Ik-Whan Kwon, Ph.D,
Professor of Supply Chain Management, Saint Louis University
Transportation plays a crucial role in supply chain optimization. Someone once said that “transportation is the blood in supply chain optimization spanning from sourcing to the last miles of delivery”. The most critical component in supply chain is to bring raw materials from sources to customers for finished products on-time to improve customer shopping experiences.
The journey starts from sourcing perhaps via ocean freight if sourcing is originated from overseas to manufacturing, to distribution centers, to wholesales to retailers and finally to customers. In each node mentioned above requires some form of transportation mode depending on types of products and origins of sourcing.
Thus, transportation provides the critical link between organizations along the supply chain, permitting goods to flow between their facilities. Through transportation, organizations can extend the reach of their supply chain beyond the local supplier capabilities and market demand.
With efficient and effective transportation capabilities, organizations can build global supply chains that leverage low-cost sourcing opportunities and allow them to compete in new markets. A shortage of transportation capacity can strand inventory in the system, leading to empty shelves and lost sales.
Transportation efficiency also promotes supply chain competitiveness. On the supply side, cost-effective transportation provides access to higher-quality, lower-priced materials and promotes production of economies of scale. Likewise, low cost transportation improves demand fulfillment opportunities. By keeping transportation expenses reasonable, the total landed cost of product can be competitive in multiple markets.
In addition, transportation service must also be effective. Inexpensive transportation is of little value to supply chain operators if the product does not arrive as scheduled and damage-free to the right location. High-quality, customer-focused transportation has a direct impact on an organization’s success as it delivers the right product at the right time, in the right quantity and quality, at the right cost, and to the right final destination. Also, by working with carriers that offer a range of transit times and service options, organizations can satisfy supply chain demands for expedited and standard delivery speeds.
Transportation influences supply chain design, strategy development, and total cost management.
Transportation service availability, capacity, and costs affect the number and location of supply chain facilities in a network. As such, transportation capabilities must align with a company’s strategic goals. For example, if Sunday delivery is desirable strategy, then a company should align with a transportation company which operates Sunday delivery. Intentional tradeoffs should be made between transportation and related activities to optimize supply chain efficiency. For example, a retailer can hold less than optimum inventory level if frequent deliveries are cheaper than inventory carrying cost.
At the micro level, transportation touches the lives of all citizens around the world. It affects their economic wellbeing, their safety, their access to other people and places, and quality of their environment. When the transportation system performs well, it provides opportunities and rewards for everyone. Understanding the fundamentals of transportation economics will provide important insights into the roles of transportations in supply chain operations.
The transportation industry, however, is facing big challenges. Offshore manufacturing poses serious challenges for the transportation industry as political and economic uncertainties in host countries often creates scheduling as well as capacity problems that usually disrupts on-time delivery.
Constant change in customer requirements add additional challenges and forces delay or changes delivery routes, costing lost time. Finally, heavy regulations on the transportation industry add another uncertainty in capacity planning. For example, environmental regulations on the ocean and trucking industry severely restrict capacity that affects transportation rates around the world.
The roles of transportation have become even more critical recently as ecommerce becomes a dominant shopping mode slowly replacing brick & motor shopping platforms. The original purpose of ecommerce was to give consumers choices and convenience.
E-commerce allows consumers almost unlimited access to markets (choice) with no time constraints. As War-Mart challenges Amazon’s dominance in ecommerce, ecommerce providers (mainly Amazon) must invent a better way to remain in a competitive position. Same day delivery becomes a strategic imperative for many delivery companies and transportation emerges as an essential tool in making such business models efficient and effective. Capacity constraints, especially for trucking companies, are inevitably pushing transportation rates higher and faster than any other time, threatening their operating margins.
The transportation share of total logistics cost for 2016 in this country increased to $894.7 billion out of a total logistics cost of $1.4 trillion (64.2%). Choice of transportation modes, of course, affects the entire supply chain cost configuration. Transportation cost has been steady at around 4% of sales for the last 10 years.
Decision criteria in selecting transportation modes includes but is not limited to; cost per ton-mile, speed of transportation, reliability (on-time delivery), capacity (amount of different types of product that can be transported) and flexibility (ability to deliver the product to the customer) through all intermodals to the last miles of delivery.
Truck has the best accessibility while air has the best transit time. Today industry targets at least 95% on-time delivery, less than 1% damage and shortage rate, at least 99% billing accuracy and at least 95% perfect delivery index, a tall order.
The transportation industry uses several parameters to make decisions on transportation performances. For example, out of a total score of 100 points, on-time delivery seems to be the most important metric for transportation performance (40%) which is followed by loss and damage rate (25%), billing accuracy (15%), equipment condition (10%) and customer services (10%). Based on the above parameters, we can see why rail and barge traffic are worst in on-time delivery while air and truck are the most reliable transportation modes.
Among various transportation modes in 2015, truck has been a dominant mode (72.9% value of goods transported) which is followed by multimodal (11.5%), pipeline (4.8%), rail (3.6%), air (2.2%), barge (1.3%) and other/unknown (3.6%).
# Some of the information in this paper is based on Supply Chain Management: A Logistics Perspective by Colye, Langley, Novack and Gibson. Publisher; Cengage Learning (2017).