Chapter 2

Transportation in the Supply

Chain

© 2007 Pearson Education 14-1

 Chapter Outline
1. Understand the role of transportation in a supply chain
2. Nature of Transport
3. Discuss the role of infrastructure and policies in
transportation
4. Identify the relative strengths and weaknesses of
various transportation network design options
5. Identify trade-offs that shippers need to consider when
designing a transportation network

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 Role of transportation in supply
chain
 It is an important supply chain driver because products
are rarely produced and consumed in the same location.
 It is a significant component of the costs incurred by
most supply chains.
 In a nodes and links scenario, transportation is the link
between fixed facilities (nodes).
 Adds value (time and place)--allows specialization
 Important to our economy

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 Fore instance In USA (2002-2004);

 Over 19 billion tons of freight, valued at $13 trillion, was

carried over 4.4 trillion ton-miles in the United States.
 Only three sectors—housing, health care, and food—
contributed a larger share to the gross domestic product (GDP)
than transportation.
 Employed nearly 20 million people ( 16% ) percent of U.S.
total occupational employment.
 Significant in global supply chains.
 freight transportation network carried export and import
merchandise worth more than $2.2 trillion.

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 Role of trans. ….
 Transportation is vital to procurement, manufacturing, and market
distribution
 Transportation is the physical link connecting the firm to its suppliers and
customers.
 Transportation also adds value to the product by providing time and place
utility for the firm’s goods.
 Time and Place Utility:
 Movement across space or distance.
» Place utility - Where it is needed
» Time utility - created or added by the warehousing & storage of
product until it is needed. Also a factor in time utility; it
determines how fast and how consistently a product move from
one point to another.

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 Role of trans. ….
• As firms engage in global competition, transportation costs are
becoming even more significant.

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 Role of trans. ….
 Outbound transportation was clearly the largest component of total
physical distribution costs.
 Cost trade-offs abound in transportation and are typified by trading lower
inventory costs for higher transportation costs.

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 Role of trans. ….
 The global supply chains of today allow production of products with parts
being produced in several countries before the final finished product is
assembled.
 A major contributing factor to the global supply chains and the economics
of production is the efficiency and effectiveness of global transportation
and associated services.
 Improved global supply chains with faster transit times and lower rates
help to promote global trade.
 Transportation efficiency promotes the competitiveness of supply chain
 Any supply chain’s success is closely linked to the appropriate use of
transportation.

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 Nature of Transport
It is complex in nature:
These complexity stems from its:
increased geographic coverage,
Diverse modal options,
changing regulatory/deregulatory transportation laws/rules,
limited fuel resources, and
multiple stakeholders.
To ease transportation complexity, one should start
understanding the fundamental functions, evolution, and
surrounding environments of transportation.

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 Fundamental transportation functions
 Creates spatial (or place) utility by reducing distance gaps
among suppliers, producers, and consumers.
 Creates value by changing the locations of raw materials,
parts/components, and finished goods to the places where they are
needed or consumed.
 Create temporal (time) utility by making the needed resources
available at the same location at the same time. For example,
assembly at the production facility requires a variety of
parts/components and workers at the same time.
 These functions have been greatly expanded by gradual changes
in business environments and management philosophy for the
last few decades.
© 2007 Pearson Education 14-10
 What are these changes?
Those changes are:
Advancements in information technology such as (GPS), satellite
tracking systems, and radio frequency identification (RFID) that help
track shipment status during transit
Government intervention in transportation practices that intends to
control the extent of competition in the marketplace and enhance
transportation safety.
Globalization of business activities that stretch the entire supply
chain and then increasingly require intermodal transportation with
frequent modal transfers
Just-in-time (JIT) delivery services, which require faster,
uninterrupted transportation within limited delivery time windows

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 What these changes require?
It need hard works of different transportation stakeholders
such as policy maker, planners or supply chain professionals
to formulate a flexible transportation policy and strategy
that can answer the following transportation related
questions.
What kind of transportation services are needed to fulfill the supply
chain missions?
Which carriers should be selected?
Which mode of transportation services is most fuel-efficient?
Which alternative fuel is available for each mode or carrier?
How should required transportation services be purchased?
To what extent should transportation services be outsourced?
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 Cont.…
 What resources are needed to support the firm’s transportation
activities or improve the firm’s transportation efficiency?
 What information should be transmitted to the firm’s supply
chain partners and how much information should be collected,
analyzed, and stored for future usage?
 Which information technology should be acquired and
developed to support transportation decisions?
 How should the transportation revenue be generated to create
financial resources? And more related questions
 Central Place Theory helps to discuss the above questions.

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 CENTRAL PLACE THEORY
The process of exchanging something of value between two parties
(e.g., producers and suppliers, producers and consumers, producers
and distributors, or distributors and consumers) that are distant from
each other often triggers transportation activities.
The location and size of the trading area can dictate
transportation activities.
The Central Place Theory, which was originally introduced by
Christaller (1933) is a geographical concept that seeks to explain the
development patterns, number, size, and location of human
settlements such as cities and towns around the world.

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 Cont……...
 Christaller’s theory assumes that central places
are distributed over a uniform plane of constant
population density and purchasing power.

 Movement across the plane is uniformly easy in

any direction, transportation costs vary linearly,
and consumers act rationally to minimize
transportation costs by visiting the
nearest location offering the desired good or
service.

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 Cont.….
 The determining factor in the location of
any central place is the threshold,
which comprise the smallest market
area necessary for the goods and services
to be economically viable.
 Once a threshold has been established,
the central place will seek to expand its
market area until the range—i.e., the
maximum distance consumers will travel
to purchase goods and services—is
reached.
© 2007 Pearson Education 14-16
 Cont.….
To elaborate, this theory can be described from two
different perspectives:
From the producer’s perspective, the producer will
gravitate toward the trading area where he or she can find
a larger number of potential consumers with higher
disposable incomes.
From the consumer’s perspective, the consumer will
be drawn into the trading area where he or she can find
particular products that he or she wants or has access to a
wide variety of products to choose from.
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 Obstacles for shopping trips are:
Distance to the trading area.
natural barriers (e.g., rivers and lakes),
road conditions,
 traffic congestion,
product characteristics (e.g., perishability)
rising energy costs can change the travel behavior of
consumers
Can increase his or her cost of travel and thus increase
the total cost of a product.

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 Cont.…
 The spatial and temporal dynamics of the
Central Place Theory will be further
complicated by the evolving technological
advances such as the Internet, which allows
consumers to buy products and services
online without making a trip.

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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

© 2007 Pearson Education 14-20

 Transportation Infrastructure
and Policies

• Governments generally take full responsibility or

played a significant role in building and managing
infrastructure elements
• Without a monopoly, deregulation and market
forces help create an effective industry structure
• Pricing should reflect the marginal impact on the
cost to society

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 Transportation Regulations and
Deregulations
Due to the heavy influence of transportation on our daily lives,
national defense, and national economy, transportation draws more
attention from the federal government than any other logistics
function.
Therefore, it comes as no surprise that the federal government has
been deeply involved in transportation affairs and has extensively
controlled transportation activities.
Neither transportation carriers nor shippers are completely free
from various forms of government intervention.
 to ensure that adequate transportation services are provided to
any potential users and protect those users from excessive price and
unfair practices.
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 Transportation regulations are broken
down into two forms:
1. Economic regulations.
 Are designed to correct market imperfections.
 Are intended to combat monopolies by setting the maximum ceilings
of freight rates and preventing discriminatory pricing; obviate
destructive competition by stabilizing prices.
 Economic regulations often play the following roles:
 They govern the entry of new firms into a particular mode.
 They govern the expansion of operating authority of established
carriers and services (or abandonment/shrinkage of operations).
 They govern the exit from the transportation business.
 They rule freight rates, mergers/acquisitions, and financial
arrangements and accounting practices.
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 Cont.…
2. Non-economic regulations.
 It focused on safety enhancement and environmental
protection.
 It addresses public safety, health, and environmental
issues by mandating seat-belt usage, restricting
driving hours, prohibiting smoking on airplanes,
imposing vehicle registration taxes, and setting
vehicle emission standards.

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 Design Options for a
Transportation Network
 When designing a transportation network
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 (milk run)?

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 Direct Shipment Network
to Single Destination
 It is a single destination option, the buyer structures the
transportation network so that all shipments come directly from
each supplier to each buyer location,
The major advantage:
• no inter-mediate warehouses
•simplicity of operation and
coordination.
•shipment decision made for one
shipment does not influence
others. • Justified only if demand at buyer
•time from supplier to buyer locations is large enough that
location is short because each optimal replenishment lot sizes are
close to a truckload from each
shipment goes direct supplier to each location.
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 Direct Shipping with Milk Runs
A milk run is a route on which a truck either delivers product
from a single supplier to multiple retailers or goes from multiple
suppliers to a single buyer location,
Its benefit:
•eliminating intermediate
warehouses,
•lower transportation cost by
consolidating shipments to multiple
locations on a single truck.
•Feasible when the quantity destined
for each location is too small to fill a
truck but multiple locations are close
enough to each other.

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 All Shipments via Intermediate
Distribution Center with Storage
• Under this option, 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
 The presence of a DC allows a
supply chain to achieve economies
of scale for inbound transportation
to a point close to the final
destination, because each supplier
sends a large shipment to the DC that
contains product for all locations the
DC serves.
It is justified if transportation economies require large
shipments on the inbound side or shipments on the outbound
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 All Shipments via Intermediate Transit
Point with Cross-Docking
 Suppliers send their shipments to an intermediate transit
point
 They are cross-docked and sent to buyer locations
without storing them
 The product flow is similar to diagram shown in above
except that there is no storage at the intermediate
facility.
 When a DC cross-docks product:
 Each inbound truck contains product from suppliers for
several buyer locations,
 Each outbound truck contains product for a buyer location
from
© 2007 Pearson several suppliers.
Education
 Major benefits Cross-docking
 Little inventory needs to be held and product flows
faster in the supply chain.
 It saves handling cost.
 It is appropriate when economies of scale in
transportation can be achieved on both the inbound
and outbound sides and both inbound and outbound
shipments can be coordinated.

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 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.
 cross-docking with milk runs
requires a significant degree of
coordination and suitable
routing and scheduling.
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 Tailored Network
 It is a suitable combination of previous options that reduces the cost
and improves responsiveness of the supply chain.
 Here transportation uses a combination of cross-docking, milk runs,
and TL and LTL carriers, along with package carriers in some cases.
 The goal is to use the appropriate option in each situation.
– High-demand products to high-demand retail outlets may be
shipped directly,
– low-demand products or shipments to low-demand retail outlets
are consolidated to and from the DC.
 Transportation network is high because different shipping procedures
are used for each product and retail outlet.
 It requires significant investment in information infrastructure to
facilitate the coordination.
© 2007 Pearson Education 14-32
 Tailored Network
Network Structure Pros Cons

Direct shipping No intermediate warehouse High inventories (due to large

Simple to coordinate lot size)
Significant receiving expense
Direct shipping with milk Lower transportation costs for small lots Increased coordination
runs Lower inventories complexity
All shipments via central Lower inbound transportation cost Increased inventory cost
DC with inventory through consolidation Increased handling at DC
storage
All shipments via central Low inventory requirement Increased coordination
DC with cross-dock Lower transportation cost through complexity
consolidation
Shipping via DC using Lower outbound transportation cost for Further increase in coordination
milk runs small lots complexity
Tailored network Transportation choice best matches Highest coordination complexity
needs of individual product and store

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 Tailored Transportation
 The use of different transportation networks and modes
based on customer and product characteristics
 Factors affecting tailoring
– Customer density and distance
– Customer size
– Product demand and value
 Tailoring transportation based on customer density and
distance, customer size, or product demand and value allows
a supply chain to achieve appropriate responsiveness and low
cost.

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 Tailored Transportation
Short Distance Medium Distance Long Distance

High density Private fleet with milk Cross-dock with milk Cross-dock with milk
runs runs runs

Medium density Third-party milk runs LTL carrier LTL or package carrier

Low density Third-party milk runs or LTL or package carrier Package carrier
LTL carrier

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 Tailored Transportation
Product Type High Value Low Value

High demand Disaggregate cycle inventory. Disaggregate all inventories and use
Aggregate safety inventory. inexpensive mode of transportation
Inexpensive mode of transportation for replenishment.
for replenishing cycle inventory and
fast mode when using safety
inventory.

Low demand Aggregate all inventories. If needed, Aggregate only safety inventory.
use fast mode of transportation for Use inexpensive mode of
filling customer orders. transportation for replenishing cycle
inventory.

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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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 Role of IT in Transportation
 The complexity of transportation decisions demands
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

1. Risk that the shipment is delayed
2. Risk of disruptions
3. 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

1. Align transportation strategy with competitive

strategy
2. Consider both in-house and outsourced
transportation
3. Use technology to improve transportation
performance
4. Design flexibility into the transportation
network

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