The Role of Transportation in a Supply Chain

Transportation refers to the movement of product from one location to another as it makes its way from the beginning of a supply chain to the customer. Transportation is an important supply chain driver because products are rarely produced and consumed in the same location. Transpor­tation is a significant component of the costs incurred by most supply chains. According to the Bureau of Transportation Statistics (BTS), “over 19 billion tons of freight, valued at $13 trillion, was carried over 4.4 trillion ton-miles in the United States in 2002.”¹ Only three sectors—hous­ing, health care, and food—contributed a larger share to the gross domestic product (GDP) than transportation. Transportation-related jobs employed nearly 20 million people in 2002, account­ing for 16 percent of U.S. total occupational employment.

The role of transportation is even more significant in global supply chains. According to the BTS, the U.S. freight transportation network carried export and import merchandise worth more than $2.2 trillion in 2004, an increase of 168 percent from $822 billion in 1990. During the same period, the ratio of exports from and imports into the United States to the GDP increased from 12 percent to 21 percent.

Any supply chain’s success is closely linked to the appropriate use of transportation. IKEA, the Scandinavian home furnishings retailer, has built a global network, with about 350 stores in 42 countries, primarily on the basis of effective transportation. IKEA’s sales for the year ending August 2013 reached 29.2 billion euros. Its strategy is built around providing good-quality prod­ucts at low prices—in fact, its goal is to cut prices by 2 to 3 percent each year. As a result, IKEA works hard to find the least expensive global source for each of its products. Modular design of its furniture allows IKEA to transport its goods worldwide much more cost effectively than a traditional furniture manufacturer. The large size of IKEA stores and shipments allows inexpen­sive transportation of home furnishings all the way to the retail store. Modular designs coupled with effective sourcing and inexpensive transportation allow IKEA to provide high-quality home furnishings at low prices globally.

Seven-Eleven Japan is another firm that has used transportation to achieve its strategic goals. The company has a goal of carrying products in its stores to match the needs of customers as they vary by geographic location or time of day. To help achieve this goal, Seven-Eleven Japan uses a responsive transportation system that replenishes its stores several times a day so the prod­ucts available match customers’ needs. Products from different suppliers are aggregated on trucks according to their required temperature to help achieve frequent deliveries at a reasonable cost. Seven-Eleven Japan uses a responsive transportation system along with aggregation to decrease its transportation and receiving costs while ensuring that product availability closely matches customer demand.

Supply chains also use responsive transportation to centralize inventories and operate with fewer facilities. For example, Amazon relies on package carriers and the postal system to deliver customer orders from centralized warehouses. McMaster-Carr uses ground transportation and package carriers to provide next-day delivery of a wide variety of MRO products to about 90 percent of U.S. businesses from five distribution centers. The location of its distribution centers along with an effective transportation network allows McMaster to be very responsive while using a low-cost mode of transportation.

The shipper is the party that requires the movement of the product between two points in the supply chain. The carrier is the party that moves or transports the product. For example, when McMaster-Carr uses UPS to ship its products from the warehouse to the customer, McMaster is the shipper and UPS is the carrier. Besides the shipper and the carrier, two other parties have a significant impact on transportation: (1) the owners and operators of transportation infrastructure such as roads, ports, canals, and airports and (2) the bodies that set transportation policy world­wide. Actions by all four parties influence the effectiveness of transportation.

To understand transportation in a supply chain, it is important to consider the perspectives of all four parties. A carrier makes investment decisions regarding the transportation equipment (e.g., locomotives, trucks, airplanes) and, in some cases, infrastructure (rail), and then makes operating decisions to try to maximize the return from these assets. A shipper, in contrast, uses transportation to minimize the total cost (transportation, inventory, information, sourcing, and facility) while providing an appropriate level of responsiveness to the customer. The effective­ness of carriers is influenced by infrastructure such as ports, roads, waterways, and airports. Most transportation infrastructure throughout the world is owned and managed as a public good. It is important that infrastructure be managed in such a way that monies are available for mainte­nance and investment in further capacity as needed. Transportation policy sets direction for the amount of national resources that go into improving transportation infrastructure. Transportation policy also aims to prevent abuse of monopoly power; promote fair competition; and balance environmental, energy, and social concerns in transportation.

In the following sections, we discuss issues that are important from the perspective of carriers, infrastructure owners and operators, transportation policy makers, and shippers. In the next section, we discuss different modes of transportation and their cost and performance characteristics.

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