Transportation Strategy in a Supply Chain

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Transportation Strategy in a Supply Chain
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Outline

• 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
  leadtimes
• Routing and Scheduling

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Importance of Transportation

• USA Freight in 1996 US 455 billion, 6 of GDP
• 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?

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Factors 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

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Transportation Modes (USA, 1998)
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Air

• 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

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Truckload (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

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Less 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

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Rail

• 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

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Pipeline

• 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

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Water - 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
• teminal costs harbour fees, loading/unloading(hig
  h costs if not containerised)
• Variable costs (low)
• no charge for use of waterways
• favours bulk commodity goods

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Containerised 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
• 75 of US ocean merchandising trade
• 70 by weight of cargo movement of Hong Kong
• containerised air freight gaining popularity
• standard size avoids re-handling
• 8 x 8 x 20 (TEU)
• 8 x 8 x 40 or 8 x 8 x 45

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International Transportation

• Mainly by Water (Container)
• over 50 by value
• 99 by weight
• By Air 21 by value
• Complexities
• customs documentation
• limited entry/exit points to a country
• limited carrier liability
• increased protective packaging

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Hong Kong - Inward/Outward Cargo Movements
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Intermodal 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

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Hong 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

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Other 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

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Transportation Costs

• 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?

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Transportation 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

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Transportation 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

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Freight Rate Structures
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Other 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

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Special 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

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Documentation

• 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

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International Transport Documents
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International Transport Documents
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Transport 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

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Choice of Transportation Mode Eastern Electric
Corporation

• 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

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Eastern Electric Mode Choices
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Eastern 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

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Eastern Electric Corporation
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Transport Service Selection

• Tradeoff between transport costs and associated
  inventory costs
• Example Ballou, p. 187-189
• Competitive considerations
• increased patronage due to better transport
  services
• better transport reflected in goods price
• transport volume effect on supplier inventory
  levels

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Example Ballou, p. 187-189
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Example Ballou, p. 187-189
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Example Ballou, p. 187-189
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Tradeoffs in Transportation Design

• Transportation, facility, and inventory cost
  tradeoff
• Choice of transportation mode
• Inventory aggregation
• Transportation cost and responsiveness tradeoff

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Alloy 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?

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Alloy Steel - Shipment size and Transportation
Costs vs. Response Time
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Transportation 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?

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Transportation Network Designs
Suppliers
Retailer Stores
Suppliers
Retailer Stores
Direct Supplier Network
Direct Shipping with Milk Runs
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Transportation Network Designs
Suppliers
Retailer Stores
Suppliers
Retailer Stores
DC
DC
All Shipment via DC
Milk Runs From DC
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Physical 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

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Inventory 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

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HighMed 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

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Inventory Aggregation at HighMed
If shipment size to customer is 0.5H 5L, total
cost of option 2 increases to 36,729.
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Transportation 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?

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• All Shipments via Kokomo

• All Shipments Direct

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• Some shipments direct,
• Some from Kokomo

• Milk Runs from Kokomo

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Milk Runs From Plants
Milwaukee
Number of DCs? Location of DCs?
Kokomo
Matamoros
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Total Costs
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Network 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

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Cross-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)

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Line 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
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Tailored Network

• Use combination of options to reduce costs and
  improve responsiveness
• High volume ship direct
• Low volume consolidate in DC

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Tailored 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

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Summary 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, 2001, Prentice-Hall.