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Supply Chain Management:
Insourcing and Outsourcing
Transportation,
presented by Dr. Darren Prokop,
Professor of Logistics
University of Alaska Anchorage.
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What is supply chain management?
It is the linkage
of organizations in
order to meet some
strategic goal.
Linkages could be
achieved through
contractual relationships
or through mergers
and acquisitions.
Linkages could be more
informal and involve
a joint venture
or a strategic alliance
covering a more limited
business activity.
In any case, the intent of
supply chain management
is to foster
trusting relationships
whereby the partners
are more valuable
together than apart.
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In this talk, I'm
going to outline
the cost structure of
the five basic modes
of transportation.
Note why transportation of
tangible items is mainly
an outsourced activity,
but in contrast, outline
the case for private fleets
of conveyances as a form of
insourced transportation.
I will also note the role of
the third party
logistics provider, 3PL.
Finally, I will
discuss the role of
the owner operator in the
transportation process.
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When it comes to the
cost structure of
the five basic modes
of transportation,
there is a pattern as
shown in the figure.
Looking down the column from
motor carrier to pipeline,
as the proportion of
fixed cost rises,
the proportion of
variable cost falls.
Note that these
numerical proportions
are approximations simply to
give an idea of where
the bulk of
transportation costs lie.
In fact, in some cases,
the air and marine modes might
switch positions
in this ranking.
It all depends on the size of
infrastructure the carrier
is responsible for.
Which by the way,
is a source of fixed cost.
For example, some
ocean carriers and
air cargo carriers own
warehouses and
maintenance facilities,
while others restrict
themselves to simply owning
their respective vessels
and airplanes in
order to quickly go wherever
their services are desired.
This is often called
tramp shipping.
Some carriers may even lease
rather than own any
conveyances at all.
The point is that as fixed cost
dominates a carriers
total cost of operations,
it tends to face
less competition.
Why? New carriers
wishing to compete with
established ones
face a barrier to
entry in the form of
high startup costs.
For example, competing with
a railroad or pipeline,
which is already built along
with an established
customer base,
means taking the time and
money to build another one.
Not to mention taking on
the risk that there will be
enough market share available
to ensure profitability.
In contrast, the level
of competition in
the motor carrier mode is much
higher since most of
the infrastructure,
i.e. roads and bridges
is publicly provided.
The start-up cost in this case
only involves having a truck and
driver on hand in
legal compliance and ready
to start operations.
The basic logistics chain
