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Supply chain management: insourcing and outsourcing transportation

Published on July 31, 2023   18 min

A selection of talks on Technology & Operations

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0:00
Supply Chain Management: Insourcing and Outsourcing Transportation, presented by Dr. Darren Prokop, Professor of Logistics University of Alaska Anchorage.
0:14
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.
0:48
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.
1:24
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

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