Supply Chain Management

(3rd Edition)

Chapter 13
Transportation in the Supply Chain

© 2007 Pearson Education 14-1

 Outline
 The role of transportation in the supply chain
 Factors affecting transportation decisions
 Modes of transportation and their performance
characteristics
 Design options for a transportation network
 Trade-offs in transportation design
 Tailored transportation
 Routing and scheduling in transportation
 Making transportation decisions in practice

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 Logistics vs Transport vs Supply
Chain

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 Factors Affecting
Transportation Decisions
 Carrier (party that moves or transports the product)
– Vehicle-related cost
– Fixed operating cost
– Trip-related cost
 Shipper (party that requires the movement of the product between
two points in the supply chain)
– Transportation cost
– Inventory cost
– Facility cost
– Example-big2 company-Tiong Nam, ptp, larger expenses
– Carrier/shipper-cost related

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 Transportation Modes
 Trucks
– TL
– LTL
 Rail
 Air
 Package Carriers
 Water
 Pipeline
 Intermodal

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 Truck
 In 2002, trucks moved 64% of US commercial freight by value and 58% by
weight.
 Trucking is more expensive than rail but offers the advantage of
– door to door shipment,
– a shorter delivery time,
– no transfer between pickup and delivery.
 TL operations have relatively low fixed costs, owning a few trucks is often
sufficient to enter the business
 The goal of TL carrier is to schedule shipments to meet service requirements
while minimizing both trucks’ idle and empty travel time
 TL pricing displays economies of scale with respect to the distance traveled.
 Trailers have different size and respect to the price of economies of scale.
 TL is suited for transportation between manufacturing facilities and warehouses
or between suppliers and manufacturers.

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 Truckload (TL)
 Average revenue per ton mile (1996) = 9.13 cents
 Average haul = 274 miles
 Average Capacity = 42,000 - 50,000 lb.
 Low fixed and variable costs
 Major Issues
– Utilization
– Consistent service-maintainance, fatigue
– Backhauls (return with no load)

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 Less Than Truckload (LTL)
 LTL operations are priced to encourage shipments in
small lots, usually less than a half a TL as TL tends to
be cheaper for larger shipments.
 Prices display EOS with the quantity shipped as well
as the distanced traveled.
 LTL shipments take longer than TL shipments bcz of
other loads that need to be picked up and dropped off.
 LTL is suitable for shipments that are too large to be
mailed as small packages but that constitute less than
half a TL. Example, furniture like sofa, cupboard.
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 Less Than Truckload (LTL)
 Average revenue per ton-mile (1996) = 25.08 cents
 Average haul = 646 miles
 Higher fixed costs (terminals) and low variable costs
 Major issues:
– Location of consolidation facilities (bring many small loads)
– Utilization (maybe increase delivery time)
– Vehicle routing (strong regional players has advantage bcz of
offered by a high density of pick up and delivery points.
– Customer service
– -less risk of accident of truck

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 Difference between TL & LTL

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 Rail
 Average revenue / ton-mile (1996) = 2.5 cents
 Average haul = 720 miles
 Average load = 80 tons
 Key issues:
– Scheduling to minimize delays / improve service
– Off-track delays (at pickup and delivery end) –due to transit
– Yard operations
– Variability of delivery times

– Main prob-vehicle and staff-similar wt flight-if delay-affect whole

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 Air
 Key issues:
– Location/number of hubs
– Location of fleet bases/crew bases
– Schedule optimization
– Fleet assignment
– Crew scheduling
– Yield management-based on availability at diferent
prices

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 Package Carriers
 Companies like FedEx, UPS, USPS, that carry small packages
ranging from letters to shipments of about 150 pounds
 Expensive
 Rapid and reliable delivery
 Small and time-sensitive shipments
 Preferred mode for e-businesses (e.g., Amazon, Dell,
McMaster-Carr)
 Consolidation of shipments (especially important for package
carriers that use air as a primary method of transport)

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 Water
 Limited to certain geographic areas
 Ocean, inland waterway system, coastal waters
 Very large loads at very low cost
 Slowest
 Dominant in global trade (autos, grain, apparel, etc.)

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 Pipeline
 High fixed cost
 Primarily for crude petroleum, refined petroleum
products, natural gas
 Best for large and predictable demand
 Would be used for getting crude oil to a port or
refinery, but not for getting refined gasoline to a
gasoline station (why?)

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 Crossdock

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 Intermodal
 Use of more than one mode of transportation to move a
shipment to its destination
 Most common example: rail/truck
 Also water/rail/truck or water/truck
 Grown considerably with increased use of containers
 Increased global trade has also increased use of
intermodal transportation
 More convenient for shippers (one entity provides the
complete service)
 Key issue involves the exchange of information to
facilitate transfer between different transport modes
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 Design Options for a
Transportation Network
 What are the transportation options? Which one to
select? On what basis?
 Direct shipping network
 Direct shipping with milk runs
 All shipments via central DC
 Shipping via DC using milk runs
 Tailored network

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 Trade-offs in Transportation Design
 Transportation and inventory cost trade-off
– Choice of transportation mode
– Inventory aggregation
 Transportation cost and responsiveness trade-off

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 Choice of Transportation Mode
 A manager must account for inventory costs when
selecting a mode of transportation
 A mode with higher transportation costs can be
justified if it results in significantly lower inventories

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 Inventory Aggregation: Inventory
vs. Transportation Cost
 As a result of physical aggregation
– Inventory costs decrease
– Inbound transportation cost decreases
– Outbound transportation cost increases
 Inventory aggregation decreases supply chain costs if
the product has a high value to weight ratio, high
demand uncertainty, or customer orders are large
 Inventory aggregation may increase supply chain
costs if the product has a low value to weight ratio,
low demand uncertainty, or customer orders are small
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 Trade-offs Between Transportation
Cost and Customer Responsiveness
 Temporal aggregation is the process of combining
orders across time
 Temporal aggregation reduces transportation cost
because it results in larger shipments and reduces
variation in shipment sizes
 However, temporal aggregation reduces customer
responsiveness

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 Tailored Transportation
 The use of different transportation networks and modes
based on customer and product characteristics
 Factors affecting tailoring:
– Customer distance and density
– Customer size
– Product demand and value

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 Selecting a Transportation
Network
 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 your
recommend if annual sales for each product at each retail store
are 120,000 units?

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 Direct shipping network
 Batch size shipped from each supplier to each store = 40,000
units
 Number of shipments/year from each supplier to each store =
960,000/40,000 = 24
 Annual trucking cost for direct network = 24x$1,100x4x8 =
$844,800
 Average inventory at each store for each product = 40,000/2 =
20,000 units
 Annual inventory cost for direct network = 20,000x$0.20x4x8 =
$128,000
 Total annual cost of direct network = $844,800 + $128,000 =
$972,800
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 Milk runs from suppliers to retail
stores
 Batch size shipped from each supplier to each store = 20,000 units
 Number of shipments/year from each supplier to each store =
960,000/20,000 = 48
 Transportation cost per shipment per store = 1,000/2 + 100 = $600
 Annual trucking cost for milk runs network = 48x$600x4x8 =
$921,600
 Average inventory at each store for each product = 20,000/2 =
10,000 units
 Annual inventory cost for milk runs network = 10,000x$0.20x4x8 =
$64,000
 Total annual cost of milk runs network = $921,600 + $64,000 =
$985,600

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 Assignment 5

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 Trade-offs when selecting
transportation mode
 Skoda is major car manufacturer in Czech Republic. Skoda’s assembly plant
in Mlada Bleslav plans to source the steering system set from TRW
Autoelektronika. Skoda plans to purchase 120,000 steering parts a year from
TRW Autoelektronika at a price of $120 per set. Demand is expected to be
constant. Each set of steering system parts weight about 10 pounds. Skoda
traditionally purchased lots of 3,000 steering system sets. At its assembly
plant, Skoda carries safety inventory equal to 50% of the average demand for
steering systems during the delivery lead time.
 The plant manager at Skoda receievd several proposals for transportation
and must decide on the one to accept. The details of various proposals are
provided in Table 13-4, where one cwt is equal to one hundred pounds.
Uniparts’s pricing represents a marginal rate for the quantity over 250 cwt in
a shipment from $4/cwt to $3/cwt and suggested that Skoda increase its
batch size to 4,000 motors to take advantage of the lower transportation cost.
What should the plant manager do?

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 Analysis
 Uniparts’s new proposal will result in very low transportation costs for
Skoda if the plant manager orders in lots of 4,000 steering system. The
plant manager, however, decides to include inventory costs in the
transportation decision.
 Skoda’s annual cost of handling = 25% x $120 = $30 per steering system
 Shipments by rail = 5 day transit time
 Shipment by truck = 3 days transit time
 The transportation decision affects the cycle inventory, safety inventory and
in-transit inventory for Skoda. The plant manager decides to evaluate the
total transportation and inventory cost for each transportation option.
 The local Rail proposal requires a minimum shipment of 20,000 pounds or
2,000 steering systems. The replenishment LT in this case is, L = 5 + 1 = 6
days

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 Analysis
 If Q = 2,000 units steering system
 Cycle inventory = Q/2 = 2,000/2 = 1,000 steering systems
 Safety inventory = L/2 days of demand = (6/2)(120,000/365) = 986 steering
systems
 In-transit inventory = 120,000(5/365) = 1,644 steering systems
 Total average inventory = 1,000 + 986 + 1,644 = 3,630 steering systems
 Annual holding cost using Local Rail = 3,630 x $30 = $108,900

 Local rail charges $6.50 per cwt, resulting in a transportation cost of $0.65
per steering system because each steering system weights 10 pounds, thus;
 Annual transportation cost using Local Rail = 120,000 x 0.65 = $78,000
 Therefore; Total annual cost for inventory & transportation = $186,900

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 Trade-off cost and responsiveness
 Table 3 shows the average weekly demand for two months. All
orders are being shipped to customers using air-freight that
charges RM200 + 0.05x, where x is the number of total weight
being shipped by air-freight. Each of the product is weighted 2
kilogram. The company has assigned you as a consultant to
advice to top management by choosing the right response day
and cost advantages. Suggest to company the suitable response
time with the right cost advantages in order to compete in
market and satisfy customer satisfaction. Provide all the
necessary analysis to prove to top management with your
justification.

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 Table 3: Average demand weekly for two months

Week Demand Total demand to be Total cost(200 + Total

(unit) shipped (respond 1 0.05x) demand
week) to be
shipped
(respon
d 2 wk)
1 8,735 8,735 200 + 0.05(2x8735) 8735
= 1073.5 +5658 =
2 5,658 5,658

3 10,131 10,131

4 12,688 12,688

5 1,035 1,035

6 10,333 10,333

7 12,050 12,050

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 Role of IT in Transportation
 The complexity of transportation decisions demands to
use of IT systems
 IT software can assist in:
– Identification of optimal routes by minimizing costs subject
to delivery constraints
– Optimal fleet utilization
– GPS applications

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 Risk Management in Transportation
 Three main risks to be considered in transportation are:
– Risk that the shipment is delayed
– Risk of disruptions
– Risk of hazardous material
 Risk mitigation strategies:
– Decrease the probability of disruptions
– Alternative routings
– In case of hazardous materials the use of modified
containers, low-risk transportation models, modification of
physical and chemical properties can prove to be effective

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 Making Transportation
Decisions in Practice
 Align transportation strategy with competitive
strategy
 Consider both in-house and outsourced transportation
 Design a transportation network that can handle
e-commerce
 Use technology to improve transportation
performance
 Design flexibility into the transportation network

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 Summary of Learning Objectives
 What is the role of transportation in a supply chain?
 What are the strengths and weaknesses of different
transport modes?
 What are the different network design options and
what are their strengths and weaknesses?
 What are the trade-offs in transportation network
design?

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