Does transportation add “cost” or “value” in the supply chain? I always find it interesting how the perception of transportation’s role differs between organizations. There are a number of reasons for this of course, ranging from the obvious one of increased costs when companies engage in outsourcing, to the more subtle, related to the role of transportation in the organization.
Remember when companies manufactured products in Canada? In those days, at least in my career experience, purchasing bought raw materials, or supplies, and focused on negotiating the actual unit cost of the item. And it was very common for buyers to negotiate the cost of materials on a “delivered” basis, in other words, “freight in”, so purchasing could more easily calculate the net cost of materials. The transportation department in this example typically focused on the cost and service requirement of outbound delivery of finished goods to customers.
Not a bad system in its time, although we would now refer to this scenario as a classic example of “silo management”. Purchasing focused on the cost of inbound materials (leaving transportation to the discretion of the supplier) in support of production forecasts, while the transportation department focused on outbound costs and service to the customer. And neither group looked at potential savings and service improvements by combining, and leveraging, common transportation suppliers.
Modern philosophy indicates there are significant advantages to combining departments like purchasing and transportation under the heading of supply chain management, or logistics, where increased communication can lead to those improvements. Makes a lot of sense when you think about it – both groups continue to do what they do best, but by working together they can identify areas of common ground related to inbound/outbound transportation for cost and service negotiations with suppliers. At the risk of sounding too one-sided, let’s not forget this can often work to the supplier’s advantage as well. Oftentimes a trucking company delivering inbound raw materials is capable of delivering outbound finished goods, and might appreciate an opportunity to negotiate for the combined volumes.
The focus of this example however is “process”, rearranging employee reporting lines to develop mutual advantage with suppliers. Transportation was often overshadowed at the earlier stage of organizational development as a sub-set of the overriding challenge of deciding who should be responsible for the function, where the budget responsibility lay, and to whom those employees should report.
Combining departments into an “integrated” operation solves that problem, or does it? In a recent conversation with the transportation manager of a large multinational company, he mentioned how he was under increasing pressure to reduce transportation costs, even though the company was extending its supply chain. Not an uncommon problem for transportation managers unfortunately. In his case, the company’s purchasing department had switched the source of supply for important materials from the U.S. to Asia, based on double-digit savings. But since it happened in the first quarter of the year, he didn’t have an opportunity to revise his inbound freight budget accordingly and, while the decision made sense for purchasing, it had a negative impact on his transportation budget.
He understood why purchasing changed their source of supply, but couldn’t understand why the CEO kept complaining he was over budget. He thought he was doing a good job, providing a service that enabled purchasing to source materials from low-cost labor countries. Senior management, on the hand, felt transportation was simply adding cost, offsetting the forecasted savings in the cost of materials by shifting supply to Asia.
While I sympathized with the transportation manager, this scenario sets up an entry-level discussion on the topic of whether or not transportation adds value, or cost. It does both of course, but the point is that, if transportation is managed effectively, value will outweigh the (extra) cost. The first problem in this example is that the transportation manager was not included in discussions with purchasing early on about the potential impact of changing the source of supply for an important raw material. Had that happened he could have provided an estimate for additional transportation costs, so the potential savings envisioned by purchasing could be put in their proper perspective.
Another problem contributing to this scenario was that purchasing in this organization reported to the plant manager, while transportation reported to the finance department. The focus of both departments was to reduce costs, leaving the transportation manager caught in the middle, having to provide an enhanced level of service over longer distances. By establishing a supply chain management department with senior management representation, the profile of the transportation function could have been raised to the point where it had a voice at the table, able to contribute to those discussions early on, working with purchasing instead of against it.
The point here is that transportation does add value. It provides flexibility, enabling organizations to change sources of supply quickly. Yes, it comes with a cost but, managed effectively, those costs can be rationalized into the overall product-package offered to the customer.
Laurie Turnbull is a supply chain consultant with Cole International Inc., a leading international logistics company providing customs brokerage, warehousing and global freight forwarding services. All posts by Laurie Turnbull