DESIGNING AND PLANNING TRANSPORTATION

NETWORKS

MODULE 3

INTRODUCTION

• Transportation involves the physical movement of goods between origin and destination points.

• The transportation system links geographically separated partners and facilities in a company’s supply.

• Transportation facilitates the creation of time and place utility in the supply chain.

• Transportation also has a major economic impact on the financial performance of businesses.

2/16/2015 2

ROLE OF TRANSPORTATION IN SUPPLY CHAIN

• Transportation provides the critical links between these organizations, permitting goods to flow between their facilities.

• Transportation service availability is critical to demand fulfillment in the supply chain.

• Transportation efficiency promotes the competitiveness of a supply chain

• Supply chain also uses responsive transportation to centralize inventories and operate with fewer facilities.

2/16/2015 3

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

2/16/2015 4

TRANSPORTATION MODES

• Trucks

• TL(Truck Load)

• LTL(Less than Truck Load)

• Rail

• Air

• Package Carriers

• Water

• Pipeline

• intermodal

2/16/2015 5

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

• Backhauls

2/16/2015 6

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

• Utilization

• Vehicle routing

• Customer service

2/16/2015 7

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)

• Yard operations

• Variability of delivery times

2/16/2015 8

AIR

• Key issues:

• Location/number of hubs

• Location of fleet bases/crew bases

• Schedule optimization

• Fleet assignment

• Crew scheduling

• Yield management

2/16/2015 9

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)

2/16/2015 10

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.)

2/16/2015 11

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?)

2/16/2015 12

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

2/16/2015 13

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

2/16/2015 14

DIRECT SHIPMENT NETWORK

SUPPLIERS BUYER LOCATIONS

2/16/2015 15

DIRECT SHIPMENT NETWORK

• In direct shipping network, the truck delivers products from a single supplier to multiple buyers

or

• Goes from multiple suppliers to a single buyer location.

• The manager has to decide on the routing of each truck, eliminating intermediate warehouses.

2/16/2015 16

MILK RUNS FROM MULTIPLE SUPPLIERS OR TO MULTIPLE BUYER LOCATIONS

SUPPLIERS BUYER LOCATIONS

2/16/2015 17

MILK RUNS FROM MULTIPLE SUPPLIERS OR TO MULTIPLE BUYER LOCATIONS

SUPPLIERS BUYER LOCATIONS

2/16/2015 18

2/16/2015 19

Example:

1. Frito-Lay that make direct store deliveries use milk runs to lower their transportation cost. If frequent deliveries are needed on a regular basis and either a set of suppliers is in geographic proximity, the use of milk runs can significantly reduce transportation cost.

2. Toyota uses milk runs from suppliers to transport its JIT manufacturing system in Japan and U.S. Toyota has many assembly plants located close together and thus uses milk runs from a single supplier to many plants.

MILK RUNS FROM MULTIPLE SUPPLIERS OR TO MULTIPLE BUYER LOCATIONS

ALL SHIPMENTS VIA DC

SUPPLIERS BUYER LOCATIONS

DC

2/16/2015 20

ALL SHIPMENTS VIA DC

• In this section, product is shipped from suppliers to a central distribution centre (DC) where it is stored until needed by the buyers when it is shipped to each buyer location.

• Storing products at an intermediary location is justified if transportation economies require large shipments on the inbound side or shipments on the outbound side cannot be coordinated . In such cases, product comes to DC in large quantities where it is held in inventory and sent to buyer locations in smaller replenishments lots when needed.

• Ex: WW Grainger has its suppliers ship products to one of nine DC (large quantities) with each DC in turn replenishing store in its vicinity with smaller quantities they need.

2/16/2015 21

MILK RUNS FROM DC

SUPPLIERS BUYER LOCATIONS

DC

2/16/2015 22

2/16/2015 23

• Milk runs reduces outbound transportation cost by consolidating small shipments.

• The use of cross docking and milk runs allows to lower transportation cost while sending small replenishment lots to each store.

• Coordination and scheduling requirement is maximum

MILK RUNS FROM DC

TRADE-OFFS IN TRANSPORTATION DESIGN

• Transportation and inventory cost trade-off

• Choice of transportation mode

• Inventory aggregation

• Transportation cost and responsiveness trade-off

2/16/2015 24

CHOICE OF TRANSPORTATION MODE

• Selecting a transportation mode is both a planning and an operational decision.

• Decisions made by managers (shippers) must balance transportation and inventory cost.

• A mode with higher transportation costs can be justified if it results in significantly lower inventories

2/16/2015 25

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

2/16/2015 26

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

2/16/2015 27

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

• Transportation cost based on total route distance

• Delivery cost based on number of deliveries

• Product demand and value

The above factors allows supply chain to achieve appropriate responsiveness and low cost.

2/16/2015 28

PROS AND CONS OF DIFFERENT TRANSPORTATION NETWORKS

2/16/2015 29

Network Structure Pros Cons

Direct shipping No intermediate warehouse. Simple to coordinate

High inventories due to large lot sizes.Significant receiving expense.

Direct shipping with milk runs Lower transportation cost for small lots,Lower inventories

Increased coordination complexity

All shipments via central DC with inventory storage

Lower inbound transportation cost through consolidation

Increased inventory cost.Increased handling cot at DC.

All shipments via central DC with cross-dock

Lower inventory requirement. Lower transportation cost through consolidation

Increased coordination complexity

Shipping via DC using milk runs

Lower outbound transportation cost for small lots

Further increase in coordination complexity

Tailored network Transportation choice best matches needs of individual product and store

Highest coordination complexity

2/16/2015 30

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

2/16/2015 31

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

2/16/2015 32

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

2/16/2015 33

ASSIGNMENT…

• 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?

2/16/2015 34

END OF MODULE 3