Transportation’s Tricky Balancing Act

This is an excerpt of the original article. It was written for the January-February 2018 edition of Supply Chain Management Review. The full article is available to current subscribers.

January-February 2018

If you frequent supply chain conferences, as I do, you’ve probably noticed that some of the best-attended sessions are the ones that focus on emerging technologies—or what we’re calling the NextGen Supply Chain. You may have noticed something else: While topics like Big Data, artificial intelligence, augmented reality, blockchain and robotics play to standing room audiences, there’s a lot of confusion about what to do with the information. At the 2016 APICS conference, one member of the audience asked a direct question at the end of an excellent session on Big Data by Hannah Kain, the CEO of Alom: “This sounds great. But there’s not a…

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In just about every episode of Shark Tank at least one of the wealthy investors will ask an aspiring entrepreneur if the deal they’re pitching is scalable. It’s certainly a good question for investors to ask. After all, they want to make their money back as quickly as possible and then sit back as the profits from sales roll in. Of course, that would be hard to do if the business in question needs to pile on costs just in order to increase its market share. In other words, investors like to see a business’ sales revenue grow faster than its costs. This is what they mean by scalable or, more specifically, economies of scale.

The term “economies of scale” is a popular one in the business world. Many, however, use the term incorrectly. Furthermore, many shippers who rely on inbound and outbound transportation to bring in raw materials and distribute their finished goods may not realize the multitude of ways that transportation carriers can achieve “scale.” The good news is that economies of scale can lower a carrier’s average costs and potentially lower the freight rates charged to their shipper customers. The bad news is that economies of scale don’t go on indefinitely. There is a point when average costs will actually rise as scale increases. This is known as diseconomies of scale. Getting this right to maximize your transportation strategy is a balancing act—regardless of the mode or modes of shipping.

How economies of scale affect that balancing act is the subject of this article. We’ll look at the specific costs involved in defining economies of scale and set out three items which are important in the definition. We’ll distinguish between the internal and external sources of economies of scale and diseconomies of scale. Finally, we’ll discuss the various ways “scale” can be achieved by transportation carriers.

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