Lecture 4 Transportation—Managing the Flow of the Supply Chain

Introduction Transportation involves the physical movement of

goods between origin and destination points.

The transportation system links geographically separated partners and facilities in a company’s supply.

Transportation facilitates the creation of time and place utility in the supply chain.

Transportation also has a major economic impact on the financial performance of businesses.

Role of Transportation in Supply Chain Management

Transportation provides the critical links between these organizations, permitting goods to flow between their facilities.

Transportation service availability is critical to demand fulfillment in the supply chain.

Transportation efficiency promotes the competitiveness of a supply chain

Challenges to Carrying out This Role

supply chain complexity

competing goals among supply chain partners

changing customer requirements

limited information availability

synchronizing transportation with other supply chain activities

Challenges to Carrying out This Role

Transportation capacity constraints pose a challenge.

Rising transportation rates present another major concern for organizations.

The transportation industry is impacted by governmental requirements that affect cost structures and service capabilities.

Regulation is growing in areas where the transportation industry has the potential to impact the quality of life, the safety of citizens, and the growth of commerce.

Modes of Transportation primary modes of transportation

truck rail air water pipeline intermodal transportation

Modes of Transportation moves approximately 19.5 billion tons valued at nearly $13

trillion Modal breakdown:

Trucking 80.0 % $635 billion

Rail 06.7%

Air 04.7%

Water 04.6%

Pipeline 01.2%

Modes of Transportation Motor Carriers

widely used mode of transportation in the domestic supply chain 573,469 private, for hire, and other U.S. interstate motor carriers economic structure of the motor carrier industry contributes to the

vast number of carriers in the industry comprised of for-hire and private fleet operations

Truckload carriers. Less-than-truckload (LTL) Small package carriers

Low fixed cost, high variable

Modes of TransportationRailroads 7 Class I railroads revenues in excess of $290 million

Activity levels have been achieved despite a lack of direct accessibility to all parts of the supply chain

Railroads are “natural monopolies”

Two carrier types: Linehaul Shortline carriers

High fixed, low variable

Modes of TransportationWater Major facilitator of international trade 81% international freight movement 19% coastal, inland, and Great Lakes traffic High variable and low fixed cost Two primary carrier types

Liner Charter

Options include Container ships Bulk carriers Tankers General cargo ships Roll-on, roll-off (RO–RO) vessels

Modes of TransportationAir Carriers 491 air cargo carriers

Combination carriers Air cargo carriers Integrated carriers Nonintegrated carriers

Domestic market is dominated by 14 major carriers

High variable and low fixed cost

Modes of TransportationPipeline Unique mode of transportation as the equipment is fixed

in place and the product moves through it in high volume 174 operators of hazardous liquid pipelines that primarily

carry crude oil and petroleum products Three primary types

Gathering lines Trunk lines Refined product pipelines

High fixed versus low variable

Modes of Transportation

Intermodal Transportation Use of two or more different modes in movement Greater accessibility Overall cost efficiency Facilitates global trade Development of standardized containers that are

compatible with multiple modes. Product-handling characteristics

Containerized freight Transload freight

Functional Control of Transportation Which department will be responsible for transportation?

Logistics

Procurement

Marketing

Decision to Outsource Transportation Firms choose between “make” or “buy”

Commercial carriers “buy”

Private fleets “make”

External experts move the freight and/or manage the transportation process “buy”

Third-party logistics (3PL) “buy”

Modal SelectionAccessibility

Accessibility advantage: Motor carriage Accessibility disadvantage: Air, rail, and water

Transit Time Transit time advantage: Air and motor carriage Transit time disadvantage: Rail, water, and pipeline

Reliability Reliability advantage: Motor carriers and air carriers Reliability disadvantage: Water carriers and rail carriers

Modal SelectionProduct Safety

Safety advantage: Air transportation and motor carriage

Safety disadvantage: Rail and waterCost

Cost advantage: The cost of transportation service varies greatly between and within the modes

Cost disadvantage: Motor carriage and air transportation

Modal Selection

The nature of a product—size, durability, and value

Durability

Product value

Shipment characteristics—size, route, and required speed

Carrier Selection selecting the individual transportation service providers within the

mode

major difference between modal and carrier selection is the number of options

difference is the frequency of the decision

type of service provided within a mode impacts carrier selection

most carriers have the capabilities to provide a similar level of service

Core carrier limited number of carriers leverage its purchasing dollars

Rate Negotiations

centralized freight rate negotiations

developing contracts with carriers for a tailored set of transportation services at a specific price

leveraging volume with a small set of carriers

Shipment Preparation corporate transportation routing guide

last-minute, cost-saving decisions

consolidate freight

coordinate shipment deliveries

take full advantage of container capacity

an accurate freight count should be taken

Maintain In-Transit Visibility

manage key events as product moves across the supply chain

technology facilitates the ability to monitor product

visibility tools must be linked to other capabilities and processes to have an impact on supply chain event management

Monitor Service Quality

analyze the outcome of all their transportation strategy, planning, and decision-making

key requirement for service quality monitoring is information

Transportation Metricskey performance indicators (KPIs)

can be used to evaluate current performance versus historical results internal goals carrier commitments

challenge lies in narrowing down metrics available to monitor performance to a manageable number of KPIs

primary categories of transportation KPIs include service quality and efficiency

Transportation Management Systems (TMS) Critical applications include the following:

Routing and scheduling proper planning of delivery routes has a major impact on customer

satisfaction, supply chain performance, and organizational success Load planning

effective preparation of safe, efficient deliveries Load tendering Status tracking Appointment scheduling

The Role of Distribution in SCM: 1. Balancing supply and demand. Whether seasonal production must

service year-round demand (e.g., corn) or year-round production is needed to meet seasonal demand (e.g., holiday wrapping paper), distribution facilities can stockpile inventory to buffer supply and demand.

2. Protecting against uncertainty. Distribution facilities can hold inventory for protection against forecast errors, supply disruptions, and demand spikes.

3. Allowing quantity purchase discounts. Suppliers often provide incentives to purchase product in larger quantities. Distribution facilities can handle the quantities, reducing the purchase cost per unit.

4. Supporting production requirements. If a manufacturing operation can reduce costs via long production runs or if outputs need to age or ripen (e.g., wine, cheese, fruit), the output can be warehoused prior to distribution.

5. Promoting transportation economies. Fully utilizing container capacity and moving product in larger quantities is less expensive per unit than shipping “air” and moving small quantities at a time. Distribution facilities can be used to receive and hold the larger deliveries of inventory for future requirements.

Distribution Facility FunctionalityFour primary functions are: accumulation sortation allocation assortment

Tradeoffs Cost of distribution centers and inventory vs. cost of

transportation Cost of additional facilities vs. level of customer service Space vs. equipment Equipment vs. people People vs. space

Capability Requirements Product characteristics must drive the design of the distribution process such as

product value, durability, temperature sensitivity, obsolescence, volume, and other factors

Two options for product flow: direct shipment of goods

from the manufacturer to retailer from the retailer to consumer

movement of goods through distribution facilities to customers Must analyze the inventory, transportation, and service trade offs before

choosing between direct shipping and the use of distribution facilities Advantages of each Disadvantages of each

Network Design Issues Inventory positioning focuses on the issue of where inventory is

located within the supply chain single location

Advantages Disadvantages

hold product in multiple customer-facing positions Advantages Disadvantages

Second and third network design issues focus on the number and locations of distribution facilities within the supply chain.

Number of facilities needed for a supply chain involves the evaluation of cost tradeoffs with other functional areas:

Transportation costs

Cost of lost sales

Warehousing costs

Inventory costs

Facility ownership question Own or contract?

Private DCs are internal facilities owned by the organization Public warehousing is the traditional external distribution option Contract warehousing is a customized version of public

warehousing in which an external company provides a combination of distribution

Choosing between private and 3PL distribution options requires significant planning and analysis

Facility Considerations:

first facility consideration is to determine the size of each operation within the network

an area may be needed for processing rework and returns

office space is needed for administrative and clerical activities

space must be planned for miscellaneous requirements

Support Functions:

Inventory control

Safety, maintenance, and sanitation

Security

Performance analysis

Information technology

Distribution Metrics Distribution KPIs are objective measures of fulfillment

performance that are critical to the success of the organization

Important issues: cost efficiency

inventory accuracy

order fill rates

capacity utilization

Customer Facing Measures Order accuracy and order completeness

Customers want to receive the exact products and quantities that they ordered, not substitute items, incorrectly shipped items, or wrong quantities

Timeliness is a critical component of customer service Perfect order index (POI)

Perfect order index (POI) delivered to the right place at the right time in defect-free condition with the correct documentation, pricing, and invoicing

Internal Measures Distribution cost efficiency

Aggregate cost efficiency total distribution spending versus goal or budget

Asset utilization

Resource productivity distribution costs averaging nearly 10 percent of a sales

dollar

Resource efficiency

Distribution Technology Warehouse Management Systems

software control system that improves product movement and storage operations

value-added capabilities

generate performance reports

support paperless processes

enable integration of materials handling equipment

picking systems

sorting systems

leverage wireless communication

Distribution Technology Warehouse Management Systems

Other value-added capabilities:

Labor management

Task interleaving

Systems integration

Activity-based costing/billing

Multifunction distribution

Automatic Identification Tools WMS utilizes Auto-ID data capture technologies:

barcode scanners

mobile computers

wireless local area networks (LAN)

RFID