Modal Choice and the Day Saved Price Tag

Oct. 16, 2012
Balance all your options to make crisper, more cost-effective supply chain-transportation decisions.

Up to 2 percent of the shipment’s value. And no less than .6 percent of the value. That’s the price tag hanging on aday saved in a studyout this year from the National Bureau of Economic Research. The study’s authors calculated the .6 percent to 2 percent range by zeroing in on firms’ willingness to pay for faster airfreight over slower sea freight, based on U.S. import data from 1991 to 2005. The authors also note how activities to make global trade happen more readily, such as trimming the fat from customs procedures or updating port facilities, are meant to result in days saved. With the price sticker, say the researchers, it’s possible to weigh what it cost to do something meant to save time against the number of days (each sporting a price tag) saved.

That picture of “cost to do x” on one side of the scale and value of days (or hours) saved on the other side is an appealingly simple one. The picture gets murkier, though, when you consider the complete list of tangible and intangible factors that should contribute to your supply-chain transport choice decisions. Time to market, first-mover advantage, brand image, out of stock events and more affect total landed cost. But don’t let the complexity of the picture put you off. It’s crucial that you evaluate the cost of your modal choices against measurable benefits.

For example, what data do you have on the product value density (PVD) of the goods in your supply chain? You find PVD by dividing the product’s value by its chargeable weight. Small, lightweight, expensive goods have a high PVD; heavy, less costly goods a low PVD. Now take the information you have about total landed cost and put it side by side with your PVD data. Ask questions such as, “Does this supply chain have a high percentage of low-PVD goods going by air? Is that happening because of planned supplemental shipments, rush shipments, or both? Is the chain ready to respond to demand ups and downs with bulk transport for the day-to-day and airfreight for demand higher than x level—a level we determined in advance, based on good visibility all up and down the supply chain?

If you are thinking at this point that every question is going to lead to still more questions, good. The point is to have as many answers as possible, and that only happens if the questions are posed in the first place. Here’s another example. If you have planned supplemental shipments—products that typically go ocean freight but switch to airfreight as the demand arises—are there delays when the products switch modes? Do processes need to be adjusted to avoid those delays? You want to know if the supply chain is primed to send product through each logistics route.

You also want to consider how the characteristics of your supply chain affect modal choice. For instance, the same researchers who applied econometrics to determine the value of a day saved also found that components have time sensitivity 60 times greater than finished goods.  What is the mix of completed products to product parts and components in your supply chain? In the past two decades, production fragmentation has skyrocketed, meaning it’s likely that if your supply chain has a big share of highly time-sensitive parts, so do your competitors. What adaptations can you make to optimize your supply chain in the face of that situation and against a macro-economic backdrop that has to take into account fuel costs, the economy’s health, climate change and consumer sentiment, among other variables?

Of course, not all of us have the option to utilize the most cost effective transportation mode, and customer dynamics often dictate our choices. In my industry, where velocity is the rule of the day, ocean freight is not an option when shipping to customers. However, the thought process outlined above is a valid one for all of us and can help us make crisper, more cost-effective decisions.

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