chapter 10 transportati on: managing the flow of the supply chain

Chapter 10

TRANSPORTATION:TRANSPORTATION:Managing the Flow of the Supply Chain

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After reading this chapter, you should be able to do the following:

Learning Objectives

●Learn the role transportation plays in the supply chain.

●Study the service and cost characteristics of the primary transportation modes.

●Identify the key activities involved in transportation planning and execution.

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●Study current transportation management strategies used to improve supply chain performance.

●Apply service and cost metrics to analysis of transportation performance.

●Understand how IT supports transportation planning and execution.

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Learning Objectives, continued


●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 has a major economic impact on the financial performance of businesses.

Introduction


● 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

Role of Transportation in Supply Chain Management


● Growing practice of outsourcing● Increasing complexity of supply chain● Competing goals among supply chain partners● Changing customer requirements (of defect

and error free delivery) ● Unstable transportation rates in the market

place (due to fuel, labor and other expenses)● Synchronizing transportation with other supply

chain activities

Challenges to Carrying out the Transportation Role in SCM


●Transportation capacity constraints pose a challenge.

●Rising transportation rates present another major concern for organizations.

●The transportation industry is impacted by federal governmental requirements (de-regulation) that affect cost structure and service capabilities.

● (Local) regulation is growing in areas where the transportation industry has the potential to impact the quality of life, the safety of citizens, and the growth of commerce.

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Challenges to Carrying out this Role, continued


●Motor (Truck) Carriers●Rail●Water●Air●Pipeline●Multiple modes

Modes of Transportation


Table 10.1

U.S. Domestic Freight Shipments 2007

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Source: Bureau of Transportation Statistics, Pocket Guide to Transportation (2011) 32


●Motor Carriers• Widely used mode of transportation in the domestic

supply chain

• Economic structure of the motor carrier industry contributes to the vast number of carriers in the industry

• Comprised of for-hire and private fleet operations (a total of 500K carriers)

Truckload carriers. Less-than-truckload (LTL) Small package carriers

• Low fixed cost, high variable for handling varying commodities and shipment sizes

Modes of Transportation


Figure 10.1

Motor Carrier Options

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Source: American Trucking Trends 2003 p 60


●Railroads• 563 railroads, but only seven Class I railroads.• Class I railroad carriers generated $46B of revenues

and handled 26M carloads and 9.9 intermodal trailers and containers.

• BNSF railway, CSX transportation, Norfolk Southern Railway, and Union Pacific Railroad are the four Class I dominant carriers.

• Railroads are for long-distance movement of low value raw materials and products.

• They are “natural monopolies”.• Two carrier types:

○Linehaul: between major markets and customers.○Shortline: the local and regional links between customers

and the national rail network of the Class I railroads.• High fixed, low variable

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Modes of Transportation, continued


●Air Carriers• Historically viewed as expensive and used only for

emergency

• There has been a sustained growth lately for small, expensive and perishable items.

• $594B globally and $33B in the US in 2010 in air freight.

• 22 out of 88 are considered a major carrier (>$1B) by FAA, including FedEx, UPS, Delta, and United.

●Water Carriers• Carried a total of $115B worth of cargo and 4.7% of total

tonnage.

• 652 carriers in the US domestic and half of them on the Mississippi river.

• They compete heavily with railways. • High variable and low fixed cost 13



●Pipelines, continued• Considered as the “hidden giants” handling 5.2% of US freight tonnage.

Very economical form of transp.• Three primary types

○Gathering lines: very small pipelines (2-8 in.)○Trunk lines: 8-24 inches in diameter○Refined product pipelines up to 42 inches

• 95K miles in total in the US, in addition to gaslines• High fixed, high volume, versus low variable

●Intermodal• Use of two or more different modes in movement• Greater accessibility• Overall cost efficiency• Facilitates global trade• Development of standardized containers that are compatible

with multiple modes.

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●Intermodal, continued

• Product-handling characteristics○Containerized freight○Transload freight

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Figure 10.2

Widely Used Intermodal Combinations

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Source: Brian J. Gibson, Ph.D.


Figure 10.3

Transport Management Planning Activities

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●Functional Control of Transportation• Which department will be responsible for

transportation?○logistics○procurement○Marketing

●Terms of Sale• Free-on-board (FOB) Origin

• FOB destination

Transportation Planning and Strategy


Table 10.2Responsibilities Under FOB and Payment Terms

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Source: Adapted from Bruce J. Riggs, “The Traffic Manager in Physical Distribution Management”, Transportation and Distribution Management, 1968 p. 45


●Decision to Outsource Transportation• Firms choose between “make” or “buy”

○Commercial carriers “buy”○Private fleets “make”○External experts move the freight and/or manage the

transportation process “buy”○Third-party logistics (3PL) “buy”

●Modal Selection• Accessibility

○Accessibility advantage: Motor carriage○Accessibility disadvantage: Air, rail, and water

• Transit Time○Transit time advantage: Air and motor carriage○Transit time disadvantage: Rail, water, and pipeline

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Transportation Planning and Strategy, continued


●Modal Selection, continued

• Reliability○Reliability advantage: Motor carriers and air carriers○Reliability disadvantage: Water carriers and rail carriers

• Product Safety○Safety advantage: Air transportation and motor carriage○Safety disadvantage: Rail and water

• Cost○Cost advantage: The cost of transportation service varies

greatly between and within the modes○Cost disadvantage: Motor carriage and air transportation

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Table 10.3

Comparison of Modal Capabilities

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Table 10.4

Performance Ratings of Modes

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Source: Edward J. Bardi, Ph.D.


●Carrier Selection• Selecting the individual transportation service providers

within the mode.• Major difference between modal and carrier selection is the

number of options and decision frequency.• Type of service provided within a mode impacts carrier

selection.• Most carriers have the capabilities to provide a similar level

of service.• Core carrier

○limited number of carriers○leverage its purchasing dollars

●Rate Negotiations• Centralized freight rate negotiations.

• Developing contracts with carriers for a tailored set of transportation services at a specific price.

• Leveraging volume with a small set of carriers.

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●Shipment Preparation• Corporate transportation routing guide

• Last-minute, cost-saving decisions○consolidate freight○coordinate shipment deliveries○take full advantage of container capacity○an accurate freight count should be taken

Transportation Execution and Control


●Freight Documentation• Bill of lading

○originates the shipment○provides all the information the carrier needs○stipulates the contract terms, including carrier’s liability for loss

and damage ○acts as a receipt for the goods the shipper tenders to the

carrier○in some cases, shows certificate of title to the goods

• Freight bill○carrier’s invoice for carrier charges listing:

shipment origin and destination consignee items total weight total charges

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Transportation Execution and Control, continued


●Maintain In-Transit Visibility• Manage key events as product moves across the

supply chain.

• Technology facilitates the ability to monitor product.

• Visibility tools must be linked to other capabilities and processes to have an impact on supply chain event management.

●Monitor Service Quality• Analyze the outcome of all their transportation

strategy, planning, and decision-making.

• Key requirement for service quality monitoring is information.

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●Transportation Metrics• Key performance indicators (KPIs)

○can be used to evaluate current performance versus historical results internal goals carrier commitments

○challenge lies in narrowing down metrics available to monitor performance to a manageable number of KPIs

○primary categories of transportation KPIs include service quality and efficiency

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●Transportation Management Systems (TMS)• Critical applications include the following:

○Routing and scheduling proper planning of delivery routes has a major impact on

customer satisfaction, supply chain performance, and organizational success

○Load planning effective preparation of safe, efficient deliveries

○Load tendering○Status tracking○Appointment scheduling

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Table 10.5

Transportation Performance Scorecard

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Summary

● Transportation is a very dynamic activity and a critical supply chain process. Not only is it the largest logistics cost component in most supply chains, but it also directly impacts fulfillment speed and service quality. By providing the physical links between key participants across domestic and global supply chains, transportation facilitates the creation of time and place utilities.

● Managing the transportation process for maximum supply chain impact requires considerable knowledge of transportation options, planning, decision making, analytical skills, and information sharing capabilities.

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● Transportation is a key supply chain process and must be included in supply chain strategy development, network design, and total cost management.

● Numerous obstacles—global expansion of supply chains, rising costs, limited capacity, and government regulation—must be overcome to synchronize transportation with other supply chain processes.

● Fulfillment of supply chain demand can be accomplished through five modal options or the intermodal use of truck, rail, air, water, and pipeline transportation.

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Summary, continued


● Multiple planning activities occur prior to carrier and mode selection: who will be responsible for managing the transportation function within the organization, what terms of sale and payment will be used, and how will goods be transported must all be determined with a strategic supply chain focus.

● Mode selection is based on the relative strengths of each modal/intermodal option in terms of accessibility, transit time, reliability, safety and security, transportation cost, and the nature of the product being transported.

● Carrier selection focuses on the type of service required (direct or indirect), geographic coverage, service levels, and carrier willingness to negotiate reasonable rates.

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Summary, continued


● Most commercial freight moves under contractual rates that are negotiated directly between freight buyers and transportation companies for specific volumes of tailored services at mutually agreed-upon prices.

● Shipment routing guides help organizations ensure internal compliance with service contracts and maintain centralized control over freight tendering decisions.

● Freight documentation provides the details of each shipment, sharing critical information that promotes uninterrupted flows of goods through the supply chain.

● Organizations must continue to manage freight after it has been tendered to carriers by maintaining in-transit visibility of shipments and monitoring carrier performance.

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Summary, continued


● Numerous metrics are available to evaluate transportation service quality in terms of carrier timeliness, freight protection, accuracy, and perfect deliveries. Service efficiency measures focus on spending proficiency, asset utilization, and labor productivity.

● Transportation management systems are widely used information technologies that support the effective planning, execution, and analysis of transportation processes.

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Summary, continued

chapter 10 transportati on: managing the flow of the supply chain

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