Transportation & Supply

Chain Systems

John H. Vande Vate

Spring 2005

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 Who am I?
• John H. Vande Vate
• Professor and EMIL Executive Director
• Office: 221(?) of the Old ISyE bldg. Used to
be the graduate student lounge. Same area
as the TLI.
• Phone: (404) 894-3035
• Office Hours:
– Tuesday, Thursday 3-5 (after class) or
– By appointment
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 Our TA
• Claudio Santiago
• csantiag@isye.isye.gatech.edu
• Office:
• Hours: TBA

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 Administrative Details

• Class Home Page:

www.isye.gatech.edu/~jvandeva/Classes/6203/syllabus2005.html

Keep up with information here!

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 Text
• Introduction to Logistics Systems Planning and Control
by Gianpaolo Ghiani, Gilbert Laporte, Roberto
Musmanno
• Publisher: Wiley
• ISBN: 0-470-84917-7
• Edition: Jan 2004 (This text was used in the Fall
Semester, 2004 so it should be possible to get used
copies. The hard cover copy lists for $148 at Amazon, the
paperback edition lists for $65.12 which is even less
expensive than the digital version at $65.95)

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 Other Resources
• You may also want to read:
– Contemporary Logistics by Johnson, Wardlow,
Wood and Murphy
– Logistic Systems Analysis by Daganzo
– Business Logistics Management 4th Edition by R.
H. Ballou, Prentice Hall, 1999
– Bramel, J. and D. Simchi-Levi, The Logic of
Logistics: Theory, Algorithms and Applications
for Logistics Management, Springer-Verlag, 1997
– Logistics and Supply Chain Management:
Strategies for Reducing Cost and Improving
Service (2nd Edition) by Martin Christopher
– Modeling the Supply Chain by Jeremy F. Shapiro 6
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 Grading
• Exams: 40%
– January 27th 20%
– March 17th 20%
May 2nd 11:30 - 2:20 20%
– You may drop your lowest exam
• Project 1: 20%
– Groups of 6 or 7
• Project 2: 20%
• Homework: 20%
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 Objectives
• Knowledge and understanding of the issues
underlying transportation and supply chain
management and
• Mastery of the tools and models to support
intelligent resolution of those issues.

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 Projects
• Project 1: Financial Assessment
– Team of up to 5 students
– Assign a company to each team member
– The companies must all be competitors
– You will want to select publicly traded
companies at least 5 years old

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 Project 1 Cont’d
• For your assigned company
– Part A: Due February 1st
• Collect Balance Sheets, Income Statements, Annual Reports,
news articles, etc. going back at least 5 years
• Over a period extending back at least 5 years calculate
– Days of Inventory
– Days Sales Outstanding
– Days Payments Outstanding
– NOPAT/Revenue
– Revenue/Capital
– Return on Investment
– Total Shareholder Return
• Compare these across your teams’ companies
• Draw conclusions about the relationships between these
metrics and Total Shareholder Return.
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 Project 1 Cont’d
• For your assigned company
– Part B: Due April 21st
• Imagine you have been hired as VP of Supply
Chain for your company, describe what initiatives
you would pursue and how they would affect the
above measures.

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 Project 1 Deliverables
• Part A: In a ZIP archive
– An HTML page or Word document that organizes the
information about the companies (and identifies who
was responsible for each company) including
references (where possible include copies of the
referenced documents in the zip archive)
• Part B: A Powerpoint presentation (to the
executive committee of your company)
motivating and explaining your proposals and
projecting their value to the company.
• Submit these documents in electronic format. DO
NOT SUBMIT PAPER COPIES
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 Project 2
• Also in teams of up to 5
• Regional Transportation and Supply Chain
Infrastructure and Issues
– Asia
– Latin America
– Europe
• Approved special topic

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 Project 2: Schedule
January 27th: Submit your team
composition and selected topic to me via
e-mail
February 15th: Submit an outline of your
report with assigned responsibilities to
me via e-mail
April 14th: Submit your report to me via e-
mail

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 Project 2 Topics
Asian Logistic Networks. This should provide a
comprehensive overview of the key freight transportation
systems in the region bounded by China, India, Australia
and Japan. It should describe:
– the key goods moving in the region,
– the flows of these goods,
– the modes these goods move by,
– the principal carriers,
– the key transport facilities (ports, airports, etc)
– the different roles organizations play in the process
– special challenges to shippers and carriers in the region
– Include a comprehensive annotated bibliography (describe the
value of each entry in the bibliography)
•Example to build on and update available
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 Project Topics
Latin American Logistic Networks. This should provide
a comprehensive overview of the key freight transportation
systems in South and Central America. It should describe:
– the key goods moving in the region,
– the flows of these goods,
– the modes these goods move by,
– the principal carriers,
– the key transport facilities (ports, airports, etc)
– the different roles organizations play in the process
– special challenges to shippers and carriers in the region
– Include a comprehensive annotated bibliography (describe the
value of each entry in the bibliography)
•Example to build on and update available

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 Project Topics
Central and Eastern European Logistic Networks. This
should provide a comprehensive overview of the key freight
transportation systems in Central and Eastern Europe It
should describe:
– the key goods moving in the region,
– the flows of these goods,
– the modes these goods move by,
– the principal carriers,
– the key transport facilities (ports, airports, etc)
– the different roles organizations play in the process
– special challenges to shippers and carriers in the region
– Include a comprehensive annotated bibliography (describe the
value of each entry in the bibliography)
•See Asian and Latin American examples
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 Project Topics
Alternative project proposals are welcome. E-mail
me an outline of the content of your report before
January 20th. Alternative projects must be
approved.

Video students may either join a team or work alone

as they prefer.

I encourage video students to select a project related

to their companies. Be careful to ensure that
proprietary concerns will not prevent your sharing
the project report with me. 18
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Algebraic Modeling Languages
• AMPL
– www.ampl.com - Free student version
– AMPL A Modeling Language for Mathematical
Programming, Fourer, Gay and Kernighan
– No full version generally available
• XPress-MP:
– Full version available in the graduate and
undergraduate labs.

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 More Options
• AIMMS:
– This application is supported in the Lab.
– Student version??
• MPL or related tools:
– Can be downloaded free from www.maximal-
usa.com/download/
– No full version available
• OPL Studio Free trial version at
www.ilog.com/products/oplstudio/trial.cfm
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 Worst Option
• Solver in Excel
– Not industrial strength
– Not reliable
– Model and data confounded
– But if you’re really struggling…

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 Schedule
• Working with Certainty
– Introductory Example
– The role of Frequency
– Financial Implications
– Network Design
– Location
– Routing
– Case Study

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 Schedule
• Working with Uncertainty
– Forecasting
– Planning
– Variability and the Bullwhip Effect
– Risk Pooling & Postponement
– Inventory
– Hedging
– Revenue Management

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 Schedule
• Working Internationally
– Incoterms
– Customs, Duties, Free Trade Zones,…

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 Illustrative Example
• Develop a distribution strategy to minimize
inventory and transportation costs
• Purpose:
– Outline issues covered in outbound logistics
– The importance of transportation in the supply
chain
– Illustrate costs and investments

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 Overview
• Products:
– Computers: CPU, Monitor, Keyboard
– Televisions: TV and Console
• Distribution Centers
– 100 across the US
– Sell 10 TVs and 10 computers per day
– 250 days/year

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 Components

Computers TV/Monitor Console

Cost $300 $400 $100

Weight 5 lbs 10 lbs 30 lbs

From Green Bay Indianapolis Denver

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Initial Strategies to Consider
• All direct shipments in full truckloads
• Consolidate in Indianapolis. All
shipments in full truckloads

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 Simplification
• Shipments on the order of 1,000 miles

Gre e n Bay

Indianapolis
De nve r

Distances

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 What Costs?
• Transportation
• Pipeline inventory – inventory in transit
• Inventory at Plants
• Inventory at DCs
• Handling
• …

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 Direct:Transportation Cost
• How many shipments/year?
– Green Bay 100*2,500/6,000 = 41.67
– Indianapolis 100*5,000/3,000 =166.67
– Denver 100*2,500/1,000 = 250
– Total ~ 460
100 stores * Annual Store Demand /Items to fill a truck
Items to fill a truck = Cap. of truck/Weight of Item
– Green Bay 30,000/5 = 6,000
– Indianapolis 30,000/10 = 3,000
– Denver 30,000/30 = 1,000

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 What Costs?
• Direct
– Transportation ~
• $1/mile*1,000 miles/trip*460 trips/year = $460,000/year
– Pipeline inventory
– Inventory at Plants
– Inventory at DCs
– Handling
– …

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 Pipeline Inventory
• How long are goods in transit?
– 1,000 miles at 50+ miles per hour
– 2 days +
• How much inventory is in transit on
average?
• Imagine we send the items one-at-a-time
• How many items in the pipe?

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 Pipeline Inventory
• One Day worth of sales at a store
– 10 TVs at $400+$100 each = $5,000
– 10 Computers at $300+$400 = $7,000
– Total $12,000 per day per store
• Two days of system-wide sales:
– 2 days * $12,000/store/day * 100 stores = $2,400,000
– Carrying cost 15% of $2,400,000 = $360,000

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 What Costs?
• Direct
– Transportation ~
• $1/mile*1,000 miles/trip*460 trips/year = $460,000/year
– Pipeline inventory
• $2,400,000 in capital
• $360,000 in annual carrying costs
– Inventory at Plants
– Inventory at DCs
– Handling
– …

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 Inventory at the Plants
• Two Extremes
– Simultaneous shipments
– Staggered shipments

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 Simultaneous Shipments
• A truckload of computers from Green Bay
has 6,000 computers in it
• A DC sells 2,500 per year
• So we only need to replenish the DCs
every 6,000/2,500 = 2.4 years

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 Inventory at Green Bay
• Simultaneous Shipments

600,000

2.4 years 38
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 Simultaneous shipments
– Green Bay ships once every 2.4 years
• Inventory is 1.2 years demand or 300,000 CPUs
• Inventory value is $90,000,000
• Inventory carrying cost is $13,500,000
– Denver ships 2.5 times per year
• Inventory is 20% of annual demand or 50,000 Consoles
• Inventory value is $5,000,000
• Inventory carrying cost is $750,000
– Indianapolis ships 1.6 times per year
• Inventory is 500,000/3.2 or about 150,000 items
• Inventory value is $60,000,000
• Inventory carrying cost is $9,000,000

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 Why Not?
• What are problems with simultaneous
shipments?
• When are simultaneous shipments likely?
• What alternatives?

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 Inventory at Green Bay
• Staggered Shipments

6,000

~6 days 41
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 What Costs?
• Inventory at Plants
– Simultaneous Shipments
Capital Carrying Cost
• Green Bay $90 million $13.5 million
• Denver $ 5 million $ .75 million
• Indianapolis $60 million $ 9.0 million
• Total $155 million $23.25 million
– Staggered Shipments (divide by 100!)
Capital Carrying Cost
• Green Bay $900 K $135 K
• Denver $ 50 K $ 7.5 K
• Indianapolis $600 K $ 90 K
• Total $1.55 million $232.5 K
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 What Costs?
• Direct
– Transportation ~
• $1/mile*1,000 miles/trip*460 trips/year = $460,000/year
– Pipeline inventory
• $2,400,000 in capital
• $360,000 in annual carrying costs
– Inventory at Plants – Staggered Shipments
• $1.55 million in capital
• $232.5 K in annual carrying costs
– Inventory at DCs
– Handling
– …
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 DC Inventory from Green Bay

6,000

~2.4 years 44
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 Inventory at DCs

• At the DC’s?
– ½ truckload or 3,000 CPUs at $300 each: $900,000
– ½ truckload or 1,500 Monitors at $400 each: $600,000
– ½ truckload or 500 Consoles at $100 each: $ 50,000
$1,550,000
Carrying cost: 15% of $1,550,000 or $232,500
Total Carrying cost at the DCs: $23,250,000!

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 What Costs?
• Direct
– Transportation ~
• $1/mile*1,000 miles/trip*460 trips/year = $460,000/year
– Pipeline inventory
• $2,400,000 in capital
• $360,000 in annual carrying costs
– Inventory at Plants – Staggered Shipments
• $1.55 million in capital
• $232.5 K in annual carrying costs
– Inventory at DCs
• $155 million in capital
• $23.25 million in carrying costs
– Handling 46
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– …
 Total Cost & Capital Direct
Costs
• Transportation Costs: $ 460,000
• Pipeline Inventory $ 360,000
• Inventory Costs at Plants: $ 232,500
• Inventory Costs at DCs: $ 23,250,000
Total: $ 24,302,500!
Capital Required:
• Pipeline Inventory $ 2,400,000
• Inventory Costs at Plants: $ 1,550,000
• Inventory Costs at DCs: $ 155,000,000
Total: $ 158,950,000! 47
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 Consolidation
• Strategy 2: Assemble Products in
Indianapolis and distribute by truckload
from there
• What will happen to costs?
– Transportation
– Pipeline
– At plants
– At Indianapolis Warehouse/Cross Dock
– At DCs

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 Via Indianapolis

Gre e n Bay

Indianapolis
De nve r

Facts

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 What Costs?
• Transportation
– To Indianapolis
– From Indianapolis to DCs
• Pipeline inventory
– To Indianapolis
– From Indianapolis to DCs
• Inventory at Plants
• Inventory at Indianapolis Cross Dock
• Inventory at DCs
• Handling
• … 50
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 Indirect: Transportation
• To Indianapolis
– Green Bay 400 miles* 42 trips = 16,800
– Indianapolis 0 miles*167 trips = ~ 0
– Denver 1,100 miles*250 trips = 275,000
– Total $291,800
• From Indianapolis to DCs
– Same as total transport before, we are moving
the same goods the same distance (roughly
1,000 miles to each DC) $460,000

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 What Costs?
• Transportation
– To Indianapolis $291,800
– From Indianapolis to DCs $460,000
• Pipeline inventory
– To Indianapolis
– From Indianapolis to DCs
• Inventory at Plants
• Inventory at Indianapolis Cross Dock
• Inventory at DCs
• Handling
• … 52
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 Pipeline Inventory
• To Indianapolis
– From Green Bay 400 miles ~ 1 day
• 1,000 per day at $300 each ~ $300,000 capital
• 15% of $300,000 is $45,000 carrying cost
– From Denver 1,100 miles ~ 2 days
• 2 days at 1,000 per day at $100 each ~ $200,000 capital
• 15% of $200,000 is $30,000 carrying cost
– Total
• Capital $500,0000
• Carrying Cost $ 75,0000
• From Indianapolis to DCs
– Same as before 2 days of sales
– Capital $2,400,000 53
– Carrying Cost $ 360,000 53
 What Costs?
• Transportation
– To Indianapolis $291,800
– From Indianapolis to DCs $460,000
• Pipeline inventory
– To Indianapolis
• Capital $500,000
• Carrying Cost $ 75,000
– From Indianapolis to DCs
• Capital $2,400,000
• Carrying Cost $ 360,000
• Inventory at Plants
• Inventory at Indianapolis Cross Dock
• Inventory at DCs
• Handling
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• … 54
 Inventory at Plants
• Same as before
– Green Bay holds ½ of a truckload
– Denver holds ½ of a truckload
– Assume Indianapolis holds ½ of a truckload
for delivery to the cross dock
– Capital $1,550,000
– Carrying Cost $ 232,500

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 What Costs?
• Transportation
– To Indianapolis $291,800
– From Indianapolis to DCs $460,000
• Pipeline inventory
– To Indianapolis
• Capital $500,000
• Carrying Cost $ 75,000
– From Indianapolis to DCs
• Capital $2,400,000
• Carrying Cost $ 360,000
• Inventory at Plants
– Capital $1,550,000
– Carrying Costs $ 232,500
• Inventory at Indianapolis Cross Dock
• Inventory at DCs
• Handling
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• … 56
 Inventory at Cross Dock

Receiving Shipping

WIP Computers & TVs

CPUs, Monitors, Consoles 57

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 Inventory at Indianapolis Cross
Dock
• Receiving from the Plants
– ½ a truckload of CPUs
Capital $1,550,000
– ½ a truckload of Monitors Carrying Cost $ 232,500

– ½ a truckload of Consols
• Shipping to the DCs
– ½ a truckload of Computers and TVs
• WIP – like Pipeline inventory
– How long does the process take?

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 What’s in a Truck
• Of Computers and TVs?
• In the same mix as demand
– 1:1 computers to TVs
– X computers in a truck
– Weight of the computers 15X lbs
– Weight of the TVs 40X lbs
– 15X + 40X = 30,000 lbs
– X = 30,000/55 = 545
• A full truck of finished goods has
– 545 computers and 545 TVs
– 545 CPUs, 545 Consoles and 1090 Monitors
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 Inventory at Indianapolis
Cross Dock
• Receiving from the Plants
– ½ a truckload of CPUs
– ½ a truckload of Monitors Capital $1,550,000
– ½ a truckload of Consols Carrying Cost $ 232,500

• Shipping to the DCs

– ½ a truckload of Computers and TVs
• 273 CPUs at $300 each or $ 81,900
• 273 Consoles at $100 each or $ 27,300
• 545 Monitors at $400 each or $218,000
• Total $327,200
• Carrying cost $ 49,080
• WIP – like Pipeline inventory
– How long does the process take? 60
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 Inventory at DCs
• Inventory at a DC:
– Visited by truck 4.6 times per year
– Same as before
– So inventory costs at DC are the same as
before, right?

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 Wrong! Magic?
Inventory
Number Number per Average Average Value Carrying
Product Value per year shipment Inventory of Inventory Cost
TV $ 500.00 2,500 545 273 $ 136,500 $ 20,475
Computer $ 700.00 2,500 545 273 $ 191,100 $ 28,665
Total: $ 49,140

• Total Inventory Carrying Cost at DCs:

$4,914,000
compared with
$23,250,000
under earlier strategy. Explain!
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 The Difference
Inventory
Number Number per Average Average Value Carrying
Product Value per year shipment Inventory of Inventory Cost
TV $ 500.00 2,500 543 272 $ 135,869.57 $ 20,380.43
Computer $ 700.00 2,500 543 272 $ 190,217.39 $ 28,532.61
Total: $ 48,913.04

Number Number per Average Average Value Inventory

Part Value per year shipment Inventory of Inventory Carrying Cost
CPU $300 2500 6,000 3,000 $ 900,000.00 $ 135,000.00
Monitor/Keyboard $400 5000 3,000 1,500 $ 600,000.00 $ 90,000.00
Console $100 2500 1,000 500 $ 50,000.00 $ 7,500.00
Total: $ 232,500.00

Explain?
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 With Consolidation
– Transportation Costs: $ 751,800
– Inventory Costs at DCs: $ 4,891,300
– Inventory Costs at Plants: $ 513,900
Total: $ 6,757,000
Without Consolidation
– Transportation Costs: $ 460,000
– Inventory Costs at DCs: $ 23,250,000
– Inventory Costs at Plants: $ 232,500
Total: $ 23,942,500!

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 Comparison
Direct Consolidation
Capital Cost Capital Cost
Transportation
To Indianapolis $ - $ 291,800
From Indianapolis to DCs $ 460,000 $ 460,000
Pipeline Inventory
To Indianapolis $ 500,000 $ 75,000
From Indianapolis to DCs $ 2,400,000 $ 360,000 $ 2,400,000 $ 360,000
Inventory at Plants $ 1,550,000 $ 232,500 $ 1,550,000 $ 232,500
Inventory at Cross Dock
Receiving $ 1,550,000 $ 232,500
Shipping $ 327,600 $ 49,140
Inventory at DCs $ 155,000,000 $ 23,250,000 $ 32,760,000 $ 4,914,000
Total $ 158,950,000 $ 24,302,500 $ 39,087,600 $ 6,614,940

Invest some of the $120 million in the cross dock

Spend some of the $18 million on handling
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 Deterministic Supply Chain
Design

• Next time: should we be shipping in full

truckloads?
• In early February we will explore to the
inventory at the cross dock in more detail

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