A framework fortransportation decisionmaking in an integratedsupply chain

Theodore P. Stank and

Thomas J. Goldsby

Introduction

Logistics and transportation managers face a

very different environment today than merely

a few years ago. Continued economic

deregulation, increased safety and social

regulation, escalating customer expectations,

increased globalization, improved

technologies, labor and equipment shortages,

and the continually changing face of the

transportation service industry present

today's managers with an array of challenges

and opportunities that contrast dramatically

with those of a decade ago. It is not

surprising, then, that many managers have

failed to fully adapt to the changing

environment, resulting in performance

shortcomings and lost opportunities.

Prominent among the list of lost opportunities

is the prospect of further leveraging the

transportation function as a critical strategic

element within the supply chain.

Despite requirements for strong cross-

functional knowledge, information system

expertise, and financial aptitude in the

modern era of logistics and supply chain

management, managers must still be

fundamentally grounded in traditional

logistical functions. Transportation

management is an area that remains critical to

overall logistics and supply chain success,

accounting for 57 percent of US firms'

logistics costs in 1997 (Berg, 1998). From a

macro-economic perspective, one in seven

jobs in the USA today is transportation

related (Bowersox and Closs, 1996). Yet

shippers often make transportation decisions

using logic devised prior to 1980. This

mentality promises increasingly poor

performance as business moves toward

integrated supply chain management

(Moultrie, 1998).

In order to meet ever-increasing

expectations, the basic work of transportation

has changed from operationally meeting low

cost or high service criteria to providing a

strategic edge by simultaneously meeting

elevated service requirements and

increasingly lower costs. Successful managers

today require a broad view of transportation

management's role and responsibilities in an

integrated supply chain. The purpose of this

paper is to clarify the major transportation

decision areas and position transportation

management within the overall integrated

supply chain environment.

The authors

Theodore P. Stank is Assistant Professor of Logistics and

Supply Chain Management, Michigan State University,

East Lansing, Michigan, USA.

Thomas J. Goldsby is Assistant Professor in the

Department of Logistics, Operations and Management

Information Systems, Iowa State University, Iowa, USA.

Keywords

Supply chain, Transport operations, Logistics

Abstract

There has been little conceptual work that

comprehensively examines the changing role of the

corporate transportation function in the modern business

environment. Successful managers today require a broad

view of transportation management's role and

responsibilities in an integrated supply chain. This paper

clarifies the major transportation decision areas and

introduces a framework that positions corporate

transportation management within the overall integrated

supply chain environment. The framework portrays initial

transportation decisions as strategic, long-term decisions

that focus on the overall supply chain transportation

system. Once decisions are understood at this level, the

decision-making scope becomes increasingly tactical in

nature, focusing on operations that implement the overall

system decisions.

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Research note

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Supply Chain Management: An International Journal

Volume 5 . Number 2 . 2000 . pp. 71±77

# MCB University Press . ISSN 1359-8546

The following section introduces a

framework that summarizes the primary

transportation decision areas relevant to an

integrated supply chain environment and

provides details regarding how each of the

decision areas may be assimilated into a

comprehensive transportation management

strategy.

Transportation decision-makingframework

Leading firms are making an effort to

coordinate purchasing, operations and

logistics to better manage the physical and

information flows within and outside the firm.

Firms that coordinate transportation and

logistics planning with purchasing and

production are less likely to be purely

reactionary and more likely to identify

consolidation opportunities. These firms are

also likely to seek similar efficiencies across

the supply chain. Bowersox et al. (1998)

found that 16 percent of North American

manufacturers utilized a supply chain strategy

in 1998. Close collaboration and extensive

information sharing with external material

and service providers creates flexible

operating systems characterized by

coordinated operations that can drastically

cut channel cycle times and inventory levels as

goods flow seamlessly from raw material

supplier to end consumer (Bowersox et al.,

1999).

Transportation services play a central role

in seamless supply chain operations, moving

inbound materials from supply sites to

manufacturing facilities, repositioning

inventory among different plants and

distribution centers, and delivering finished

products to customers. Benefits accruing

from world class operations at the points of

supply, production, and customer locations

are pointless without the accompaniment of

excellent transportation planning and

execution. Having inventory positioned and

available for delivery is not enough if it cannot

be delivered when and where needed in a

cost-efficient manner (Fox, 1992; 1993).

The critical role transportation plays in the

supply chain is more explicitly portrayed in

Figure 1. The gears represent the multiple

supply chain entities in a channel. Each gear

is dependent upon its predecessor to keep the

machine in operation. The supply chain is

only as strong as its weakest component.

Should any one gear fail, the entire machine

fails. Transportation managed independently

of other value-added supply chain operations

often represents one of the chain's weaker

elements. Transportation decisions made in

cooperation with related functions alleviate

this weakness.

When transportation managers are

provided supply chain planning information

that includes resource availability and delivery

requirements they can arrange shipments to

take advantage of load/carrier consolidations

or routing efficiencies. Purchasing,

operations, and customer service should

provide the transportation department with

information regarding when items are

available for shipment and when they are

needed at their destination. With this

information, transportation planners can

assess consolidation requirements and

arrange inbound, outbound, and interfacility

moves such that products flow seamlessly

through the supply chain while finding ways

to combine movements to lower costs

(Bowersox et al., 1999; Moultrie, 1998).

Conversely, the transportation department

should actively provide other functional areas

with information regarding transportation

capabilities and constraints, ensuring minimal

customer service failures and unnecessary

cost.

The emergence of new objectives for the

transportation function has created a need for

a framework that identifies and organizes

transportation decision making in an

integrated supply chain environment. Figure

2 portrays the major decision areas involved

in managing transportation as part of an

integrated supply chain. The framework

portrays initial transportation decisions as

strategic, long-term decisions that focus on

the overall supply chain transportation

Figure 1 Transportation value contribution

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Transportation decision making in an integrated supply chain

Theodore P.Stank and Thomas J. Goldsby

Supply Chain Management: An International Journal

Volume 5 . Number 2 . 2000 . 71±77

system. Once decisions are understood at this

level, the decision-making scope becomes

increasingly tactical in nature, focusing on

operations that implement the overall system

decisions. Details regarding each decision

area are provided below.

Total network and lane design decisions

At the highest strategic decision level,

transportation managers must understand

and be constantly appraised of total supply

chain freight flows and have input into

network design. This area involves

consideration of the network link/node

structure, i.e. supplier, plant, distribution

center, and customer locations as well as the

various physical movements among them. At

this level, long-term decisions related to the

appropriateness and availability of

transportation modes for freight movement

should be made. For example, managers

should decide which primary mode of

transportation is appropriate for each general

flow (i.e. inbound, interfacility, outbound) by

product and/or location, paying careful

attention to consolidation opportunities

where feasible. Plans should indicate the

general nature of product flows, including

volume, frequency, seasonality, physical

characteristics, and special handling

requirements. Strategic mode and carrier

sourcing decisions should be considered part

of a long-term network design, identifying

core carriers in each relevant mode to gain

enhanced service quality commitments and

increase bargaining power. Additionally,

managers should make decisions regarding

the level of outsourcing desired for each major

product flow, ranging from providing the

transportation using private assets to latch-

key turnover of transportation operations to

third-party providers.

Network and lane design decisions should

examine tradeoffs with other operational cost

areas, e.g. inventory and distribution center

costs. A primary factor to consider among

these decisions is that networks need not be

fixed or constant. Rather, substantial service

improvements and cost reductions can be

achieved by critically examining existing

networks and associated flows. For instance,

it may become apparent that stock locations

can be centralized by using contract

transportation providers to move volume

freight to regional cross-dock facilities for

sorting, packaging, and brokering small loads

to individual customers. For example, one

manufacturer reviewed the existing node/link

network and lane designs, with an eye toward

significant adaptations. The manufacturer,

with one plant in the Midwest and one in

Texas, combined the need for frequent

interfacility shipments with demands for low-

cost, high-service customer shipments by

contracting with a truckload motor carrier to

operate terminal facilities near each plant.

The carrier ran routine routes between the

facilities ± morning and afternoon

southbound from the Midwest location and

morning and afternoon northbound from

Texas. The freight included on these runs

consisted of work-in-process moving between

plants as well as finished goods bound for

customers. At the terminals, the carrier sorted

the finished goods bound for customers and

brokered it to a group of less-than-truckload

(LTL) core carriers for final delivery. The

costs incurred for handling freight at the

terminal was more than recovered by the

savings realized from the full truckload

movements between plants and the decreased

miles that freight moved by LTL. Ultimately,

the manufacturer reduced freight costs by

$1.3 million per year while decreasing average

transit times from seven to four days.

Lane operation decisions

The second level of decision making regards

lane operation decisions. Where network and

lane design decisions focus on long-term

planning, these decisions focus on daily

Figure 2 Transportation decision making in an

integrated supply chain

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Transportation decision making in an integrated supply chain

Theodore P.Stank and Thomas J. Goldsby

Supply Chain Management: An International Journal

Volume 5 . Number 2 . 2000 . 71±77

operational freight transactions. At this level,

transportation managers armed with real-time

information on product needs at the various

system nodes must coordinate product

movements along inbound, interfacility, and

outbound shipping lanes to meet service

requirements at lowest total costs. Decision

makers adept at managing information realize

consolidation opportunities such that

products arrive where they are needed in the

quantities they are needed just in time to

facilitate other value-added activities, while

realizing transportation cost savings.

The primary opportunities associated with

lane operation decisions include inbound/

outbound consolidation, temporal

consolidation, vehicle consolidation, and

carrier consolidation. If managers have access

to inbound and outbound freight movement

plans, opportunities to combine freight to

build volume shipments become apparent. An

inbound shipment may arrive from a supplier

located in Philadelphia, for example, on the

same day that a production order destined for

a customer in Wilmington, Delaware

becomes available for movement. If this

information is known to transportation

planners far enough in advance, arrangements

could be made for the inbound carrier to haul

the outbound load back to Wilmington. In

many cases the inbound carrier would be

willing to negotiate lower roundtrip rates to

avoid deadhead miles on the backhaul. This is

particularly true if the carrier and/or driver are

headquartered in the Philadelphia area. If this

happens to be a heavy traffic lane, the firm

may consider strategically sourcing a core

carrier in this geographic region to capitalize

on this opportunity.

Similarly, less-than-volume-load (LVL)

shipments moving to the same geographic

region on consecutive days may be detained

until sufficient volumes exist to justify a full

load on one carrier with multiple stops

(temporal consolidation). By avoiding the

LVL terminal system, the detained freight

often arrives at the same time or earlier than

the original LVL shipment, and at a lower

cost. Multiple, small shipments inbound from

suppliers or outbound to customers in the

same geographic region scheduled for delivery

on the same day may also be combined on

one vehicle at full-volume rates, paying stop-

off charges but saving on multiple LVL rates

(vehicle consolidation). One multi-divisional

electronics manufacturer with five plants in

the same Southwestern city, for example,

discovered that each facility was receiving

LTL shipments of electrical fasteners from

the same supplier in Chicago nearly every

week. The annual savings generated by

consolidating the multiple LTL shipments

into one TL move with multiple deliveries

were substantial ± easily exceeding the

subsequent inventory carrying costs.

Another opportunity for consolidation

springs from the core carrier concept.

Assigning greater shipping volumes to fewer

carriers should result in lower per-unit

transportation costs and higher priority

assigned to the shipper's increased freight. In

addition to consolidating the carrier base, the

shipper can identify reliable carriers in need of

backhaul miles. For instance, a plastics

distributor identifies carriers that operate a

high percentage of deadhead miles in lanes

over which the firm regularly moves freight

(Macht, 1996). The firm negotiates

advantageous rates with these carriers in

exchange for guaranteed backhaul revenue

miles. If the plastics firm plans to move

significant amounts of product from Texas to

Florida, the transportation manager will find

a Florida carrier that moves a large volume of

product from Florida to Texas. Given

sufficient planning information, the

transportation manager can use guaranteed

volumes on the backhaul to negotiate

attractive rates.

Unfortunately, transportation planners are

sometimes aware of opportunities to

consolidate replenishment shipments,

customer deliveries, and inbound materials,

but they are hindered by a lack of information

and the fact that these supply chain

movements are handled by different

functional groups. Specific information

regarding inbound freight movements, for

example, is frequently unknown to firms since

suppliers often control these movements. As

noted earlier, transportation cost information

is rolled into the total purchase price of the

supplied products in these instances. If firms

do have specific inbound freight data, they are

usually managed by a different information

system than that used to manage outbound

movements. It may be difficult or impossible

to exchange information between the two

systems. The transition of planning systems

from functionally focused applications such as

materials requirements planning (MRP) and

distribution requirements planning (DRP) to

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Transportation decision making in an integrated supply chain

Theodore P.Stank and Thomas J. Goldsby

Supply Chain Management: An International Journal

Volume 5 . Number 2 . 2000 . 71±77

integrated systems such as enterprise resource

planning (ERP) may help to provide the

transportation manager with the needed

information to make these decisions.

Mode/carrier assignment decisions

Just as information enables the deployment of

different techniques in network and lane

operations decisions, the capability to store

and access large amounts of data facilitates a

new approach to transportation mode/carrier

assignment decisions. Traditional methods of

selection, portrayed in Figure 3, suggest

sequential decision making based upon a set

of product, market, service, and cost criteria

for a given freight movement. First the

appropriate mode is chosen, followed by the

specific type of carrier, and, ultimately, the

individual carrier (Coyle et al., 1996). The

pool of potential carriers becomes smaller

with each sequential decision until, finally, a

set of carriers that meets the criteria is

identified. This set can then be contacted to

determine resource availability and rates. For

example, if a shipper requires 24-hour

delivery the traditional modal choice is air,

with the type of air carrier chosen based upon

the type and size of load and origin/

destination. Of the carriers that fit these

criteria, the one that has satisfactory financial

and operational track records, available

assets, and the lowest rate is typically chosen.

Traditional mode/carrier assignment

decisions, however, prevent consideration of

other options that may meet these criteria at a

lower total cost. Due to the blurring of service

capabilities among traditional transportation

modes, options that in the past would not be

considered feasible may now emerge as the

preferred choice. For example, rail container

service may offer a cost-effective alternative to

long-haul motor transport while yielding

equivalent service. Similarly, package delivery

carriers are competing with traditional LTL

business. Truckload carriers, on the other

hand, are increasingly bidding for low-volume

shipments as well as for overnight freight

movements. For the shipper seeking 24-hour

delivery, truckload carriers may offer an

alternative to air carriers at significantly lower

rates ± and, quite possibly, higher reliability.

In an integrated decision-making scenario,

depicted in Figure 4, each shipment would be

evaluated based upon the service criteria that

must be met, (e.g. delivery date/time or

special handling requirements) as well as the

cost constraints of the movement. All core

carriers ± regardless of mode ± that could

possibly meet the service and cost criteria

would be pulled from the database. Managers

would then choose the carrier from this multi-

modal set based on availability and existing

rates (Lillibridge, 1996).

Service negotiations

Transportation managers are increasingly

managing relationships with transportation

service providers rather than managing

private fleets. The wide array of cost and

service options available today requires

managers to possess a broad knowledge of

strategic and tactical business issues. While

price remains a central concern among

transportation managers, a thorough

understanding of service expectations and

customer- and product-specific costs must be

included in contract negotiations. Cross-

functional tradeoffs and inter-firm

relationships present themselves for

consideration as well. For example, a

manager may decide to incur increased

transportation costs if the subsequent

transportation service results in substantially

lower inventory levels. Similarly,

Figure 4 Integrated mode/class/carrier selectionFigure 3 Traditional mode/class/carrier selection

75

transportation carriers may be able to provide

sorting and packaging services in transit more

efficiently and effectively than moving

product to regional distribution centers for

the same services.

In addition to the operational decisions that

must be made with regard to transportation

service choices, managers must also become

more knowledgeable about the legal

implications of contracts. While shippers

would agree that deregulation has vastly

improved transportation operations, it has

also opened the door to a number of difficult

issues related to the nature of contracts and

legal arrangements between shippers and

their transportation providers. In today's

deregulated environment, virtually every facet

of a relationship between a shipper and carrier

must be negotiated and stated in a contract.

Otherwise, the carrier is free to make

assumptions that may not be beneficial to the

shipper. The old warning of `̀ let the buyer

beware'' appropriately describes the shipper's

environment where legal resolutions are now

based upon what is written in the contract ±

not necessarily by traditional precedents

established under rule of the Interstate

Commerce Commission. Many

transportation managers, comfortable with

their knowledge of business under the old

precedents, find out the hard way that these

precedents are no longer binding (Barrett,

1998).

Dock level decisions

The final set of transportation decisions

involves dock level operations, such as load

planning, routing and scheduling. These

activities encompass the operational

execution of the higher level planning

decisions. While the fundamental purpose of

shipping docks may not have changed much

over the years, the manner in which work is

done certainly has. One obvious change is the

common usage of advanced information

technology and decision support systems.

These tools help the dock personnel to make

better use of the transportation vehicle space,

to identify the most efficient routes, and to

better schedule equipment, facilities and

drivers on a given day. As with other decision

areas, transportation departments that avail

themselves of better and more timely

information can derive significant benefits

from more efficient and effective load

planning, routing and scheduling. For

example, if a vehicle is being loaded with

multiple customer orders, dock level

managers must ensure that the driver is

informed of the most efficient route and that

loads are placed in the order of the planned

stops. Modern transportation managers, even

at the dock level, must develop expertise in

using the information tools available to aid in

these decisions.

In addition, most would agree that poor

blocking and bracing of a load can result in

damaged products. The implications of

damaged product in the modern environment

are far greater than that of the past. When

many retailers today operate on a continuous

replenishment basis, without an abundance of

safety stock, a short order often leads to

stockouts and backorders ± instances that can

send today's demanding, sophisticated

consumer to rival retailers in future

transactions. The retailer subsequently

penalizes the manufacturer when it must send

customers away unhappy as a result of

damage occurred in transit. Therefore, while

strategic decisions tend to gain the attention

of top executives in the firm, one must

appreciate the execution of the strategy that

takes place at the operational level. Poor

decisions at the dock or over the road can

prove extremely costly.

The need for sound dock level decisions

and execution stems from the recognition that

the work taking place here serves as the `̀ face''

presented to customers. Distribution center

personnel and delivery drivers represent the

firm with each and every transaction. Poor

decisions and mistakes at this stage of the

process ruin the efforts and value added over

preceding stages. In an age of customer

success, management must emphasize to

dock workers and drivers that errors made in

the closing stages of order fulfillment can

devastate a critical supply chain relationship.

Conclusions

The supply chain processes emerging from

transportation deregulation, advances in

information technology, time-based

competition, and globalization will continue

to evolve in the early part of the twenty-first

century. The basic concepts of supply chain

management will evolve as firms and

76

Transportation decision making in an integrated supply chain

Theodore P.Stank and Thomas J. Goldsby

Supply Chain Management: An International Journal

Volume 5 . Number 2 . 2000 . 71±77

industries struggle with implementation. This

evolution represents a continuous

improvement process as firms and managers

learn to overcome their fear of change. The

framework presented in this paper is intended

to provide a road map for synthesizing

transportation decisions with an integrated

supply chain approach.

Transportation managers will continue to

encounter significant challenges as their firms

proceed down the road toward supply chain

integration. Managers must encourage their

firms to view the total cost and total value

provided by carriers, and refrain from buying

transportation solely based upon lowest

transactional cost. While this reflects thinking

in line with strategic materials procurement,

many firms that consider goods suppliers to

be strategic partners view transportation

providers as commodities and treat them as

such. Carriers, on their part, must stop selling

price and emphasize the value added by their

services. Additionally, the role of outsourcing

must be addressed. Managers must ensure

that shipper goals are aligned with those of the

transportation provider and that rewards ±

and risks ± are shared. Transportation service

providers should be provided with incentives

to seek the shipper's best interest, not its own.

This philosophy suggests that if a

transportation provider is able to reduce a

shipper's overall freight bill, the provider

should receive a share of the savings.

Another intention of the framework is to

suggest areas for further research. Some of

those areas include negotiating and writing

contracts including legal implications and

liabilities, what information to exchange and

how often, what performance measures to

monitor, how to collect them and how often.

Another area of interest lies in the area of

information technology development for

decision making in network planning, tactical

planning, communications, transactions and

the effects of Internet/intranet for electronic

commerce. In sum, this framework serves as a

point of reference for managers, educators

and researchers to reconceptualize the role of

transportation in a changing environment.

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77

Transportation decision making in an integrated supply chain

Theodore P.Stank and Thomas J. Goldsby

Supply Chain Management: An International Journal

Volume 5 . Number 2 . 2000 . 71±77