Title: Transportation Strategy in a Supply Chain
1Transportation Strategy in a Supply Chain
2Outline
- Key modes of transport and major issues
- Transportation Costs
- Transportation System Design
- Tradeoffs in transportation design
- Transportation and inventory Choice of mode
- Transportation and inventory Consolidation
- Transportation and service Transit points and
lead-times
3Importance of Transportation
- USA Freight in 2006 US 1.4 trillion, 10 of
GDP - Employs 22 million people, 16 of all workers
- Accessibility to markets
- Greater competition
- more distant markets can be served
- Economies of scale
- wider markets gt greater production volume
- production points need not be close to markets
- Lower prices
- increased competition among suppliers
- lower production and transportation costs
- E-Commerce managing (global) transportation
costs is crucial - Amazon.com? Dell Computers?
US Bureau of Transportation Statistics
4Factors Affecting Transportation Decisions
- Carrier
- (party that performs the move)
- investment decisions
- operating policies
- Costs considerations
- Vehicle-related Type? Number?
- Fixed operating e.g. Terminal facilities
- Trip-related labour and fuel
- Quantity-related loading/unloading
- Overhead planning/scheduling, information
technologies - Capacity utilisation
- Responsiveness/Service level offered
- Shipper
- (party requiring movement of goods)
- supply chain design
- transportation mode choice
- assignment of shipment to transportation mode
- Cost considerations
- Transportation paid to carriers
- Inventory at intermediate warehouses, retailers,
etc. - Facility e.g. warehouse operating costs
- Processing loading/unloading, invoicing, etc.
- Service level expediting, safety stock, etc.
- Responsiveness Delivery guarantees
5Transportation Modes (USA)
a U.S. Bureau, Statistical Abstract of the United
States 2002 b Ballou, Business Logistics
Management, 5th edition, 2004
6Air
- Expensive
- (2 x truck, 20 x rail)
- High security
- Size of shipment constrained
- hold space and lifting capabilities
- Key Issues
- Location/Number of hubs
- Location of fleet bases / crew bases
- Schedule optimization
- Fleet assignment
- Crew scheduling
- Yield management
7Truckload (TL)
- Average Capacity 42,000 - 50,000 lb.
- Smaller dispatch lots (compared with rail)
- Low fixed cost
- carriers do not own or maintain roads
- Door-to-door convenience
- Good speed and frequency (small dispatch lots)
- Cannot carry large loads
- Major Issues
- Utilization
- Consistent service
- Backhauls
8Less Than Truckload (LTL)
- Higher fixed costs (terminals) and low variable
costs - Major Issues
- Location of consolidation facilities
- Utilization
- Order assignment/loading
- Vehicle routing
- Customer service
- Utilization vs. delivery-time and reliability
9Rail
- Long haul (avg. 720 miles)
- Slow mover (22 mph, 64 miles per day)
- Large load Average load 80 tons
- carload, less-than-carload, multiple carload
- consolidation, stop-off, re-route
- High fixed costs, low variable costs
- Key Issues
- Scheduling to minimize delays / improve service
- Off track delays (at pick up and delivery end)
- Yard operations (switching of multiple shipments)
- Variability of delivery times
10Pipeline
- limited capabilities crude oil, water
- slow (3-4 mph)
- high capacity
- 3 mph, 12-in pipe 90,000 gal/hr
- reliable, low risk of disruption and damage
- 24-hour service
- high fixed costs
- pipes, pumping equipment
- own or lease right-of-way
- Variable costs
- pump operation
- depends on throughput and pipe diameter
- loss through seepage
11Water - Inland and Coastal
- heavy , bulk commodities
- slow (5 mph on Mississippi)
- affected by weather (freezing, floods)
- Fixed costs
- mainly transport equipment
- waterways and harbours publicly owned
- terminal costs harbour fees, loading/unloading(hi
gh costs if not containerised) - Variable costs (low)
- no charge for use of waterways
- favours bulk commodity goods
12Containerised Freight (COFC)
- first trip
- trailers on a WWII tanker from New Jersey to
Texas in 1956 - soon after
- specially converted ships to stack van-sized
boxes on deck - now
- world container fleet capacity 19.3 million TEUs
(2004) - 75 of US ocean merchandising trade
- 70 by weight of cargo movement of Hong Kong
- mega-ships Gudrun Maersk (worlds largest) 8000
TEUs, 1204 ft. long, 140 ft. wide (30 ft. wider
than Panama Canal) - standard size avoids re-handling
- 8 x 8 x 20 (TEU)
- 8 x 8 x 40 or 8 x 8 x 45
- containerised air freight gaining popularity
13Intermodal Transport
- Truck-Rail TOFC piggyback
- Truck-water RORO fishyback
- Trailer on Flat Car (TOFC)
- long haul cost economy of rail
- convenience and accessibility of trucks at
origin/destination - shipper door-to-door service at lower than truck
rates - rail more business
- 17-fold increase 1960-1996
- now 55 of rail loading in USA
- 2 million carloads (13 million units) moved in
2004
14International Transportation
- Mainly by Water (Container)
- over 50 by value
- 99 by weight
- By Air 21 by value
- 6.76 billion tons shipped seaborne in 2004
- Complexities
- customs documentation
- limited entry/exit points to a country
- limited carrier liability
- increased protective packaging
15Busiest Container Ports in the World
16Hong Kong
17Hong Kong - Mid-Stream Operations
- Unique to Hong Kong
- Barges with crane
- Transfer containers from ship (in harbour) to
shore - Transfer rate weather dependent
- approx. 1/3 of container terminal
- Lower Cost
- approx. 1/4 of container terminal
- Handles about 17 of container traffic through
Hong Kong - mostly to South-East Asia
- non-time critical
18Worlds BusiestCargo Airports
19Other key players in the Transportation Supply
Chain
- Freight forwarders
- provide service to small shippers by
consolidating shipments to get lower rates - purchase transportation service from carriers
- Shippers agents
- consolidate shipments for piggyback transport
- purchase service in bulk and re-sell to
individual shippers - Freight brokers
- arrange door-to-door service, dealing with all
modes of transport in between - Shippers Associations
- common industry or geographical area
- common negotiation line to get better rates
20Transportation Costs
- 63 of total logistics expenditures
- Fixed Costs
- road/railway acquisition and maintenance,
terminal facilities, transport equipment, carrier
administration - Variable Costs
- fuel, labour, equipment maintenance, handling,
pickup and delivery - Cost Allocation Difficult
- By shipment? Weight? Volume?
- Insurance value? Delivery guarantees?
- Back Haul Costs?
21Transportation Rates
- Freight classification
- determined by density, stowability, ease of
handling, value, liability, substitutability,
risk of damage, fairness - Class Rates
- standardized tariffs by weight and distance
- break weight
- Contract Rates
- discount rate from class rate tariffs
- depends on volume, direction of movement, valued
customer? - Freight-All-Kinds
- used by freight forwarders
- mixed shipments
22Transportation Rates
- Volume-related
- minimum charge (AQ) rate
- less-than-vehicle-load rate
- vehicle load rate
- special rate for high volume shipments
- Distance related
- uniform rate
- proportional rate
- tapering rate
- blanket rate (simplicity, competition)
- Demand related rates
23Freight Rate Structures
24Other Transportation Rates
- Incentive rates
- for large shipment
- Cube rates
- for light and bulky goods
- Import/Export rates
- Deferred rates
- used to fill out available space (esp. in air or
water mode) - Released value rates
- limited liability for carrier
- Ocean freight rates
- by weight or space basis
- set by carrier conference
25Special Service Charges
- Diversion and Re-consignment
- change destination or change consignee
- ship perishables before markets crystallize
- use carriers as warehouse
- Transit or Stop-off privileges
- cost lower than two separate rates
- partial loading/unloading
- Protection
- refrigeration/heating/ventilation
- additional bracing
- Interlining
- carrier transfer shipment and pays 2nd carrier
- Terminal services
- pickup/deliver, rail switching
- detention and demurrage penalty
- allowed free time 48 hours for rail cars
- straight plan vs. average plan
26Documentation
- Bill of lading
- legal contract between shipper and carrier for
freight movement with reasonable dispatch and
free of damage - certification of classification and tariffs of
goods received - contract of carriage
- documentary evidence of title
- straight bill of lading (cannot be sold)
- order bill of lading (can be endorsed)
- Freight bill
- invoice of carrier charges
- prepaid by shipper or collected from consignee
- Freight claims
- loss, damage and delay claims
- carrier liable for full value
- overcharge/misclassification amendments
27International Transport Documents- Exporting
- Bill of lading. Receipt for the cargo and a
contract for transportation between the shipper
and the carrier. - Dock receipt. Used to transfer accountability for
cargo between domestic and international
carriers. - Delivery instructions. Provides specific
instructions to the inland carrier regarding
delivery of the goods. - Export declaration. Required by the U.S.
Department of Commerce as a source document for
export statistics. - Letter of credit. Financial document guaranteeing
payment to the shipper for the cargo being
transported. - Consular invoice. Used to control and identify
goods shipped to particular countries. - Commercial invoice. Bill for the goods from
seller to the buyer. - Certificate of origin. Used to assure the buying
country precisely in which country the goods were
produced. - Insurance certificate. Assures the consignee that
insurance is provided on goods while in transit. - Transmittal letter. A list of the particulars of
the shipment and a record of the documents being
transmitted together with instructions for
disposition of the documents.
28International Transport Documents -Importing
- Arrival notice. Informs the estimated arrival
time of the shipment along with some details of
the shipment. - Customs entries. A number of documents describing
the merchandise, its origin, and duties that aid
in expediting clearance of the goods through
customs, with or without the immediate payments
of duties. - Carriers certificate and release order.
Certifies to customs the owner or consignee of
the cargo. - Delivery order. Issued by the consignee to the
ocean carrier as authority to release the cargo
to the inland carrier. - Freight release. Evidence that the freight
charges for the cargo have been paid. - Special customs invoice. An official form
usually required by U.S. Customs if the rate of
duty is based upon the value and the value of the
shipment exceeds a fixed dollar amount. - Preparation of this paperwork is facilitated by
the many foreign trade specialists that - can aid the shipper and receiver of goods moving
internationally.
29Transport Service Selection Considerations
- Price
- line haul, terminal handling,, delivery
- door-to-door
- Average Transit time
- Transit Time Variability
- increases for multi-modal or consolidated
shipments - Loss and Damage
- Cost, speed and dependability considered most
important
30Choice of Transportation Mode Eastern Electric
Corporation
- Average Annual demand 120,000 motors
- Cost per motor 120
- Current order size 3,000 motors
- Safety stock carried 50 of demand during
delivery lead time - Holding cost 25
- Each motor weighs 10 pounds
31Eastern Electric Mode Choices
Marginal discount applies (i.e. first 150 cwt
cost 8, next 100 cwt cost 6, etc.)
32Eastern Electric Rail option
- Minimum shipment 20000 lbs 2000 motors
- Cycle inventory Q/2 2000/2 1000
- Safety stock L/2 days demand
(6/2)(120000/365) 986 - In-transit inventory (120000/365)51644
- Annual holding costs (10009861644)(120)(0.25)
108900 - Annual transportation costs (120000)(0.65)
78000
33Eastern Electric Corporation
34Transport Service Selection
- Tradeoff between transport costs and associated
inventory costs - Example Ballou, p. 221-223
- Competitive considerations
- increased patronage due to better transport
services - better transport reflected in goods price
- transport volume effect on supplier inventory
levels
35Example
The Carry-All Luggage Company produces a line of
luggage goods. The typical distribution plan is
to produce a finished goods inventory located at
the plant site. Goods are then shipped to
company-owned field warehouses by way of common
carriers. Rail is currently used to ship between
the East Coast plant to a West Coast warehouse.
The average transit time for rail shipment is
T21 days. At each stocking point, there is an
average of 100,000 units of luggage having an
average value of C30 per unit. Inventory
carrying costs are I30 percent per year. The
company wishes to select the mode of
transportation that will minimize total costs. It
is estimated that for every day that transit time
can be reduced from the current 21 days, average
inventory levels can be reduced by 1 percent,
which represents a reduction in a safety stock.
There are D700,000 units sold per year out of
the West Coast warehouse. The company can use the
following transportation services
36Example (continued)
Procurement costs and transit-time variability
are assumed to be negligible. A diagram of the
companys current distribution is shown below. By
selecting alternate modes of transportation, the
length of time that inventory is in transit will
be affected. Annual demand (D) will be in transit
by the fraction of the year represented by T/365
days, where T is average transit time. The annual
cost of carrying this in-transit inventory is
ICDT/365. The average inventory at both ends of
the distribution channel can be approximated as
Q/2, where Q is the shipment size. The holding
cost per unit is I?C, but the item value C must
reflect where the inventory is in the channel.
For example. The value of C at he plant is the
price, but at the warehouse it is the price plus
the transportation rate.
37aR transport rate D annual demand I carry
cost (/yr) C product value at plant
Cproduct value at warehouse (CR) T time in
transit and Q shipment size. b100,000 is more
than the shipping quantity/2 to account for
safety stock.. cAccounts for improved transport
service and number of shipments per year.
38Tradeoffs in Transportation Design
- Transportation, facility, and inventory cost
tradeoff - Choice of transportation mode
- Inventory aggregation
- Transportation cost and responsiveness tradeoff
39Alloy Steel - Transportation cost and
responsiveness tradeoff
- Order shipped via LTL
- shipping cost 100 0.01 (shipment weight in
pounds) - plus 10 per delivery
- two day in transit
- Current ship orders on arrival
- two-day response time
- Three-day response?
- Can aggregate and ship every other day
- Four-day response?
40Alloy Steel - Shipment size and Transportation
Costs vs. Response Time
41Transportation Network Design
- Direct Shipment Network
- Delivery direct from a supplier to a retailer
- Direct Shipment with Milk Runs
- Delivery from single supplier to several
retailers - Central Distribution Centre (DC)
- Suppliers ship only to DC
- DC ship direct to retailers
- Central Distribution Centre with Milk Runs
- Tradeoffs? Number and location of DCs?
42Transportation Network Designs
Suppliers
Retailer Stores
Suppliers
Retailer Stores
Direct Supplier Network
Direct Shipping with Milk Runs
43Transportation Network Designs
Suppliers
Retailer Stores
Suppliers
Retailer Stores
DC
DC
All Shipment via DC
Milk Runs From DC
44Physical Inventory Aggregation Inventory vs.
Transportation cost
- As a result of physical aggregation
- Inventory costs decrease
- Inbound transportation cost decreases
- Outbound transportation cost increases
- Good when
- inventory and facilities costs high
- product has high value-to-weight ratio
- products with high variability
- On-line store vs. real retail locations
- store bears out-bound costs as well as in-bound
costs
45Inventory Aggregation at HighMed
- Medical equipment sold direct to doctors
- Madison -gt 24 sales territories (each keeping own
inventories) - Highval (200, 0.1 lbs/unit)
- weekly demand in each of 24 territories ?H 2,
?H 5 - Lowval (30/unit, 0.04 lbs/unit)
- weekly demand in each territory ?L 20, ?L 5
- Cycle Service Level 0.997
- Inventory holding percentage 25
- Current Territories re-order every 4 weeks
- UPS rate 0.66 0.26x for replenishments,
lead time 1 week - Option A Territories re-order every week
- Option B Aggregate all inventory at central
warehouse, replenish warehouse weekly, ship
direct to customers - Average customer order 1 HighVal and 10 LowVal
- FedEx rate 5.53 0.53x for customer shipping
46HighMed Current Scenario
- Reorder interval T 4 weeks
- Replenishment lead-time 1 week (by UPS)
- Inventory costs (HighVal)
- Lot size QH T ?H (4)(2) 8
- Safety stock ssH F-1(CSL) (TL)0.5 ?H 30.7
- Average inventory for 24 regions 24(QH/2 ssH)
832.8 - Annual inventory holding cost
(832.8)(200)(0.25) 41,640 - Inventory costs (LowVal) (1696.8)(30)(0.25)
12,726 - Transportation costs
- Avg. weight of each replenishment order 0.1 QH
0.04 QL (0.1)(8)(0.04)(80) 4 lbs. - Shipping costs per order 0.66(0.26)(4)
1.70 - Annual transportation costs (52/4)(24)(1.70)
530 - Total Cost 54, 896
47Inventory Aggregation at HighMed
If shipment size to customer is 0.5H 5L, total
cost of option 2 increases to 36,729.
48Transportation System Design
- AC Delco Very high value low volume parts
- Three plants Milwaukee, Kokomo, Matamoros
- 21 assembly plants (customers for above plants)
- What are the distribution options? Which one to
select? On what basis?
49 50- Some shipments direct,
- Some from Kokomo
51Milk Runs From Plants
Milwaukee
Number of DCs? Location of DCs?
Kokomo
Matamoros
52Total Costs
53Network Design Tradeoffs
- Direct Shipment Network
- Simple operation
- Delivery Lot-size truckload
- High inventories
- High loading/unloading costs
- Direct Shipment with Milk Runs
- Small lot-size per retailer
- Increased co-ordination complexity
- Central Distribution Centre (DC)
- Inventory consolidation/disaggregation
- Transfer point (allow transportation mode change)
- Lower in-bound transportation costs
- Central Distribution Centre with Milk Runs
- Increased co-ordination complexity
54Cross-docking
- Inbound goods transferred directly into outbound
vehicles without being stored in DC - Disaggregate goods from one supplier to several
retailers - Aggregate different goods from respective
suppliers to one retailer - Economies of scale (both in- and out-bound)
55Line Haul and Cross Dock
Milwaukee
- This approach is useful if deliveries are time
sensitive and there are several dropoffs in
proximity, not all of which can be delivered on a
single truck.
Kokomo
Matamoros
56Tailored Network
- Use combination of options to reduce costs and
improve responsiveness - High volume ship direct
- Low volume consolidate in DC
57Tailored Transportation
- Factors affecting tailoring
- Customer distance and density
- high customer density near DC -gt own fleet, milk
runs - customers far away -gt use third-party carrier
reduce backhaul costs - Customer size
- TL, LTL, courier
- Replenishment frequency
- Mixed milk runs with large and small customers
- Product demand and value
- high demand, high value cheap mode for cycle
stock replenishment aggregate safety stock, fast
transport mode - high demand, low value disaggregate inventory
location, cheap mode - low demand, high value aggregate inventories,
fast mode - low demand, low value aggregate only safety stock
58Summary of Learning Objectives
- Strengths and weaknesses of transport modes
- Choices of transportation networks
- Tradeoffs in transportation network design
- Tailored transportation networks
- Reference Chopra Meindl, Supply Chain
Management, 2004, Prentice-Hall.