TRUCKS KEEP INVENTORIES ROLLING PAST WAREHOUSES TO PRODUCTION LINES
It seems warehouses have grown wheels Called "rolling inventories, n trucks have become the place of choice for just-in-time stockpiles. Eighteen wheelers pull-up to factory loading docks to deliver parts go almost immediately onto production lines, bypassing the warehouses ",'Companies now precisely plan their need of inventory so that [intermediate] warehouses aren't needed," says Don Schneider, president of trucking concern Schneider National Inc. and a member of the Chicaqo Federal Reserve Bank. . o be sure, just-in-time inventory methods aren't new. But as more companies come around to this approach, trucks and railcars have begun to function as warehouses for nany producers-adding yet another anomaly to the economic recovery.The construction of warehouse square footage tumbled nearly 18 percent in 1992 and 9 percent in 1993, evenas the economy gained momentum and space in stores and shopping centers grew 6 percent and 12 p~rcent,respectively. For trucking companies, the trend means new business. but also more demanding customers. Many trucking ornoanies say that in recent years, they've come under
increasing pressure to deliver parts within a small window of time. "There are sometimes less than 10-minute lag times," says Larry Mulkey, president of Ryder Dedicated Logistics Inc., a Miami unit of transportation-service
company Ryder Systems Inc. Such use of trucks enables businesses to cut space costs, freeing up capital for investments such as equipment or new employees. "The back room decreases in size because you don't need it to store stockpiles and that means you have more floor space for selling," Mr. Mulkey says. But a heavy reliance Oil trucks to keep Inventories low isn't without its risks. The General Motors Corp., ToyotaMotor Co. joint venture in Fremont, California, once had to shut down its production line because a just-in-time delivery truck broke down on the highway. Ken Simonson, chief economist of the American Trucking Associations, says trucking for just-in-time orders generally works better in uncongested regions of the country. But trucking companies have come a long way in eliminating delivery glitches. Mr. Schneider of Schneider Nation.al boasts that not one load was late because of the
icy, wintry weather that hit much of the nation recently. Technology enables trucking companies and their clients to track a load's progress from minute to minute. If a problem comes up, another truck can be dispatched immediately to pick up the load. Trucks also have become more reliable mechanically. Source: Lucinda Harper, "Trucks Keep Inventories Rolling Past to Production Lines." The Viall Street Joe. February:y 7, 1994, Copyright © 199~ Dow Jones & Co., Inc. Reproduced with permission of Dow Jones & Co .. Inc. via Copyright Clearance Center .
In deciding which is the most economical mode of transportation to use. a analyzer needs to take into consideration two cost elements: the actual costs of transportation ;nd the in- transit inventory carrying costs of product while in transit. These carrying costs consist primarily of the cost of the capital tied up when items are purchased at the vendor', plant. but are not available for use until they arrive at the firm's plant. (For a more detailed definition of the CC1stof capital, see Charter 16.) T) typically. the slower the mode of transportation. the lower the transportation costs. the longer the shipment time. and thus the higher the in-transit carrying cost. The trade-off between these two costs s shown in Exhibit 13"+. he total annual costs associated with transporting products from a vendor's plant are
Total costs = Transportation costs + In-transit inventory carrying costs + Purchase cost
TC = DM + (X/365liDC nc
Based on this analysis the more economical mode of transportation i by truck, even though the actual transportation cost per unit is twice that of sending the items by ship. Note that when evaluating alternative modes of transportation from the same vendor, the purchase cost remains the same and, for simplicity, is not included in the analysis.