What trade-offs do managers need to consider when making transportation decisions?

What will be an ideal response?

Answer: The cost of coordinating operations is generally hard to quantify. Companies should evaluate different transportation options in terms of various costs as well as revenues and then rank them according to coordination complexity. A manager can then make the appropriate transportation decision. Managers must consider the following trade-offs when making transportation decisions:
• Transportation and inventory cost trade-off
• Transportation cost and customer responsiveness trade-off

The trade-off between transportation and inventory costs is significant when designing a supply chain network. Two fundamental supply chain decisions involving this trade-off are:
• Choice of transportation mode
• Inventory aggregation

When selecting a mode of transportation, managers must account for inventory costs. Modes with high transportation costs can be justified if they result in significantly lower inventories. Firms can significantly reduce the safety inventory they require by physically aggregating inventories in one location. Transportation cost, however, increases when inventory is aggregated.

The transportation cost a supply chain incurs is closely linked to the degree of responsiveness the supply chain aims to provide. If a firm has high responsiveness and ships all orders within a day of their receipt from the customer, it will have small outbound shipments resulting in a high transportation cost. If it decreases its responsiveness and aggregates orders over a longer time horizon before shipping them out, it will be able to exploit economies of scale and incur a lower transportation cost because of larger shipments.