How To Plan The Modern Supply Chain

In the early days of factory production, plants were located close to vital resources and/or markets. Transportation was, and continues to be, a major factor in manufacturing. Early factories (many of them mills for making cloth) were located near rivers where water power could drive the machinery but, as soon as steam power became available, mills moved closer to the cotton fields and farms because bolts of finished cloth were easier and cheaper to transport than bales of raw cotton or wool.

Availability of critical resources and transportation logistics explains the location of manufacturing facilities and the movement of same from place to place over the decades. Although today the location of plants might be more driven by the availability of human resources rather than materials or markets, transportation of materials and finished goods is still an important factor in the success and profitability of a manufacturing facility.

The nature and economics of global transportation have certainly changed a lot since the age of sailing ships and horse-drawn carriages. Reasonably priced transportation alternatives are readily available to-and-from virtually anywhere on the planet and transportation lead times can be as short as hours, if you are willing to pay the price.

The major transportation “modes” available today range from rail, ship and pipeline to long-haul and local trucking, package delivery services, and air transportation. Many shipments are inter-modal, moving goods via truck to the port, airfield or railhead, over long distances via inexpensive rail or ship or fast air transport, then on trucks again for the so-called last mile to the ultimate destination (factory, retailer or consumer).

The point of all this is that transportation is a critical factor in the supply chain and there are choices to be made because each mode of transportation has its own capabilities and limitations. The primary trade-off that planners deal with are time and cost. Generally speaking, faster transportation is more expensive per pound, cubic foot, and mile. Slower modes of transport tend to be less expensive per pound/cube/mile.

Low value-density items, ore or grain for example, have to go by the slowest modes because faster modes are too expensive and may not have the capability to handle large, heavy shipments. Procurement and inventory decisions for large commodities or products, including quantity and timing of shipments, are driven by that fact of supply chain life.

Very high value density items can and generally should travel by air because the transportation cost is a small fraction of the value of the items being shipped and faster shipment supports great benefits in customer service and inventory reductions. There may be strategic decisions or priorities that favor larger shipments via less expensive modes, however.

For the majority of items in between these two extremes, there are a number of factors to trade-off to determine the best mode of transportation, which may in fact be different for specific shipments. A larger, slower shipment will likely cost less for transportation but will be slower and will almost certainly result in higher inventory with all its associated costs including storage costs, use of capital, risk of damage or obsolescence, and more. Lot size may also have an effect on production or supplier schedules and inventory and may affect the unit cost for the goods (either positive or negative). Lot size may also be a sourcing factor if the supplier or supplying plant has limited capacity or full schedules that would make it hard for them to accommodate the order.

These are just a few of the factors to be considered in developing the logistics plan. While experienced supply chain planners have done an admirable job of planning complex supply chains using rules-of-thumb, reason, experience and “that’s the way we’ve always done it”, a modern supply chain planning system uses simulation and advanced logic to consider all of the identified factors and develop a truly optimized plan that delivers the desired level of customer service (and risk) at the lowest overall cost. Such a system will also monitor activities and provide early warning – and can recommend remedial actions – when things don’t happen as planned.