The Role of Transportation in Supply Chains and Business

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(57:32 - 58:34) You're at the hub of logistics optimization in the whole world right here. Georgia Tech, we have the largest logistics faculty of any university in the whole world. The research, the teaching, all of it. So this concept, if you can get hold of it, is very helpful for solving logistics problems and it goes like this. The basic idea is that there's an objective function that you're trying to minimize or maximize and there's some constraints that make that difficult to do. The optimal solution satisfies all the requirements of the constraints and minimizes or maximizes that objective function. So in logistics, what does that look like? Typically the objective function would say let's minimize the total logistics cost. This is where you got to be careful because you got to include the right stuff in the logistics cost. We usually include four things. (58:35 - 1:05:21) Warehousing, transportation, inventory carrying, and lost sales. And when we say cost, we have the expenses and the capital charges included in there. If you add transportation and warehousing costs together, those are called distribution. Total distribution cost. If you add inventory carrying and lost sales costs, we call that the inventory policy cost. Why do I need those four? Why those four? Here's the reason. They're interrelated. They're interdependent. Remember the example I shared with you with a retailer where they had this really low distribution cost per unit and they thought they were doing a great job? They were saving let's say eight million dollars a year in transportation and warehousing and they were costing the company 250 million dollars a year in lost sales. That's why you have all four because they're interrelated. Now suppose I only have the objective function and that's the whole game. We're looking at it right there. You see I think I can win that game. I win that by taking the cost to zero. Can I have zero cost? You say look transportation, I'm not going to move anything anywhere. That goes to zero. You want your stuff, you come pick it up. Warehousing, I read warehousing is a really bad idea. That just costs money. We're going to shut down our warehouses too. Inventory, you got to be joking. Lean, we're all over lean. We're into that man. Inventory, that's bad for business. We're not going to carry inventory. Take that to zero. Now since we have no inventory, there's no customers, so lost sales cost, it goes to zero too. Whole thing just zeros right out. I win the game. We're not in business anymore. Right. What should stop me from going down that path? Constraints, which in our world have a name and they're called the customer service policy, which says I got to have fill rate

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