Chapter 7-Transportation Design-FULL

Course:
LOGISTICS ENGINEERING AND SUPPLY

CHAIN DESIGN
International University
Vietnam National University HCMC
Chapter 7
Transportation Design
Lecturer: Dr. Nguyễn Hằng Giang Anh

Email: nhganh@hcmiu.edu.vn
Main Contents
1. Transportation Modes in Supply Chain
2. Transportation network design options
3. Tailored transportation networks in a supply chain
4. Trade-offs in transportation design
1.
TRANSPORTATION MODES IN
SUPPLY CHAIN
Modes of Transportation (1/3)
❖ Air
❖ Truck What are differences between TL vs. LTL?
❖ Rail
❖ Water
❖ Pipeline
❖ Intermodal: more than one mode of transport are used
to move a shipment to its destination.
Mode of
Characteristics Suitable products
transportation
The most commonly used when the Large, heavy and low-value
Rail distance is long but it is slow and inflexible shipments over long distances
Advantage of door-to-door shipment and a

shorter delivery time. Small as well as Large shipment
Road/Truck
Disadvantage of weather and traffic
problems.
The oldest mode of transport, the Large and bulky loads at low cost
Water slowest of all the modes and inflexibility
The newest but least utilized mode very fast Small, high-value items or time-
Air sensitive emergency shipments for a
but fairly expensive mode
long distance
The unique mode which is operated on a Oil, gas and coal together with
24-hour basis, 7 days per week. water. Only carrying large volumes
Pipeline of certain types of fluid.
It is cheapest way of moving liquids but
slow and inflexible
Mode of
Fixed cost Variable cost
transportation
High
Rail Low
(equipment, terminals, tracks)
Low
Medium
Road/Truck (highways in place and provided by public
(fuel, maintenance)
support).
Low
Medium
Water (capability to transport large amount of
(ships and equipment)
tonnage)
High High
Air
(aircraft and handling and cargo systems) (fuel, labor, maintenance)
Highest
Lowest
Pipeline (construction, requirements for control
(no labor cost of any significance)
stations, and pumping capacity).
2.
TRANSPORTATION NETWORK
DESIGN OPTIONS
Designing a transportation network
Three basic questions need to be considered when designing

a transportation network between two stages of a supply chain:
1. Should transportation be direct or through an

intermediate site?
2. Should the intermediate site stock product or only serve
as a cross docking location?
3. Should each delivery route supply a single destination
or multiple destinations?
Transportation Network Design Options
1. Direct Shipment Network to Single Destination

2. Direct Shipping with Milk Runs
3. All Shipments via Intermediate Distribution Center
with Storage
4. All Shipments via Intermediate Transit Point with
Cross Docking
5. Shipping via Distribution Center using Milk Runs
6. Tailored Network
Direct Shipment Network to Single Destination
All shipments come directly

from each supplier to each
buyer location
❖ This network is justified only if demand at buyer locations is large

enough that optimal replenishment lot sizes are close to a truckload from
each supplier to each location.
❖ Advantage: elimination of intermediate warehouses and its simplicity of
operation and coordination.
Direct Shipping with Milk Runs (Joint collection & delivery)
A supplier delivers
directly to multiple
buyer locations on
a truck
OR
A truck picks up
deliveries destined
for the same buyer
location from many
suppliers
❖ Milk runs make sense when the quantity for each location is too small to
fill a truck but multiple locations are close to each other →Using this
option, managers need to decide on the routing of each milk run.
❖ Advantage: Milk runs lower transportation cost by consolidating shipments
toInternational
multiple locations
University on a single truck.
All Shipments via Intermediate Distribution Center
with Storage
Product is shipped from

suppliers to a central
distribution center, where it
is stored until needed by
buyers when it is shipped to
each buyer location
❖ This option is justified if transportation economies require large

shipments on the inbound side or shipments on the outbound side
cannot be coordinated.
❖ Advantage: a DC allows a supply chain to achieve economies of scale
forVietnam
inbound transportation
National University HCMC to a point close to the final destination.
All Shipments via Intermediate Transit Point with
Cross Docking
Intermediate
transit point
without storing
products
Suppliers send their
shipments to an
intermediate transit
point, where they are
cross-docked and sent
to buyer locations
without storing them
❖ When a DC cross-docks product, each inbound truck contains product

for several buyer locations, whereas each outbound truck contains
product from several suppliers.
❖ Advantage: little inventory needs to be held and product flows faster in
the supply
Vietnam chain
National → Cross-docking
University HCMC also saves on handling cost.
Shipping via DC Using Milk Runs
❖ Milk runs can be used from a DC if lot sizes to be delivered to each

buyer location are small.
❖ Milk runs reduce outbound transportation costs by consolidating
small shipments.
Tailored Network
❖ This tailored network is a combination of previous options

that reduces the cost and improves the responsiveness of
the supply chain.
❖ High-demand products may be shipped directly to high-
demand retail outlets, whereas low-demand products to low-
demand retail outlets are consolidated to and from the DC.
❖ The network allows for the selective use of a shipment
method to minimize the transportation as well as
inventory costs.
❖ Operating a tailored network requires significant investment
in information infrastructure to facilitate the coordination.
Pros and Cons of Different Transportation
Networks
Example 1: Selecting a Transportation Network (1/4)
A retail chain has eight stores in a region supplied from four

supply sources. Trucks have a capacity of 40,000 units and cost
$1,000 per load plus $100 per delivery. Thus, a truck making two
deliveries charges $1,200. The cost of holding one unit in
inventory at retail for a year is $0.20. The vice president of supply
chain is considering whether to use direct shipping from suppliers
to retail stores or setting up milk runs from suppliers to retail
stores.
→ What network do you recommend if annual sales for each
product at each retail store are 960,000 units? What network do
you recommend if sales for each product at each retail store are
120,000 units?
We have:
• Eight stores, four supply sources
• Truck capacity = 40,000 units
• Cost $1,000 per load and $100 per delivery
• Holding cost = $0.20/year
• Two options:
o Direct shipping from suppliers to retail stores.
o Milk runs from suppliers to retail stores.
→ Case 1: If annual sales = 960,000 units and suppliers run milk
runs to two stores on each truck. What network do you
recommend?
→ Case 2: If annual sales = 120,000 units and suppliers run milk
runs to four stores on each truck. What network do you
recommend?
When annual sales of each product at each retail store are 960,000 units
Direct shipping Milk runs
Batch size shipped from each

40,000 units 40,000/2 = 20,000 units
supplier to each store
Number of shipments/year from

960,000/40,000 = 24 960,000/20,000 = 48
each supplier to each store
1,000 + 100 =$1,100 1,000/2 + 100 =$600

Transportation cost per shipment
(one store/truck) (two stores/truck)
Annual trucking cost 24 x 1,100 x 4 x 8 = $844,800 48 x 600 x 4 x 8 = $921,600
Average inventory at each store

40,000/2 = 20,000 units 20,000/2 = 10,000 units
for each product
20,000 x 0.2 x 4 x 8 = 10,000 x 0.2 x 4 x 8 =
Annual holding inventory cost
$128,000 $64,000
$844,800 + $128,000 = $921,600 + $64,000 =

Total annual cost University
International
$972,800 $985,600
When annual sales of each product at each retail store are 120,000 units
Direct shipping Milk runs
Batch size shipped from each

40,000 units 40,000/4 = 10,000 units
supplier to each store
Number of shipments/year from

120,000/40,000 = 3 120,000/10,000 = 12
each supplier to each store
1,000 + 100 =$1,100 1,000/4 + 100 =$350

Transportation cost per shipment
(one store/truck) (four stores/truck)
Annual trucking cost 3 x 1,100 x 4 x 8 = $105,600 12 x 350 x 4 x 8 = $134,400
Average inventory at each store

40,000/2 = 20,000 units 10,000/2 = 5,000 units
for each product
Annual holding inventory cost 20,000 x 0.2 x 4 x 8 = $128,000 5,000 x 0.2 x 4 x 8 = $32,000
$105,600 + $128,000 = $134,400 + $32,000 =

Total annual cost University
International
$233,600 $166,400
3.
TAILORED TRANSPORTATION
NETWORKS IN A SUPPLY
CHAIN
Tailored transportation
❖ Tailored transportation is the use of different transportation

networks based on customer and product characteristics.
❖ Most firms sell a variety of products and serve many
different customer segments → should not design a
common transportation network to meet all needs.
❖ A firm can meet customer needs at a lower cost by using
tailored transportation to provide the appropriate
transportation choice based on customer and product
characteristics.
→ Allows a supply chain to achieve appropriate
responsiveness and low cost.
Three forms of Tailored transportation
1. Tailored Transportation by Customer Density and

Distance
2. Tailored Transportation by Size of Customer
3. Tailored Transportation by Product Demand and

Value
Tailored Transportation by Customer Density
and Distance
❖ Firms must consider customer density and distance from

warehouse when designing transportation networks.
❖ Ex: When a firm serves a high density of customers close

to the DC → the firm should own a fleet of trucks that are
used with milk runs originating at the DC to supply
customers.
Tailored Transportation by Size of Customer
❖ Firms must consider customer size (in terms of quantity

purchased) and location when designing transportation
networks.
❖ Large customers can be supplied using a TL carrier,
whereas smaller customers will require an LTL carrier or
milk runs.
Tailored Transportation by Product Demand and
Value
❖ The degree of inventory aggregation and the modes of

transportation vary with the demand and value of a product
❖ The cycle inventory for high-value products with high demand

is disaggregated to save on transportation costs.
4.
TRADE-OFFS IN
TRANSPORTATION DESIGN
Trade-offs in Transportation Design
❖ Transportation and Inventory cost trade-off

Two fundamental SC decisions involving this trade-off:
o Choice of transportation mode
o Inventory aggregation
❖ Transportation cost and Responsiveness trade-off
Choice of transportation mode (1/2)
❖ The mode of transportation that results in the lowest

transportation cost does not necessarily lower total costs for
a supply chain.
• Cheaper modes of transport → have longer lead times and larger
minimum shipment quantities → resulting in higher inventory levels.
• Modes allow shipping in small quantities with lower inventory levels

but are more expensive.
❖ When selecting a mode of transportation, managers must

account for unit costs and cycle/safety/in-transit inventory costs
that result from using each mode → Need to balance
transportation and inventory costs.
Choice of transportation mode (2/2)
❖ The impact of using different modes of transportation on

inventories, response time, and costs in the supply chain.
Example 2: Trade-Offs when Selecting Transportation
Mode (1/8)
❖ Eastern Electric (EE) is a major appliance manufacturer with a large plant in the
Chicago area. EE purchases all the motors for its appliances from Westview
Motors near Dallas. EE currently purchases 120,000 motors each year from
Westview at $120/motor. Demand has been relatively constant for several years
and is expected to stay that way. Each motor averages about 10 pounds in
weight, and EE has traditionally purchased lots of 3,000 motors. Westview ships
each EE order within a day of receiving it (lead time is one day more than transit
time). Transit time using truck is three days and transit time for rail is five days.
EE carries a safety inventory equal to 50% of the average demand for motors
during the replenishment lead time. EE’s annual holding inventory cost is 25%.
❖ The plant manager at EE has received several proposals for transportation
and must decide on the one to accept. The details of various proposals are
provided in the Table (next slide), where 1 cwt = 100 pounds.
❖ Golden’s pricing represents a marginal unit quantity discount. Golden’s
representative has proposed lowering the marginal rate for the quantity over 250
cwt in a shipment from $4/cwt to $3/cwt and suggested that EE increase its
batch size to 4,000 motors to take advantage of the lower transportation cost.
What should the plant manager do?
Mode (2/8)
We have:
❖ D = 120,000 motors, P = $120/motor, 1 motor = 10 pounds
❖ W = 10 lbs/motor, h = 25%
❖ Safety stock = 50% demand during RLT. 1cwt = 100pounds
❖ Transit time: 5 days by rail and 3 days by truck.
❖ Leadtime = 1 day more than transit time.
Carrier Range of Quantity Shipped (cwt) Shipping Cost ($/cwt)

AM Railroad 200+ 6.50
Northeast Trucking 100+ 7.50
Golden Freightways 50 – 150 8.00
Golden Freightways 151 – 250 6.00
Golden Freightways 251+ 4.00
❖ Golden Freightways suggests new proposal to

• Increase University
International the batch size to 4,000 motors from the batch size of 3,000 motors.
• Vietnam
LowerNational University
shipping cost HCMC
from $4/cwt to $3/cwt for the quantity over 250 cwt.
Mode (3/8)
Lot Size Transportation Cycle Safety In-Transit Inventory Total

Alternative (Motors) Cost Inventory Inventory Inventory Cost Cost
1. AM Rail 2,000 $78,000 1,000 986 1,644 $108,900 $186,900
2. Northeast 1,000 $90,000 500 658 986 $64,320 $154,320

Trucking
3. Golden 500 $96,000 250 658 986 $56,820 $152,820
4. Golden 1,500 $96,000 750 658 986 $71,820 $167,820
5. Golden 2,500 $86,400 1,250 658 986 $86,820 $173,220
6. Golden 3,000 $80,000 1,500 658 986 $94,320 $174,320
7. Golden 4,000 $67,000 2,000 658 986 $109,320 $176,820

(new
proposal)
Mode (4/8)
Alternative 1: Using AM Rail, we have
• Shipping cost = $6.5/cwt = $0.65/motor (1 motor = 10 pounds = 0.1 cwt)
• Lot size Q = 2,000 motors, Replenishment lead time L = 5+1=6 days.

• Holding cost = h*P= 25% * 120 = $30/motor
• Average inventory
Total annual cost for inventory and transportation using AM Rail

Mode (5/8)
Alternative 2: Using Northeast Trucking, we have
• Lot size Q = 1,000 motors, Replenishment lead time L = 3+1= 4 days.

Total annual cost for inventory and transportation using Northeast Trucking
Mode (6/8)
Alternative 3: Using Golden Freightways (Q=500), we have
• Lot size Q = 500 motors, Replenishment lead time L = 3+1= 4 days.

Total annual cost for inventory and transportation using Golden Freightways
Mode (7/8)
Alternative 7: Using Golden Freightways (Q=4,000), we have
• Shipping cost: ▪ ≤ 1,500 motors: $0.80/motor;

▪ 2,500 motors: $0.60/motor;
▪ > 2,500 motors: $0.30/motor.
• The number of shipments:
• Transportation cost per shipment:
• Lot size Q = 4,000 motors, Replenishment lead time L = 3+1= 4 days.

Total annual cost for inventory and transportation using Golden Freightways
Example 2: Trade-Offs When Selecting Transportation
Mode (8/8)
Lot Size Transportation Cycle Safety In-Transit Inventory Total

Alternative
(Motors) Cost Inventory Inventory Inventory Cost Cost
1. AM Rail 2,000 $78,000 1,000 986 1,644 $108,900 $186,900
2. Northeast 1,000 $90,000 500 658 986 $64,320 $154,320

Trucking
3. Golden 500 $96,000 250 658 986 $56,820 $152,820
4. Golden 1,500 $96,000 750 658 986 $71,820 $167,820
5. Golden 2,500 $86,400 1,250 658 986 $86,820 $173,220
6. Golden 3,000 $80,000 1,500 658 986 $94,320 $174,320
7. Golden 4,000 $67,000 2,000 658 986 $109,320 $176,820

(new
proposal)
Inventory Aggregation
❖ Firms can significantly reduce the safety inventory by physically

aggregating inventories in one location.(Chapter 6)
❖ Transportation cost, however, generally increases when inventory

is aggregated → Inventory aggregation decisions must account
for inventory and transportation costs.
o If a product has a high value-to-weight ratio, high demand uncertainty, low
transportation cost and customer orders are large → Inventory
aggregation decreases supply chain costs. (ex: Diamond industry)
o If a product has a low value-to-weight ratio, low demand uncertainty, large

transportation cost or small customer orders → Inventory aggregation
may increase supply chain costs. (ex: Best-selling books)
Example 3: Trade-Offs when Aggregating Inventory
(1/5)
❖ HighMed, a manufacturer of medical equipment, is located in Madison, Wisconsin. HighMed
currently divides the United States into twenty-four territories, each with its own sales force.
All product inventories are maintained locally in each territory and replenished from Madison
every four weeks using UPS. The average replenishment lead time using UPS is one week.
UPS charges at a rate of $0.66 + 0.26x, where x is the quantity shipped in lbs. The products
sold fall into two categories - HighVal and LowVal.
❖ HighVal products weigh 0.1 lbs and cost $200 each. Weekly demand for HighVal products in
each territory is normally distributed, with a mean of 𝜇H = 2 and a standard deviation of 𝜎H = 5.
LowVal products weigh 0.04 pounds and cost $30 each. Weekly demand for LowVal products
in each territory is normally distributed, with 𝜇L = 20 and 𝜎L = 5.
❖ HighMed maintains sufficient safety inventories in each territory to provide a CSL of 0.997 for
each product. Annual holding cost at HighMed is 25%. In addition to the current approach, the
management team at HighMed is considering two other options:
Option A: Keep the current structure but replenish inventory once a week rather than once every
four weeks.
Option B: Eliminate inventories in the territories, aggregate all inventories in a finished-goods
warehouse at Madison, and replenish the warehouse once a week.
❖ If inventories are aggregated at Madison, orders will be shipped using FedEx, which charges
$5.53 + 0.53x per shipment, where x is the quantity shipped in lbs. The factory requires a
one-week lead time to replenish finished-goods inventories at the Madison warehouse. An
average customer order is for 1 unit of HighVal and 10 units of LowVal. What should
HighMed do? University
International
(2/5)
We have:
• 24 regions
• Highval – weekly demand H = 2, H = 5, weight = 0.1 lbs, cost = $200
• Lowval – weekly demand L = 20, L = 5, weight = 0.04 lbs, cost = $30
• CSL = 0.997, h = 25%, L = 1 week, T = 4 weeks (reorder interval)
• UPS lead time = 1 week, $0.66 + 0.26x; x is quantity shipped
• FedEx lead time = overnight, $5.53 + 0.53x
→ Calculate the total cost (Inventory cost + Transportation cost) in
three scenarios and choose the best:
❖ Current scenario. Disaggregate with T = 4 weeks.
❖ Option A. Keep the current structure disaggregate with T = 1 weeks.
❖ Option B. Aggregate all inventories in a finished-goods warehouse
with T = 1 weeks.
(3/5)
Current scenario: HighMed Inventory costs
HighVal LowVal
Average lot size =

expected demand
during T weeks
Cycle inventory
Safety inventory
Average inventory
across 24 regions
for each product
category
Annual holding
inventory cost for
HighMed
(4/5)
Current scenario: HighMed Transportation costs
HighVal LowVal
Average lot size = Average

replenishment order quantity
Average weight of each

replenishment order
Shipping cost per replenishment

order by UPS
Number of replenishment order

per year
Annual transportation cost for

HighMed acrsoss 24 regions
Current scenario: Total annual inventory and transportation costs

(5/5)
Transportation Cost and Customer
Responsiveness Trade-off
❖ The transportation cost of a supply chain incurs is closely linked

to the degree of responsiveness the supply chain aims to provide.
▪ If a firm has high responsiveness and ships all orders within a day of receipt
from a customer → small outbound shipments, resulting in a high
transportation cost.
▪ If a firm decreases its responsiveness and aggregates orders over a longer

time horizon before shipping them out → exploit economies of scale and
incur a lower transportation cost.
→ Temporal aggregation → reduces transportation costs but hurts

customer response time → trade-off between responsiveness and
transportation cost when designing its transportation network.
Example 4: Trade-Offs between Transportation Cost
and Responsiveness (1/3)
❖ Alloy Steel is a steel service center in the Cleveland area. All orders are
shipped to customers using an LTL carrier that charges $100 + 0.01x,
where x is the number of steel shipped in lbs on the truck.
Currently, Alloy Steel ships orders on the day they are received.
Allowing for two days in transit, this policy allows Alloy to achieve a
response time of two days. Daily demand at Alloy Steel over a two-
week period is shown in the below Table.
❖ The general manager at Alloy Steel believes that customers do not

really value the two-day response time and would be satisfied with a
four-day response time. What are the cost advantages of
increasing the response time?
❖ As the response time increases, Alloy Steel has the opportunity to

aggregate demand over multiple days for shipping. For a response time
of three days, Alloy Steel can aggregate demand over two successive
days before shipping. For a response time of four days, Alloy Steel
can aggregate demand over three days before shipping.
❖ The manager evaluates the quantity shipped and transportation costs for
different response times over the two-week period. The transportation
cost for Alloy Steel decreases as the response time increases.
▪ As the response time increases from two to three days, transportation

cost over the two-week window decreases by ??$700.
▪ Increasing the response time from three to four days reduces the
transportation cost by ??only $200.
❖ Thus, Alloy Steel may be better off offering a three-day response,

because the marginal benefit from further increasing the response time
is International
small. University

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Chapter 7-Transportation Design-FULL

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Course:

LOGISTICS ENGINEERING AND SUPPLY

Lecturer: Dr. Nguyễn Hằng Giang Anh

1. Transportation Modes in Supply Chain

2. Transportation network design options

3. Tailored transportation networks in a supply chain

4. Trade-offs in transportation design

Advantage of door-to-door shipment and a

Three basic questions need to be considered when designing

1. Should transportation be direct or through an

1. Direct Shipment Network to Single Destination

All shipments come directly

❖ This network is justified only if demand at buyer locations is large

Product is shipped from

❖ This option is justified if transportation economies require large

❖ When a DC cross-docks product, each inbound truck contains product

❖ Milk runs can be used from a DC if lot sizes to be delivered to each

❖ This tailored network is a combination of previous options

A retail chain has eight stores in a region supplied from four

Direct shipping Milk runs

Batch size shipped from each

Number of shipments/year from

1,000 + 100 =$1,100 1,000/2 + 100 =$600

Annual trucking cost 24 x 1,100 x 4 x 8 = $844,800 48 x 600 x 4 x 8 = $921,600

Average inventory at each store

$844,800 + $128,000 = $921,600 + $64,000 =

Direct shipping Milk runs

Batch size shipped from each

Number of shipments/year from

1,000 + 100 =$1,100 1,000/4 + 100 =$350

Annual trucking cost 3 x 1,100 x 4 x 8 = $105,600 12 x 350 x 4 x 8 = $134,400

Average inventory at each store

$105,600 + $128,000 = $134,400 + $32,000 =

❖ Tailored transportation is the use of different transportation

1. Tailored Transportation by Customer Density and

2. Tailored Transportation by Size of Customer

3. Tailored Transportation by Product Demand and

❖ Firms must consider customer density and distance from

❖ Ex: When a firm serves a high density of customers close

❖ Firms must consider customer size (in terms of quantity

❖ The degree of inventory aggregation and the modes of

❖ The cycle inventory for high-value products with high demand

❖ Transportation and Inventory cost trade-off

❖ The mode of transportation that results in the lowest

• Modes allow shipping in small quantities with lower inventory levels

❖ When selecting a mode of transportation, managers must

❖ The impact of using different modes of transportation on

Carrier Range of Quantity Shipped (cwt) Shipping Cost ($/cwt)

❖ Golden Freightways suggests new proposal to

Lot Size Transportation Cycle Safety In-Transit Inventory Total

2. Northeast 1,000 $90,000 500 658 986 $64,320 $154,320

4. Golden 1,500 $96,000 750 658 986 $71,820 $167,820

5. Golden 2,500 $86,400 1,250 658 986 $86,820 $173,220

6. Golden 3,000 $80,000 1,500 658 986 $94,320 $174,320

7. Golden 4,000 $67,000 2,000 658 986 $109,320 $176,820

• Shipping cost = $6.5/cwt = $0.65/motor (1 motor = 10 pounds = 0.1 cwt)

• Lot size Q = 2,000 motors, Replenishment lead time L = 5+1=6 days.

Total annual cost for inventory and transportation using AM Rail

• Shipping cost = $7.5/cwt = $0.75/motor (1 motor = 10 pounds = 0.1 cwt)

• Lot size Q = 1,000 motors, Replenishment lead time L = 3+1= 4 days.

• Shipping cost = $8.0/cwt = $0.80/motor (1 motor = 10 pounds = 0.1 cwt)

• Lot size Q = 500 motors, Replenishment lead time L = 3+1= 4 days.

• Shipping cost: ▪ ≤ 1,500 motors: $0.80/motor;

• Lot size Q = 4,000 motors, Replenishment lead time L = 3+1= 4 days.