Growth in international trade

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Growth in international trade
Caused greater reliance on intermodal
connections, ports, and air terminals
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Growth not from neighbors
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Major Gateways
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Logistics Cost

• Professor Goodchild
• Spring 09

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How do goods get to market?
West Coast Port
Asian Factories
Distribution Center
Destination Store
Container on marine vessel
Short or Long-haul truck
Drayage truck
Transportation cost is typically much less
significant than the reductions in
manufacturing.
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Logistics Costs

• Transportation cost
• The cost incurred through the need to move
  products over space.
• In a vehicle, with a forklift, etc.
• Inventory cost
• The cost incurred through the need to hold goods
  over time.
• In a vehicle, in a distribution center, etc.

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• In-transit inventory or pipeline inventory
  inventory that is in the process of movement from
  point of receipt or production and between points
  of storage and distribution.
• Inventory-at-rest inventory that is NOT in the
  process of movement from point of receipt or
  production and between points of storage and
  distribution, rather it is stationary, typically
  at a production facility, warehouse, distribution
  center, or consumption facility.

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How does REI get goods to market?
West Coast Port
Asian Factories
Distribution Center
Destination Store
Container on marine vessel
Short or Long-haul truck
Drayage truck
In transit inventory
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Initial gains from deregulation (restructuring of
networks), stalling in the mid-90s dropping off
again after 9/11, but increasing with congestion
and fuel prices After 2003.
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(No Transcript)
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Currently inventories are piling up
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Follow the path of an item

• Carried from production area to storage area
• Held in temporary storage
• Loaded into transport vehicle
• Transported to the destination
• Unloaded, handled, and held for consumption

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What incurs cost?

• Overcoming distance (motion)
• transportation cost (over the road/rail)
• handling cost (through a terminal, in and out of
  vehicles)
• Overcoming time (holding)
• holding cost
• Rent (proportional to DH)
• Waiting (valuetimeinterest rate)
• In transit
• pipeline

How you calculate the value depends on the
analysis you are doing (cost or price) We will
include all costs, regardless of who pays them
(we are designing systems)
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Cumulative Number of Items Diagram
Production (rate D)
shipments
cumulative number of items
An item is a fixed quantity of infinitely
divisible quantity (e.g. person, parcel, case of
beer)
H
tm
Consumption (D)
arrivals
time
Consider units on area
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Queue Discipline

• FIFO First In First Out
• LIFO Last In First Out
• Others

If LIFO inventory cost is usually underestimated
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Holding cost Rent

• proportional to max. accumulation
• Independent of flow rate, D
• Proportional to max. time between dispatches

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Holding cost Waiting

• Cost associated with delay to items
• ciHi citm
• Stationary pipeline inventory
• Determining ci is difficult

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Transportation Cost

• Shipment cost has fixed and variable portions
  cf cvv (v is number of items)
• Fixed cost driver wage
• Variable cost increased fuel consumption
• Cost for n shipments cfn cvV (V is total
  items across shipments, n is number of shipments)

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Transportation cost

• Cost per item cf/vavgcv
• Economies of scale from sharing fixed cost
• Also cost per item is (cf/DHavg)cv
• Transportation cost decreases with average
  headway
• Holding cost increased with maximum headway
• Therefore shipments should be spread so as to
  minimize the maximum (all the same)

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Transportation cost and distance

• cf is independent of v (items) but both cf and cv
  are typically functions of distance (d)
• cfcscdd
• cvcscdd
• Cost for n shipments cfncvV
• csncddncsVcddV
• Add cost of stopping cs(1ns)ncddncsVcddV

So small we neglect it
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Transportation cost

• Cost per item (divide by nvavg)
• cs(1ns)/vavgcdd/vavgcs or
• cs(1ns)/DHavgcdd/DHavgcs
• If headways vary a lot so do shipment sizes, and
  therefore truck sizes, better to use consistent
  truck sizes (second reason to keep shipment sizes
  consistent)

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Capacity Restrictions
Trans. Cost Per shipment
cv
cf
Slope is total cost per item, lowest when truck
full
vmax number of items that will fit in vehicle
shipment size
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Relationship to size
Magnitude of fixed and variable cost determine
most economic choice as a function of shipment
size.
Trans. Cost Per shipment
As shipment size increases, favor lower
variableand higher fixed costs.
shipment size
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Inventory Cost

• Captures time-value of holding product
• Perishability, theft, opportunity cost of cash,
  insurance, shrinkage, obsolescence
• Usually 10-15 for electronics
• Value of goodinterest ratetime

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Exercise
Fuel economy 10 mpg Driver wages
15/hour Ignore depreciation of vehicle,
insurance Speed of vehicle 25 mph Price of fuel
2.50 per gallon Value of goods in a truck
100,000 Interest rate 6 per year Time spent
at DC 3 days Handling cost at DC 50 per
truck Ignore rent, operating cost of
DC Calculate one way transportation cost and
one way inventory cost.
60 miles
100 miles
100 miles
DC
40 miles
50 miles
50 miles
100 miles
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Cost Comparison
Transportation Inventory Handling Total
Direct 3(6025) 255 3(2.74) 8.22 0 263.22
DC (3 days) (3615) 2(3012.50) (2410) 170 4.93 2(1.37) 1.10 3(49.32) 156.73 150 476.73
DC (1 days) (3615) 2(3012.50) (2410) 170 4.93 2(1.37) 1.10 49.32 58.09 150 378.09
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Hypothetical curves
Minim cost shipment frequency
total
transportation
cost
inventory
Shipment frequency
We will identify the optimal when we talk about
distribution systems
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Cumulative Number of Items Diagram
Production (rate D)
shipments
cumulative number of items
An item is a fixed quantity of infinitely
divisible quantity (e.g. person, parcel, case of
beer)
H
tm
Consumption (D)
arrivals
time
Consider units on area
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Cumulative Number Diagram

• Good for one origin/one destination problems
• Identify production and consumption rates
• Items waiting to be shipped
• Shipment times
• Shipment sizes
• Items waiting to be consumed
• Total wait time from production to consumption
  (if FIFO)
• Headway (H)
• Travel time
• Units
• Storage space proportional to max accumulation is
  DH

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Network Structures

• Trade-off inventory cost and transportation cost
• Milk-run
• Hub and spoke (distribution center)
• Direct Shipping

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warehouse
crossdocks

• No DC cost
• Reduce lead times
• Higher transportation expense
• Good if fully loaded trucks or timely goods

• Store goods to pool inventory risk
• Trade-offs in size as more demand can be pooled,
  but then farther from destination

• Not stored for a significant length of time
• Sorted, consolidated, shipped out directly
• Use different containers
• Requires high volume

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Exercise
Inventory Pooling What is the inventory held in
the system without the distribution
center? What is the inventory held in the
system with the distribution center?
60 miles
100 miles
100 miles
DC
40 miles
50 miles
50 miles
100 miles
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Inventory Aggregation
Store 1 Store 2 Store 3
Average demand 10 units/day 20 units/day 30 units/day
Standard deviation of demand 2 units/day 4 units/day 6 units/day
Calculate number required on hand if held at 3
stores, central facility. Online retailers as
well as traditional retailers Typically increases
transportation cost (think outbound, but who
pays?)
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Inventory Management

• Improve service level
• Reduce logistics cost
• Cope with randomness and seasonality
• Speculate on price
• Overcoming inefficiencies in managing the
  logistics system

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Distribution Systems

• Prof. Anne Goodchild
• Spring 2009

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Distribution systems

• One to one
• One to many
• Many to one
• Many to many

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1-1 Distribution Examples

• Port to rail head drayage
• Small in scale and/or scope
• Decisions
• Shipment frequency
• Route (this is typically a function of the
  network and travel times)
• Shipment times

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1-1 Distribution

• Constant demand
• Trade-off inventory and transportation cost
  zminv(ch/D)vcf/v, s.t. vltvmax
• cf fixed transportation cost
• ch holding cost
• vsqrtcfD/ch

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EOQ (economic order quantity)

• zminvAvB/vC
• vsqrtB/A
• z2sqrtAB
• If vgtvmax use vvmax
• v makes both of the terms in the objective
  function equal (motion cost holding cost)
• Why should these be equal?

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Lot Size problem with Variable Demand

• D(t) gives cumulative number of items demanded
  between 0 and t
• D(t) is variable demand rate
• Seek the set of times when shipments are to be
  received and the shipment sizes that will
  minimize sum of motion plus holding costs over
  some time period
• With an infinite time horizon and constant demand
  this is the EOQ problem just discussed

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When holding cost close to rent

• Variable demand
• Inventory cost negligible (big, cheap items)
• Increases with maximum inventory accumulation
• Recall motion cost independent of shipment sizes
  and times (only dependent on total amount moved
  or average)
• Thus we want to choose times and sizes to
  minimize holding cost
• V D(tmax)/n, all equal minimizes cost
• cost/timecrD(tmax)/ncfn/tmax, find n by
  minimizing

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When rent is negligible

• Small, expensive items
• Simple expression cannot be obtained unless D(t)
  varies slowly with t (CA method)
• Use numerical solution (e.g. dynamic programming)

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One to Many Distribution

• Movement of containers from the port to landside
  destinations
• Delivery systems
• Decisions
• Network structure
• Fleet size (VRP and TSP)
• Shipment frequency
• Use of an intermediate facility (minimizing
  logistics cost)

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Many to one distribution

• Export containers being delivered to a marine
  port
• Collection systems
• The same analytical methods can be used as with
  one to many distribution
• Decisions
• Network structure
• Fleet size
• Shipment frequency
• Use of an intermediate facility

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Many to Many Distribution

• Global distribution of marine containers
• Collection and distribution systems
• Decisions
• Network structure
• Coordination of inboundand outbound shipments

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Many to many distribution

• The problem can often, and should often, be
  broken down into pieces
• Inbound logistics (many to one)
• Outbound logistics (one to many)
• Be mindful of who is responsible for cost within
  the supply chain
• Most supply chains are not operated by the same
  entity
• Use terminals to consolidate some of the flow

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Transshipment
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Transshipment
1
Reduce line-haul cost through consolidation
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Transshipment
Influence area
2
1
2
Introduce levels of transshipment terminals These
can be used on the collection side or the
distribution side Consider the use of tiered
airports in a hub and spoke system
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Influence Areas
total
outbound
Cost per item delivered
inbound
terminal
Size of influence area
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Themes

• Scale
• What part of the logistics system will you
  consider?
• Typically determined by ownership and operating
  units but it depends on your goals
• Consistency
• Logistics systems are more manageable