When companies optimize their Supply Chain they are maximizing their profit via their supply chain activities. Maximizing profit involves balancing the tradeoff of cost and customer service. It is efficient (also known as Pareto Optimal) to have a high-cost / high service, or low-cost / low service supply chain design. However, a high-cost / low service is inefficient and not competitive. To optimize your supply chain you must put all of your cost-drivers and customer service measures through a careful Supply Chain Analysis.

To optimize your supply chain you must put all of your cost-drivers and customer service measures through a careful Supply Chain Analysis.

Transportation Costs are largely a function of distance. A company would minimize transportation costs by putting their factories or warehouses close to their customers. This also has the positive effect of reducing the delivery time to customers, a key aspect of customer service. (As will be discussed below, however, this also increases facility costs.) As Transportation Costs are the greatest percentage of supply chain costs, it is critical that companies carefully choose their facility locations, mode of transportation (boat, barge, rail, full truck, less-than-truckload, delivery vans, and drones) and optimize their routes.

Inventory Costs involve the most obvious tradeoff of cost versus customer service. More inventory is (almost) always better for customer service, but of course inventory consumes cash and has other negative aspects including obsolescence and storage costs. Inventory is therefore a double-edged sword. It is a weapon against competitors in providing better service to customers, and a threat to cash flow. Inventory is the second greatest supply chain cost. Inventory optimization software and methods are available to maximize the profit return on inventory investment.