Transportation Strategy in a Supply Chain

1
Transportation Strategy in a Supply Chain
2
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
  lead-times

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Importance 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
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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)
Mode Freight Value in 2002a ( billons) Intercity Ton-miles in 2002a (billions) Intercity Tonnagea (millions) Revenue / Ton-mileb Average haul length 2002a (miles per ton)
Air 777 15 10 61.20 1429
Truck 6,660 1,449 9197 9.13 158
Multimodal 1,111 226 213 1061
Rail 388 1,254 1,895 2.28 662
Water 867 733 2,345 0.74 313
Pipeline (Oil) 285 753 1,656 1.46 455
a U.S. Bureau, Statistical Abstract of the United
States 2002 b Ballou, Business Logistics
Management, 5th edition, 2004
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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
• 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

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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
• 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

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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
• 2 million carloads (13 million units) moved in
  2004

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International 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

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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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• Hong Kong also one of the worlds busiest
  cross-border road cargo traffic

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Worlds BusiestCargo Airports
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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

• 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?

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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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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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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- 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.

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International 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.

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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

• 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

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Eastern Electric Mode Choices
Marginal discount applies (i.e. first 150 cwt
cost 8, next 100 cwt cost 6, etc.)
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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. 221-223
• 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
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
Transportation Service Rate (/unit) Door-to-door Transit Time (days) No. of shipments per year
Rail 0.10 21 10
Piggyback 0.15 14 20
Truck 0.20 5 20
Air 1.40 2 40
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Example (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.
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Modal Choices Modal Choices Modal Choices Modal Choices
Cost Type Method of Computat-iona Rail Piggyback Truck Air
Transportation R?D (0.10)(700,000) 70,000 (0.15)(700,000) 105,000 (0.2)(700,000) 140,000 (1.4)(700,000) 980,000
In-transit Inventory ICDT/365 (0.30)(30) (700,000)(21)/ 365 363,465 (0.30)(30) (700,000)(14)/ 365 241,644 (0.30)(30) (700,000)(5)/ 365 86,301 (0.30)(30) (700,000)(2)/ 365 34,521
Plant Inventory ICQ/2 (0.30)(30) (100,000)b 900,000 (0.30)(30) (50,000)(0.93)c 418,500 (0.30)(30) (50,000)(0.84)c 378,000 (0.30)(30) (25,000)(0.81)c 182,500
Field Inventory ICDQ/2 (0.30)(30.1) (100,000) 900,300 (0.30)(30.15) (50,000)(0.93)c 420,593 (0.30)(30.2) (50,000)(0.84)c 380,250 (0.30)(31.4) (25,000)(0.81)c 190,755
Total 2,235,465 1,185737 984,821 1,387,526
aR 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.
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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
2-Day Response 2-Day Response 3-Day Response 3-Day Response 4-Day Response 4-Day Response
Day Demand Quantity Cost() Quantity Cost() Quantity Cost()
1 19,970 19,970 299.70 0 0 0 0
2 17,740 17,740 274.70 37,440 474.40 0 0
3 11,316 11,316 213.16 0 0 48,756 587.56
4 26,192 26,192 361.92 37,508 475.08 0 0
5 20,263 20,263 302.63 0 0 0 0
6 8,381 8,381 183.81 28,644 386.44 54,836 648.36
7 25,377 25,377 353.77 0 0 0 0
8 39,171 39,171 491.71 64,548 745.48 0 0
9 2,158 2,158 121.58 0 0 66,706 767.06
10 20,633 20,633 306.33 22,791 327.91 0 0
11 23,370 23,370 333.70 0 0 0 0
12 24,100 24,100 341.00 47,470 574.70 68,103 781..03
13 19,603 19,603 296.03 0 0 0 0
14 18,442 18,442 284.42 38,045 480.45 38,045 480.45
4,164.46 3,464.46 3264.46
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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, 2004, Prentice-Hall.