Supply Chain Management (SCM) 101: Transportation Management - Carrier Selection, Rate, Transit Time, Reliability, Capacity, Sustainability

What This Is

Carrier selection is the process of choosing the most suitable transportation provider to move goods from one location to another. This decision is critical in supply chain management as it directly affects the cost, reliability, and speed of delivery. For instance, Amazon relies on a network of carriers, including its own logistics arm, to ensure timely delivery of packages to its customers. By selecting the right carrier, Amazon can maintain its high service level and competitive pricing.

Key Frameworks & Formulas

• Carrier Selection Matrix: A decision-making tool that evaluates carriers based on factors such as rate, transit time, reliability, capacity, and sustainability.
• Total Cost of Ownership (TCO): The sum of all costs associated with a carrier, including transportation costs, fuel surcharges, and insurance premiums.
• Service Level (SL): The percentage of orders fulfilled within a specified time frame, calculated as (Number of on-time deliveries / Total number of deliveries) x 100.
• Lead Time: The time it takes for a carrier to transport goods from origin to destination, typically measured in days.
• Capacity Utilization: The percentage of a carrier's available capacity used to transport goods, calculated as (Actual volume / Available capacity) x 100.
• Carrier Risk Assessment: A framework that evaluates a carrier's reliability, financial stability, and operational capabilities.
• Fisher's Model: A framework that categorizes carriers into four types based on their reliability and speed: (1) on-time, fast; (2) on-time, slow; (3) late, fast; and (4) late, slow.
• SCOR (Supply Chain Operations Reference) Model: A framework that evaluates a carrier's performance based on five key processes: plan, source, make, deliver, and return.
• EOQ (Economic Order Quantity): The optimal order quantity that minimizes inventory costs, calculated as ?(2DS/H), where D = demand, S = ordering cost, and H = holding cost.
• Safety Stock: The additional inventory held to mitigate stockouts and meet demand variability, calculated as Z ×-× ?L, where Z = service level,-= demand standard deviation, and L = lead time.

Step-by-Step Application

1. Identify the key requirements of the shipment, including rate, transit time, reliability, capacity, and sustainability.
2. Evaluate potential carriers using a carrier selection matrix or a risk assessment framework.
3. Calculate the total cost of ownership (TCO) for each carrier to determine the most cost-effective option.
4. Assess the carrier's capacity utilization and lead time to ensure they can meet the shipment's requirements.
5. Consider the carrier's service level and reliability to ensure on-time delivery.
6. Select the carrier that best meets the shipment's requirements and budget.

Common Mistakes

• Mistake: Focusing solely on rate when selecting a carrier.
• Correction: Consider all factors, including transit time, reliability, capacity, and sustainability, to ensure the best overall value.
• Mistake: Not evaluating a carrier's capacity utilization and lead time.
• Correction: Assess the carrier's ability to meet the shipment's requirements to avoid delays and stockouts.
• Mistake: Not considering the total cost of ownership (TCO).
• Correction: Calculate the TCO for each carrier to determine the most cost-effective option.

Exam / Certification Tips

• Be prepared to apply the carrier selection matrix or risk assessment framework to a case study.
• Understand the differences between push and pull strategies in carrier selection.
• Recognize the importance of capacity utilization and lead time in carrier selection.
• Be able to calculate the total cost of ownership (TCO) and safety stock.

Quick Practice Problem

A retailer needs to transport 1,000 units of inventory from a warehouse to a distribution center, with a lead time of 5 days and a service level of 95%. What is the reorder point?

Answer: Reorder point = Lead time x Demand / Service level = 5 x 1,000 / 0.95 = 5,263 units.

Last-Minute Cram Sheet

• Carrier selection is not just about rate; consider all factors.
• Total cost of ownership (TCO) = transportation costs + fuel surcharges + insurance premiums.
• Service level (SL) = (Number of on-time deliveries / Total number of deliveries) x 100.
• Lead time = time it takes for a carrier to transport goods from origin to destination.
• Capacity utilization = (Actual volume / Available capacity) x 100.
• Fisher's Model categorizes carriers into four types: (1) on-time, fast; (2) on-time, slow; (3) late, fast; and (4) late, slow.
• SCOR Model evaluates a carrier's performance based on five key processes: plan, source, make, deliver, and return.
• EOQ = ?(2DS/H), where D = demand, S = ordering cost, and H = holding cost.
• Safety stock = Z ×-× ?L, where Z = service level,-= demand standard deviation, and L = lead time.