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| RightModes™ Mode Optimization (click image to enlarge) |
There is more to mode optimization than meets the eye. At first thought, how hard can it be to decide whether or not to put something on a truck, train, plane, or ship? What difference does it make anyway? It turns out, quite a bit. Since trucks, trains, planes, and ships move at different speeds, run on different schedules, hold varying degrees and types of cargo, offer different levels and types of security, show up with different frequencies, and have widely varying price points; the choice of transportation mode has a significant impact on the total transportation cost, inventory carrying cost, warehousing cost, lost sales cost, total logistics cost, and customer service policy. As a result, the choice of transportation mode also has a major impact on some of the all encompassing financial metrics such as gross margin return on inventory (GMROI) and inventory value added.
An example mode optimization analysis comparing two air options with five ocean options is provided in the figure. Note that the two air options offer significantly lower inventory policy costs (the sum of inventory carrying and lost sales cost), but significantly higher total transportation cost (the sum of total freight cost and transportation setup cost). The sum of all those costs is lowest for Ocean Carrier No. 4, but Air Carrier No. 2 is very close in cost. Air Carrier No. 2 wins the GMROI, LGMROI, and Inventory Value Added (Gross Margin less Inventory Carrying Cost) battles. So, what’s the answer. That’s where finance and transportation meet! The answer depends on the financial objective of the company. If it’s strictly cost, then Ocean Carrier No. 4. If it’s a value-based metric, then Air Carrier No. 2. Like so many answers in supply chain logistics, it depends!
