Transportation decisions

Operations Management

Transportation decisions

Transportation is a key decision area in the logistics mix. Except for procurement costs, transportation absorbs, on average, a higher percentage of logistics costs than any other logistics activity.

Although transportation decisions are expressed in a variety of ways, the primary ones are mode selection, route design, vehicle scheduling, and shipment consolidation.

Selection of Transportation Services

The selection of a mode of transportation or a service offering that includes a mode of transportation depends on the different characteristics of the service.

Six key variables for choosing a transportation service:

1. Freight rates;
2. Safety or reliability;
3. Transit time;
4. Loss, damage, complaint and claim processing, and tracking;
5. Consignee market considerations;
6. Carrier considerations.

Selection of Transportation Services

Basic cost balance

When transportation services are not used to achieve a competitive advantage, the best service option is found by balancing the cost of using a particular transportation service with the indirect inventory costs associated with the performance of the selected mode.

Selection of Transportation Services

There are often other factors to consider, some of which are beyond the decision-maker's control:

1. Effective cooperation between the supplier and buyer is encouraged if there is reasonable knowledge of each party's costs. If the supplier and buyer are separate legal entities, it is doubtful that perfect cost information is possible unless some form of information exchange occurs. In any case, sensitivity to the other party's reactions to a transportation service option or degree of preference should guide the direction of cooperation.

Selection of Transportation Services

2. When there is a competing supplier in the distribution channel, the buyer and supplier should act judiciously to achieve an optimal transportation cost-service balance.
3. Price effects have not been considered. If a supplier were to provide a higher-quality transportation service than the competition, it could raise the product's price to offset, at least in part, the added cost. The buyer should therefore consider both price and transportation performance when determining its decision.

Selection of Transportation Services

4. Changes in the transportation rate, product mix, and inventory costs, as well as possible transportation service retaliation by a competing supplier, add a dynamic element to the problem that is not directly considered.
5. The indirect effects of transportation choice are not assessed on the supplier's inventories. Suppliers may experience increases or decreases in inventory levels as a result of the shipment size associated with the transportation option, just as the buyer does. Suppliers may adjust their prices to reflect this, which, in turn, will affect the transportation option.

Route design

Since transportation costs typically account for between one-third and two-thirds of total logistics costs, improving efficiency through maximum utilization of transportation equipment and personnel is a major concern.

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A common problem in decision-making is reducing transportation costs and improving customer service by finding the best routes for a vehicle to follow.