At a macro level, it has been possible to measure how the costs of logistics have fallen for companies over time. For instance, between 1980 and 2002, the costs of logistics in the United States dropped from 16 percent to just 9 percent. While these reductions are due to many factors, such as telecommunications technology and transportation economic deregulation, they are also due to improvements in transportation infrastructure. Following are several examples of how companies are positively or negatively affected by the level of transportation infrastructure available to them. Some have used superior transportation systems to remodel their supply chain logistics in a way that boosts productivity. Others have relied on quality transportation to help draw skilled employees to their area, and actively seek to locate facilities where such transportation infrastructure exists.
Dell is a great example of how companies have been able to restructure their production and supply chain systems because of the availability of superior transportation infrastructure and institutions. By using just-in-time deliveries, that would only be feasible with fast, reliable and relatively low-cost transportation, Dell has been able to centralize production in specialized plants. They have also been able to eliminate market area warehouses, cut inventory from 85 days supply to just 6.6, and provide a customized “make to order” product for their customers, with reasonable cost, next day delivery anywhere in the world. Such a response-based system would not be possible without access to quality transportation networks.
Another example is Campbell Soup Company. “Campbell improved performance throughout its supply chain and reduced overall production costs using a good system of highways to achieve reliable transportation. This allows them to adopt just-in-time deliveries and strategic alliances with suppliers. The greater reliability and reduced transport time achieved with truck transportation have allowed Campbell’s plants to reduce inventory and handling costs.”
Hewlett-Packard (HP) has also been able to improve its production and supply chain logistics because of superior transportation infrastructure, but employee mobility and quality of life are also key considerations for them. On the production/distribution side, HP has been able to reduce order cycle times and reduce inventories by making more frequent shipments in small quantities. A good highway system and access to airports are key to implementing that strategy. HP also is in part able to attract and retain highly skilled, innovative employees by locating its facilities in areas where the highway network provides good labor access for short and long distance commuting.
The Limited brand retail chain provides another example of the value of good highways. They are able to stay in-stock with the latest fashions and cost efficiently distribute to a network of 4,425 stores in 48 states from a centralized distribution point in Columbus, Ohio, by having access to the interstate highway system. The reliability and short transport time achieved by long distance trucking over the nation’s highway system allows frequent and reliable restocking of even the most remote locations from one centralized distribution point. By centralizing inventory, the Limited is able to reduce warehouse and inventory costs in a way that maximizes service and actually lowers total logistics costs even though they pay more for freight.
General Motors, and other U.S. and foreign auto companies, also rely on the highway system to tie them to their network of suppliers around the world and around the country. Their integrated manufacturing processes depend on just-in-time delivery of production components from thousands of suppliers. The speed and reliability of truck transportation that is possible over a good highway network facilitates the receipt of more frequent, smaller shipments just-in-time, thereby allowing for far lower inventory levels of components.
Smaller companies also rely on congestion-free highways. Bueno Foods, a New Mexico producer of chilies, sauces, and salsas, says any type of congestion causes it serious problems in that it delivers to customers great distances away on both coasts. Bueno says congestion imposes costs on the supply chain, but that those costs are hard to see. That is especially true for smaller companies that don’t have the resources or options of the bigger companies.
Finally, for Xerox Corporation, a good highway system provides essential support for on-time delivery of components to manufacturing facilities in even remote locations. The efficiency and reliability of truck transportation over the interstate system also makes it possible to ship finished products to customers all over the country. This can be done in a timely way despite long distances, and without the need for large inventories in market area warehouses.
On the other hand, when adequate transportation is not available, it is interesting to see what kinds of impacts there are. When the transportation system cannot guarantee speed and reliability over large distances, shippers change logistics strategies by adding distribution centers and filling them with more inventory — all at great cost. While the biggest problems are currently in ports, airports and rail yards; highways are also a problem, especially in urban areas.
Wal-Mart’s experience with their private fleets in urban areas further clarifies the costs of poor transportation systems and resulting congestion. Wal-Mart averages 21.3 percent fewer miles per tractor per week in urban areas than in rural markets. This would seem to be a good indicator of the impact of congestion. As a result, Wal-Mart needs more tractors, consumes more fuel and generates more pollution than would otherwise be the case. And of course it is consumers that in the end pay the higher costs.