My way into supply chain management is mostly academic, one element of supply chains that is sometimes overlooked in academia is transportation. By that I mean the nitty-gritty day-to-day operations of freight carriers. However, in terms of supply chain risk, each individual freight carrier, even each and every truck driver delivering a package is one of the, if not the key ingredient towards supply chain performance. Without trucks, nothing works.
I was reminded of this in one of the latest academic articles that passed my desk recently:
Bask, A. (2001). Relationships among TPL providers and members of supply chains – a strategic perspective. Journal of Business & Industrial Marketing, 16 (6), 470-486
The buyer-seller-3PL triad
What caught my attention in this article was a figure that illustrated the relationship between supplier, buyer and 3rd party logistics providers (3PLs):
What struck me was that 3 PLs should be seen as an integral part of the supply chain, not as service provider or add-on to the supply chain. Similarly, a supply chain risk assessment should also include an assessment of transportation risks.
In fact, supply chains and are exposed to a wide range of transportation risks, and the list below is taken from a recent study I was involved in, looking at disruption risks in freight transportation by road. Some of the typical transportation risks that can lead to disruptions in incoming and outgoing flows in supply chains are (in random order):
- Accidents and engine/vehicle breakdowns
- Lack of spare parts or lack of facilities and resources for repair
- Lack of fuel
- Weather and road conditions
- Errors in loading, e.g. mixing hazardous and non-hazardous goods
- Strikes and other work-related issues
- Disregard of rules and regulations (e.g. driver resting hours)
- Bankruptcy or other financial difficulties at other players in the supply chain
- Wrong or erroneous driving/loading permits
- Wrong or erroneous documents, e.g. customs declaration
- Wrong or erroneous information from and to other players in the supply chain
The list is potentially endless, and the above examples are not meant to be exhaustive. What is clear, is that the risks can be separated into risks related to the transportation means, e.g. the truck and the driver and to the transportation infrastructure, e.g. the road.
What we found in the study I referred to above that transportation-dependent businesses seek a vertical integration of a freight carrier into their supply chain, while freight carriers establish flexible solutions to meet the contingent needs of different businesses. What the freight owner (supplier or buyer) and he freight carrier engaged is also known as risk sharing.
Transporting goods from one place to the other will always have a risk of the goods not arriving on time or in broken condition, and a transportation company (i.e. freight carrier) that accepts a transportation order from a freight forwarder or directly from a freight owner will want to clearly identify and contractually determine which party that is bearing which risk. Extra transportation costs will possibly occur in case of engine breakdowns, avoidable delays or unforeseeable detours, some of which may in hindsight have been foreseeable, the cost of which should ideally be fairly shared among the parties involved.
If on-time delivery is imperative, the freight owner may demand the carrier to install systems for tracking and locating vehicles and or goods, and orders may be relayed directly from the freight owner to a certain vehicle of the carrier company, something that may affect the sequence of other orders the carrier has to undertake that day. The type of goods carried may demand increased vehicle maintenance or may require the carrier to invest in certain equipment for loading and handling. Such equipment typically has a high investment cost, but decreasing average costs, something that may lead the carrier to seek a long-term relationship with the forwarder to cover the costs that have been occurred in relation to this particular type of goods. In long-term contracts, there may be other uncertainties, e.g. fuel costs may unexpectedly rise or there may be changes in government health and safety regulations and driver resting hours, items that are typical candidates for a re-negotiation of the contract terms.
The risk sharing principles prescribe that risk should be borne by the party closest to the risk source, and thus is the party most able to “control” (through mitigative or contingent actions) any consequences stemming from the risk. In practice, this means that the carrier should bear any risks associated with equipment, vehicles or infrastructure-related events, while the freight owner is best suited for handling risks associated with delivery times or risk related to suppliers and sub-suppliers of the goods transported.
With the freight carrier, i.e. truck driver being closest to handling disruption risks, here are some of the typical mitigation measures we saw in our study:
- Contingency contracts with companies offering maintenance, repair, rescue or towing services along the most frequently used road links.
- Cooperation agreements with other carriers to secure replacement drivers or replacement vehicles for transferring goods from the broken vehicle to the replacement vehicle.
- Structural and/or technical modifications of vehicles and equipment to improve operations, particular under winter conditions.
- Regular dissemination of information to drivers where to find which roadside assistance.
- Neutral and non-descript packaging to avoid theft of valuable goods.
- Sufficient slack in lead time of scheduled routes in order to account for possible delays.
- Depending on the external circumstances, no guaranteed lead time or arrival time.
Clearly, freight carriers employ various measures, depending on how strong ties they may have to a certain freight owner. Mainly, freight carriers establish a certain contingent flexibility, by which additional resources (e.g. replacement vehicles or repair crews) can be called upon, either from within one’s own ranks or in cooperation with other freight carriers. In addition, vehicles are modified and adapted to ensure more reliable operations, particular for winter conditions. Within the freight carrier community there seems to be a general readiness to “help each other out” in times of need.
So, freight carriers play a vital role in minimizing overall supply chain risk. Don't forget, the devil is in the details.
Without trucks, nothing works
What would happen if there were no trucks driving in the UK?
McKinnon, Alan (2006). Life Without Trucks: The Impact of a Temporary Disruption of Road Freight Transport on a National Economy Journal of Business Logistics, 27 (2), 227-250
to find out.