Evaluation of transportation contract using simulation-based approach

Distribution and transportation management is one of the areas that has strong impact on cost and performance of an organization. Generally, there are two ways to deal with a transportation provider, which are forming a transportation contract and buying at spot rate. The transportation contract generally offers a better rate than a spot rate, but the organization has to commit to the minimum volume requirement. If the actual volume is less than the minimum requirement, the organization may end up paying more with the contract. Due to the fluctuation in the demand from customers, the delivery requirement differs across time. Thus, it is difficult to decide whether to purchase service at spot rate or form a transportation contract (and at what minimum volume requirement). This paper presents a simulation-based approach in making decisions regarding transportation outsourcing. A Monte Carlo simulation model was developed to help the organization forecast the delivery volume requirement and also serves as a platform to evaluate different transportation contract policies under different circumstances. A case study company was chosen to illustrate the usefulness of the model. The finding helps the company in planning and negotiating the contract with the provider and be able to lower the transportation cost.