| Driven by the expanding global economy – as well as mergers and acquisitions which have
consolidated the manufacturing and retail sectors into fewer, more competitive corporations – the demand for
supply chain management (SCM) solutions is growing exponentially throughout the industrial world. Demand for SCM has
been further fueled by an increased awareness and focus on profitability tied to reduced operating costs. |
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| The ascent of SCM, coupled with the introduction of enterprise resource planning systems which
dovetail with SCM to give corporations unprecedented insight into, and control of, their operations, has fostered an
increased awareness of the impact that Operations Research (OR) systems and OR practitioners have on defining business
processes and solutions. |
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| This article describes the real-life experience of one firm that suffered growing pains in its
transportation system as it struggled to cope with rapid expansion, and details the impact OR-based software has had
on helping manage the firm's day-to-day transportation operations. The company shall remain nameless, but the story
is true. |
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Joe is the transportation operations manager for a major do-it-yourself home improvement retailer which
operates stores nationwide. He is responsible for shipping more than a million pounds of merchandise from
several thousand vendors located worldwide onto the shelves of hundreds of retail stores each day. The
merchandise involved ranges in shape, size and weight, from nails to power drills to lawn fertilizer to
ride-on tractor mowers. Joe's transportation function represents the critical link in his company's
supply chain management process, and is key to its competitiveness and profitability. If the store in your
neighborhood doesn't have the drill you want in stock because of a late shipment, you'll surely take
your business down the street. Or even if it's in stock, you may choose to buy the drill from a competitor
if Joe's shipping costs drive up his price. |
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| Joe's job is a delicate balancing act between competing goals of reducing transportation
costs and increasing customer service levels while satisfying many conflicting side considerations. Although Joe is
not schooled in OR, as we will see he tackles a tough real-world OR problem with a fresh new (albeit ugly) data set
every day. |
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| Joe's daily routine begins with reviewing new or modified orders received from an order
processing system and resolving data errors (inaccurate information). Next, he must decide how best to ship them,
choosing among several alternative modes and carriers. Before he had the help of optimization software, he performed
this difficult step manually. The remainder of his day is spent awarding shipments to carriers, generating bills of
lading (BOLs) and, most importantly, communicating shipment details (scheduled pickup/delivery times, etc.) to the
vendors, stores, and carriers, primarily by phone and fax. |
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| Like many retailers, Joe's company does not currently manage its own fleet of trucks. Instead,
they rely on outside truckload (TL) and less-than-truckload (LTL) motor carriers, as well as small package delivery
companies. Carrier contract terms specify the types of freight these carriers will handle, negotiated rates along travel
lanes, and charges for special services. As their names suggest, TL rates are designed for large (i.e. > 10000 lbs.)
shipments, LTL rates for mid-sized loads, and small package rates for under 75 lbs. or so. |
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| In deciding how to ship each order, Joe can take the easy route and book them individually with
LTL, TL or small package carriers based strictly on order size. To cut costs, however, he can build routes combining
LTL orders into multi-stop TL shipments to take advantage of cheaper per-mile TL rates (multi-stop order consolidation).
Trying to find the most cost-effective combinations of orders is a complex task however, so Joe often must overlook
savings opportunities to focus on the other tasks required to get shipments out the door and delivered on-time. |
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| As his company grew over the years, so did Joe's workload. With the addition of new vendors
and new stores, the volume of shipments grew to the point that the tasks of correcting order errors, generating BOLs and
communicating shipment details to vendors and carriers consumed most of his department's time. This left precious
little time to look for order consolidation opportunities, and as a result, the bulk of his shipments went individually
using expensive LTL carriers. In fact, the majority of Joe's vendors were simply allowed to take care of their own
shipping, and passed along high shipping charges in the price of the goods. |
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| After a series of enhancements were added to the software and a testing phase was completed,
Joe's department "went live" with the software in the spring of 1998. To date, the pooling concept has
been a smashing success. In fact, as soon as control was assumed over a sufficient number of vendors, the software
more than paid for itself processing barely one week's worth of orders. The software's automated order
consolidation and pooling functionality identified savings opportunities hidden within thousands of orders which
were simply not humanly possible for Joe to find manually. |
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| The moral of the story is that OR is ready for prime time, and there is a demand for
OR practitioners to package their expertise into tailored solutions to day-to-day logistics problems like
Joe's. |
