Transportation in the Supply Chain

In this section, we discuss the role that transportation plays in the supply chain and key transpor­tation-related decisions that supply chain managers must make.

1. Role in the Supply Chain

Transportation moves product between different stages in a supply chain and affects both responsiveness and efficiency. Faster transportation is more expensive but allows a supply chain to be more responsive. As a result, the supply chain may carry lower inventories and have fewer facilities.

The appropriate choice of transportation allows a firm to adjust the location of its facilities and inventory to find the right balance between responsiveness and efficiency. A firm selling high-value items such as pacemakers may use rapid transportation to be responsive while cen­tralizing its facilities and inventory to lower cost. In contrast, a firm selling low-value, high- demand items like light bulbs may carry a fair amount of inventory close to the customer but then use low-cost transportation such as sea, rail, and full trucks to replenish this inventory from plants located in low-cost countries.

EXAMPLE 3-3 Blue Nile

Blue Nile is an online retailer of diamonds that has used responsive transportation with FedEx to ship diamonds to customers in the United States, Canada, and several countries in Europe and Asia. Given the high value of diamonds, Blue Nile offers free shipping for overnight delivery. Responsive shipping, however, allows Blue Nile to centralize its inventory of diamonds and eliminate the need for expensive storefronts. In spite of the high transportation costs, Blue Nile has very low costs compared with those of bricks-and-mortar retailers because of the low facility and inventory expenses. Blue Nile is thus able to offer significantly lower prices than its bricks- and-mortar competition.

2. Components of transportation Decisions

We now identify key components of transportation that companies must analyze when designing and operating a supply chain.

Design of transportation network The transportation network is the collection of transportation modes, locations, and routes along which product can be shipped. A company must decide whether transportation from a supply source will be direct to the demand point or will go through intermediate consolidation points. Design decisions also include whether or not multiple supply or demand points will be included in a single run.

Choice of transportation mode The mode of transportation is the manner in which a product is moved from one location in the supply chain network to another. Companies can choose

among air, truck, rail, sea, and pipeline as modes of transport for products. Today, information goods can also be sent via the Internet. Each mode has different characteristics with respect to the speed, size of shipments (individual parcels to pallets to full trucks to entire ships), cost of ship­ping, and flexibility that lead companies to choose one particular mode over the others.

TRANSPORTATION-RELATED METRICS Inbound transportation decisions affect the cost of goods sold, whereas outbound transportation costs are part of the selling, general, and adminis­trative expenses. Thus, transportation costs affect the profit margin. A manager should track the following transportation-related metrics that influence supply chain performance:

• Average inbound transportation cost typically measures the cost of bringing product into a facility. Ideally, this cost should be measured per unit brought in, but it is often mea­sured as a percentage of sales or cost of goods sold (COGS). The inbound transportation cost is generally included in COGS. It is useful to measure this cost separately for each supplier.
• Average incoming shipment size measures the average number of units or dollars in each incoming shipment at a facility.
• Average inbound transportation cost per shipment measures the average transportation cost of each incoming delivery. Along with the incoming shipment size, this metric identi­fies opportunities for greater economies of scale in inbound transportation.
• Average outbound transportation cost measures the cost of sending product out of a facility to the customer. Ideally, this cost should be measured per unit shipped, but it is often measured as a percentage of sales. It is useful to separate this metric by customer.
• Average outbound shipment size measures the average number of units or dollars on each outbound shipment at a facility.
• Average outbound transportation cost per shipment measures the average transporta­tion cost of each outgoing delivery. Along with the outgoing shipment size, this metric identifies opportunities for greater economies of scale in outbound transportation.
• Fraction transported by mode measures the fraction of transportation (in units or dol­lars) using each mode of transportation. This metric can be used to estimate whether cer­tain modes are overused or underused.

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