Supply Chain Trade-Offs :Maximizing Efficiency and Minimizing Costs between Big and Small Tankers
Description
Supply chain trade-off refers to the decision-making process where a bigger tank may have higher building and operating costs, but it reduces the need for frequent replenishment voyages, which can lead to overall cost savings.
Table of Contents
What is supply chain trade off ?
Supply chain trade-offs involve making decisions that balance the trade-offs between different factors such as cost, time, quality, and risk. It is an essential aspect of supply chain management because companies need to make decisions that optimize their supply chain performance, while considering the different trade-offs involved.
One of the most common trade-offs in the supply chain is between inventory costs and transportation costs. Inventory costs include the cost of holding inventory, such as storage and handling costs, as well as the opportunity cost of tying up capital in inventory. Transportation costs, on the other hand, include the cost of shipping products from suppliers to manufacturers, from manufacturers to distributors, and from distributors to retailers or customers.
One example of a supply chain trade-off is deciding whether to use a bigger tank or a smaller tank for transporting goods. A bigger tank has higher building and operating costs than a smaller tank, but it can transport more goods per voyage, reducing the need for frequent replenishment voyages. This can result in lower transportation costs but higher inventory costs as more goods are held in inventory. Conversely, a smaller tank has lower building and operating costs but requires more frequent replenishment voyages, which can result in higher transportation costs but lower inventory costs.
Other supply chain trade-offs include the trade-off between transportation lead time and transportation cost. For example, companies may choose to use air transportation for faster lead times, but this can result in higher transportation costs than using sea or ground transportation. Similarly, companies may choose to source raw materials from low-cost countries, but this can result in longer lead times and higher transportation costs
Sea freight Supply chain trade-offs
Sea transport is a critical component of global supply chains, providing an efficient and cost-effective way to move large quantities of goods across long distances. However, like any other supply chain component, sea transport involves trade-offs that need to be carefully managed to optimize supply chain performance.
One of the primary trade-offs in sea transport is between cost and lead time. Shipping goods by sea is generally cheaper than using air transport or other modes of transport, but it is also slower. This trade-off needs to be carefully managed by companies to balance the cost of transportation with the need for timely delivery of goods. For example, if a company needs to transport high-value, time-sensitive products, it may choose to use air transport despite the higher cost to meet delivery deadlines.
Another trade-off in sea transport is between economies of scale and transportation flexibility. Large container ships offer economies of scale by transporting large quantities of goods at a lower cost per unit, but they also have limitations on port access and flexibility. In contrast, smaller vessels offer greater port access and transportation flexibility, but they may be less cost-effective due to their smaller cargo capacity. Companies need to consider these trade-offs when selecting the type of vessel to use for transporting goods.
Another important trade-off in sea transport is between transportation costs and inventory costs. Transportation costs include the cost of shipping products from the supplier to the customer, while inventory costs include the cost of holding inventory, such as storage and handling costs, as well as the opportunity cost of tying up capital in inventory. For example, using a larger vessel can reduce transportation costs per unit, but it may result in higher inventory costs due to the need to hold more inventory on board the vessel.
Finally, sea transport also involves trade-offs related to risk and reliability. Shipping goods by sea involves various risks, such as delays due to weather conditions or port congestion, piracy, and theft. Companies need to manage these risks by selecting reliable carriers, purchasing insurance, and implementing effective risk management strategies.
Role of transportation vessel in supply chain trade off
When it comes to transportation of goods, the size of the transport vessel plays an important role in determining the overall cost of transportation. One of the most common examples of supply chain trade-off is deciding whether to use a bigger tank or a smaller tank for transporting goods.
A bigger tank has a larger cargo capacity and can transport more goods per voyage compared to a smaller tank. This reduces the need for frequent replenishment voyages, resulting in lower transportation costs. However, a bigger tank has higher building and operating costs compared to a smaller tank due to its size and complexity. The construction of a bigger tank requires more materials and labor, while the operation of a bigger tank requires more fuel, maintenance, and personnel.
Despite the higher initial investment and operational costs, using a bigger tank can result in cost savings over time. This is because the cost per unit of transportation decreases with an increase in the cargo capacity of the vessel. For example, if a company needs to transport 10,000 units of a product, they can either use a small tank that can carry 1,000 units per voyage and make ten voyages, or they can use a big tank that can carry 10,000 units per voyage and make only one voyage. The latter option reduces the number of voyages required, which in turn reduces transportation costs, such as fuel and labor costs.
Furthermore, using a bigger tank can also improve supply chain efficiency by reducing lead time, minimizing the risk of stockouts, and improving customer satisfaction. This is because fewer voyages are required to transport goods, which reduces the time it takes to move products from the supplier to the customer. Additionally, using a bigger tank can reduce the risk of stockouts, as there is more space available to carry inventory. This can lead to increased customer satisfaction as products are more likely to be available when needed.
In this project
Choosing the right size of tanker for transporting goods is a crucial decision for companies involved in sea transport. A tanker’s size impacts both the initial investment and the operational costs associated with it, making it a crucial factor to consider when designing a supply chain strategy.
In this case, our client was faced with a dilemma of choosing between the size of the tanker and the cost associated with it. The client needed to transport a large quantity of goods and had to decide whether to use a smaller tanker or a larger one.
A smaller tanker would have lower initial costs and operational expenses, making it a more cost-effective option. However, it would also have a lower cargo capacity, which would require more frequent replenishment voyages. This would result in higher transportation costs in the long run due to increased fuel consumption, more labor costs, and more frequent maintenance requirements.
On the other hand, a larger tanker would have a higher initial cost and operational expenses due to its size and complexity. However, it would have a larger cargo capacity, reducing the need for frequent replenishment voyages. This would result in lower transportation costs over time, as the cost per unit of transportation would decrease with the increase in the cargo capacity of the vessel.
The client’s dilemma of choosing between tanker size and cost associated with it reflects a common trade-off in supply chain management. The choice between a smaller and a larger tanker involves balancing the short-term cost savings against the long-term transportation cost reduction. To make an informed decision, the client needed to consider various factors, such as the cargo volume, transportation distance, port access, and operational constraints. By weighing these factors against the costs associated with each option, the client could select the most cost-effective option that meets their supply chain objectives.
Results
After analyzing client’s port location and detailed study of environmental and port regulations, we recommended our client to go with tanker size X and size Y. As these two sizes offers the ideal combination of solutions for our clients problems. The investment and operational cost are a combination of X and Y size tankers can be an optimal solution. By using a combination of X and Y size tankers, our client can balance the investment cost with the benefits of operational efficiency. For instance, the larger tanker can transport the bulk of the cargo, while the smaller tanker can handle the remaining cargo that doesn’t require the larger vessel’s capacity.
This approach can offer several benefits, such as lower investment costs compared to using only larger vessels, reduced transportation costs due to the use of economies of scale, and greater flexibility in responding to changes in demand. Additionally, it can also minimize the risk of cargo loss in case of accidents or disruptions in the supply chain.
Key learnings
- Choosing the right tanker size is critical for sea transport, as it affects the investment cost, operational expenses, and overall supply chain efficiency.
- There is a trade-off between the cost of investment and the benefits of operational efficiency, with larger tankers offering economies of scale but also higher investment costs and operating expenses.
- A combination of larger and smaller tankers can offer an optimal solution that balances the benefits of economies of scale with the lower investment costs and greater flexibility of using smaller vessels.
- The decision to use a combination of vessels should be based on specific supply chain requirements, such as the volume of cargo, transportation distance, port access, and operational constraints.
- To make informed decisions, companies need to weigh various factors involved in sea transport, such as the cost of investment, operational expenses, cargo volume, transportation distance, port access, and operational constraints.
- By balancing these factors, companies can optimize their supply chain strategy, achieve greater operational efficiency, and reduce transportation costs in the long term.
Conclusion
In conclusion, supply chain trade-offs play a critical role in sea transport. When it comes to choosing the right tanker size for transporting goods, companies face a trade-off between the investment cost and the benefits of operational efficiency. A larger tanker can transport a larger volume of goods at a lower cost per unit, but it also comes with higher investment costs and operating expenses. On the other hand, a smaller tanker has a lower investment cost and operational expenses but requires more frequent replenishment voyages.
Choosing the optimal tanker size involves balancing the short-term cost savings against the long-term transportation cost reduction. In this context, a combination of larger and smaller tankers can offer an optimal solution that balances the benefits of economies of scale with the lower investment costs and greater flexibility of using smaller vessels. Ultimately, the decision to use a combination of vessels should be based on the specific requirements of the supply chain, such as the volume of cargo, transportation distance, port access, and operational constraints.
To make informed decisions, companies need to consider various factors involved in sea transport, such as the cost of investment, operational expenses, cargo volume, transportation distance, port access, and operational constraints. By weighing these factors against the costs associated with each option, companies can select the most cost-effective option that meets their supply chain objectives.
In summary, supply chain trade-offs in sea transport involve a careful balancing of investment costs, operational efficiency, and long-term transportation cost reduction. By making informed decisions that balance these factors, companies can optimize their supply chain strategy and achieve greater operational efficiency and cost savings.
About the Author
Vivek Sood: Sydney based managing director of Global Supply Chain Group, a strategy consultancy specializing in supply chains. More information on Vivek is available on www.linkedin.com/in/vivek and more information on Global Supply Chain Group is available www.globalscgroup.com
Vivek is the Managing Director of Global Supply Chain Group, a boutique strategy consulting firm specialising in Supply Chain Strategies, and headquartered in Sydney, Australia . He has over 24 years of experience in strategic transformations and operational excellence within global supply chains. Prior to co-founding Global Supply Chain Group in January 2000, Vivek was a management consultant with top-tier strategy consulting firm Booz Allen & Hamilton.
Vivek provides strategic operations and supply chain advice to boards and senior management of global corporations, private equity groups and other stakeholders in a range of industries including FMCG, food, shipping, logistics, manufacturing, chemicals, mining, agribusiness, construction materials, explosives, airlines and electricity utilities.
Vivek has served world-wide corporations in nearly 500 small and large projects on all continents with a variety of clients in many different industries. Most of projects have involved diagnostic, conceptualisation and transformation of supply chains – releasing significant amount of value for the business. His project work in supply chain management has added cumulative value in excess of $500M incorporating projects in major supply chain infrastructure investment decisions, profitable growth driven by global supply chain realignment, supply chain systems, negotiations and all other aspects of global supply chains.
Vivek has written a number of path breaking articles and commentaries that are published in several respected journals and magazines. Vivek has spoken at several supply chain conference, forums and workshops in various parts of the world. He has also conducted several strategic workshops on various aspects of supply chain management. He received his MBA with Distinction from the Australian Graduate School of Management in 1996 and prior to these studies spent 11 years in the Merchant Navy, rising from a Cadet to Master Mariner.
More information on Vivek is available on www.linkedin.com/in/vivek and more information on Global Supply Chain Group is available on www.globalscgroup.com
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