Question

21.         Considering supply chain costs, as the number of facilities increases, the transportation cost goes down to a certain level and it then starts increasing. Provide an explanation for this behavior of the transportation cost. (4 points)

Answer 1

Considering the distribution network and its performance, the two aspects become very important, meeting the customer needs and the related cost. Thus, Customer needs impacts the organization's overall revenue which actually decides the profitability of the distribution network. Some of the components of the customer needs are, such as response time, variety of the products and its availability, customer experience, time to market, order tracking and it's delivery and most important returning of the order. So organizations look for that customer who can wait for the longer response time for their order delivery and this needs only a few locations which may be away from the customer. Therefore, the organization can target to increase the location capacity and vice versa. Hence, the decrease in the response time for the customer needs aims for the more number of facilities needed in the distribution network. With the increase in the facilities in the supply chain, resulting in the inventory cost increase. Henceforth the inbound (costs related to getting the material in the facility location) and outbound (costs relates with the sending material out of the location) transportation costs also get influenced. With the increase in the warehouse locations there will be a decrease in the average outbound distance for the customer and inbound transportation economies of scale maintained, reduces the overall transportation cost with the increase in the facilities location.