Transportation Strategy - Essay Sample

2021-07-28 05:31:04
7 pages
1704 words
University of California, Santa Barbara
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Transportation is a vital economic activity for both businesses and the economy. It contributes to economic growth, as well as a source of competitive force for companies. Essentially, it is the activity that physically connects various businesses to their supply chain partners including the clients and the suppliers, and thus, it is a significant influence on the satisfaction of the clients with the firm. In essence, by moving goods from the location they are sourced to where they are demanded, transportation provides the critical service to businesses and the clients, which supports economic utilities of time and place, as well as the logistics function. Place utility infers that clients have the products they need where they demand it while time utility suggests that customers should have access to the product when they demand it.

Transportation management is therefore imperative for organizations as it leads to the accessibility of markets (locally, regionally, nationally, and globally). It also improves the businesss competitiveness as a good strategy allows the organization to serve distant markets. This demands the formulation of a working transportation strategy that allows the business to enjoy economies of scale and access to wider markets, which means that the production points need not be close to markets. An excellent transportation strategy allows the corporation to lower prices, which is attributed to increased competition among the suppliers. Besides, a transportation strategy needs to facilitate time-saving, for example, in e-commerce where managing transportation costs are crucial.

Parties and Factors Involved in Formulating a Transportation Strategy

In formulating a transportation strategy, an organization should consider parties that affect the transportation strategy. There are various parties involved, including carriers and shippers. The carrier is considered as the party that performs the movement of goods and services- The organization can choose to transport its goods. The organization can also outsource third part logistics (fourth party logistics (4PLs) is a more modern concept). 4PL accumulates an amalgamation of resources, technologies, and capabilities that can effectively and efficiently run a complete supply chain system. 4PLs enables companies to implement and undertake associations between them and the 3PLs. In consequence, this will promote the building of closer relationships among the supply chain stakeholders, which will support cost-cutting, and thereby, facilitate flexibility in the way demand and supply chain fluctuations are dealt with (Win, 2008). Furthermore, 4PLs outsource warehouse facilities and fleet as well as the physical movement of products, and therefore, they do not have to incur extra costs. The carrier must also consider the capacity utilization- the rate (Mohammaditabar & Teimoury, 2008).

Also, the responsiveness/service level offered must be put into consideration. The organization has to make investment decisions based on various factors, such as the availability of funds and operating policies. The costs considerations include: (1) type and number of vehicles to be used; (2) the need for fixed operations, such as terminal facilities; (3), the number of trips to be conducted, say on a daily basis, which directly correlates to labor and fuel; (4) the quantity of goods or services that need to be loaded or unloaded; (5) overheads from planning and scheduling, as well as the inclusion of information technologies (Mohammaditabar & Teimoury, 2008).

On the other hand, the shipper is the party requiring the movement of goods, and thus, organizations can be shippers. Transportation strategy decisions are based on the supply chain design, transportation mode choice, and assignment of shipment to the preferred transportation mode (Fugate, Davis-Sramek, & Goldsby, 2009). The cost considerations factors for shippers include: (1) transportation costs paid to the carriers; (2) inventory at the intermediate retailers, and warehouses among other storage places; (3) the costs with facility management, for example, the warehouse operating costs; (4) the labor to process loading and unloading processes, as well as invoicing, etc.; (5) the service level needed to conduct the transportation, including expediting, inventory management, safety stock, etc. (Fugate, Davis-Sramek, & Goldsby, 2009). Other factors that affect shippers include the responsiveness of the transportation strategy regarding time needed to complete the transportation of goods (Fugate, Davis-Sramek, & Goldsby, 2009). In essence, the shipper must also put into consideration the delivery guarantees primarily because organizations must always put into consideration the safety of the goods.

Other players that an organization should consider when formulating the transportation strategy include freight forwarders, shippers agents, freight brokers, as well as shipper associations. Freight forwarders are important as they provide service to small shippers by consolidating various shipments to lower rates; they purchase transportation service from the carriers (Frankel, 1993; Yang, Marlow, & Lu, 2009). The shippers agents consolidate organizational shipments for piggyback transport and purchase services in bulk and subsequently re-sell to other individual shippers (Frankel, 1993; Yang, Marlow, & Lu, 2009). Freight brokers arrange for door-to-door service and deal with all modes of transport. (Frankel, 1993; Yang, Marlow, & Lu, 2009). Lastly, the shippers associations are common in industry or geographical area and are important in negotiating to get better transport rates. (Frankel, 1993; Yang, Marlow, & Lu, 2009).

Tradeoffs of the transportation modes.

Organizations, in their transport strategy, must make a decision on the mode of transport that can be applied. They can choose rail, truck, air, pipeline, or water modes depending on the cost, market location, type of goods, and time needed to transport the goods to the client (Strogen, Bell, Breunig, & Zilberman, 2016). The transportation strategy must put into consideration of the transportation mode, as this directly is affected by cost, service, and desired a position in the marketplace. For instance, for global markets, the organization should consider how fast or soon the client wants the goods. If it is fast, then air travel is the desired mode of transportation. Perishability of the goods is vital for consideration. For instance, if they are easily perishable, air transport is viable as it is fast. Also, the bulkiness of the goods is important consideration aspect. More bulk goods mean use of water transport if the target market is global. Trucks can be used to transport goods within a country, city, or region depending on the infrastructure.

In selecting the desired mode of transportation, it is important to consider various aspects., including the price the transport mode (for instance, air expensive), the delivery method (e.g., door-to-door, trucks, ships, and pipeline), the average transit time. It should be noted that the transit time variability increases for multi-modal or consolidated shipments. An organization should also consider the loss and damage implications. Choosing the safest transport service is most effective as it will save cost in the long term. Further, the organization should keep in mind that cost, speed, and dependability considered most important aspects to consider in coming up with the most appropriate strategy (Dullaert & Zamparini, 2013).

There are five modes that organizations can choose from in formulating an effective transportation strategy. These include rail, air, pipeline, water, as well as trucks. Air transport is expensive and requires high security, the size of shipment (goods) is constrained. Trucks have an average capacity is 42,000 - 50,000 lb and will always dispatch in small lots in comparison to rail, but has low fixed cost. The advantage of using trucks is that the carriers do not own or maintain roads. Rail, on the other hand, is characterized by long-haul transportation (with avg. of 720 miles) but it is slow mover (22 mph, 64 miles daily). The advantage is that it can be used by organizations with large load shipments where the average load is 80 tons, where there is a high fixed cost and low variable costs. Pipeline mode of transport has limited capabilities regarding shipment goods type and can only transport crude oil and water. It is also slow (3-4 mph for low capacity and high capacity shipment three mph, 12-in pipe = 90,000 gals/hr). The merit is that it is highly reliable as there is a low risk of disruption and damage and it is a continuous 24-hour service, the only downside is that it is characterized by high fixed costs. Lastly, water is both inland and coastal and is used in transporting heavy and bulky commodities. However, it is slow (5 mph) and is affected by weather (freezing, floods) and has low variable costs (Strogen, Bell, Breunig, & Zilberman, 2016).

Transportation Costs and Rates Associated with Developing a Transportation Strategy

To come up with an appropriate transport strategy, it is imperative to consider the various costs. The fixed costs associated with the various transportation modes include costs associated with road/railway acquisition and maintenance, the organizational terminal facilities, the transport equipment used, e.g. trucks, as well as carrier administration. Variable costs are the costs that vary, including fuel, equipment, labor, maintenance, pickup, handling, and delivery. From a management point of view, cost allocation is difficult and is dependent on the type of shipment, its weight, and its volume. Also, organizations must put into consideration of the insurance and delivery guarantees as shipments can undergo unforeseen adverse effects, such as destruction. Additionally, when strategizing on the transportation of goods, firms should also consider backhaul cost.

Besides, the organizational transport strategy is dependent on shipment volume, and the rates involved include the minimum charge (AQ) rate, vehicle load rate, the less-than-vehicle-load rate, special rates for high volume shipments. Distance-related rates include uniform, proportional, tapering, blanket (simplicity, competition), and demand- related rates.

The rates are important in determining the costing of the transportation strategy. Besides, while coming up with the transport strategy, the organization should consider these rates: freight classification, class, contract, freight-all-kinds (offered by freight forwarders), incentive, cube, import/export, deferred, release value, and ocean freights.

Importance of Transportation Strategy in Supply Chain Management

Transportation is a key aspect of maintaining effective and efficient business logistics. In fact, transportation acts as the physical supply between the sources of supply and plant/operations, as well as the physical distribution between plant/operations and the clients. As such, coming up with an effective transportation strategy streamlines a companys business logistics by allowing for effective physical supply and physical distribution of information and inventory maintenance, materials handling, warehousing, order processing, protective packaging, as well as the acquisition of raw materials between the supply source and the plant or operations. Based on the supply chain, shipment, and warehousing, the transportation strategy is dependent on strategic, tactical, and operational standpoints as shown in the figure below.

Supply Chain Transportation Shipment Warehousing

Strategic Site/

location ,

Capacity sizing,




marketing coordination. Warehouse location,

Fleet composition,...

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