Question 1: Why would a company be interested in transportation-oriented supply chain metrics?

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1 Question 1: Why would a company be interested in transportation-oriented supply chain metrics? Answer 1: Any company that buys from a supplier or ships products to a customer should be interested in transportation-oriented metrics. Metrics will allow the company to make good choices regarding shipping modes and shipping vendors. Many companies will also use the vendors to evaluate the trade-offs between cost and shipping time, shipping cost versus customer service, cost and inventory, as well as vendor reliability. Further uses for the metrics include measuring performance to contracted standards and understanding lead times. Transportation makes a majority of the logistics budgets of the company, so proper corporate governance requires close management of this activity. Question 2: What sized company is more likely to utilize third-party logistics (3PL)? Why? Answer 2: The ARC Advisory Group (Beyond Software, 2002) performed a study in which it looked at who was more likely to outsource its logistics activity. Its study indicated that large companies were more likely to outsource their logistics to third-party logistics providers. Further, large companies indicated that they were likely to outsource nonstrategic business processes. The authors found that smaller companies were reluctant to outsource their logistics because of their greater need to control their entire supply chain to remain in competition with larger companies, whereas larger companies were more likely to focus on their strategic competencies, giving up some measure of control to the 3PL firms. The study also indicated that although all companies desired control over logistics functions, larger firms indicated that they required less control than smaller firms. Question 3: How does delivery reliability affect the decision of transportation mode? Answer 3: Delivery reliability, which is the ability to deliver when specified, depends upon how much and where inventory is placed in the supply chain. To run the 1

2 supply chain with minimum inventory, a high degree of delivery reliability is required. When delivery reliability is not high, extra inventory must be kept. If the inventory costs exceed the difference in transportation costs, a more reliable form of transportation may be purchased. In general, slower modes of transportation are less reliable. Absolute reliability of delivery can be required in certain circumstances, for example, delivery of parts to an assembly line. Some assembly lines cost the company hundreds of thousands of dollars a minute when they are shut down for any reason, including lack of parts. Other companies maintain enough inventory to cover any eventuality. Question 4: Why is the foot mode of transportation still viable? Answer 4: The foot mode of transportation for the delivery of goods is still viable for a couple reasons. First, many goods must be delivered to facilities without a proper shipping dock. These facilities would include offices, homes, worksites, and so forth. The items that may be delivered via foot would typically be items such as small packages, mail, food, and so forth. The other reason that items may be delivered by foot is that in certain countries, the cost of labor is much less expensive than the cost of fuel and vehicles to deliver packages. Certainly, this is the case in many third-world countries. Such foot deliveries are also made in cities such as Hong Kong. Question 5: If your company competes on cost or customer service, what supply chain metrics would you use? Answer 5: Cost: When a company competes on cost, the strategy and tactics are to drive costs out of the supply chain. Transportation is the largest component of logistics cost, so measuring transportation costs to reduce them is an important activity. A company might measure the cost of processing and export transaction, the cost of inventory required to maintain desired customer service levels, transportation costs, average delivery time, and so forth. All of these metrics would orient company performance toward the reduction of costs, thereby aligning the supply chain with company strategy. Customer Service: A company that competes for time needs to have customer service desire to have products available whenever a 2

3 customer demands. Such a company would be interested in having enough inventory on hand to satisfy customer demand. As such, the focus is not on costs of inventory but rather having a sufficient amount of inventory. Other metrics that the company might use would include the cost of missed deliveries, stockout costs, delivery reliability, detailed metrics on customer demand pattern, and so forth. Stockouts can be minimized even with slightly unreliable deliveries through properly placed and sized inventory. Much attention must be given to maintaining the proper inventory levels not too much and not too little. Question 6: How is the supply chain operations reference (SCOR) model organized? Answer 6: The SCOR framework stands for the supply chain operations reference model. It is a management tool that was developed to describe the business activities associated with all phases of satisfying customer demand. The SCOR framework includes the standard descriptions of processes, relationships between those processes, and standard metrics for the processes, and it must process best practices and standard alignment to the features and functionality required in the supply chain (SCOR 8.0 Reference Booklet, 2006). There are four levels in this SCOR model as follows (SCOR 8.0 Reference Booklet, 2006): Level 1 is the top level and defines the plan, source, make, deliver, and return processes and objectives. Level 2 provides the ability to configure-to-order the 26 possible core supply chain management processes. Level 3 develops information for planning and goal-setting improvements, which include process element definitions, process element information inputs and outputs, process performance metrics, best practices, and the system capabilities required to support the best practices. Level 4 is the implementation step and defines practices to achieve competitive advantage to adapt to changing business conditions. 3

4 SCOR metrics are designed to help the company achieve its goals. There are performance attributes that the metrics are intended to support: reliability, responsiveness, flexibility, cost, and assets. A Level 1 metric includes perfect performance fulfillment, which supports the reliability performance attribute. There are similar metrics at Level 2, Level 3, and Level 4. All of the metrics are intended to support best-in-class performance and are rolled up into the next level metric. This allows for implementation to roll into operational and then strategic performance measurement (Chopra & Meindl, 2003). Question 7: What role does software or technology play in transportation decisions? Answer 7: Customer The customer of transportation services look for two properties in the software or technologies offered by the transportation company. First, the customer looks for visibility into shipment location. Many companies provide their customers with websites that allow queries into a shipment s location and progress to the destination. Many companies are using new technologies such as radio frequency identification (RFID) to provide this capability for their internal supply chain. The second property that a customer of transportation services desires is automation for shipping, billing, and notifications. Many transportation providers have already provided these sorts of automation through their Web sites. Transportation Company The transportation company desires software and technology to help it reduce costs, increase reliability, and maintain regulatory compliance. There is software that allows competitive shippers true aggregate shipments that are less-than-truckload (LTL) into full truckloads to reduce costs. There is software that allows the trucking company to find shipments to fill the trip back. There are systems that allow the company to track their trucks using a global positioning system (GPS). Not only does the company know where the truck is, but it can also track its progress and determine the speed at which 4

5 the driver is making progress toward the destination. Online trucking logs integrated with tracking software helps the company prove compliance with trucking regulations. Question 8: How does location affect transportation decisions? Answer 8: When sourcing a part, component, or product, consideration must be made of the transportation from vendor to customer. Sometimes the consideration is trivial, such as when a product can be easily mailed. Other times, the size and volume of the product involved make transportation a much more important issue. For example, if you were a sports apparel manufacturer who had sourced your shoe manufacturing to Dongguan, China, the volume of shoes (which would probably be in the hundreds of thousands of pairs) and the location of the manufacturing facility will limit you to two possible choices: airfreight and container ship. In this situation, the advantage of airfreight is the very quick delivery, and the disadvantage is cost. The advantage of container ship is cost, and the disadvantage is slower delivery, which is on the order of a month. Other products further limit choices. For example, coal and iron ore may be shipped by rail or ship but not by airfreight. Question 9: Who pays the freight bill? Answer 9: When goods are shipped, the responsibility for payment of transportation is negotiated beforehand. This is typically done by the purchasing agent as part of the contract negotiation for purchase of goods and products. The term free on board (FOB) means that the seller pays the shipping. FOB shipping point and FOB destination refer to vendor- and customer- paid shipping, respectively. Many times, a vendor will have specialized equipment for transportation of materials. Examples include ships and or railroad cars for iron ore or coal, specialized ships for liquid natural gas, and so forth. The cost of shipping, therefore, is paid either by the buyer or seller. All shipping costs would be included in the final price paid by the consumer. In the end, the consumer pays for all shipping. 5

6 Question 10: How does the bull-whip effect change transportation costs? Answer 10: When a supply chain suffers from the bull-whip effect, transportation costs rise. It might seem that because the same amount of goods is purchased by consumers regardless of the bull-whip effect, transportation costs would remain the same. The reason transportation costs rise is because the bullwhip effect requires that excess transportation capacity be maintained because of the high quantities ordered during the peaks. This has two cost components: capital equipment costs and excess labor costs. If the bull-whip effect can be eliminated, the excess transportation capacity is not required and transportation costs can be decreased. References Beyond software: Maximizing value via outsourcing. (2002). Retrieved from ARC Advisory Group Web Site: Chopra, S., & Meindl, P. (2003). Supply chain management: Strategy, planning, and operation. Upper Saddle River, NJ: Prentice Hall. SCOR 8.0 reference booklet. (2006). Retrieved from Supply Chain Council Web site: hank+you ion=scor+model 6