Another reason why transport costs are increasing is the increasing focus of companies to give total satisfaction to the customers who want to enjoy the good here and now, or at least, as soon as possible. Included among these customers are those who buy on impulse after seeing an ad on the television and who expect the product to be available at the nearest corner store. This is a perennial supply chain challenge to transportation services.
Well, perhaps this is an exaggeration, but it brings home the point that the desire of consumers for instant gratification is one of the factors that drive up the share of transportation costs in the price of the final product. This also why companies are getting obsessed with transport speed, efficiency, and costs.
It is therefore easy to understand why the excellence of the overall supply chain is linked to the excellence of the transportation system. Any breakdowns or snags in the latter (transport) would greatly affect the performance of the former (SCM). Transportation systems are but one component of SCM, but it is a major one that accounts for a big chunk of the total cost of implementing SCM. As the case material indicates, transportation costs can range between 3 and 7 percent of total sales, and this amounts to millions of dollars of expenses each year even for small- and mid-sized companies. This is why SCM practitioners call this the low-hanging fruit where improvements can raise profits considerably: every percentage point in transport cost savings go directly to the bottom line.
Take as an example the simple solution of improving transport efficiency by doubling the capacity of a delivery van. For almost the same cost, you automatically halve the transport cost of the goods delivered because one trip allows you to deliver twice as much. Of course, improving transportation efficiency is not as simple as that, because most SCM solutions require goods to be delivered at the right amount, at the right time, and to the right place. This means that dumping twice the inventory to a buyer would not always be welcome. It may even lead to losses if the goods are not sold and returned.
There are four ways for companies to take control of transportation processes and bring down transportation related costs: process improvement, shipment optimization (which is the example we cited above), continuous moves, and carrier management. Of these four, we will focus on the first: process improvement.
Process improvement involves changing (for the better, hence, an improvement) the way that key transportation and logistics processes are carried out. There are several ways of doing this. The first is by automating key processes using advanced transportation management systems (TMS). Automation applied to manual tasks like shipment planning, carrier selection, tendering and acceptance can cut down errors and inefficiencies by