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Freight Logistics Fundamentals
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Freight Logistics and Strategies:
Fundamentals of Freight DecisionsAlan Erera
Associate Professor, Industrial and Systems EngineeringFaculty Director, MS in Supply Chain Engineering Program
Planning for the Future of Freight MovementSoutheast Diesel Collaborative
September 16, 2013
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Supply Chain Engineering at Georgia Tech ISyE
• 25 faculty in logistics/manufacturing • Graduate programs
– MS in Supply Chain Engineering• 50 grads/yr
• Exec MS in International Logistics (EMIL)– 20 grads/yr
• Ph.D. in IE: Supply Chain Engineering– 5-10 grads/yr
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My role
• MS in Supply Chain Engineering– Faculty Director
• Research program– Co-director, Center for Global
Transportation – Optimizing design and control of
logistics systems– Research program funded by
• NSF, DHS, USDOT• Industry partners (trucking, freight
railroads, manufacturers)
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What to remember
• Shippers focus on total logistics costs when making freight transport decisions
• Providers (carriers) configure freight systems to deliver excellent customer service at lowest possible cost
• Supply chains continuously evolve, but fundamentals change little
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Supply chain 101
• People demand products– Food, clothing, staples (must have),
everything else (nice to have)• Supply chain networks
– Procure/produce products– Get them to people
• “Logistics” systems– Connect suppliers to customers cost-
effectively, using freight transportation networks and logistics facilities
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• Inbound logistics (procurement)
Supply chain 101
auto assembly
Tier 1 supplier
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• Inbound logistics (procurement)
Supply chain 101
auto assembly
Tier 1 supplier
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• Inbound logistics (procurement)
Supply chain 101
auto assembly
Tier 1 supplier
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• Inbound logistics (procurement)
Supply chain 101
auto assembly
Tier 2 supplier
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• Outbound logistics (distribution)
Supply chain 101
medical supplies
primary DC
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• Outbound logistics (distribution)
Supply chain 101
medical supplies
primary DC
regional DCs
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• Outbound logistics (distribution)
Supply chain 101
medical supplies
primary DC
regional DCs
customer facilities
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Fundamental 1: Transportation Cost EOS and Batching
• Cost economies of scale (EOS)– Average transportation cost per
unit decreases as units increase
items
Truckload Shipment Price on Lane (o, d)
full
trailer 1
trailer 2
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Fundamental 1: Transportation Cost EOS and Batching
• Cost economies of scale (EOS)– Average transportation cost per
unit decreases as units increase
items
LTL Shipment Price on Lane (o, d)
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Fundamental 2: Balancing Freight and Inventory Costs
• Selecting shipment quantity– Small shipments sent frequently lead
to high freight bill spending– Larger batched shipments take
advantage of cost scale economies and reduce freight spend, but
– Larger shipment quantities create larger cycle inventories• Working capital increase (cost)• Storage capacity increase (cost)• Other inventory carrying costs:
obsolescence/perishability, insurance, …
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Fundamental 2: Balancing Freight and Inventory Costs
t
I(t)
safety stock
cycle stock
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Fundamental 2: Balancing Freight and Inventory Costs
t
safety stock
Reduce inventory costs 50% by shipping twice as frequently
cycle stock
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Fundamental 2: Balancing Freight and Inventory Costs
• Another implication– Although freight cost scale
economies often create incentives for sending full trailer (container, …) shipments, cycle inventory costs sometimes make it worthwhile to send partially-loaded equipment
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Fundamental 3: Pipeline Inventory and Mode Selection
• Pipeline inventory– Items on order, that have not yet
arrived, often in transit– Although not stored in a facility, still
creates working capital and inventory cost!!
• For shippers of very high value goods or with high storage costs, inventory costs dominate freight costs– Hard to shift to slower modes
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Fundamental 3: Pipeline Inventory and Mode Selection
t
Time items spend in inventories
in plant cycle stockin-transitin DC cycle stock
Items
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Fundamental 3: Pipeline Inventory and Mode Selection
t
Items
Reducing pipeline inventory may substantially reduce cost
in plant cycle stockin-transitin DC cycle stock
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Fundamental 3: Pipeline Inventory and Mode Selection
t
in plant cycle stockin-transitin DC cycle stock
Items
Low cost goods with high storage costs may better off in pipeline!
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Fundamental 4: Safety Stock and Mode Selection
• Safety stock inventory– Buffer inventory held in a supply
chain to hedge against uncertainty• Customer demand uncertainty• Procurement quality and reliability
uncertainty• Freight transit time uncertainty
• Shippers with high costs of inventory will strongly prefer freight modes with little transit time variability
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Fundamental 5: More Ton-Miles is Often Cheaper
• Batching over geography (usually called consolidation) can be as important as batching over time– for shippers– and, for consolidation carriers like
LTL, package express, …• Freight ton-miles may increase,
but total equipment miles and total costs may decrease– More time, and extra handling
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Fundamental 5: More Ton-Miles is Often Cheaper
• Inbound cross-docking for retail
crossdock
suppliers
destination DC
direct LTL
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Fundamental 5: More Ton-Miles is Often Cheaper
• Inbound cross-docking for retail
crossdock
suppliers
destination DC
consolidated TL
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Fundamental 5: More Ton-Miles is Often Cheaper
• LTL cross-docking terminal network
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Fundamental 5: More Ton-Miles is Often Cheaper
• LTL cross-docking terminal network
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Fundamental 5: More Ton-Miles is Often Cheaper
• 40’ to 53’ domestic container transload
destination DCPOLA/LB
ATL ramp40’ service
from Asia
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Fundamental 5: More Ton-Miles is Often Cheaper
• Pack three 40’ into two 53’ domestic containers
crossdock
destination DCPOLA/LB
ATL ramp53’ domestic service
from Asia
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Fundamental 5: More Ton-Miles is Often Cheaper
• “Consolidation” onto freight intermodal trains of truckload shipments
originMOD ramp
IND ramp destination
53’ domestic service
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Fundamental 5: More Ton-Miles is Often Cheaper
• Non-stop sleeper team truckload
originMOD ramp
IND ramp destination
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Fundamental 6: Trailers and Containers Must Move Empty
• Geographic imbalance between freight origins and destinations– Certain areas net producers of freight
traffic (by mode, carrier, …)– Other areas net consumers– Imbalance!
• Freight transport mobile resources are reusable– Always travel in cycles: (A, B, C, … ,
A)
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California
Midwest
Southwest
15
106
Weekly flow (10s)
56
8
Fundamental 6: Trailers and Containers Must Move Empty
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California
Midwest
Southwest
Weekly flow (10s)
6 net arrivals
8 net arrivals
14 net departures
Fundamental 6: Trailers and Containers Must Move Empty
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Fundamental 6: Trailers and Containers Must Move Empty
Empty Plan Weekly flow (10s of 53’ tractor-trailers)
California
Midwest
Southwest
6 empty supply
8 empty supply
8
6
14 net departures
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Fundamental 7: Freight Demand, Supply, and Pricing
• Backhaul lanes– Light volume origin-destination
pair lanes that help move equipment back toward high volume lanes
– Freight pricing can be significantly lower• Carrier gets paid for otherwise
empty move
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Fundamental 7: Freight Demand, Supply, and Pricing
California
Midwest
Southwest
6 empty supply
8 empty supply
8
6
14 net departures
6
8
No backhaul from Southwest to California, due to network effect
Not all imbalanced lanes are backhaul lanes!
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Fundamental 8: Last-mile Freight Efficiency is Hardest
• Last-mile– Consolidation modes– Pickup from shipper into first terminal– Delivery to consignee from last terminal
• Examples– Container drayage into seaport/IM
terminal– Package express pickup/delivery routes– LTL pickup/delivery routes– Distribution delivery routes into stores
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Fundamental 8: Last-mile Freight Efficiency is Hardest
• Challenges to efficiency– Small shipment sizes– Multiple stop vehicle tours– Tour duration constraints,
deadlines– Customer delivery constraints,
time windows– Urban logistics: congestion,
parking, regulation
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Parting Thoughts: Trends for Supply Chains
1. Global manufacturing here to stay2. Consumers continue to demand better
cheaper products, faster 3. Retailing is more and more a supply
chain business4. Ubiquitous sensors, connected
devices, data, automation will continue to drive efficiency gains
5. Alternate fuel technologies will expand steadily into fleets as total costs to own/operate decrease
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What to remember
• Shippers focus on total logistics costs when making freight transport decisions
• Providers (carriers) configure freight systems to deliver excellent customer service at lowest possible cost
• Supply chains continuously evolve, but fundamentals change little