet their needs. This decision should be based on a firm’s ability to handle transportation profitably as well as the strategic importance of transportation to the success of the firm. In general, outsourcing is a better option when shipment sizes are small, whereas owning the transportation fleet is better when ship­ment sizes are large and responsiveness is important. For example, Walmart uses responsive trans­portation to reduce inventories in its supply chain. Given the importance of transportation to the success of its strategy, it owns and manages its transportation fleet itself. This is made easier by the fact that it achieves good utilization from its transportation assets because most of its ship­ments are large. In contrast, firms such as W.W. Grainger and McMaster-Carr send small ship­ments to customers; inventory management rather than transportation is the key to their success. A third-party carrier can lower costs for them by aggregating their shipments with those of other companies. As a result, both companies use third-party carriers for their outbound transportation.
3. Use technology to improve transportation performance. Managers must use infor­mation technology to decrease costs and improve responsiveness in their transportation net­works. Software helps managers do transportation planning and modal selection and build deliv­ery routes and schedules. Real-time tracking allows carriers to communicate with each vehicle and identify its precise location and contents. These technologies help carriers lower costs and become more responsive to changes.
4. Design flexibility into the transportation network. When designing transportation networks, managers should take into account uncertainty in demand as well as availability of transportation. Ignoring uncertainty encourages a greater use of inexpensive and inflexible trans­portation modes that perform well when everything goes as planned. Such networks, however, perform poorly when plans change. When managers account for uncertainty, they are more likely to include flexible, though more expensive, modes of transportation within their network. Although these modes may be more expensive for a particular shipment, including them in the transporta­tion options allows a firm to reduce the overall cost of providing a high level of responsiveness.

Source: Chopra Sunil, Meindl Peter (2014), Supply Chain Management: Strategy, Planning, and Operation, Pearson; 6th edition.