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Supply Chain Cage Match – Inventory v. Transportation

By Richard Forrest  August 17, 2016

When a business makes a decision regarding the transportation of their products it can positively or negatively affect the inventory performance of their supply chain.  These transportation decisions are too often made in a vacuum.

What is not well known is the extent these transportation decisions have on inventory levels and inventory related costs.

The proper question is:

“How much more inventory related cost and investment will be incurred by utilizing longer lead time sources or cheaper transportation modes rather than those with shorter lead times?”

The answer is inherently difficult to quantify because of the multitude of variables required for that type of analysis, making it common for transportation planning and inventory strategy to be separate functions for a lot of businesses.  In fact, a lot of businesses employ separate processes to “optimize” independently of each other which inevitably leads to sub-optimal decision making for the business as a whole.  The ideal solution is to consider all of the transportation and inventory related variables in one centralized decision making process.  This results in the lowest total cost to the business; putting the most margin in your pocket for every dollar sold!

Inventory carrying costs are substantial. CSCMP and many reputable reports peg the number at 1.7 percent of revenue.  In other words, for every dollar of revenue your company sells it cost them 1.7 cents to finance that inventory.  This excludes the cost of transportation, distribution centers or even the cost of the inventory itself.

Because there isn’t a monthly invoice for inventory carrying costs, businesses direct their attention on controlling the easier to measure transportation costs.  This reality is compounded when you consider the external factors that businesses are facing today which continue to drive up the cost of transportation.  To complicate matters even further, these cost and constraints are ever changing and can fluctuate substantially over time.

  • Fuel costs, taxes, and regulations
  • Varying rates and lead times for different transportation providers in each shipping lane
  • Driver shortages and capacity constraints resulting in rates changing throughout the year
  • Supplier or manufacturing constraints that result in variable product delivery lead times

In environments such as these with so many external factors to consider, businesses need to ensure they are doing everything in their power to make the best decisions.

Which mode of transport to choose for each product, in each lane, and each time period?

What quantity to produce or procure of each product from each manufacturing site or supplier considering the different transport rates available and based on the quantity ordered?

How much to order and how much to store to have the correct stock levels at each warehouse to avoid using expedited transportation and to ensure service levels can be met?

The reality is that supply chains are not static or fixed.  Whether it is by choice or by force, supply chains are continuously changing to include new options or requirements for sourcing, transportation and storage.  Additionally, most entities within the supply chain influence and are influenced by the other entities in the chain.  A “small” decision made in one part of the supply chain can have a profound effect on the supply chain as a whole.

Having the capability to holistically solve complex supply chain issues by simultaneously considering all of the potential costs to move and store product can realise significant savings.  This holistic decision making approach is accomplished through calculating and trading off of all the network costs and constraints to ultimately recommend a cost-optimal tactical forward plan.  This will include outputs detailing recommended time period specific plans for sourcing, transportation, production, warehousing, inventory policy and customer (service level) commitment.  These optimized plans will certify that the sales and operations planning process is completed using information produced through a holistic supply chain decision making process.