The Role of Transportation in Supply Chains and Business

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greater than or equal to a target and I get got to get there within a certain period of time. But if I only have one of those and not the other, there's going to be some problems. People instinctively know through common sense that some of the decisions that are being made are not right. They may not be able to say it in those words or put numbers to it, but they realize this is in place and what we find is that when we can get the customer service policy written and then identify what those costs are and get both of those out in front of people making these decisions, things get a lot easier. If you take those equations in words and put them in pictures, you get something that looks like this. If this is our total logistics cost and we're considering different fill rates, the fill rate is the portion of the customer's demand I have inventory on hand to satisfy. If I take my fill rate from 90% to 95% to 99% to 99.5, what just happened to the inventory carrying cost? It goes up. However, what happened to the lost sales cost? It went down. In response time, if I get to the customer instead of in four days, I get there in three or two, what happened to the response time cost? It goes up. Why? Why does it cost more to get there faster? It's one of two phenomena. It's one of two. Why does it cost me more to get there faster? More DCs. Very good. You may have to have more facilities. We have a decline. They have to be to the customer within two hours all over the world. Tel Aviv, Tokyo, Thailand, Tennessee. They don't just work in T-related places. Okay, you think you get the idea. They have to have physical facilities. The other could be the transportation mode. You have to be on the next flight out instead of on a truck, instead of on the rail, instead of on the ocean, etc. However, if I get there faster, what happens to lost sales? They go down. So you got all those factors working and you kind of get this graph, but in this case that was the optimal solution. It was 95% fill rate and three-day response time. I'm not saying that's the optimal in every situation. I just want you to get the concept right now. That's how you start to take the customer service policy and put it with these costs and start making some good decisions. Second is inventory. In inventory the game is I want to maximize the financial performance of the inventory. Let me say that again. There's a different way of thinking about inventory. I want to maximize the financial performance of the inventory through metrics called things like gross margin return on inventory value added and I want to meet all the requirements of the customer service policy. Three is supply. In supply what I want to do is minimize the total acquisition cost of the product which would include things like the unit price, all the landing cost, and all the inventory related costs of the purchase while I meet the requirements of the customer service policy.

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