Balancing the Logistics Cost-of-Service Equation in an Increasingly Uncertain Business Environment

By Dobie, Kay; Wilson, Jerry | Journal of Transportation Management, Fall 2003 | Go to article overview

Balancing the Logistics Cost-of-Service Equation in an Increasingly Uncertain Business Environment


Dobie, Kay, Wilson, Jerry, Journal of Transportation Management


INTRODUCTION

Companies today are operating in an environment of increasing complexity on many fronts. Prices are soft owing to a mix of over-capacity, heightened competition, and a sluggish economy. Customers are demanding higher quality, more technologically advanced products, value-added services, and dependable, on-time transportation in an effort to achieve their own organizational goals. Companies are responding to the increasing pressure on the bottom line by keeping inventory carrying costs to the minimum and reducing their exposure to potentially shorter product life cycles. To further complicate matters, these and other activities are being carried out in a global arena where the emphasis is on total supply chain coordination, cost reduction, and high levels of customer service.

Since September 11, 2001, another element has been introduced into the mix--the effects of supply chain failures resulting from specific targeted activities with the potential to cause wide-spread disruption of transportation and, subsequently, manufacturing. Many companies have already factored into their strategic planning process a "Plan B." Such contingency plans are common in the event of unexpected incidents, or acts of nature, such as earthquakes or hurricanes and floods which might lead to service disruptions. While events such as these can be damaging, they tend to be localized and the return to normalcy is swift. Even in the case of an extended shut-down of an individual port, such as that experienced recently in California, other port facilities were available for firms with the ability, and time, to re-route cargo. However, the events of September 11, 2001, demonstrated to many firms that the typical contingency plan was extremely deficient under such globally shocking circumstances.

In an effort to improve domestic security and prevent the occurrence of further incidents such as those experienced on September 11, 2001, Congress created the Department of Homeland Security. Increased emphasis has also been placed on transportation safety and security through the activities of the Transportation Safety Administration, the Department of Transportation and other government agencies. The proposal and implementation of new laws and policies, such as C-TPAT, the 24-Hour Rule, and the Known Shipper Rule, are designed to reduce the exposure of transportation infrastructure, equipment, personnel, and cargo to incidents of targeted terrorism ("Adjusting to New Cargo Rule Takes Time," 2003). Concurrently, strategic planners have been forced to review and restructure to avoid exposure to such events in the future. Many are taking a closer look at the vulnerabilities in their individual operations, supply chain and supply chain operations. An increased emphasis on risk management has resulted in the need to reevaluate the adequacy of the original "Plan B."

As part of the reevaluation effort, strategic planners must take a new look at inventory flow to/from their individual company as well as throughout the supply chain. Cost constraints imposed by a mixture of customer expectations and global competition demand that the delicate balance between inventory holding costs and transportation costs be maintained. The location of current supply chain members must be assessed relative to the costs of security, maintaining inventory levels, and managing transportation costs. The result of these efforts will undoubtedly lead to the alteration of previously established inventory level policies, and to reconsideration of transportation modes, carriers and routes for normal as well as abnormal operations.

INVENTORY, TRANSPORTATION, AND THE COST OF SERVICE I + T = [C.sub.s]

Even as corporate-level strategic plans for supply chain design and operations are being reviewed, the basic procedures for providing an unbroken stream of product into, within, and out of the organization should be under review. …

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