Lecture 9 Logistics and Transport

SCM20003 Global Logistics and Supply
Chain Management
Lecture 9: Logistics and Transport
CRICOS 00111D
TOID 3059
What is Logistics?
What Is Logistics?
Logistics can be viewed as part of organizational
management with four major subdivisions.
4 1 Part of supply chain that plans, implements,

and controls the flow and storage of goods,
services, and related information.
Service Business
Logistics Logistics
2 Design and integration of all aspects of support
for the operational capability of the military
1 forces and their equipment.
3 3 Network of activities, facilities & personnel

Event Military required to organize, schedule & deploy the
Logistics Logistics resources for an event to take place and
withdraw after the event.
2 4 Acquisition, scheduling & management of

facilities, assets, personnel & materials to
support a service operation & business.
© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3
Value-added Roles of Logistics
Five Principal Types of Economic Utility
TIME
PLACE FORM
Economic
Utility
QUANTITY POSSESSION
Value-added Roles of Logistics
Generally, production/manufacturing activities are credited with
providing form utility; logistics activities with time, place, and
quantity utilities; and marketing activities with possession utility.
Logistics
Place, Time &
Quantity utility
Production
Form
utility
Marketing
Possession
utility
Key Logistics Activities
Inventory Customer
control service
Production
Storage 5 planning & 10
scheduling Plant &
Transporta- 2 Order 8 warehouse site
tion fulfillment location
1 Industrial 6 Procurement 11
packaging
3 Demand
forecasting
9 Others*
Materials
handling
7 12
* Others include parts and service
4 support, return goods handling, and
salvage and scrap disposal.
Macro Perspective of Logistics
Major Categories of Logistics Costs
Three major categories of
logistics costs: Warehousing and
inventory costs, transportation
costs, and other logistical costs.
Images courtesy of Logistics Management (2015)
Micro Dimension of Logistics
Logistics Interfaces with Other Functional Areas
Manufacturing Marketing (4 Ps Marketing Mix)

 Length of the production run  Price e.g. purchase quantity discounts
 Available quantity of raw material  Product e.g. size, shape, weight,
and component packaging
 Industrial packaging  Promotion
 Place (distribution channel selection)
Logistics
Finance Accounting
 Inventory  Cost information for analysis of
 Warehouses & transportation fleet alternative logistics options
owned and/or outsourced  Supply chain tradeoffs and
 Customer service performance measurement
Factors Affecting Cost & Importance of Logistics
1 Competitive relationships
2 Order cycle length
3 Substitutability
4 Inventory effect
5 Transportation effect
6 Product-related factors
7 Spatial relationships
Factors Affecting Cost & Importance of Logistics (continued)
Competitive Order Cycle

Length Substitutability
Relationships
 Customer service can  Shorter order cycles  Customer service is

be a very important reduce the important for highly
form of competition. inventory required substitutable
by the customer. products to reduce
lost sales cost.
© 2016 Cengage Learning. All Rights Reserved. May not be scanned, 10

Transportation Spatial
Inventory Effect Effect Relationships
 Increasing inventory  Cost of lost sales  The location of fixed

costs can reduce the can be reduced by points in the logistics
cost of lost sales. spending more on system with respect
transportation to demand and
service to improve supply points are
customer service. very important to
transportation costs.
Images courtesy of (left to right) Sales VU, Advance Staffing Solutions, WCL Consulting
© 2016 Cengage Learning. All Rights Reserved. May not be scanned, 11

Spatial Relationship Example
SA1 SB1 SB2 $0.60

$0.40
A $0.75
$0.50 $1.15 B
SA2 $3.50
Production Market
cost $8.50 Production
cost $7.00
Product-related Factors
 Dollar value. The product’s dollar value typically
affects warehousing costs, inventory costs,
transportation costs, packaging costs, and even
materials-handling costs.
 Density. Weight/space ratio affects transportation
and warehousing costs. As density increases for a
product, its transportation and warehousing costs
tend to decrease.
 Susceptibility to damage. The greater the risk of
damage to a product, the higher the transportation
and warehousing cost.
 Special handling requirements. Need for special handling (e.g. refrigeration,
heating, or strapping) will usually increase warehousing, transportation, and
packaging costs.
Logistics and Systems
Analysis
Logistics and Systems Analysis
Short-run and Long-run Analysis
 Concentrates on a
Short-run or
specific point in
Static time or level of
Analysis production output.
 Examines a logistics
Long-run or
system over a long
Dynamic time period or range
Analysis of output.
Logistics and Systems Analysis
Approaches to Analyzing Logistics Systems
The analysis of logistics systems may require different
views or perspectives of logistics activities.
Examine logistics as Examine logistics Examine nodes Examine supply
inbound vs. activities as cost (fixed spatial chain of network
outbound logistics. centers, allowing points where goods organizations
tradeoffs between stop for storage or engaged in transfer,
them to be processing) vs. storage, handling,
analyzed. links communication,
(transportation and other functions
network that that contribute to
connect the nodes product flow.
in the logistics
system).
Materials
management vs. Logistics
Cost Centers Nodes vs. Links
Physical Channels
distribution
The Role of Transportation in Supply Chain Management
(SCM)
Transportation provides the critical links between organizations in a
supply chain network, permitting goods to flow between their facilities.
Transportation also influences supply chain design, strategy
development, and total cost management.
Transport Customer-
Demand Organization
service focused
fulfillment success
availability transport
Transport Supply chain Effective Supply chain

efficiency competitiveness transport flexibility
The Role of Transportation in SCM
Role Inhibitors
Offshore
manufacturing
Growing Changing
governmental customer
requirements requirements
Transportation
Transportation
capacity
rate variation
constraints
Modes of Transportation
Transport
Supply chains are networks of organisations separated by
distance and time – transportation provides the critical
links between these organisations, permitting goods to
flow between their facilities.
Transport
 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 organisations, 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
 Supply chain complexity
 Competing goals among supply chain partners
 Changing customer requirements
 Limited information availability
 Synchronising transportation with other supply chain

activities
Challenges
 Transportation capacity constraints pose a challenge.
 Rising transportation rates present another major

concern for organisations.
 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.
The five basic modes of transportation and intermodal
transportation each has different economic and technical structures,
and each can provide different qualities of link service.
Freight Shipments within the US (2015)
Ton-Miles
Mode of Transportation Value of Goods Tons (Millions)
(Billions)
Truck 72.9% 70.2% 40.2%
Rail 3.6% 11.1% 26.4%
Water 1.3% 3.6% 8.2%
Air 2.2% <1% <1%
Pipeline 4.8% 8.7% 15.0%
Multiple modes 11.5% 3.2% 8.4%
Other/Unknown 3.6% 3.1% 1.6%
Source: Table 11.1
Motor Carriers
Motor carriage is the most widely used mode of
transportation in the US domestic supply chain,
and is useful for shipping goods to an adjacent
countries like Canada and Mexico.
Much of the freight moved by the trucking
industry is regional in nature, moving
within a 500-mile radius of the origin.
Multiple equipment types and sizes allow

motor carriers to transport a wide variety
of commodities and shipment sizes.
Images courtesy of Forbes
Trucking is a high-variable-cost, low-fixed-

cost business.
Motor Carriers (continued)
The trucking industry is highly competitive, comprising of 532,024 interstate
carriers and intrastate hazardous materials carriers that range in size from
single-truck, owner-operator service providers to conglomerate like UPS.
Key challenges: Labor, costs, and competition
Motor Carrier Industry
For-Hire (48%) Private (42%) For-Hire/Private

Others(2%)
Hybrid (8%)
Less-than-
Truckload (TL) Small Package
Truckload (LTL)
Railroads
Railroads is a high ton-mile mode of transportation,
moving nearly 2.2 billion tons of freight with average
shipment length of 805 miles annually.
Railroad transportation is primarily used for the

long-distance movement of low-value goods.
Railroads also handle some high-value goods,
primarily automobiles and intermodal containers.
Railroads cost structure consists of high fixed costs in

proportion to variable costs due to a large investment
in terminals, equipment, and trackage.
Rail equipment can be organized into loads and

transported in one of the three primary ways: mixed
trains, unit trains, and intermodal trains.
Images courtesy of pixgood.com
Railroads (continued)
There are 575 railroads in the US, but the industry is dominated by seven
Class I railroads. No single rail carrier services the entire country. Carriers
use interline agreements to provide coast-to-coast rail service.
Key challenges: Captive shippers’ demand for rate relief, external factors e.g.
fluctuating economic conditions & severe weather events, and capacity.
575 Freight Rail Carriers
7 Class-I Linehaul Freight Carriers 568 Shortline Carriers

BNSF, Canadian National, Canadian
Pacific, CSX, Kansas City Southern,
Norfolk Southern, Union Pacific
Air Carriers
Air cargo transportation is specialized

mode in terms of tonnage with U.S.
spending at $28 billion in 2014, $12
billion of which is international cargo.
Air transportation is used to ship small

quantities of high-value, low-weight goods.
Images courtesy of imgkid.com

The air carrier cost structure consists of high
variable costs in proportion to fixed costs.
Air Carriers (continued)
Key challenges: Decreased demand for products previously moved in
large volume via air, mode-shifting of freight from air to ocean, new
rail connections in Asia, near-shoring and on-shoring strategies.
Air Carriers
Combination Air Cargo

Carriers Carriers
Integrated carriers (e.g. FedEx and UPS) Nonintegrated carriers

provide door-to-door service, scheduled pickup provide on-demand, air-
and delivery windows, and expedited service only service from airport to
through their hub-and-spoke networks. airport.
Water Carriers
Globally, water carriers dominate all other modes, garnering
approximately half of the international freight revenue and
handling nearly all tonnage.
The international ocean fleet includes approximately
50,000 merchant ships: 16,800 bulk carriers, 11,651
tankers, 10,381 general cargo ships, and 5,106
containerships.
Domestic water carriers compete with

railroads for long-distance movement of
low-value, high-density, bulk cargoes.
The fleet of U.S. flagged fleet moves 2.2 percent of

the nation’s freight value.
Water transportation is a high variable cost business.
Images courtesy of pixshark.com
Water Carriers (continued)
Key challenges: Significant overcapacity in the container shipping
sector, congestion at major ports and transfer points for containers,
schedule reliability of liner service lagging behind other modes.
Widely used
Water specialized ships
Carriers
include:
 Containerships
 Bulk carriers
For-Hire Private
 Tankers
 General cargo ships
Liner Charter  Roll-on, roll-off
Services Services (RO–RO) vessels
Pipelines
The United States has the largest network of energy pipelines
of any nation in the world.
Pipelines is the most economical form of transport

with the lowest cost per ton of any mode.
Pipelines handled 5.6 percent of U.S. freight
tonnage, the vast majority of products moved are
liquids and gases.
Pipeline costs are predominantly fixed as pipeline

operators must build their own right-of-way.
The oil system is made up of three primary types of pipelines:

gathering lines, trunk lines, and refined product pipelines.
The major difference of natural gas pipeline network from that of oil is
the direct delivery of natural gas to homes & businesses via local
distribution lines.
Images courtesy of Hi-tech Online
Pipelines (continued)
Key challenges: Network capacity, Health and environmental safety
Pipeline
Carriers
For-Hire Private
 For-hire carriers of liquid  Private carriers include petroleum &

products can move different natural gas companies that use
products through their system pipelines to move product to and
at the same time. from their facilities. Companies, like
a power plant or a chemical plant,
may operate a small pipeline system
to move fuel or feed-stocks.
Intermodal
Intermodal transportation service refers to uses of two or more carriers
of different modes in the origin-to-destination movement of freight.
Importance &
Primary Benefits Volume Growth Growth Drivers
 Greater accessibility  Number of containers  Development of

 Overall cost efficiency flowing through North standardized containers
without sacrificing American ports more  Better information
service quality or than doubled in 20 systems
accessibility years; from 24.7 million  New generations of
 Global trade facilitation TEUs in 1995 to 56.9 ocean vessels, railcars,
million TEUs in 2014 and truck trailers
Intermodal (continued)
The freight services provided by intermodal transportation can be viewed in
terms of product-handling characteristics or the type of service used.
Product-Handling
Type of Service Used
Characteristics
 Containerized freight is loaded Pick up Linehaul Delivery
into or onto storage equipment at
the origin and delivered to the
destination in or on that same piece
of equipment with no additional
handling.
 Transload freight involves goods
that are handled and transferred
between transportation equipment
and mode multiple times.
Transportation Planning &
Strategy
Transportation Planning and Strategy
Framework of Transportation Management Planning Activities
Source: Figure 11.3
Functional Control of Transportation
In most organizations, responsibility for transportation
decisions falls to one or more of the following
departments: logistics, procurement, and marketing.
Inbound transportation typically
controlled by the purchasing department
Outbound transportation typically

controlled by marketing or logistics
Often, this decision-making structure leads to

missed opportunities to generate transportation
efficiencies and service improvements.
Terms of Sale: Freight Control & Payment Terms
Terms of sale clarify the delivery and payment terms agreed upon by a seller and
buyer. Wise selection of these terms is critical as the decision determines where
the buyer’s responsibilities begin and where the seller’s responsibilities end.
Source: Table 11.4
Terms of Sale: Incoterms
Images courtesy of NDF Freight Forwarding Ltd
Decision to Outsource Transportation
The organization with FOB freight control and procurement responsibility
must analyze and choose between using a private fleet (the “make” option)
and using external service providers to move freight (the “buy” option).
Private Fleet External Service Providers

 Account for nearly half of all U.S.  For-hire carriers. Using for-hire carriers
freight transportation spending & avoids large capital cost of starting a
more than half of miles traveled. private fleet, time needed to build
 A well-run private fleet can operate transportation expertise, and challenges
at costs competitive with for-hire inherent in operating a private fleet.
carriers while providing greater  3PLs. Provide a wide array of
scheduling flexibility and control transportation services: (1) dedicated
over transit time. contract carriage, (2) traffic management,
 Intangible benefits: Promotional (3) specialized international freight 3PLs,
impact and prestige of having highly notably International Freight Forwarders
visible company trucks on the road (IFF), Non Vessel-owning Common
Carriers (NVOCC), and Customs Brokers
Modal Selection: Capabilities, Product Characteristics & Pricing
Source: Table 11.5
Modal Selection: Performance Ratings of Modes
Mode of Transportation
Truck Air Rail Water Pipeline
Accessibility* 1 3 2 4 5
Transit time* 2 1 3 4 5
Reliability* 2 3 4 5 1
Security* 3 2 4 5 1
Cost** 4 5 3 2 1
*1 = Best to 5 = Worst
**1 = Lowest cost to 5 = Highest cost
Source: Table 11.6
Carrier Selection
Modal Selection vs. Carrier Selection
Carrier Selection
Factors:
Modal selection  Geographic
More options Carrier selection coverage
Fewer options
 Transit time average
Number of options available and reliability
 Freight rates
Modal selection  Equipment
More long-range Carrier selection availability and
More active & capacity
frequent
 Product protection
Frequency of the decision
Carrier Selection (continued)
 Core carrier strategy. Carrier
selection strategy commonly
focuses on concentrating the
transportation buy with a limited
number of quality carriers, while
striving to be carrier-friendly
shippers.
 Advantages
 Helps the organization leverage its purchasing dollars for lower overall rates.
 Allows the company to focus its attention on other supply chain issues.
 Promotes strong relationships with the carriers that produce mutual
understanding of requirements, coordination of processes, and service
improvement.
 Give a company priority access to the carriers’ limited capacity.
Rate Negotiations
BUYERS CARRIERS
Key negotiation issues: Key negotiation issues: Volume
Equipment availability, commitments, shipment frequencies,
freight rates, and origin–destination combinations, freight
service levels characteristics, and related cost issues
Negotiation
Approaches
Adversarial Approach
Seeks to minimize transportation cost regardless of the impact on carrier financial
performance or long-term viability.
Collaborative Approach
Focuses on developing contracts with carriers for a tailored set of transportation
services at rates that fairly compensate the carriers.
Transportation Execution &
Control
Transportation Execution and Control
Shipment Preparation
Freight Documentation
Maintain In-Transit Visibility
Transportation Metrics
Monitor Service Quality
Common Transportation Metrics
Metric Formula Typical Target

Total on-time deliveries / Total
On-time Delivery > 95%
deliveries
Sum of transit times / Total Low variation
Transit Time Average
deliveries around goal
Total units damaged / Total units
Damage Rate < 1%
shipped
Total units lost or stolen / Total
Shortage Rate < 1%
units shipped
Total accurate freight bills / Total
Billing accuracy > 99%
freight bills
On-Time % × Damage-Free % ×
Perfect Delivery Index > 95%
Billing Accuracy %
Source: Table 11.7
Performance Scorecard
Source: Table 11.8
Transportation Technology
Transportation buyers and managers leverage a variety of tools and
technologies to support supply chain success. The carrier community
relies on technology to coordinate the flow of customer freight.
Buyers Carriers
 Individual applications e.g.  Routing and load planning tools promoting
load planning optimization, optimization of pickup, linehaul, and delivery
freight rating, and load  Dispatching software facilitating management
tendering of drivers, in-transit visibility, & regulatory
 Integrated supply chain compliance.
tools e.g. global trade  Brokerage solutions helping to match loads
management software, and with available capacity and transaction financial
transportation management manage
systems (TMS)
 Tracking and communication technology
supporting visibility and control of freight
 Others e.g. pricing strategy, documentation
Transportation Management System (TMS)
Images courtesy of S2B Group
Summary
 Transportation is the largest logistics cost in most supply chains
that directly impacts fulfillment speed and service quality.
 Fulfillment of supply chain demand can be accomplished through
five modal options or the intermodal use of these options.
 Most commercial freight moves under contractual rates that are
negotiated directly between freight buyers and transportation
companies.
 Organizations must continue to manage freight after it has been
tendered to carriers by maintaining in-transit visibility of
shipments and monitoring carrier performance.
 Transportation management systems and related tools are widely
used to support effective planning, execution, and analysis of
transportation processes.

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SCM20003 Global Logistics and Supply

4 1 Part of supply chain that plans, implements,

3 3 Network of activities, facilities & personnel

2 4 Acquisition, scheduling & management of

Images courtesy of Logistics Management (2015)

Manufacturing Marketing (4 Ps Marketing Mix)

2 Order cycle length

Competitive Order Cycle

 Customer service can  Shorter order cycles  Customer service is

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, 10

 Increasing inventory  Cost of lost sales  The location of fixed

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, 11

SA1 SB1 SB2 $0.60

Transport Supply chain Effective Supply chain

 Transportation involves the physical movement of

 The transportation system links geographically

 Transportation facilitates the creation of time and

 Transportation also has a major economic impact on

 Transportation provides the critical links between

 Transportation service availability is critical to demand

 Transportation efficiency promotes the

 Supply chain complexity

 Competing goals among supply chain partners

 Changing customer requirements

 Limited information availability

 Synchronising transportation with other supply chain

 Transportation capacity constraints pose a challenge.

 Rising transportation rates present another major

 The transportation industry is impacted by

 Regulation is growing in areas where the

Multiple equipment types and sizes allow

Trucking is a high-variable-cost, low-fixed-

Motor Carrier Industry

For-Hire (48%) Private (42%) For-Hire/Private

Railroad transportation is primarily used for the

Railroads cost structure consists of high fixed costs in

Rail equipment can be organized into loads and

Images courtesy of pixgood.com

575 Freight Rail Carriers

7 Class-I Linehaul Freight Carriers 568 Shortline Carriers

Air cargo transportation is specialized

Air transportation is used to ship small

Images courtesy of imgkid.com

Combination Air Cargo

Integrated carriers (e.g. FedEx and UPS) Nonintegrated carriers

Domestic water carriers compete with

The fleet of U.S. flagged fleet moves 2.2 percent of

Water transportation is a high variable cost business.

Images courtesy of pixshark.com

Pipelines is the most economical form of transport

Pipeline costs are predominantly fixed as pipeline

The oil system is made up of three primary types of pipelines:

 For-hire carriers of liquid  Private carriers include petroleum &

 Greater accessibility  Number of containers  Development of

Source: Figure 11.3

Outbound transportation typically

Often, this decision-making structure leads to

Source: Table 11.4

Images courtesy of NDF Freight Forwarding Ltd

Private Fleet External Service Providers

Source: Table 11.5

Source: Table 11.6

Maintain In-Transit Visibility

Monitor Service Quality