A common supply chain model with North American-based brands will include the outsourced manufacturing of components or even finished goods to Asia. This outsourcing to Asia can obviously result in significantly reduced costs of manufacturing, but also presents some significant challenges with shipping or transportation – both in cost and also the transit time.
The trade off is cost versus speed as to how to get the goods from Asia to North America: via air or sea. In an ideal world, and especially for bulky items, freight by sea is the most cost effective option and is used as the default shipment option. Shipments by sea can take around a month or even longer to reach the destination. Therefore, there are times when shipments need to be expedited to meet demand and air freight must be used. This is a classic supply chain problem: how to balance transportation costs against demand and supply.
Once the decision to put the materials on a boat is committed to, these materials are basically unavailable for a month or more. This can be a real problem to have this in-transit inventory tied up when these materials are needed to fulfill shortages or customer demand.
Many ERP systems have modules available to help manage transportation, and there are also third party logistics applications or Transportation Management Systems (TMS) on the market that can be “bolted on” as well to assist with transportation management.
However, some companies struggle with the issue of transportation, primarily because there are multiple considerations:
- Which orders should be expedited to use air shipment?
- Is the cost of the expedited shipment worth it?
- How do you effectively communicate to suppliers which orders to expedite?
Related to item 1, we need access to planning information to determine orders that potentially are late to demand. Adding in item 2, we need to be able to evaluate the cost of expediting against the additional revenue that can be realized in the current period with the expedited order. This implies that some sort of simulation capability needs to be present to model the change in the supply plan and how that will impact the fulfillment of demand. Item 3 has to do with the actual execution, purchase orders may need to be updated or at a minimum the change in shipping method needs to be clearly communicated to the supplier. The considerations or dimensions of the problem can be summarized as
- calculate cost, and
Many of the third party or extended modules available on the market today can only handle one or two of the three considerations. Therefore, the above considerations require a “one to many” solution. The ideal solution is to have an application that enables all three of the dimensions: determining what needs to be expedited and the resulting impact on revenue and customer service; calculating the cost and benefit; and effective communication to suppliers and execution.
I am curious if you have any insights as to how you have (or suggested approaches) solved this multi-dimensional problem of transportation management?