3.Transportation in a Supply Chain

8/6/2019 3.Transportation in a Supply Chain

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TRANSPORTATION IN ATRANSPORTATION IN ASUPPLY CHAINSUPPLY CHAIN


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Learning ObjectivesLearning Objectives

To Understand :To Understand : The role of transportation in a Supply ChainThe role of transportation in a Supply Chain Type of transportation modesType of transportation modes Transportation network designTransportation network design The trade off in transportation designThe trade off in transportation design Risk management in transportationRisk management in transportation


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Role of Transportation in aRole of Transportation in aSupply ChainSupply Chain

Movement of product from one location to anotherMovement of product from one location to anotherlocation.location.Its important driver because products are rarely producedIts important driver because products are rarely producedand consumed in the same locationand consumed in the same location Transportation decision impact to supply chainTransportation decision impact to supply chainprofitability and influence both inventoryprofitability and influence both inventory and facilityand facilitydecision within a supply chaindecision within a supply chain

4 Parties that have significant impact to transportation :4 Parties that have significant impact to transportation :-- ShipperShipper-- CarrierCarrier-- Transportation infrastructuresTransportation infrastructures-- Transportation policy (Gov body)Transportation policy (Gov body)


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Modes Of TransportationsModes Of Transportations

AirAir Package carriersPackage carriers TruckTruck

RailRail WaterWater PipelinePipeline IntermodalIntermodal

-- Effectiveness of any mode of transport is effected by equipmentEffectiveness of any mode of transport is effected by equipmentinvestment & operating decision by the carrier and availableinvestment & operating decision by the carrier and availableinfrastructure & transportation policy.infrastructure & transportation policy.

-- Carrier objective is to ensure good utilization of its assets whileCarrier objective is to ensure good utilization of its assets whileproviding customer with an acceptable level of serviceproviding customer with an acceptable level of service


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AirAir

-- Fast and very expensive mode of transportationFast and very expensive mode of transportation

-- Usually to transport high value items, small size or time sensitiveUsually to transport high value items, small size or time sensitiveemergency shipment at long distanceemergency shipment at long distance

--Large fixed cost in infrastructure & equipment & relatively low variableLarge fixed cost in infrastructure & equipment & relatively low variable

costcost-- Labor and fuel cost are mostly trip relatedLabor and fuel cost are mostly trip related

-- Airline goal : Maximize the daily flying time of a plane and revenueAirline goal : Maximize the daily flying time of a plane and revenuegenerated per trip.generated per trip.

-- Key issues :Key issues :

-- Identifying location and number of planesIdentifying location and number of planes

-- assigning planes routesassigning planes routes

-- setting up maintenance schedules for planessetting up maintenance schedules for planes

-- scheduling crewscheduling crew

-- managing prices and availability at difference pricemanaging prices and availability at difference price


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Package CarriersPackage Carriers-- Package carriers are the transportation companies such asPackage carriers are the transportation companies such asFedEx, UPS, which carry small packages ranging from letters toFedEx, UPS, which carry small packages ranging from letters toshipment weighing about 150 poundsshipment weighing about 150 pounds

-- Package carriers usually use air, truck and railPackage carriers usually use air, truck and rail

-- Shipper use for small size items and time sensitive shipmentsShipper use for small size items and time sensitive shipments

-- Major service : rapid and reliable deliveriesMajor service : rapid and reliable deliveries

-- Provide pick up service from the source and deliver it to theProvide pick up service from the source and deliver it to thedestination.destination.

-- Allow shipper to track order statusAllow shipper to track order status

-- Consolidation of shipments is the key factor in increasingConsolidation of shipments is the key factor in increasing

utilization and decreasing cost of package carrier.utilization and decreasing cost of package carrier.-- Key issues :Key issues :

-- Location and capacity of transfer pointsLocation and capacity of transfer points

-- Information capability to facilitate and track the packageInformation capability to facilitate and track the packageflowflow


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TruckTruck-- Truck consist of 2 major segments : TL (Truck Load) and LTLTruck consist of 2 major segments : TL (Truck Load) and LTL(Less Truck Load)(Less Truck Load)

-- Compare to rail : More expensive but provide door to doorCompare to rail : More expensive but provide door to doorservice and shorter delivery time, no transfer between pickup &service and shorter delivery time, no transfer between pickup &delivery.delivery.

-- TL tend to be more cheaper for larger shipment than LTLTL tend to be more cheaper for larger shipment than LTL

-- LTL usually for small lots (


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RAILRAIL-- In 2002 rail carriers about 4% of US shipments by value, 12%In 2002 rail carriers about 4% of US shipments by value, 12%by weight, >25% by total tonby weight, >25% by total ton--miles.miles.

-- Ideal mode for carrying large and heavy products for longIdeal mode for carrying large and heavy products for longdistance and not vary time sensitive.distance and not vary time sensitive.

-- High fixed cost of rails, locomotives, cars and yardsHigh fixed cost of rails, locomotives, cars and yards

-- Labor cost and fuel cost are about 60% of railroads expenses.Labor cost and fuel cost are about 60% of railroads expenses.Those cost are incurred even though the trains are not movingThose cost are incurred even though the trains are not moving

-- Major goal for rail road firm is to keep locomotive and crewMajor goal for rail road firm is to keep locomotive and crewwell utilizedwell utilized


-- vehicle and staff schedulingvehicle and staff scheduling

-- Terminal delaysTerminal delays

-- poor on time performancepoor on time performance


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WaterWater-- Major ocean carriers : Maersk Sealand, evergreen group,Major ocean carriers : Maersk Sealand, evergreen group,American President Lines, Hanjin Shipping Co etcAmerican President Lines, Hanjin Shipping Co etc

-- Dominant mode for shipping all kinds of product.Dominant mode for shipping all kinds of product.

-- Ideal for carrying very large loads at low cost.Ideal for carrying very large loads at low cost.

-- The cheapest cost but the slowest and significant delays occurThe cheapest cost but the slowest and significant delays occur

-- Key issues :Key issues :-- Delays at port, customs, securities and the management ofDelays at port, customs, securities and the management of

containerscontainers


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PipelinePipeline-- Use primary to transport crude petroleum, refined petroleumUse primary to transport crude petroleum, refined petroleum

products and natural gasproducts and natural gas-- Significant initial fix cost in setting up the pipelinesSignificant initial fix cost in setting up the pipelinesinfrastructure.infrastructure.

IntermodalIntermodal-- Is the use of more than one mode of transport to move aIs the use of more than one mode of transport to move ashipment to its destination.shipment to its destination.

-- For Global trade, intermodal is often the only option becauseFor Global trade, intermodal is often the only option becausefactories and markets may not be next to ports. Containerizedfactories and markets may not be next to ports. Containerizedfreight often use truck/water/rail.freight often use truck/water/rail.


-- Exchange of information to facilitate shipment transfersExchange of information to facilitate shipment transfersbetween difference modes because the transfer often involvebetween difference modes because the transfer often involvedelays that hurting delivery time performancedelays that hurting delivery time performance


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Transportation design networkTransportation design network1. Direct Shipment Network1. Direct Shipment Network

-- All Shipment come directly from each supplier to each buyer location.All Shipment come directly from each supplier to each buyer location.-- Strength :Strength :

-- Elimination of intermediate warehouses and its simplicity ofElimination of intermediate warehouses and its simplicity of

operational and coordination,operational and coordination,

-- Shorter transportation timeShorter transportation time

-- Efficient if demand at buyer location is large enoughEfficient if demand at buyer location is large enough

& lot size close to TL& lot size close to TL

-- Weaknesses : High cost for small qty, (If use TL carrier and order fullWeaknesses : High cost for small qty, (If use TL carrier and order fulltruck will impact to inventory)truck will impact to inventory)


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2. Direct Shipping with Milk Run2. Direct Shipping with Milk Run

-- Milk Run is a route on which a truck either delivers product fromMilk Run is a route on which a truck either delivers product from

single supplier to multiple buyers or from multiple suppliers to a singlesingle supplier to multiple buyers or from multiple suppliers to a singlebuyer location.buyer location.

-- Trade off between transportation cost and inventory cost.Trade off between transportation cost and inventory cost.

-- Strength :Strength :

-- Elimination of intermediate warehousesElimination of intermediate warehouses

-- Lower transportation cost by consolidating shipments to multipleLower transportation cost by consolidating shipments to multiplelocations on single truck.locations on single truck.

-- Weaknesses :Weaknesses :

-- Longer delivery timeLonger delivery time

-- multi coordination with buyers or suppliersmulti coordination with buyers or suppliers


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3. All Shipment via Central DC3. All Shipment via Central DC

-- Supplier do not ship directly to buyer locationSupplier do not ship directly to buyer location

-- The buyer divides location by geographic region and a DC is built forThe buyer divides location by geographic region and a DC is built foreach region.each region.

-- Suppliers send the shipments to DC then DC will forwards to eachSuppliers send the shipments to DC then DC will forwards to eachcustomers location.customers location.

-- Strength :Strength :

-- Reduce inbound transportation costReduce inbound transportation cost-- Weakness : Require high degree of coordinationWeakness : Require high degree of coordination


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4. Shipping via DC Using Milk Run4. Shipping via DC Using Milk Run

-- Milk run can be use from a DC if lots sized to be delivered to eachMilk run can be use from a DC if lots sized to be delivered to each

buyer location are small.buyer location are small.-- Strength : Reduce transportation cost by consolidating smallStrength : Reduce transportation cost by consolidating small

shipments.shipments.

-- Weakness : longer time of deliveryWeakness : longer time of delivery


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5. Tailored Transportation5. Tailored Transportation The used of different transportation network and modes based onThe used of different transportation network and modes based on

customer and product characteristics.customer and product characteristics.3 types :3 types :

Tailored transportation by customer density and distanceTailored transportation by customer density and distance

Tailored transportation by size of customerTailored transportation by size of customer-- Very large customer can be supplied using a TL carrierVery large customer can be supplied using a TL carrier

-- Small customer using LTL or milk runsSmall customer using LTL or milk runs

Tailored transportation by product demand and valueTailored transportation by product demand and value

High density Private fleet and milk runs Cross Dock with milk runs Cross Dock with milk runs

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

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

Table 13.9 Transportation options based on Customer density and distance

Product Type High Value Low Value

High Demand Disaggregated cycle inventory Disaggregated all inventories

Aggregated safety inventory held close to the customer

Low demand Ayggregated all inventory Aggregated safety inventory

cycle inventory can be close to

customer


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Trade off in Transportation DesignTrade off in Transportation Design Two important things to be consider when making transportationTwo important things to be consider when making transportation

DecisionDecision-- Transportation mode and Inventory cost trade offTransportation mode and Inventory cost trade off

-- Transportation cost and customer responsiveness trade off.Transportation cost and customer responsiveness trade off.

1. Transportation and Inventory cost trade off1. Transportation and Inventory cost trade off

-- Two fundamental supply chain decisions for this trade off are choiceTwo fundamental supply chain decisions for this trade off are choice

of transportation mode and Inventory cost.of transportation mode and Inventory cost.

-- Faster mode are preferred for products with a high value to weightFaster mode are preferred for products with a high value to weightratioratio

-- Slower or cheaper modes are preferred for product with small valueSlower or cheaper modes are preferred for product with small valueto weight ratio.to weight ratio.


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Example : Eastern Electric (EE)Example : Eastern Electric (EE)

Eastern Electric is a major major appliance manufacturer with a largeEastern Electric is a major major appliance manufacturer with a large

plant in the Chicago area. EE purchases 120,000 motors each year fromplant in the Chicago area. EE purchases 120,000 motors each year fromWest view at priceWest view at price $120$120 per motor. Demand has been relativelyper motor. Demand has been relativelyconstant for several years. Each motor average aboutconstant for several years. Each motor average about1010 pounds inpounds inweight and EE has traditionally purchase lots ofweight and EE has traditionally purchase lots of3,0003,000 motors. Westmotors. Westview ships each EE order within a day. EE carriers a safety inventoryview ships each EE order within a day. EE carriers a safety inventory

equal toequal to 50%50% of the average demand and for motors during theof the average demand and for motors during thedelivery lead time. Plant manager of EE receive several proposals fordelivery lead time. Plant manager of EE receive several proposals fortransportation. Golden offer marginal rate for the quantitytransportation. Golden offer marginal rate for the quantity >250>250 cwt ,cwt ,shipment cost will be reduce from $4/cwtto $3/cwt. Suggested EE toshipment cost will be reduce from $4/cwtto $3/cwt. Suggested EE toincrease lot size toincrease lot size to 4,0004,000 motors. What should the plant manager do?motors. What should the plant manager do?(annual holding cost is 25%)(annual holding cost is 25%)

Carrier Range of Qty shipped (cwt) Shipping cost ($/cwt)

AM Rail 200+ 6.5Nothest Trucking 100+ 7.5

Golden Freigweys 50-150 8

Golden Freigweys 150-250 6

Golden Freigweys 250+ 4

Transportation proposal for EE Electric


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Analysis : GM decide to analyze total cost of both transportation costAnalysis : GM decide to analyze total cost of both transportation costand inventory cost of each transportation optionand inventory cost of each transportation option

Annual holding cost = 25% x $120 = $30 per motorAnnual holding cost = 25% x $120 = $30 per motor

Transit time by rail is 5 days, transit time by truck is 3 days.Transit time by rail is 5 days, transit time by truck is 3 days.

Rail : Minimum qty 20,000 ponds each shipment)Rail : Minimum qty 20,000 ponds each shipment)

Q : 20,000 pound or 2,000 motorsQ : 20,000 pound or 2,000 motors

L : 5 + 1 : 6 daysL : 5 + 1 : 6 days

Cycle inventory : Q/2 : 1,000 motorsCycle inventory : Q/2 : 1,000 motorsSafety Inventory : L/2x 120,000/365 : 986 motorsSafety Inventory : L/2x 120,000/365 : 986 motors

In transit inventory : 120,000 (5/365) : 1,644 motorsIn transit inventory : 120,000 (5/365) : 1,644 motors

Total average inventory : 1,000 +986 +1,644 : 3,630 motorsTotal average inventory : 1,000 +986 +1,644 : 3,630 motors

Annual holding cost :3,630 x $30 : $108,900 Annual holding cost :3,630 x $30 : $108,900

Annual transportation cost : 120,000 x $0.65 : $78,000Annual transportation cost : 120,000 x $0.65 : $78,000

Total annual inventory and transportation cost : $186,900Total annual inventory and transportation cost : $186,900


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Alternative Transport

Cost

Cycle

Inventory

Safety

Inventory

Transit

Inventory

Inventory

Cost

Total

Cost

AM Rail

(2,000)

$78,000 1,000 986 1,644 $108,900 $186,900

Northeast

Trucking

(1,000)

$90,000 500 658 986 $64,320 $154,320

Golden

(500)

$96,000 250 658 986 $56,820 $152,820

Golden

(2,500)

$72,000 1,250 658 986 $86,820 $161,714

Golden

(3,000)

$36,000 1,500 658 986 $94,320 $133.464

Golden

(4,000)

$36,000 2,000 658 986 $109,320 $148,964

Sign contract with Golden Freightways and order motors with lotsSign contract with Golden Freightways and order motors with lots3,000 pcs, lowest overall cost.3,000 pcs, lowest overall cost.


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2. Trade off between Transportation cost and customer2. Trade off between Transportation cost and customerresponsivenessresponsiveness

-- High responsivenessHigh responsiveness ------ high transportation costhigh transportation cost

--Decreasing responsiveness by temporary aggregatingDecreasing responsiveness by temporary aggregating -------- lowerlowertransportation costtransportation cost

--Example : Alloy steel is steel service center. All orders are shipped toExample : Alloy steel is steel service center. All orders are shipped to

customers using LTL that charge $100+0.01x, where x is the weight ofcustomers using LTL that charge $100+0.01x, where x is the weight ofsteel ship per truck. Currently Alloy steel ship the orders on the daysteel ship per truck. Currently Alloy steel ship the orders on the daythey received orders., 2 days in transit so total Lt is 2 days.Dailythey received orders., 2 days in transit so total Lt is 2 days.Dailydemand can be shown in Table 13.7. The GM feel that the customer dodemand can be shown in Table 13.7. The GM feel that the customer donot value the 2 days LT. And would be satisfy with about 4 days. Whatnot value the 2 days LT. And would be satisfy with about 4 days. Whatare the cost advantage of increasing the response time?are the cost advantage of increasing the response time?

Mon T e We T Fri Sat S n

Week 1 19,970 17,470 11,316 26,192 20,263 8,381 25,377

Week2 39,171 2,158 20,633 23,370 24,100 19,603 18,442

Ta le 13.7 Dail e and lloy steel over last two eriod


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--Increase response time from 2 to 3 days will reduce transportation cost ofIncrease response time from 2 to 3 days will reduce transportation cost of$700, reduce response time from 3 to 4 days will only reduce $200$700, reduce response time from 3 to 4 days will only reduce $200


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Risk Management In TransportationRisk Management In Transportation The risk that the shipment is delayedThe risk that the shipment is delayed

-- moving inventory closer to the destinationmoving inventory closer to the destination-- building buffer stockbuilding buffer stock

-- design network with multiple routesdesign network with multiple routes

-- long term contract for transportationlong term contract for transportation

The risk that the shipment does not reach the destination due to externalThe risk that the shipment does not reach the destination due to externalforces :forces :-- to design alternative routesto design alternative routes

-- decrease the possibility of such disruptiondecrease the possibility of such disruption

The risk of hazardous materialThe risk of hazardous material-- to minimize probability of exposureto minimize probability of exposure

-- low risk transportation modelow risk transportation mode

-- use modified containersuse modified containers

-- selecting routes with less accident probabilityselecting routes with less accident probability

3.Transportation in a Supply Chain

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