scm transport

Transportation Management

(Source: Supply Chain Management By Janat Shah, Pearson; Supply Chain Management, Strategy, Planning and Operation, By Sunil Chopra, Peter Meindl, D. V. KalraPearson)For academic purpose and private circulation only

Transportation refers to movement of product from one location to another.

Shipper is the party that requires the movement of the product between two points in the supply chain.

Carrier is the party that moves or transports the product.Transportation related decisions significantly affect cost as well as responsiveness of the supply chain.

Transportation decisions cannot be taken in isolation as transportation, facility, inventory management decisions are interrelated.4-*Transportation Management

Transportation Cost Structures:

Transportation cost for a given mode of transports is a function of distance and the quantity of goods shipped.

Transportation cost show both economies of distance and economies of scale.4-*Transportation Management

Economies of scale:Transportation costs (per unit) decrease with increase in shipment weight.

This is because bulk of fuel related costs, driver and crew costs do not depend on load and are a function of distance

Also, higher load allows a operator to use bigger vehicle which results in reduction of costs per ton of shipment.

It is because of economies of scale, full truck load (FTL) rates are lower than less than full truck load (LTL) rates.4-*Transportation Management

Economies of distance: A minimum amount charged irrespective of the distance to be travelled.However, transportation rates (cost per unit distance) taper with increasing distance. With increasing distance the rate of increase of transportation costs will go down.

This is because of longer distance travelled , the related fixed costs at the point of origin and destination (loading and unloading) are distributed over more kilometers.Also longer the distance travelled, better will be the overall vehicle utilisation.4-*Transportation Management

Transportation Management: Air Freight data from Mumbai

In addition to distance and shipment size, transportation rates also depend on the point of origin and point of destination of freight.

This is because freight rates depend on demand and supply at the point of origin

Transportation rates are generally quoted for origin-destination pairs.

Note that package carriers work with much simpler and uniform rate structures than other transport companies.

This is because bulk of their costs are fixed costs (of setting up network and handling shipment) and shipment sizes are comparatively small.4-*Transportation Management

Product characteristics And Transportation :Product characteristics influences the choice of mode of transport.

Nature of product characteristic is captured by a concept called value density.

Value density is the ratio of rupee value of the product to its weight.

Value density concept allows a firm to examine tradeoff between transportation and inventory costs.4-*Transportation Management

Transportation costs are function of weight and inventory costs are function of value.

For products with higher value density, firms can use faster mode of transportation as transportation cost is a small fraction of product cost.

In high technology products, transportation costs are relatively less important as compared to low value density products like cement, steel, furniture etc.E.g. Apple vs IKEA4-*Transportation Management

Volumetric weight:

In case of bulky products, transportation costs are captured by volume and not by weight (e.g. water storage tank ).For such products, air freight industry uses volumetric weight. 1m = 200 kg). Freight rate is charges based on volumetric or physical weight, which ever is higher.4-*Transportation Management

Demand Volume And Transportation Costs:Cycle and safety stock are associated with volume of demand and uncertainty of demand respectively.

Higher volume of demand allows firm to have larger lot sizes and thereby lower transportation costs but higher cycle inventory.

Lower volume of demand do not allow firm to have larger lot sizes and obtain benefit of economies of scale in transportation, transportation costs are higher. Thus firm typically work with LTL shipments or milk runs.

FTL is cheaper for large shipments

4-*Transportation Management

Demand uncertainty and Transportation Costs

For a products with higher demand uncertainty, if a firm is using slower mode of transport (with long lead time), firm ends up with high safety inventory .

Firms typically employs faster mode of transportation with high demand uncertainty products and slower mode of transportation with low demand uncertainty products.4-*Transportation Management

Tradeoff in Transportation Design:Following Tradeoffs must be considered in making transportation decisions:

1. Transportation and Inventory cost Tradeoff

2. Transportation and customer responsiveness tradeoff4-*Transportation Management

1. Transportation and Inventory cost TradeoffTwo decisions involved in this tradeoff are:

i) Choice of transportation modeCheaper mode of transportation typically have longer lead times and larger minimum shipment quantities resulting in higher inventory levels.

Modes of transport that allow small shipments results in low inventory levels but are expensive.4-*Transportation Management

Faster mode of transportation are preferred for products with high value density as in this case reducing inventory costs are important.

Cheaper mode of transportation are preferred for products with low value density as in this case reducing transportation costs are important.


ii) Inventory Aggregation:Required inventory level (safety inventory) reduces with aggregation in one location.Transportation costs in general increases with aggregationInventory aggregation is useful for products with large value to weight ratio (i.e. high value density) and products with high demand uncertainty.Inventory aggregation is suitable when inventory and facilities costs form large fraction of total supply chain costs.4-*Transportation Management

2. Transportation and customer responsiveness tradeoff

If a firm is responsive then it shall use faster mode of transportation and shipping time is less, shipment size will be small, both resulting in high transportation costs.

Temporal aggregation (combining orders across time) increases the shipments size and decreases the transportation costs as well as responsiveness.


Mode of Transports:AirRailRoad / TruckWaterPipeline

Mix mode services:Package carriersIntermodal4-*Transportation Management

Air:Fast but expensiveSuitable of high value density and time sensitive goodsRail:Suitable of Large /heavy/ low value density goods over large distances Goods that are not time sensitive , long lead times.Freight cost is lowerUnreliable and Indian Railways share of freight movement in India is about 30%. 95% of freight is bulk goods with coal alone accounts for about 50%.


Road / TruckExpensive than Rail but offers advantage of door to door shipment and short delivery time.

Trucking Industry consists of two major segments

Truckload (TL or FTL) and less than truckload (LTL)Shipment lots are smaller in LTL than TL. TL cheaper for larger shipments.LTL suited for shipments that are too large to be mailed as packages but are less than half of TL.LTL takes longer time than TL because of other loads that need to be picked up or dropped off.

Transportation Management

Dominant mode of transport in India.Accounts for about 65% of freight movement in India.More than 90% vehicles are owned by small transporters who own less than 5 trucks.Although freight rates are among lowest in the world but quality of service is poor with long unreliable lead times & damages.4-*Transportation Management

Water:Cheapest mode but also the slowestLimited to certain geographic areasOcean, inland waterway system, coastal watersVery large bulky loads at very low costExtensively used for international cargo in view of quantities shipped and distances involvedMarked by delays . Avg. turn around time for a container ship in India is about 1-3 days.Indias Largest container port , Jawahar lal Nehru Port at Navi Mumbai handles about 56 million tonnes of cargo as against 776 million tonnes handled at Shangai port.4-*Transportation Management

Package Carriers:ExpensiveRapid and reliable deliverySuitable for small and time-sensitive shipmentsUses air, rail and truck for time-sensitive small deliveriesPackages ranging from letters to shipmentsMore expensive than LTL for similar shipmentsProvide other value-added servicesConsolidation of shipments a key factor (because of small package size and several delivery points)


Pipelines:Bulk transportation of predictable volumes of specialized products like petroleum products and natural gas.High fixed costBest for large and stable flows


Intermodal:Use of more than one mode of transportation to move a shipment to its destination.

Variety of intermodal combinations possible with most common being truck / rail.

Grown considerably with increased use of containers.

Containerized freight often uses truck/rail/water combinations particularly for global freight.

On land intermodal system offers lower costs than TL and faster delivery than railExchange of information to facilitate transfer between different modes is a critical issue.


4-*Transportation ManagementComparison of Modes of Transport on Supply Chain Performance Measures

Design Options for a Transportation Network (in context of a buyer and its several suppliers) A well designed transportation network allows a supply chain to achieve the desired degree of responsiveness at a low cost.

A variety of transportation networks are possible based on the answers to these basic questions :

Should transportation be direct or through an intermediate site?Should the intermediate site stock product or only serve as a cross-docking location?Should each delivery route supply a single destination or multiple destinations (milk run)?


Direct Shipment Network to Single Destination

Shipments comes directly from each supplier to each buyer location.

Advantage is elimination of intermediate stage and simplicity of operation.

Transportation time is short as shipment moves directly.

Justified only when the demand at the buyer locations is large enough that so that lot sizes are optimal and close to truckload.

However, large lot sizes leads to high inventory levels


4-*Direct Shipment Network to Single Destination

2. Direct Shipping with Milk Runs

A milk run is a route which a truck either delivers product from a single supplier to multiple retailers or goes from multiple suppliers to single buyer location.

Milk runs are suited when quantity destined for each location is too small to fill a truck but the multiple locations are close enough to each other that their combined quantity fills the truck.

Used when deliveries are needed on regular basis

Lowers transportation cost by consolidating shipments to a single truck.(not using milk runs results in higher costs as FTL cannot be employed)


4-*Direct Shipping with Milk Runs

.4-*Direct Shipping with Milk Runs

3. All Shipments via Intermediate Distribution Center with StorageProducts are shipped from suppliers to a central distribution centre where it is stored and shipped to buyer location when needed.Suitable when lot sizes on inbound side is larger than sum of lot sizes on the outbound side or shipment on outbound side cannot be coordinated.Helps in achieving economies of scale on inbound transportation from supplier to DC. Expensive for suppliers to serve customers directly.DC are typically close to buyers so outbound transportation costs are not large.High inventory coste.g. Amazon


4-*All Shipments via Intermediate Distribution Center with Storage

4. All Shipments via Intermediate Transit Point with Cross-DockingSuppliers send their shipments to an intermediate transit point with no storage at intermediate facility.

Each inbound truck contains products from suppliers for several buyer locations whereas each outbound truck contains product for a buyer location.

They are cross-docked and sent to buyer locations.


Major benefit is low inventory and product flow is faster.

Also saves on handling costs as no inventory storage at DC

Suitable when economies of scale in transportation can be achieved on both inbound and outbound sides and both inbound and outbound shipments can be coordinated.

E.g. Walmart4-*Transportation Management

5. Shipping via DC Using Milk Runs Suitable when outbound lot sizes to be delivered from DC to each buyer locations are small.

Milk runs reduce outbound transportation costs by consolidating small shipments.

e.g. Seven eleven Japan cross docks deliveries from fresh food suppliers and milk runs to retail outlets4-*Transportation Management

4-*Shipping via DC Using Milk Runs

6. Tailored Network:Suitable combination of previous options that reduces costs and improve responsiveness of the supply chain.

Transportation networks uses combination of options like cross docking, milk runs, Tl , LTL carriers etc.

E.g. High demand retail outlets may be served directly whereas low demand retail outlets can be served via DC



Network StructureProsConsDirect shippingNo intermediate warehouse Simple to coordinateHigh inventories (due to large lot size)Significant receiving expenseDirect shipping with milk runsLower transportation costs for small lots Lower inventoriesIncreased coordination complexityAll shipments via central DC with inventory storageLower inbound transportation cost through consolidationIncreased inventory cost Increased handling at DCAll shipments via central DC with cross-dockLow inventory requirementLower transportation cost throughconsolidationIncreased coordination complexityShipping via DC using milk runsLower outbound transportation cost for small lotsFurther increase in coordination complexityTailored networkTransportation choice best matches needs of individual product and storeHighest coordination complexity

Total Cost Approach in Comparing Different Transport Modes: Firm can choose the mode of transport resulting in least total cost.

Total Cost = Transportation Cost + Cycle Stock Inventory carrying cost + Safety Stock Inventory carrying cost + Facilities and processing costs + Cost of losses and damages

(if different mode of transport result in different nos. of handlings, handlings cost should also be taken into account)4-*Transportation Management

Note in reference to total cost equation:

Lot size: Differences in required shipment sizes translate to differences in cycle stock related inventory.

Delivery time: pipeline inventory and safety stock carried in supply chain is a function of lead-time in transport

Delivery time variability: safety stock carried in a supply chain is function of the variability in lead time in transport.


Pipeline Inventory:Also called in-transit inventory.It consists of materials actually being worked on (work-in-process inventory) or being moved from one location to another in the chain (on transit inventory).Pipeline inventory of an item between two adjacent locations is the product of the process time or transport time and usage rate of an item Pipeline inventory may be reduced by using faster rater of transporting or by reducing manufacturing lead time. 4-*

example :

LT -Shipment by air = 7 daysLT- Shipment by sea = 45 daysAverage demand = 100/dayPipeline Inventory ( Shipment by air) = 700 unitsPipeline Inventory ( Shipment by Sea = 4500 units

Illustration:A retail chain has eight stores in a region supplied from four supply sources. Trucks have a capacity of 40,000 units and costs $1000 per load plus $100 per delivery. Thus a truck making two deliveries charges $1200. 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 retailers or setting up milk runs from suppliers to retail stores (to two stores). 4-*Transportation Management

What network do you recommend if annual sales for each product at each retail store are 960,000 units? In this case compare between direct shipping, milk run to two stores / truck.

What network do you recommend if annual sales for each product at each retail store is 120,000 units. In this case compare between direct shipping, milk run to two stores / truck, milk run to four stores / truck


4-*Transportation ManagementChoice of Mode of Transport: IllustrationA global company has decided to use India as its manufacturing base for supply of printers to Europe. Firm wants to decide the optimum mode of transport.

High End Standard Low end PrintersValue/unit ( Rs.) 20,000 15,000 10,000Inv. Carrying cost/unit/year (20%) 4,000 3000 2000Mean Demand/week (units) 100 100 100 SD of demand /week(Units) 30 30 30

Option Sea AirLot size (units) 400 100Fright/unit (Rs.) 90 360Lead time(weeks) 4 1

Part I) under assumption of stable demand, d = 0 and no supply uncertainty L = 0.For sea as mode of transport, high end printers:Cycle stock = Q/2 = 400/2 = 200 unitsPipeline inventory = Lead Time x Demand Rate = 4 x 100 = 400 unitsTotal inventory = 600Annual Inventory carrying cost = 600 x 4000 = Rs 2,400,000Annual Transportation Cost = Annual demand x Transport rate per unit = 100 x 52 x 90 = Rs 468,0004-*Transportation Management

Thus it is seen that for high end printers, air is preferred mode of transport. For standard and low end printers, sea is the preferred mode of transport.Part II) Let the demand uncertainty exists and d =3 0 With 98 % service level, K= 2Safety Stock = K x Lead Time Demand For Sea , Lead Time Demand = L d2 = 30 x 2= 60 and Safety stock = 2 x 60 = 120 unitsFor, Air , Lead Time Demand = L d2 = 30 x 1= 30 and Safety stock = 2 x 30 = 60 units


4-*Transportation ManagementThus with demand uncertainty, optimal transport mode is air for highend and standard printers. For low-end printers, optimal transport is Sea.

Comparison of Distribution Network Design Options: IllustrationA Garment manufacturing firm has three plants (A, B &C), each manufacturing a different product line and serving a stable market through three depots ( X, Y & Z). Plant A is manufacturing menswear, plant B is manufacturing ladies wear and plant C is manufacturing childrens wear.

Weekly demand = 100 units for each of the three types of garments at each of the three depots. Demand is stable.

Truck can carry 300 units of garments and the transport cost is Rs 2 per km. for TL shipments. To obtain economies of scale firm has decided to work with TL shipments.. Inventory carrying cost is at 20% per annum.

IllustrationAll the products cost Rs 200 per unit, so inventory carrying cost is Rs 40 per unit per year. Facility cost of maintaining a DC is Rs 12,000 per year.

Spatial Arrangement of the plants and depot is given.

Compare between:Direct shippingDirect shipping with milk runsAll shipments via central DC with inventory storage4-*

Illustration

If the cost of a garment is Rs 75 instead of Rs 200, what will be the change?How would network design change if demand at each depot is 300 units per week for each of the product instead of 100 per week?Illustration

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