Lecture 3: Transportation Strategy (Transport_2002.ppt)

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 SchedulingRouting 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 => 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)

Mode FreightExpense(billions)

Inter-cityTon-miles(billions)

IntercityTonnage(millions)

Revenue/Ton-mile(cents)

Averagehaul length(miles)

Air 18.87 12.72 10.5 58.75 1260

Truck(TL)

348.11 921 3373 9.13 289

Truck(LTL)

25.08 629

Rail 34.36 1375 1911 2.50 722

Water 22.24 258 1000 0.73 Rivers/canals481

Great Lakes 509Costal 1653

Pipeline 8.29 599 (Oil) 1118 1.40 Crude 761Products 394

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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(high 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)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 timedelivery lead time Holding cost = 25%

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Eastern Electric – Mode ChoicesAlternative Range of Quantity

Shipped (cwt) Shipping Cost ($/cwt)

Transit Leadtime

AM Rail 200+ $ 6.50 6

Northeast Trucking

100+ $ 7.50 4

Golden 50-150 $ 8.00 4

Golden 150-250 $ 6.00 4

Golden 250-400 $ 4.00 4

Golden 250 -400 $ 3.00 4

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Eastern Electric – Rail optionMinimum shipment = 20000 lbs = 2000 motorsCycle inventory = Q/2 = 2000/2 = 1000Safety stock = L/2 days’ demand = (6/2)

(120000/365) = 986In-transit inventory = (120000/365)5=1644Annual holding costs = (1000+986+1644)(120)

(0.25) = $108900

Annual transportation costs = (120000)(0.65) = $78000

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Eastern Electric CorporationAlternative Transport

CostCycleInventory

SafetyInventory

TransitInventory

InventoryCost

TotalCost

AM Rail(2,000)

$78,000 1,000 986 1,644 $108,900 $186,900

NortheastTrucking(1,000)

$90,000 500 658 986 $64,320 $154,320

Golden(500)

$96,000 250 658 986 $56,820 $152,820

Golden(2,500)

$86,400 1,250 658 986 $86,820 $173,220

Golden(3,000)

$78,000 1,500 658 986 $94,320 $172,320

Golden(4,000)

$67,500 2,000 658 986 $109,320 $176,820

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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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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 3-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 DC’s?Number and location of DC’s?

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Transportation Network DesignsSuppliers Retailer Stores

Direct Supplier Network

Suppliers Retailer Stores

Direct Shipping with Milk Runs

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Transportation Network DesignsSuppliers Retailer Stores

All Shipment via DC

Suppliers Retailer Stores

Milk Runs From DC

DC 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 -> 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) (T+L)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 HighMedCurrentScenario

Option 1 Option 2

# Locations 24 24 1

Reorder Interval 4 weeks 1 week 1 week

Inventory Cost $54,366 $29,795 $8,474

Shipment Size 8 H + 80 L 2 H + 20 L 1 H + 10 L

Transport Cost $530 $1,148 $14,464

Total Cost $54,896 $30,943 $22,938

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 Direct All Shipments via Kokomo

Milwaukee

Kokomo

Matamoros

Milwaukee

Kokomo

Matamoros

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Milwaukee

Kokomo

Matamoros

Some shipments direct,Some from Kokomo

Milk Runs from Kokomo

Milwaukee

Kokomo

Matamoros

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Milk Runs From PlantsMilwaukee

Kokomo

Matamoros

Number of DCs?Number of DCs?

Location of DC’s?Location of DC’s?

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Total CostsRoutes Transport Inventory Total Direct, Full Load 2.0 17.5 19.5

Direct,Optimal Load

4.0 5.6 9.6

Via Kokomo, Full Load

2.1 9.7 11.8

Via Kokomo, Optimal Load

3.0 7.2 10.2

Direct + Kokomo

3.7 5.8 9.5

Milk run from Kokomo

2.4 7.2 9.6

Milk run from Plants

3.5 4.6 8.1

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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 DockThis 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.

Milwaukee

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 -> own fleet, milk runs customers far away -> 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.