MA IN Logistics and Supply Chain Management

COURSE LECTURE NOTE

Course Name: Transportation System and Management
Course Code: LSCM561
CREDIT HOUR: 2
TARGET GROUP: 1st YEAR, 1st SEMESTER

Name: Mebrahtu T. (Ph.D)

National Aviation 2024

 CHAPTER TWO
TRANSPORTATION DECISIONS
 Integrated Transportation Decisions in Supply
Chain
• By taking a systems perspective, the goal of integrating
processes along the components of the supply chain to
reduce costs and improve service is well established as one
of the key objectives of logistics and supply chain
management.
• Supply chain integration is difficult. As each supply chain
member strives to optimize its own economic value (the
most profitable return for its efforts) there are inevitable
conflicts in respective goals.
• For instance, transport operators would ideally like to have
regular, predictable demand for full loads with wide
delivery windows (and a full return load), while supply
chain partners stress the need to be flexible to their
customers’ needs and changing demands.
• Logistics and transportation managers face a very
different environment today than merely a few years
ago.
• Continued economic deregulation,
• Increased safety and social regulation,
• Escalating customer expectations,
• Increased globalization,
• Improved technologies,
• Labor and equipment shortages, and
• Continually changing face of the transportation service
industry
• present today’s managers with an array of challenges
and opportunities that contrast dramatically with those
of a decade ago.
• It is not surprising, then, that many managers have failed
to fully adapt to the changing environment, resulting in
performance shortcomings and lost opportunities.
• Prominent among the list of lost opportunities is the
prospect of further leveraging the transportation function
as a critical strategic element within the supply chain.
• Despite requirements for strong cross-functional
knowledge, information system expertise, and financial
aptitude in the modern era of logistics and supply chain
management, managers must still be fundamentally
grounded in traditional logistical functions.
• Transportation management is an area that remains
critical to overall logistics and supply chain success,
• In order to meet ever-increasing expectations,
the basic work of transportation has changed
from operationally meeting low cost or high
service criteria to providing a strategic edge by
simultaneously meeting elevated service
requirements and increasingly lower costs.
• Successful managers today require a broad
view of transportation management’s role and
responsibilities in an integrated supply chain.
• Leading firms are making an effort to coordinate
purchasing, operations and logistics to better
manage the physical and information flows within
and outside the firm.
• Firms that coordinate transportation and logistics
planning with purchasing and production are less
likely to be purely reactionary and more likely to
identify consolidation opportunities.
• These firms are also likely to seek similar
efficiencies across the supply chain.
• Transportation services play a central role in
seamless supply chain operations, moving inbound
materials from supply sites to manufacturing
facilities, repositioning inventory among different
plants and distribution centers, and delivering
finished products to customers.
• Benefits accruing from world class operations at the
points of supply, production, and customer locations
are pointless without the accompaniment of
excellent transportation planning and execution.
• Having inventory positioned and available for
delivery is not enough if it cannot be delivered
when and where needed in a cost-efficient manner.
• Thus, in success of any logistical system and
coordinated and efficient supply chain performance,
transportation plays the following strategic role:
– It ensures speedy and timely physical movement of
goods
– It creates core competency by preventing stock-out
and customer annoyance.
– It provides protective storage during transit.
– It ensures cost efficient and better customer
services.
– Tracking system is assuring the exact position of
shipment in terms of times and distance from its
place of usage.
• Transportation: a key decision in logistics mix
transportation absorbs a higher percentage of
logistics costs than any other logistics activity
• Transportation decisions are
 Mode and carrier selection
 Legal Forms of Carriers
 Routing and scheduling
 Design Options for a Transportation Network
 Shipment consolidation
2.2. Modal Selection
• Sometimes the choice of transport mode
seems obvious, if you want to move heavy
items between two points you will use
shipping. For land journeys, many
organizations seem happy to put materials on
Lorries without much thought for the
alternatives.
• In practice the choice of mode of depends on
variety of factors. Perhaps, the main ones are
the nature of materials to move, the volume,
and distance.
Other Factors include
• Value of material
• Importance
• Transport transit times
• Reliability
• Cost and flexibility to negotiate rates
• Reputation and stability of carrier
• Security, loss and damage
• Schedules and frequency of delivery
• Special facility available
• Three factors of primary importance in
establishment of the transport service
capability from the logistical perspectives:
cost, speed, and consistency.
• In the design of a logistical system, a delicate
balance must be maintained between
transportation cost and quality of service.
• In some circumstances low-cost slow transfers
will be preferred. Other conditions may
require faster methods.
• Three aspects of transportation should be kept
in mind as they relate to the logical system.
• First, facility selection established a structure
or network that limits the range of transport
alternatives and determines the nature of the
transfer effort that must be accomplished.
• Second, the total cost of transportation
involves more than a carrier’s freight bill for
movement between two locations.
• Third, the entire effort to integrate transport
capability into logistical system may be
defeated if the services sporadic and
inconsistent.
Modal selection need to consider a number of factors :
Nature of the Goods
• Low valued bulk goods seldom fly. A dump truck load of
load sand will not be able cover the freight cost of
flying; neither will it packaged well for handling in
airfreight operations. By the same token, diamonds and
silicon chips are rarely move by tramp ships. Why? This
is because the transit time is too uncertain, the value of
the goods too high, and the chance for loss or damage
of the package too greater in ocean freight handling.
• These extremes illustrate how the nature of the goods
and the nature of the shipment affect modal choice.
Access to carriers
• Not all shippers can readily access all modes of
transportation. For instance, moving iron and
copper bores out of konso to Addis Ababa by
water would make good economic sense.
Because the ores have bulk volume, require no
protection, and will tolerate slow transit times.
Unfortunately, konso lacks navigable waterways,
so the ores must be moved by the truck. This
demonstrates the value of access to low- cost
transportation but also underscores the need for
access to it.
Price
• Air transportation costs more than motor
transportation, which costs more than rail, which costs
more than pipeline. Taking transportation costs alone
into consideration, costs relate directly to speed- the
higher the costs, the higher the terminal speed.
However, to consider only terminal to terminal costs will
be wrong. Goods do not move from terminal to
terminal. Goods have to move to the final customers.
They move from origin to destination, which often
means additional costs.
• In integrated logistics, time is measured in how quickly
the goods move, not how quickly the vehicles moves.
Pricing based on costs takes in to account the total cost
of the service which include both time and money.
Carrier Selection

• In decision of transport firms needs to

recognize that the lowest carriers’ does not
necessary guarantee that this carrier will result
in the lowest landed cost –transportation
supply chain relationship.
• Various modes of transport should be
considered to choose a carrier(s) within the
selected mode and carefully examine the
services capabilities of the selected carrier as
services can vary between carries’ selection
decision.
• A transport or logistics manager is required to
take into consideration the following factors
while selecting transportation mode/or
carrier.
 The strength and weaknesses of the company
in terms of marketing, finance and production
resources.
 The prevailing market characteristics
 Product feature and suitability to various
modes of transportation such as height, size,
shape, etc.
 Quantity to be transported each time
 Distance to be covered
 Carrier performance in terms of speed,
availability, reliability, safety, claim
settlement procedures and logistical service
capacities.
 Total transportation cost of various mode of
transportation.
 The buyer should select the mode, carrier,
and routing that will provide for the safe
movement of goods, within required time, at
lowest total transport cost.
• Carrier selection logically follows mode
selection. Having chosen a particular mode of
transportation, the logistics/traffic manager
must decide which carrier(s) to use. The choice
will depend on which carrier best manifests the
characteristics of the mode which trucking firm
is most flexible.
• Carriers are chosen on the basis of
 Price
 Accessibility
 Responsiveness
 Claims record and
 Reliability
The major criteria for carrier selection are
discussed in the paragraphs that follow in
more detail.
Price
• Price will often influence carrier selection.
Many logistics systems demand the basic
service offered by a mode of transportation.
Managers assume, often correctly, that most
carriers provide that basic, core service, so the
major distinction between carriers is price.
Here, are some ways in which prices are fixed.
Cost-of-Service Pricing
• Cost-of-service pricing (COSP) is defined as charging a
rate that at least covers the actual expense of
providing that service. Low-valued products often
move under COSP. These products usually have thin
profit margins that permit only transportation rates.
Full-Cost Pricing
• Full-cost pricing refers to a price that covers all variable
costs of shipment plus a fair share of the fixed costs.
Full-cost pricing allows the carriers to cover all costs.
Value of Service Pricing
• Value of service pricing refers to what the traffic will
bear. The rate charged maximizes revenue regardless of
costs.
• The price a carrier charges for a particular
movement depends on a variety of factors and
may reflect any one of the three pricing
schemes.
– Value of service pricing
– Fully-allocated-pricing
– Costs-of-service pricing
• Other variable influence the price to
transportation services including volume,
handling requirement, liability, market factor,
freight density, stow ability, and distance.
Accessibility
• Accessibility is the corner stone of service for a
shipper. The transportation capacity must be
available when and where the logistics system
needs it. Rail and moor carrier’s often spot
equipment at customer sites to ease loading and
unloading of railcars.
• Accessibility is the ability of the transportation
provider to move the freight between a specific
origin and destination. The inability of a carrier to
provide direct service between an origin and
destination results in added costs and transit time
for the shipper.
Responsiveness
• For carriers' selection this means how readily the
carrier responds to changing customer needs. Some
carrier provide services under detailed contract but
provides only those services described in the
contract. That sometimes leaves the customer
seeking unspecified carriers to fill the seams in the
contract or oven to grow at the expense of the large
contracting carries.
• If any volume of freight is moved, some damage will
be incurred resulting in claims against the carriers,
should the carriers get into financial difficulty, or
even become insolvent, collection of claims becomes
a problem.
Claims Record
• Prompt and efficient investigation and settlement
of claims is another key factor in carrier selection.
• Some carriers damage goods more often than
others. Because of this, the low priced carriers
may not be the low cost carriers. Imagine what
happens when goods arrive damaged.
• The customer cannot use the goods, so they must
be discarded or returned at someone’s expense.
The receiver experience poor service, the shipper
has a dissatisfied customer and the carrier pays a
claim. No one wins.
Reliability
• Carriers that consistently deliver goods on
time add more value than those that don’t,
they are worth more. The importance of
reliable delivery and pickup rises as firm move
towards JIT, quick response, etc. JIT fails
without reliable carriage, regardless of the
mode.
• The higher the reliability requirements, the
more likely goods will move by faster modes
and faster carries.
Routing and Scheduling

• The objective of most routing and scheduling

is to minimize the total cost of providing the
service.
• This includes vehicle capital costs, mileage,
and personnel costs. But other objectives also
may come into play, particularly in the public
sector.
Routing
• Routing primarily deals with determining the
most efficient paths for delivery vehicles to
travel from the starting point to the destination
points.
• It involves deciding the sequence of stops and
the specific routes that vehicles should take.
• The main objective of routing is to minimize
travel time, distance, and fuel consumption
while considering factors such as road
conditions, traffic congestion, vehicle capacities,
and delivery time windows.
• Key aspects of routing include:
1. Route Optimization: Finding the optimal path
for each delivery vehicle to visit all the necessary
stops in the most efficient order. This often
involves using routing algorithms and software.
2. Traffic and Road Conditions: Taking into account
real-time traffic information, road closures, and
other factors that might affect travel times.
3. Vehicle Capacities: Ensuring that the selected
routes are feasible for the capacity and size of
the delivery vehicles being used.
Routing Identification
• Routing is the design of transportation network.
This network created, when different points or lines
linked together into a structure. Such networks by
carrying flows of goods, People, information, or
anything else that is moved from one place give rise
the benefits of transportation system.
• Good Identification of Routing:
 Reduce transportation costs
 Improve customer services
 Minimize time or distance
 Increase accessibility
Scheduling

• Scheduling focuses on determining when

deliveries should take place, taking into
account constraints such as customer
availability, delivery time windows, and driver
work hours.
• The main goal of scheduling is to allocate
delivery orders to specific time slots in a way
that balances operational efficiency with
customer convenience.
• Key aspects of scheduling include:
1. Time Window Management: Assigning delivery time
windows to each customer based on their
preferences and operational constraints.
2. Driver Availability: Ensuring that delivery routes are
planned within the available work hours of the
delivery drivers.
3. Customer Convenience: Attempting to accommodate
customer preferences for delivery times, within the
logistical limitations.
4. Order Grouping: Combining orders with similar
delivery windows or locations to maximize delivery
efficiency.
Transport networks
• The term network refers to the framework of routes within
a system of locations, identified as nodes. A route is a single
link between two nodes that are part of larger network
that can refer to tangible routes such as roads and rails or
less tangible routes such as air and sea corridors.
• The setting of network is the outcome of various strategies,
such as providing access and mobility to a region,
reinforcing a specific trade corridor or technological
developments making a specific mode and its network
more advantageous over others.
• A transport network denotes either a permanent track
(e.g. roads, rail and canals) or a scheduled service (e.g.
airline, public transit, train)
Design Options for a Transportation Network
A. Direct shipment network
• With the direct shipment network option, all
shipments come directly from each supplier to
each buyer location, with a direct shipment
network, the routing of each shipment is
specified, and the supply chain manager only
needs to decide on the quantity to ship and
the mode of transportation to use.
• The major advantage of a direct shipment
transportation network is the elimination of
intermediate warehouses and its simplicity of
operation and coordination.

• The shipment decision is completely local, and

the decision made for one shipment does not
influence others.
• The transportation time from supplier to buyer
location is short because each shipment goes
direct.
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.
• Indirect shipping with milk runs, a supplier deliver
directly to multiple buyer location on a truck picks
up deliveries destined for the same buyer location
from many suppliers.
• Direct shipping provides the benefits of eliminating
intermediate warehouse; whereas milk runs lower
transportation cost by consolidating shipments to
multiple locations.
ALL shipment via Central Distribution Center
• Under this option suppliers do not sent
shipments directly to buyer location. The buyer
divide's location by geographic region and
distribution center (DC) is built for each region.
Suppliers send their shipments to the DC and the
DC then forwards appropriate shipments to each
buyer location.

• The DC is an extra layer between suppliers and

buyer location and can play two different roles.
One is to store inventory and the other is to serve
as a transfer location.
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 transportation costs by
consolidating small shipments.
Network Evaluation Indicators
• Evaluation of transport system should be based
on defined development object of the city.
Evaluating criterion is set depending on the goal
of development each city. Criteria and indicate
may differ significant depending on many factors
such as city type regional transportation vision,
or travel behaviour even between modes.
• Transport Infrastructure Availability
• Accessibility
• Equity
• Mobility
Legal Forms of Transportations

a. Common Carriers
• Common carriers must offer their
transportation services to the public without
discrimination, meaning they must charge the
same rates for the same service to all
customers.
B. Contract Carriers
• Typical contracts are for movement of a specified
cargo for a negotiated and agreed-upon price.
C. Exempt Carriers
• Carriers are classified as exempt if they
transport certain exempt products such as
produce, livestock, coal, or newspapers. School
buses, taxis and ambulances are also examples
of exempt carriers.
• The exempt status was originally established to
allow farmers to transport agricultural products
on public roads.
D. Private Carrier
• Firms transporting their own products
typically own and operate fleets large enough
to make the cost of transportation less than
what it would be if the firm hired a
transportation provider.
• Flexibility and control of product movements
also play major roles in the ownership of a
private carrier.
 Freight consolidation
• Freight consolidation, also known as assembly
service, cargo consolidation, and consolidation
service, is the process of combining multiple small
shipments into one large shipment.
• Consolidated shipping is an excellent method for
saving money on shipping without sacrificing
schedule. It is well worth the effort to consolidate
shipments, even though it is more labor-intensive
than shipping a full truckload.
• It allows merchants to consolidate their
inventory with other merchants to reduce supply
chain costs and preserve margins.
• For most companies, especially smaller ones like
ecommerce sellers, consolidating shipping is essential.
• Companies can benefit from consolidating their
shipping by getting better rates and shipping more
frequently and to more locations.
• When this combined cargo reaches the central
consolidation center or distribution center, it’s
separated, sorted, and combined into full truckloads
(FTL) to be delivered to the fulfillment center or
retailer.
• As shipping volume increases, per unit shipping costs
decrease, so it’s advantageous to combine shipments
to boost total volume and lower overall transit costs.
 Benefits of consolidation Shipping
Freight consolidation offers four primary
benefits, especially for businesses that only send
a few pallets of inventory at one time or who
have a high frequency of smaller shipments
• Boost Profitability – Freight consolidation
significantly cuts costs since shops get the
advantage of full truckload (FTL) pricing at
less-than truckload (LTL) mass.
• A higher volume of freight has lower shipping
costs. So, working with other companies that
ship to the same region to fill a truck or
container will reduce the total cost of delivery.
Plus, merchants will receive bulk rates if they
combine multiple shipments into a single
truck.
• Maximize Supply Chain Performance – Complexity
and unpredictable variables at each stage of a
delivery’s journey increases the likelihood of
delays.
• Consolidation alleviates this by incorporating more
FTL moves, which removes the burden of
managing multiple LTL transitions.
• Sellers also have more control over production
schedules and due dates because they’re
managing the entire distribution chain themselves
or through an outsourced fulfillment provider.
• Additionally, because multiple companies’
freight is consolidated, the carrier is responsible
for the entire combined shipment. Therefore,
the docking and loading process is faster,
ensuring delivery schedules remain on track.
• On the facility management front, FTL
shipments take much less time to inventory, and
document compared to LTL, as well.
• Ultimately, fewer touchpoints throughout the
journey leads to faster delivery times and
happier customers.
• Strengthen Customer Relationships – Since
truckers see consolidated freight as a full load, it
moves faster, ensuring customers routinely
receive orders when promised.
• For instance, a cross-country shipment that’s
cross-docked several times will take 6-10 days to
reach its destination, whereas a consolidated load
arrives in just 2-3 days.
• As a result, freight consolidation ensures that
customers receive orders efficiently and quickly,
especially if sellers strategically forward stock
inventory in advance.
• More Sustainable Supply Chain – Carbon
dioxide (CO2) emissions are reduced
dramatically with fewer trucks on the road,
idling at distribution centers, and making
multiple stops.
• Accordingly, freight consolidation helps the
environment and supports companies’
environmental, social and governance (ESG)
plans.
• Further, shippers spend less on fuel and per-
mile transport costs.