The World Is Rethinking Supply Chain Transportation Management
BY River Logic
One of the most striking aspects of the coronavirus pandemic in 2020 is the effect it had on transportation. In some countries and states, the flow of products and goods almost came to a complete halt, except for essential services.
Even these services struggled to deliver. While manufacturing also suffered, the transportation shortage was undoubtedly one of the biggest supply chain problems, in addition to the availability of stock, due to lockdown and increased demand on at-home deliveries.
While supply chain managers have focused on low-cost but complex supply chains, it’s debatable whether thought has been given to what will happen in the event of wide-scale transportation disruptions. Related to that is whether the true cost of goods transportation is really understood, especially in the light of prevailing accounting principles that regard transportation cost as separate from raw materials cost, even though it’s an essential component of landed raw material cost.
Part of the problem is that transportation management and material sourcing usually operate in separate organisational silos and, while costs are ultimately reconciled, they are largely opaque. Rarely do bill of material (BOM) costs properly take transportation costs into account.
This is one reason why supply chain managers are rethinking supply chain transportation management and using advanced analytics such as predictive and prescriptive analytics to better evaluate supply chain transportation costs and how they impact the bottom line.
What Do We Mean by Supply Chain Transportation Management?
In simple terms, supply chain transportation management can be defined as the organisation of goods transport from suppliers to manufacturers to wholesalers and, ultimately, to the public. It’s an integral part of supply chain management, and its ultimate goals include ensuring goods are shipped efficiently, at the lowest cost and to where they are needed so that they’re available to meet demand.
Unfortunately, this definition reinforces the perception that transportation management is a separate function to purchasing, raw materials procurement and sales. What it doesn’t convey is that transportation costs contribute, positively or negatively, to the bottom line, and that transportation decisions need to be part of, and integral with, broader purchasing and logistics planning.
How Is Supply Chain Transportation Managed?
Solutions vary from spreadsheets to comprehensive transportation management systems (TMS). Some organisations, like Walmart, manage transportation in-house, while others utilise the services of external logistics specialists. Some centralise operations, while others decentralise. Because of the complexity associated with managing multiple shipping routes, a great many organisations depend on experienced planning teams utilising manual systems.
Although these solutions all have a place, the question must arise as to whether they are fit for purpose.
In terms of software, larger organisations often use in-house TMS systems. However, the high costs associated with in-house solutions mean many companies contract out TMS. More recently, various companies have switched to cloud-based transport management systems. This is partly because of the ease of access, but also because the lower cost of SaaS solutions means smaller organisations can afford them.
Whatever TMS is chosen, a key step is mapping out transportation routes, identifying supply and delivery nodes and using advanced software to determine optimal transportation routing. Ideally, this would be part of supply chain network design, but is often treated as a separate exercise, particularly when working with external logistics
What Does Transportation Cost?
Transportation represents a significant percentage of total selling costs. While figures vary, some commentators believe transportation represents as much as 50% of total supply chain costs. A report from McKinsey and Company stated that outbound logistics represent between 1.8% and 10% of sales costs, while others point to the fact that transportation costs are equal to around 9% of the nation’s GDP.
These figures demonstrate the need for effective control of transportation costs and go a long way toward explaining why transport management is a separate function in organisations.
However, there’s one question that’s often not answered or even addressed, and that is whether a particular pickup or delivery is economically justified. Granted, these questions may have been considered when the supply chain network was set up, but thereafter, apart from an occasional review, they are ignored.
While this is understandable, given that transportation management usually doesn’t have visibility into detailed supply chain costs and vice versa, it means product costs probably don’t reflect current realities and that organisations may be wasting lots of money.
Balancing Act of Time Versus Cost
As companies strive to reduce inventories while meeting demand, there’s continual pressure to reduce shipping and delivery times. Added to that is the additional complexity of omnichannel marketing; direct order customers expect delivery of small packages, while at the same time, there’s the need to send bulk stock to retail stores.
While Amazon avoids that dilemma by concentrating on direct marketing and Walmart dodges it through their nationwide chain of stores, many organisations are forced to develop omnichannel strategies to stay in the game.
Determining the best transportation strategy in these circumstances isn’t easy without the aid of logistics modeling software that’s able to determine answers to questions such as how to optimise profit while meeting customers’ expectations.
Are Global Supply Chains the Right Answer?
In the current context of how the coronavirus has disrupted international and national transportation, supply chain managers need to seriously review the wisdom of their globalised supply chains. Thanks to decades of growth in international trade, virtually all major companies have extended supply chains that depend on Asian suppliers. Additionally, the practice of single sourcing means, in many instances, there’s only one supplier of critical parts.
While the disruption caused by the coronavirus pandemic is unprecedented, perhaps organisations need to rethink how their global sourcing works. We’re not suggesting that global sourcing, per se, is wrong, rather that risk mitigation strategies need to be more objective around the frequency and impact of such events.
The Need for Predictive and Prescriptive Analytics Solutions
The complexity of supply chain transportation management systems together with supply chain intricacy indicates that a different approach is needed. While there may be good reasons for separate TMS and supply chain software solutions, the degree of interdependency between these solutions highlights the need for increased visibility into both the supply chain and transportation logistics
Many companies like Walmart run simulations to predict optimal supply chain routings. However, companies are also taking advantage of prescriptive analysis (optimisation) to model the end-to-end value chain, which means modeling supply chain while simultaneously modeling logistics. This analysis is run on top of a digital planning twin, a more expanded version of a supply chain digital twin in that it incorporates financial impact analysis and inputs, in addition to areas outside of the supply chain. This type of modeling has a distinct advantage in that, when running and evaluating transportation scenarios, overall cost—including production and vendor—and revenue can be calculated.
Rethinking Supply Chain Transportation Management: Minimising Risk Versus Cost
One of the characteristics of modern transportation management is that when someone finds a better way to do something, everyone follows. Few seem to stop and say: Is this best for my organisation? However, Walmart stands out as a good example of a company that successfully bucked the trend for outsourcing transportation.
The possibility of a coronavirus pandemic originating from China was predicted in January 2019, but no one took it seriously because conventional wisdom said that global sourcing is the answer.
These examples point to an urgent need to rethink supply chain transportation management philosophies. It’s essential to be aware that bias, emotion and wishful thinking often determine organisational decisions.
Prescriptive analytics offers a viable alternative. Using modeling software, it’s possible to create a model that accurately reflects the organisation’s supply chain. Then, using the organisational data together with external information, to run what-if scenarios to determine optimal transportation and sourcing solutions. Using prescriptive analytics, it’s possible to anticipate the disruption when the unthinkable happens and to determine viable alternatives. In this way, it’s possible to objectively rethink supply chain transportation management.