Transportation

1
Transportation
2
Relative Transportation Costs

• Transportation costs represented 6.3 of total
  U.S. GDP in 1990
• Transportation costs represented over 50 of
  total U.S. logistics expenditures in 1990
• Transportation accounted for 27 of total U.S.
  energy use and 63 of total U.S. petroleum use in
  1990

3
Economic Impact

• Logistics contributes approximately 10.5 of GDP
• U.S. industry spent 451 billion on freight
  transportation in 1996
• U.S. industry spent 311 billion on warehousing,
  storage, and carrying inventory in 1996
• Total logistics costs equals almost 800 billion

4
Logistics Overview

• Why has logistics become increasingly important?

• Cost reduction pressures are severe
• Logistics has a high impact on customer service
• A strong need exists for demand and supply
  planning consistency
• A focus on core competencies has placed logistics
  in the outsourcing spotlight
• Development of IT technology supports integrated
  logistics management
• Government deregulation of transportation has
  created new opportunities

5
Total Cost Concept

• The total cost concept recognizes that an optimum
  cost in one area or function may not lead to an
  optimum total system cost
• Total cost analysis requires the management of
  supply chain trade-offs
• Logistical activity areas that drive total
  logistics costs
• Customer service level costs
• Inventory carrying costs
• Lot quantity costs
• Order processing and information costs
• Warehousing costs
• Transportation costs

6
Customer Service Measures

• Order cycle lead time
• Stock availability/fill rates/stockouts/back
  orders/partial shipments
• Record integrity
• Frequency of delivery
• Delivery reliability
• Order tracing capability
• Volume flexibility

7
Customer Service Measures

• Invoice accuracy
• Order status information
• Technical support responsiveness
• Unscheduled service responsiveness
• Speed of product feature changes
• Product and service quality

8
Value-added Transportation Concept
Product/Info Flows
Inbound
Outbound
Supplier
Manufacturer
Customer
Info/Return Goods Flows
9
Transportation-Related Service Elements

• Speed time-in-transit
• Availability accessible to customers when they
  want it
• Dependability pick-up and delivery time
  variability
• Flexibility adjustment to shippers needs

10
Basic Modes of Transportation

• Fixed Variable Traffic
• costs costs composition
• Rail high low bulk food, mining,
• heavy mfg
• Motor low medium consumer goods,
• medium/light mfg
• Water medium low bulk food, mining,
• chemicals
• Air low high high-value goods,
• rush shipments
• Pipe high low petroleum, chemicals,
• mineral slurry

11
Relative Operating Characteristics

• Operating
• characteristics Rail Motor Water Air
  Pipe
• Speed 3 2 4 1 5
• Availability 2 1 4 3 5
• Dependability 3 2 4
  5 1
• Capability 2 3 1 4 5
• Frequency 4 2 5 3 1
• Composite 14 10 18 16 17
• 1 best, 5worst

12
Intermodal
Rail
Truck
Air
Water

• Enables shippers to benefit from advantages of
  multiple modes of transportation
• minimizes disadvantages of individual modes

13
Transportation Decision Making in an Integrated
Supply Chain
Understand total network flows
Strategic
Macro
Understand individual lane flows
Understand current carrier usage patterns
Decision Scope
Make mode/carrier decisions
Routing/Scheduling, Load Planning, etc.
Operational
Micro
14
Transportation Costs

• Product related
• density
• stowability
• ease or difficulty of handling
• liability

• Market related
• intramode/intermode competition
• location of markets
• nature and extent of regulation
• balance/imbalance of freight traffic
• seasonality of product movements
• domestic vs. international

15
Transportation Economies

• Economy of Scale

Cost per unit
LTL
Volume/weight
TL
16
Transportation Economies

• Economy of Distance

Tapering Principle
Cost per load
Distance
17
Shelf Standards

• Brand Consolidation
• Space
• Position
• Proper Groupings
• Price
• Schematic
• Housekeeping
• Point of Sale

18
Shelf Management Principles

• Place your wines at eye level or the best
  position possible.
• 80 increase if moved from bottom to eye level
• 43 increase if moved from bottom to waist level
• Place your wines next to the best selling
  competitive wines.
• Place your wines next to wines that are priced
  higher than your wines.

19
Topics

• Introduction
• Transportation Infrastructure
• Transportation Management

20
Introduction

• Importance of Transportation
• Value-added Role of Transportation

21
Transportation Role in Value Attainment Process

• Critical element of structure, capacity, and
  movement decisions
• Both between supply chain members and
  intra-organizational

22
Transportation Infrastructure

• Modal Characteristics
• Changing Environment

23
Distribution of U.S. Intercity Freight ( of
ton-miles)

• Rail Motor Water Air Pipe
• 1980 38 22 17 .2 24
• 1990 37 26 16 .2 20

Average Revenue per Ton-Mile
1980 2.8 18.0 .77 46
1.0 1990 2.7 24.4 .75 140
1.4
24
Changing Transportation Environment

• Deregulation
• Time-based competition
• Expanding geographic coverage
• Information technology
• Social and environmental concerns

25
Selected Results of the Changing Environment -
Economic Impact

• Increased competition in individual markets -
  both within modes and between modes
• More efficient carrier operations - less
  interlining, more direct routing, efficient
  pricing
• Transportation costs declined in real terms and
  as percent of GDP
• Transportation service quality improved

26
Selected Results of the Changing Environment -
Industry Impact

• Consolidation in rail, air and LTL trucking
• Proliferation of TL carriers
• Strong growth in regional trucking - networks
• TL growing faster than LTL
• Air freight growth
• Intermodal growth rail-truck, air-truck,
  rail-ship
• Growth of one-stop shopping - 3PL
• Private fleet conversion

27
Selected Results of the Changing Environment -
Market Impact

• Demand for fast, dependable, responsive service
  at lower cost
• Demand for a broader range of services to
  integrate supply chain functions
• Core carrier concept - interdependence between
  shipper-carrier
• Customized price/service packages/contracts
• Relational view of transportation as a
  value-added service

28
Transportation Management

• Network Freight Flows Macro-Decisions
• Micro-Decisions
• Information Systems Support

29
Network Freight Flows A Fully Integrated
Approach

• Managing Inbound-Outbound flows in an optimal
  manner requires firm to have a good handle on the
  entire logistics process
• Traditionally view transportation in a vacuum--
  need to look at it in the context of the total
  logistics system
• Greatest improvement opportunities lie in
  integrating transportation with other logistics
  functional areas such as purchasing, inventory
  control, forecasting and production scheduling

30
Approach to Analysis

• Analyze lane densities/frequencies what
  opportunities emerge for
• inbound/outbound consolidation
• vehicle consolidation
• temporal consolidation
• network consolidation - cross dock potential (hub
  and spoke systems)

31
Approach to Analysis (cont.)

• ) Once opportunities for consolidation are
  visible, make mode/carrier selection based on
  service/cost mix
• Given similar service, are rates better on 1
  mode/carrier than another?
• Does any mode/carrier have relative strengths in
  a particular lane?
• Any backhaul opportunities?
• ) If so, look to consolidate loads on
  mode/carrier with best cost structure - assign
  private fleet to most costly routes

32
Consolidation Opportunities

• Inbound-Outbound flow consolidation look for
  opportunities to combine inbound/outbound freight
• Vehicle consolidation use one vehicle/multi
  stops for LTL volumes vs. one shipment to each
• Temporal consolidation hold orders until large
  volume shipment possible

33
Suggested Analyses

• Network flows
• Lane densities, frequencies, consistency
• Freight distribution by mode, carrier
• Consolidation opportunities

34
Nodes and links in a Logistics System
(Wwarehouse, Pplant, Mmarket)

• M M
• M W
• P W P
• M W W
• W P W
• M W P M

35
Total freight flows
36
Lane Densities

• Volume on a weekly basis
• Consistency of volume
• Volume Consistency Rate bargaining power
• Identify LTL freight consolidation opportunities

37
Inbound-Outbound Lane Densities

• Site State In Avg Wt Out Avg Wt
• DC 1 CA 135 2024 592 989
• DC 2 CA 110 625 465 654
• DC3 CA 125 1690 572 1005
• DC1 AZ 2 228 28 444
• DC2 AZ 7 502 9 484
• DC3 AZ 1 1135 36 622
• DC1 NM 0 0 44 462
• DC2 NM 0 0 42 418
• DC3 NM 0 0 89 517
• DC1 TX 598 971 1975 957
• DC2 TX 911 3147 2125 693
• DC3 TX 1631 1619 1368 1716

38
Mode/Carrier Profile Analysis

• Understand freight distribution among carriers by
  state
• Identify potential for core carrier concept

39
CARRIER WT (k) OF MARKET COTTON 4261.4 18.7
WARDS 3050.7 13.39 PIQUA 2491.2 10.93 SO.BRO
KE 1914.4 8.40 N P 1764.0 7.74 TRANSDYN 15
46.2 6.78 KBT 1368.6 6.01 ITCO 1363.0 5.98
WRIGHT 811.9 3.56 TELEDYNE 727.2 3.19 OSBORN
723.1 3.17 SHAFFER 421.3 1.85 THREE
I 259.0 1.14 ROCHEST 253.4 1.11 INTERSTATE 2
50.3 1.10 SUNFLOWER 232.0 1.02 SOS 190.2 0.
83 MAWSON 169.9 0.75 LEE EXPR 165.4 0.73 PO
OLE 127.0 0.56 OLDSOUTH 124.1 0.54 NOBLETRK 1
23.6 0.54 CONCEPT 121.5 0.53 VICTORY 86.2 0
.38 RBX 69.7 0.31 S M 44.0 0.19 NORANDAL
43.6 0.19 PERFORM 43.1 0.19 MCGRIFF 42.3 0.
19
North Carolina TL Van Freight Distribution
40
Summary

• Identify
• Opportunities to achieve balanced flows - obtain
  lower rates for providing loads both ways
• Significant volumes for rate negotiation
• Vehicle/temporal consolidation opportunities
• Advantages of reducing number of carriers

41
Mode/Carrier Selection

• step 1
• step 2
• Modal Choice
• basic mode Specific Carrier step 3
• intermodal legal type Transport
• individual carrier provider

42
Transportation Pricing

• Function of
• cost-of-service
• value-of-service

43
Prices and Volume

• Per pound costs will decrease over volume/weight

Price per pound
Weight of load
44
Price and Density

• Assuming no weighing out, denser products use
  space better

Price per pound
cotton
steel
Product Density
45
Transportation Cost Structures

• Variable costs vary with services or volume
• line-haul costs of fuel, labor and maintenance
• handling
• pickup and delivery
• Fixed constant regardless of activity
• Facilities, equipment and administration
• Joint hand-in-hand costs -- unavoidable
• Example the backhaul move
• Common shared costs (overhead)
• need for Activity-based costing

46
Pricing Structures

• Cost-of-service cost plus method
• Value-of-service market based method
• Combination a middle of the road approach using
  cost (minimum) and value (maximum)
• Net Rate Pricing All-inclusive prices specific
  to customers needs (not discount-based)

47
Limits on Rates

• maximum value of service demand
• rate level
• minimum cost of service supply
• fully allocated
• average variable
• out-of-pocket

48
Routing and Scheduling

• Goals
• find best path a vehicle should follow through
  networks of roads, rail lines, shipping lanes,
  and air routes
• determine best pattern for stops, multi-vehicle
  use, driver layovers, time of day restrictions
• Benefits
• greater vehicle utilization
• improved and more responsive customer service
• reduced transportation expenses
• reduced capital investment in equipment

49
Principles for Good Routing/Scheduling

• load trucks with deliveries for customers closest
  to each other
• stops on individual days arranged together
• start routes with farthest stops first
• circular routes - dont cross paths
• use largest vehicles first if can be filled
• mix pickups in with deliveries, not at end
• if one stop far from other, use other truck
• avoid narrow stop time windows, or handle
  separately

50
What Is Contract Logistics?

• It is a very confusing term because there are so
  many different descriptions of what it really is.
• Contracting out the entire distribution function
  and the related information function
• Subcontracting specific logistics activities to
  a third-party specialist service provider.
• A wide range of practices fall under these
  definitions

51
Services Provided by Third-party Logistics
Providers

• Transportation
• Warehousing
• Information management
• Human resources
• Management

52
Two Types of Providers

• Asset-based
• Own their own warehousing, transportation,
  computer systems, etc.
• Data-based
• essentially asset free companies who sell
  logistics management capability through their
  computer systems and managerial skill
• There is frequently a bias against asset-based
  providers

53
Categories of Services Available

• Exclusive Service Provider-devotes all resources
  to a single client
• Consortium Service Provider-provides services to
  a small group of clients
• Specialist Provider-provides services for
  products or clients who have specialized needs
• National/Multinational Provider-provides services
  to many clients throughout the world

54
Business Drivers

• Stick to the knitting
• Vertical disintegration
• How to do more, with less

55
Changing Business Environment

• Debt reduction ltgt unleveraging
• Strategic focus of ...
• Financial resources
• Human resources
• Information technology
• Competition
• Faster (agility)
• Better (quality)
• Cheaper (low cost provider)

Investment Rationing
56
Advantages/Disadvantages

• Less asset investment, redeploy capital
• Lower operating cost (service provider
• has economies of scope and scale)
• Time lag between increased costs
• and changing rates
• More attention for core business
• Gather missing management knowledge
• Provide higher service level
• Increased flexibility
• Entry mode to new markets
• Flexibility as environment changes

• Switching costs
• Possible higher operating costs
• Less direct customer contact
• Dependency
• Loss of control

57
Information Systems Support

• Network analysis
• Electronic Data Interchange
• Freight rate maintenance and auditing
• Routing and scheduling
• Administration
• Produce/track bill of lading for each shipment
• Automated bills of lading
• Automate shipment data files
• Carrier evaluation