Unit-4

Role of transportation in a supply chain

Transportation refers to the movement of product from one location to another as it makes its way from
the beginning of a supply chain to the customer. Transportation is an important supply chain driver
because products are rarely produced and consumed in the same location. The role of transportation is
even more significant in global supply chains. Dell currently has suppliers worldwide and sells to
customers all over the world from just a few plants. Transportation allows products to move across Dell's
global network.

Supply chains also use responsive transportation to centralize inventories and operate with fewer
facilities. For responsive transportation one required the responsible person or group for that we define
two most common terms used for persons or group of persons.

The shipper is the party that requires the movement of the product between two points in the supply
chain. A shipper, in contrast, uses transportation to minimize the total cost (transportation, inventory,
information, sourcing, and facility) while providing an appropriate level of responsiveness to the
customer.

The carrier is the party that moves or transports the product. A carrier makes investment decisions
regarding the transportation equipment (locomotives, trucks, airplanes, etc.) and in some cases
infrastructure (rail), and then makes operating decisions to try to maximize the return from these assets.

Two other parties have a significant impact on transportation: the owners and operators of transportation
infrastructure such as roads, ports, canals, and airports; and the bodies that set transportation policy
worldwide. Actions by all four parties influence the effectiveness of transportation.

Transportation originates and ends at nodes and travels on links. For most modes of transportation,
infrastructure such as ports, roads, waterways, and airports is required both at the nodes and links.

Most transportation infrastructure is owned and managed as a public good throughout the world. It is very
important that infrastructure be managed in such a way that monies are available for maintenance and
investment in further capacity as needed.

Transportation policy sets direction for the amount of national resources that go into improving
transportation infrastructure.

Transportation policy also aims to prevent abuse of monopoly power, promote fair competition, and
balance environmental, energy, and social concerns in transportation.

DESIGN OPTIONS FOR A TRANSPORTATION NETWORK

The design of a transportation network affects the performance of a supply chain by establishing the
infrastructure within which operational transportation decisions regarding scheduling and routing are
made. A well-designed transportation network allows a supply chain to achieve the desired degree of
responsiveness at a low cost. These design options may be implemented between any two stages of a
supply chain.
DIRECT SHIPMENT NETWORK
The buyer structures his transportation network so that all shipments come directly from each supplier to
each buyer location, as shown below

With a direct shipment network, the routing of each shipment is specified and the supply chain manager
only needs to decide on the quantity to ship and the mode of transportation to use. This decision involves
a trade-off between transportation and inventory costs

The major advantage of a direct shipment transportation network is:

1. Eliminations of intermediate warehouse.

2. Its simplicity of operation and coordination.
3. The shipment decision is completely local, and the decision made for one shipment does not
influence others.
4. The transportation time from supplier to buyer location is short because each shipment goes
direct.
5. A direct shipment network is justified if demand at buyer locations is large enough that optimal
replenishment lot sizes are close to a TL from each supplier to each location.

If a TL carrier is used for transportation, the high fixed cost of each truck results in large lots moving
from suppliers to each buyer location, resulting in high supply chain inventories. If a LTL carrier is used,
the transportation cost and the delivery time increase, though inventories are lower. If package carriers are
used, transportation costs are very high. With direct deliveries from each supplier, receiving costs are high
because each supplier must make a separate delivery.

Direct shipping provides the benefit of eliminating intermediate warehouses, whereas milk runs lower
transportation cost by consolidating shipments to multiple locations on a single truck.

DIRECT SHIPPING WITH MILK RUNS

In direct shipping with milk runs, a supplier delivers directly to multiple buyer locations on a truck or a
truck picks up deliveries destined for the same buyer location from many suppliers. When using this
option, a supply chain manager has to decide on the routing of each milk run. Direct shipping provides
the benefit of eliminating intermediate warehouses, whereas milk runs lower transportation cost by
consolidating shipments to multiple locations on a single truck.
CROSS DOCKING

Under this option, suppliers do not send shipments directly to buyer locations. The buyer divides
locations by geographic region and a DC is built for each region. Suppliers send their shipments to the
DC and the DC then forwards appropriate shipments to each buyer location The DC is an extra layer
between suppliers and buyer locations and can play two different roles. One is to store inventory and the
other is to serve as a transfer location. In either case, the presence of DCs can help reduce supply chain
costs when suppliers If transportation economies require very large shipments on the inbound side, DCs
hold inventory and send product to buyer locations in smaller replenishment lots. If replenishment lots for
the buyer locations served by a DC are large enough to achieve economies of scale on inbound
transportation, the DC does not need to hold inventory. In this case the DC can cross dock product
arriving from many suppliers on inbound trucks by breaking each inbound shipment into smaller
shipments that are then loaded onto trucks going to each buyer location.

.Cros
s-docking also saves on handling cost because product does not have to be moved into and out of storage.
Successful cross-docking, however, does require a significant degree of coordination and synchronization
between the incoming and outgoing shipments. Cross-docking is appropriate for products with large,
predictable demands and requires that DCs be set up such that economies of scale in transportation are
achieved on both the inbound and outbound sides. Wal-Mart has used cross-docking successfully to
decrease inventories in the supply chain without incurring excessive transportation costs.

As a result, the total lot size to all stores from each supplier fills trucks on the inbound side to achieve
economies of scale. On the outbound side, the sum of the lot sizes from all suppliers to each retail store
fills up the truck to achieve economies of scale. As a result, the total lot size to all stores from each
supplier fills trucks on the inbound side to achieve economies of scale. On the outbound side, the sum of
the lot sizes from all suppliers to each retail store fills up the truck to achieve economies of scale.
Wal-Mart has used cross-docking successfully to decrease inventories in the supply chain without
incurring excessive transportation costs. Wal-Mart builds many large stores in a geographic area
supported by a DC. As a result, the total lot size to all stores from each supplier fills trucks on the inbound
side to achieve economies of scale. On the outbound side, the sum of the lot sizes from all suppliers to
each retail store fills up the truck to achieve economies of scale.

TAILORED NETWORK

The tailored network option is a suitable combination of previous options that reduces the cost and
improves responsiveness of the supply chain. The goal is to use the appropriate option in each situation.
High demand products to high-demand retail outlets may be shipped directly, whereas low demand
products or shipments to low-demand retail outlets are consolidated to and from the DC. The complexity
of managing this transportation network is high because different shipping procedures are used for each
product and retail outlet. Operating a tailored network requires significant investment in information
infrastructure to facilitate the coordination.
Network Structure Pros Cons

push vs. pull systems;

Transportation decisions (mode selection, fleet size)

Supply chains use a combination of the following modes of transportation:

Air
Package carriers
Truck
Rail
Water
Pipeline
Intermodal

The effectiveness of any mode of transport is affected by equipment investments and operating decisions
by the carrier as well as the available infrastructure and transportation policies. The carrier's primary
objective is to ensure good utilization of its assets while providing customers with an acceptable level of
service.

Air
Airlines have a high fixed cost in infrastructure and equipment. Labor and fuel costs are largely trip
related and independent of the number of passengers or amount of cargo carried on a flight. An airline's
goal is to maximize the daily flying time of a plane and the revenue generated per trip. Given the large
fixed costs and relatively low variable costs, revenue management in which airlines vary seat prices and
allocate seats to different price classes, is a significant factor in the success of passenger airlines.

Package carriers

Package carriers are transportation companies such as FedEx, UPS, and the U.S. Postal. Service, which
carry small packages ranging from letters to shipments weighing about150 pounds. Package carriers use
air, truck, and rail to transport time-critical smaller shippers use package carriers for small and time-
sensitive shipments. Package carriers also provide other value-added services that allow shippers to speed
inventory flow and track order status. By tracking order status, shippers can proactively inform customers
about their packages. Package carriers also pick up the package from the source and deliver it to the
destination site. With an increase in just-in-time (JIT) deliveries and focus on inventory reduction,
demand for package carriers has grown. Package carriers are the preferred mode of transport for e-
businesses. Package carriers seek out smaller and more time-sensitive shipments than air cargo, especially
where tracking and other value-added services are important to the shipper.

TRUCK

The trucking industry consists of two major segments- TL or LTL. Trucking is more expensive than rail
but offers the advantage of door-to-door shipment and a shorter delivery time. It also has the advantage of
requiring no transfer between pickup and-delivery. Major TL carriers include Schneider National, JB
Hunt, Ryder Integrated, Werner, and Swift Transportation. A key to reducing LTL costs is the degree of
consolidation that carriers can achieve for the loads carried. LTL carriers use consolidation centers to
which trucks bring in many small loads originating from a geographic area and leave with many small
loads destined for the same geographic area. This allows LTL carriers to improve their truck use, although
it increases delivery time somewhat. Larger firms enjoy an advantage in the LTL industry given the
importance of consolidation and the fixed cost of setting up consolidation centers. Strong regional players
have developed in the LTL industry because of the advantage offered by a high density of pickup and
delivery points in a geographic area.

RAIL

Rail carriers incur a high fixed cost in terms of rails, locomotives, cars, and yards. There is also a
significant trip-related labor and fuel cost that is independent of the number of cars but does vary with the
distance traveled and the time taken. Any idle time, once a train is powered, is very expensive because
labor and fuel costs are incurred even though trains are not moving. Idle time occurs when trains
exchange cars for different destinations. It also occurs because of track congestion. Labor and fuel
together account for over 60 percent of railroad expense. From an operational perspective, it is thus
important for railroads to keep locomotives and crew well utilized. Transportation time by rail, however,
can be long. Rail is thus ideal for very heavy, low-value shipments that are not very time sensitive.

WATER

Water transport is ideally suited for carrying very large loads at low cost. Water transport is used primarily
for the movement of large bulk commodity shipments and is the cheapest mode for carrying such loads. It
is, however, the slowest of all the modes, and significant delays occur at ports and terminals. For the
quantities shipped and the distances involved in international trade, water transport is by far the cheapest
mode of transport. A significant trend in maritime trade worldwide has been the growth in
containerization. This has led to a demand for larger, faster, and more specialized vessels to improve the
economics of container transport. Delays at ports, customs, security, and the management of containers
used are major issues in global shipping.

PIPELINE

Pipeline is used primarily for the transport of crude petroleum, refined petroleum products, and natural
gas. A significant initial fixed cost is incurred in setting up the pipeline and related infrastructure that does
not vary significantly with the diameter of the pipeline. Pipeline operations are typically optimized at
about 80 to 90 percent of pipeline capacity. Pipeline may be an effective way of getting crude oil to a port
or a refinery. Sending gasoline to a gas station does not justify investment in a pipeline and is done better
with a truck. Pipeline pricing usually consists of two components fixed component related to the shipper's
peak usage and a second charge relating to the actual quantity transported.
INTERMODAL

Intermodal transportation is the use of more than one mode of transport to move a shipment to its
destination. A variety of intermodal combinations are possible, with the most common being truck/rail.
Major intermodal providers with rail include CSX Intermodal, Pacer Stacktrain, and Triple Crown.
Intermodal traffic has grown considerably with the increased use of containers for shipping and the rise of
global trade.

Market channel structure

1. Roads, seaports, airports, rail, and canals are some of the major infrastructural elements that exist
along nodes and links of a transportation network.

2. In almost all countries, the government has either taken full responsibility or played a significant
role in building and managing these infrastructure elements. The role of the railroads and canals
in the economic development of the United States is well documented.

3. More recently, the impact of improved road, air, and port infrastructure on the development of
China is very visible. An excellent discussion of the history of road construction and pricing is
given by Levinson (1998). In the late 1700s, turnpikes were built using public funds in Virginia,
Maryland, and Pennsylvania but were then turned over to private companies that collected tolls.

4. Over time, other turnpikes were built as a result of competition between towns to gain trade.
Other than federal land grants, these roads were typically built with local effort and money. The
tolls on these turnpikes were generally structured to keep local travel free and make people
traveling across an area pay for this right.

5. With the growth in railroads and canals, turnpikes suffered financially in the mid-1800s and were
eventually converted into public roads. In the twentieth century, as the modes of transport
changed, there was a need for higher-quality roads.

6. A network of national toll-free highways was built, largely using gasoline taxes as the source of
funding. At the same time, other facilities such as tunnels and bridges were often constructed as
toll facilities. In many other countries, such as France and Spain, concessions were granted to
private companies that received toll revenue. More recently, private toll roads have also been built
in Malaysia, Indonesia, and Thailand.

7. From the above examples it seems reasonable that the government has to either own or regulate a
monopolistic transportation infrastructure asset. When the transportation infrastructure asset has
competition either within a mode or across modes, private ownership, deregulation, and
competition seem to work well.

8. The deregulation of the transportation industry within the United States is a case in point. Keep in
mind, however, that roads, ports, and airports are largely public and not private. This is because
of the inherently monopolistic nature of these transportation infrastructure assets. In such a
setting the public ownership of these assets is justified.

9. This raises the policy question of financing the construction and maintenance of these publicly
owned transportation assets. Should roads be financed through a gasoline tax, or is some other
form of financing such as tolls more appropriate? Economists such as Vickrey have argued for
 public ownership of these assets but the setting of quasi-market prices to improve overall
efficiency. Quasi-market prices need to take into account the discrepancy between the incentives
of an individual using the transportation infrastructure and the public as a whole that owns the
infrastructure.

IT also comes into play in the use of Global Positioning Systems (GPS) and electronic notification of
impending arrivals. GPS systems monitor the real-time location of vehicles. This real-time information
improves a firm's response to customer questions.

RISK MANAGEMENT IN TRANSPORTATION

There are three main types of risk to consider when transporting a shipment between two nodes on the
network:
1. The risk that the shipment is delayed
2. The risk that the shipment does not reach its destination because intermediate nodes or links are disrupted by
external forces
3. The risk of hazardous material

Vehicle routing problem:

Tailored transportation is the use of different transportation networks and modes based on customer and
product characteristics. Most firms sell a variety of products and serve many different customer segments.
A firm can meet customer needs at a lower cost by using tailored transportation to provide the appropriate
transportation choice based on customer and product characteristics.

TAILORED TRANSPORTATION BY CUSTOMER DENSITY AND DISTANCE

Firms must consider customer density and distance from warehouse when designing transportation
networks. The ideal transportation options based on density and distance

When a firm serves a very high density of customers close to the DC, it is often best for the firm to own a
fleet of trucks that are used with milk runs originating at the DC to supply customers, because this
scenario makes very good use of the vehicles. If customer density is high but distance from the warehouse
is large, it does not pay to send milk runs from the warehouse because trucks will travel a long distance
empty on the return trip.

In such a situation it is better to use a public carrier with large trucks to haul the shipments to a cross-dock
center close to the customer area, where the shipments are loaded onto smaller trucks that deliver product
to customers using milk runs.

In this situation, it may not be ideal for a firm to own its own fleet. As customer density decreases, use of
an LTL carrier or a third party doing milk runs is more economical because the third-party carrier can
aggregate shipments across many firms. If a firm wants to serve an area with a very low density of
customers far from the warehouse, even LTL carriers may not be feasible and the use of package carriers
may be the best option. Boise Cascade Office Products, an industrial distributor of office supplies, has
designed a transportation network consistent with the suggestion.
Customer density and distance should also be considered when firms decide on the degree of temporal
aggregation to use when supplying customers. Firms should serve areas with high customer density more
frequently because these areas are likely to provide sufficient economies of scale in transportation,
making temporal aggregation less valuable. To lower transportation costs, firms should use a higher
degree of temporal aggregation when serving areas with a low customer density.

TAILORED TRANSPORTATION BY SIZE OF CUSTOMER

Very large customers can be supplied using a TL carrier, whereas smaller customers will require an LTL
carrier or milk runs. When using milk runs, a shipper incurs two types of costs:
Transportation cost based on total route distance
Delivery cost based on number of deliveries

Transportation cost based on total route distance

The transportation cost is the same whether going to a large or small customer. If a delivery is to be made
to a large customer, including other small customers on the same truck can save on transportation cost.
For each small customer, however, the delivery cost per unit is higher than for large customers. Thus, it is
not optimal to deliver to small and large customers with the same frequency at the same price. One option
firms have is to charge a higher delivery cost for smaller customers. Another option is to tailor milk runs
so that they visit larger customers with a higher frequency than smaller customers.

Firms can partition customers into large (L), medium (M), and small (S) based on the demand at each.
The optimal frequency of visits can be evaluated based on the transportation and delivery costs If large
customers are to be visited every milk run, medium customers every other milk run, and low-demand
customers every three milk runs, suitable milk runs can be designed by combining large, medium, and
small customers on each run. Medium customers would be partitioned into two subsets (M 1, M 2) and
small customers would be partitioned into three subsets (S1, S2, S3).

Delivery cost based on number of deliveries

The degree of inventory aggregation and the modes of transportation used in a supply chain network
should vary with the demand and value of a product The cycle inventory for high-value products with
high demand is disaggregated to save on transportation costs because this allows replenishment orders to
be transported less expensively. Safety inventory for such products can be aggregated to reduce
inventories and a fast mode of transportation can be used if the safety inventory is required to meet
customer demand. For high-demand products with low value, all inventories should be disaggregated and
held close to the customer to reduce transportation costs. For low-demand, high-value products, all
inventories should be aggregated to save on inventory costs. For low-demand, low-value products, cycle
inventories can be held close to the customer and safety inventories aggregated to reduce transportation
costs while taking some advantage of aggregation. Cycle inventories are replenished using an inexpensive
mode of transportation to save costs.

MAKING TRANSPORTATION DECISIONS

1. Align transportation strategy with competitive strategy. Managers should ensure that a firm's
transportation strategy supports its competitive strategy. They should design functional incentives that
help achieve this goal. Historically, the transportation function within firms has been evaluated based on
the extent to which it can lower transportation costs. Such a focus leads to decisions that lower
transportation costs but hurt the level of responsiveness provided to customers and may raise the firm's
total cost.
2. Consider both in-house and outsourced transportation. Managers should consider an appropriate
combination of company-owned and outsourced transportation to meet their needs. This decision should
be based on a firm's ability to handle transportation profitably as well as the strategic importance of
transportation to the success of the firm. In general, outsourcing is a better option when shipment sizes are
small, whereas owning the transportation fleet is better when shipment sizes are large and responsiveness
is important. For example, Wal-Mart uses responsive transportation to reduce inventories in its supply
chain. Given the importance of transportation to the success of its strategy, it owns its transportation fleet
and manages it itself. This is made easier by the fact that it achieves good utilization from its
transportation assets because most of its shipments are large.

3. Use technology to improve transportation performance. Managers must use information technology to
decrease costs and improve responsiveness in their transportation networks. Software helps managers do
transportation planning, modal selection, and build delivery routes and schedules. Available technology
allows carriers to identify the precise location of each vehicle as well as the shipments the vehicle carries.

4. Design flexibility into the transportation network. When designing transportation networks, managers
should take into account uncertainty in demand as well as availability of transportation. Ignoring
uncertainty encourages a greater use of inexpensive and inflexible transportation modes that perform well
when everything goes as planned. Such networks, however, perform very poorly when plans change.
When managers account for uncertainty, they are more likely to include flexible, though more expensive,
modes of transportation within their network.

THE ROLE OF IT IN TRANSPORTATION

1. The complexity and scale of transportation makes it an excellent area within the supply chain for
the use of IT systems. The use of software to determine transportation routes has been the most
common IT application in transportation. This software takes the location of customers, shipment
size, desired delivery times, information on the transportation infrastructure (such as distances
between points), and vehicle capacity as inputs. These inputs are formulated into an optimization
problem whose solution is a set of routings and a packing list for each vehicle that minimize costs
while meeting delivery constraints

2. By accounting for the size of the container and the size and sequence of each delivery

3. This IT also comes into play in the use of Global Positioning Systems (GPS) and electronic
notification of impending arrivals. GPS systems monitor the real-time location of vehicles. This
real-time information improves a firm's response to customer questions regarding deliveries
corresponding administrative work in a more efficient manner.

4. The most common problems in the use of IT in transportation relate to cross enterprise
collaboration and the narrow view taken by some transportation software. Collaboration across
enterprises is crucial in transportation because this is a function that is often outsourced and does
not directly involve either the shipper or the customer.

5. The players in this space include virtually all the major supply chain vendors, including the ERP
firms and the supply chain-focused best-of-breed firms. There has also been a large amount of in-
house development that has focused on the transportation management process.
Mathematical foundations of distribution management

THE ROLE OF DISTRIBUTION IN THE SUPPLY CHAIN

A variety of distribution network models are presented, along with an analysis of the pros and cons of each
model. Distribution refers to the steps taken to move and store a product from the supplier stage to a
customer stage in the supply chain. Distribution occurs between every pair of stages in the supply chain.
Raw materials and components are moved from suppliers to manufacturers, whereas finished products are
moved from the manufacturer to the end consumer. Distribution is a key driver of the overall profitability
of a firm because it affects both the supply chain cost and the customer experience directly. Distribution
related costs make up about 10.5 %of the U.S. economy and abo~ut20 % of the cost of manufacturing.

FACTORS INFLUENCING DISTRIBUTION NETWORK DESIGN

At the highest level, performance of a distribution network should be evaluated along two dimensions:
1. Customer needs that are met
2. Cost of meeting customer needs firm must evaluate the impact on customer service and cost as it
compares different distribution network options. The customer needs that are met influence the company's
revenues, which along with cost decide the profitability of the delivery network.

Although customer service consists of many components, we focus on those measures that are influenced
by the structure of the distribution network. These include:
Response time
Product variety
Product availability
Customer experience
Time to market
Order visibility
Return ability

1. Response time- is the amount of time it takes for a customer to receive an order.

2. Product variety- is the number of different products/configurations that are offered by the
distribution network.

3. Product availability- is the probability of having a product in stock when a customer order
arrives.

4. Customer experience- includes the ease with which customers can place and receive orders as
well as the extent to which this experience is customized.

5. Time to market -is the time it takes to bring a new product to the market.

6. Order visibility- is the ability of customers to track their orders from placement to delivery.

7. Return ability - is the ease with which a customer can return unsatisfactory merchandise and the
ability of the network to handle such returns.
Changing the distribution network design affects the following supply chain costs
Inventories
Transportation
Facilities and handling
Information
DESIGN OPTIONS FOR A DISTRIBUTION NETWORK

In this section, we discuss distribution network choices from the manufacturer to the end consumer. When
considering distribution between any other pair of stages, such as supplier to manufacturer or even a
service company serving its customers through a distribution network, many of the same options still
apply. Managers must make two key decisions when designing a distribution network:

1. Will product be delivered to the customer location or picked up from a preordained site?
2. Will product flow through an intermediary (or intermediate location)?

Based on the firm's industry and the answers to these two questions, one of six distinct distribution
network designs may be used to move products from factory to customer, which are classified as follows:
1. Manufacturer storage with direct shipping
2. Manufacturer storage with direct shipping and in-transit merge
3. Distributor storage with package carrier delivery
------~

4. Distributor storage with last-mile delivery

5. Manufacturer/distributor storage with costumer pickup
6. Retail storage with customer pickup
Next we describe each distribution option and discuss its strengths and weaknesses.
MANUFACTURER STORAGE WITH DIRECT SHIPPING

In this option, product is shipped directly from the manufacturer to the end customer, bypassing the
retailer (who takes the order and initiates the delivery request). This option is also referred to as drop-
shipping, with product delivered directly from the manufacturer to the customer. The retailer, if
independent of the manufacturer, carries no inventories. Information flows from the customer, via the
retailer, to the manufacturer, and product is shipped directly from the manufacturer to customers as shown
in Figure.

Online retailers such as e-Bags and Nordstrom.com use drop-shipping to deliver goods to the end
consumer. E-Bags hold few bags in inventory. Nordstrom carries some products in inventory and uses the
drop-ship model for slow-moving footwear.

W.W. Grainger also uses drop-shipping to deliver slow-moving items to customers. The biggest advantage
of drop-shipping is the ability to centralize inventories at the manufacturer. A manufacturer can aggregate
demand across all retailers that it supplies. As a result, the supply chain is able to provide a high level of
product availability with lower levels of inventory. A key issue with regard to drop-shipping is the
ownership structure of the inventory at the manufacturer. If specified portions of inventory at the
manufacturer are allocated to individual retailers, there is little benefit of aggregation even though the
inventory is physically aggregated. Benefit of aggregation is achieved only if the manufacturer can
allocate at least a portion of the available inventory across retailers on an as-needed basis. The benefits
from centralization are highest for high value, low-demand items with unpredictable demand. The
decision of Nordstrom to drop-ship low-demand shoes satisfies these criteria. Similarly, bags sold by
eBags tend to have high value and relatively low demand per SKU. The inventory benefits of aggregation
are small for items with predictable demand and low value. Thus, drop-shipping does not offer a
significant inventory advantage to an online grocer selling a staple item such as detergent. For slow-
moving items, inventory turns can increase by a factor of 6 or higher if drop-shipping is used instead of
storage at retail stores. Drop-shipping also offers the manufacturer the opportunity to postpone
customization until after a customer has placed an order.
Supply chain facility layout and capacity planning
The other two drivers, sourcing and pricing, also affect the choice of the distribution system; the link will
be discussed when relevant. As the number of facilities in a supply chain increases, the inventory and
resulting inventory costs also increase.

The other two drivers, sourcing and pricing, also affect the choice of the distribution system; the link will
be discussed when relevant. As the number of facilities in a supply chain increases, the inventory and
resulting inventory costs also increase

Inbound transportation costs are the costs incurred in bringing material into a facility.

Outbound transportation costs are the costs of sending material out of a facility. Outbound transportation
costs per unit tend to be higher than inbound costs because inbound lot sizes are typically larger.

Facility costs decrease as the number of facilities is reduced, as shown because a consolidation of
facilities allows a firm to exploit economies of scale. Total logistics costs are the sum of
inventory, transportation, and facility costs for a supply chain network. As the number of facilities
increases, total logistics costs first decrease and then increase as shown in Figure 4-5. Each firm
should have at least the number of facilities that minimize total logistics costs. For example,
Amazon has more than one warehouse primarily to reduce its logistics costs (and improve
response time).
As a firm wants to reduce the response time to its customers further, it may have to increase the number
of facilities beyond the point that minimizes logistics costs. A firm should add facilities beyond the cost-
minimizing point only if managers are confident that the increase in revenues because of better
responsiveness is greater than the increase in costs because of the additional facilities.

The customer service and cost components listed earlier are the primary measures used to evaluate
different delivery network designs. In general, no distribution network will outperform others along all
dimensions. Thus, it is important to ensure that the strengths of the distribution network fit with the
strategic position of the firm.

Supply chains save on the fixed cost of facilities when using drop-shipping because all inventories are
centralized at the manufacturer. This eliminates the need for other warehousing space in the supply chain.
There can be some savings of handling costs as well, because the transfer from manufacturer to retailer no
longer occurs. Handling cost savings must be evaluated carefully, however, because the manufacturer is
now required to transfer items to the factory warehouse in full cases and then ship out from the warehouse
in single units. The inability of a manufacturer to develop single-unit delivery capabilities can have a
significant negative effect on handling cost and response time. Handling costs can be reduced
significantly if the manufacturer has the capability to ship orders directly from the production line.

A good information infrastructure is needed between the retailers and the manufacturer so that the retailer
can provide product availability information to the customer, even though the inventory is located at the
manufacturer. The customer should also have visibility into order processing at the manufacturer, even
with the order being placed with the retailer.