SCM Chapter 3

8/12/2019 SCM Chapter 3

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Departmentof

Business Administration

SUPPLY CHAIN MANAGEMENT

Module III –Designing & PlanningTransportation Network



Role of Transportation……..

Transportation refers to the movement of product fromone location to another as it makes its way from thebeginning of a supply chain to the customer

Transportation is an important supply chain driverbecause products are rarely produced and consumed inthe same locationTransportation is a significant component of the costs

incurred by most supply chainsTransportation-related jobs employed nearly 20 millionpeople, accounting for 16 percent of U.S. totaloccupational employment




The role of transportation is even more significant inglobal supply chainsDell currently has suppliers worldwide and sells tocustomers all over the world from just a few plants Transportation allows products to move across Dell’s global networkSimilarly, global transportation allows Wal-Mart to sell

products manufactured all over the world in the UnitedStates




Any supply chain’s success is closely linked to theappropriate use of transportationIKEA, the Scandinavian home furnishings retailer, hasbuilt a global network with about 180 stores in 23

countries primarily on the basis of effectivetransportationIKEA’s strategy is built around providing good-qualityproducts at low prices. Their goal is to cut prices by 2 to

3 percent each yearModular design of its furniture allows IKEA to transportits goods worldwide much more cost effectively than atraditional furniture manufacturer.




The large size of IKEA stores and shipments allowsinexpensive transportation of home furnishings all theway to the retail storeEffective sourcing and inexpensive transportation allow

IKEA to provide high-quality home furnishings at lowprices globallySeven-Eleven Japan is another firm that has usedtransportation to achieve its strategic goals

The company has a goal of carrying products in its storesto match the needs of customers as they vary bygeographic location or time of day




To help achieve this goal, Seven-Eleven Japan uses a veryresponsive transportation system that replenishes itsstores several times a day so that the products availablematch customers’ needsProducts from different suppliers are aggregated ontrucks according to the required temperature to helpachieve very frequent deliveries at a reasonable cost

Supply chains also use responsive transportation tocentralize inventories and operate with fewer facilities




Four Parties Influence the Effectiveness of TransportationThe Shipper – Party that requires the movement of theproduct between two points in the SC

The Carrier- Party that moves or transports the productThe Owners and Operators of TransportationInfrastructure such as roads, ports & airportsThe Bodies that set Transportation Policy Worldwide



MODES OF TRANSPORTATION AND THEIRPERFORMANCE CHARACTERISTICS

AIR PACKAGE CARRIERS

TRUCK

RAIL

WATER

PIPELINE

INTERMODAL/MULTIMODAL



MODES OF TRANSPORTATION AND THEIRPERFORMANCE CHARACTERISTICS

The effectiveness of any mode of transport is affected byequipment investments and operating decisions by thecarrier as well as the available infrastructure andtransportation policies

The carrier’s primary objective is to ensure goodutilization of its assets while providing customers with anacceptable level of service

Carrier decisions are affected by equipment cost, fixedoperating cost, variable operating costs, theresponsiveness the carrier seeks to provide its targetsegment, and the prices that the market will bear



MODES OF TRANSPORTATION -Air

Airlines have a high fixed cost in infrastructure andequipment

Labor and fuel costs are largely trip related andindependent of the number of passengers or amount ofcargo carried on a flight

An airline’s goal is to maximize the daily flying time of aplane and the revenue generated per trip

Air carriers offer a very fast and fairly expensive mode oftransportation



MODES OF TRANSPORTATION -Air

Small, high-value items or time-sensitive emergencyshipments that have to travel a long distance are bestsuited for air transport

Key issues that air carriers face include

Identifying the location and number of hubs

Assigning planes to routes

Setting up maintenance schedules for planes

Scheduling crews and

Managing prices and availability at different prices.



MODES OF TRANSPORTATION –PackageCarriers

Package carriers also provide other value-added servicesthat allow shippers to speed inventory flow and trackorder status

By tracking order status, shippers can proactively informcustomers about their packages

Package carriers also pick up the package from the sourceand deliver it to the destination site

With an increase in just-in-time (JIT) deliveries and focuson inventory reduction, demand for package carriers hasgrown




Given the small size of packages and several deliverypoints, consolidation of shipments is a key factor inincreasing utilization and decreasing costs for packagecarriers

Package carriers have trucks that make local deliveries andpick up packages

Packages are then taken to large sorting centers fromwhich they are sent by full truckload, rail, or air to thesorting center closest to the delivery point

From the delivery-point sorting center, the package is sentto customers on small trucks making milk runs




Key issues in this industry include the location andcapacity of transfer points as well as informationcapability to facilitate and track package flow

For the final delivery to a customer, an importantconsideration is the scheduling and routing of the deliverytrucks



MODES OF TRANSPORTATION –Truck

The trucking industry consists of two major segments-TL or LTLTrucking is more expensive than rail but offers the advantageof door-to-door shipment and a shorter delivery timeIt also has the advantage of requiring no transfer between

pickup and deliveryTL operations have relatively low fixed costs, and owning a fewtrucks is often sufficient to enter the businessThe goal of a TL carrier is to schedule shipments to meetservice requirements while minimizing both trucks’ idle andempty travel timeTL shipping is suited for transportation betweenmanufacturing facilities and warehouses or between suppliersand manufacturers




LTL operations are priced to encourage shipments in smalllots, usually less than half a TL, as TL tends to be cheaperfor larger shipments

Prices display some economies of scale with the quantityshipped as well as the distance traveled

LTL shipments take longer than TL shipments because ofother loads that need to be picked up and dropped off

LTL shipping is suited for shipments that are too large tobe mailed as small packages but that constitute less thanhalf a TL




Key issues for the LTL industry include location ofconsolidation centers, assigning of loads to trucks, andscheduling and routing of pickup and delivery

The goal is to minimize costs through consolidationwithout hurting delivery time and reliability



MODES OF TRANSPORTATION –Rail

The price structure and the heavy load capability makesrail an ideal mode for carrying large, heavy, or high-density products over long distances

Transportation time by rail, however, can be long

Rail is thus ideal for very heavy, low-value shipments thatare not very time sensitive

Major operational issues at railroads include

Vehicle and staff schedulingTrack and terminal delays

Poor on-time performance



MODES OF TRANSPORTATION –Pipeline

Pipeline is used primarily for the transport of crudepetroleum, refined petroleum products, and natural gas

A significant initial fixed cost is incurred in setting up thepipeline and related infrastructure that does not varysignificantly with the diameter of the pipeline

Pipeline may be an effective way of getting crude oil to aport or a refinery



MODES OF TRANSPORTATION –Intermodal

Key issues in the intermodal industry involve the exchangeof information to facilitate shipment transfers betweendifferent modes because these transfers often involveconsiderable delays, hurting delivery time performance



TRANSPORTATION INFRASTRUCTURE &POLICIES

Some of infrastructure elements that exist along nodesand links of a transportation network are :

Roads

SeaportsAirports

Rail

Canals




Improved Infrastructure has played a significant role indevelopment of transportation and the growth of trade within the country

In most of the countries government has either taken the fullresponsibility or played significant role in building andmanaging the infrastructure elements

Developed Country like USA and developing country like Chinais witnessing a tremendous growth in infrastructuredevelopment to attract trade and commerce in the country




Case study –Does deregulation improves or hammers thefinancial performs of the railroads industry – Ellison

Construction of railroads of US occurred rapidly in 1850s

The railroads were private but were built with significantGovt. subsidy in the form land grants

In 1870 ’s this rail road connected most of the US

Each railroad was the exclusive provider of carriage overits trackThe monopoly allowed railroads to determine the price

Initial construction of news roads led to some competition




When the competition increased between rail roads, thecompanies responded by entering into agreement with eachother ,so that it ends the competition and raise the rates

This was not acceptable by farmers and other user of railroadsthis led for the establishment of ICC (Interstate CommerceCommission)

Prohibited discriminatory pricing by the railroad companies

With response to this railroads formed cartel to restrict supplyand service to public

This led to passage of the Sherman Antitrust Act in 1890




Case study -Financial assistance for infrastructurethrough taxes or toll charges –By Levinson

In 1700 ’s turnpikes were built using public fund inVirginia, Maryland & Pennsylvania

But where turned over to private companies that collecttolls

Over time, other turnpikes were built as a result of

competition between the towns to gain tradeThese road where built by the local efforts and money,apart from some federal land grants




Tolls on these turnpikes were generally structured to keep localtravel free, pay if you are travelling across

Later when new and new means of transport whereintroduced like rail ,roads canals turnpikes suffered loss

Finally where converted into public roadsBut, the increasing changes in modes of transportation thereraised a need for high quality roads

At last a network of national toll free highways was builtlargely using gasoline taxes as the sources of funding

At the same time other facilities such as tunnels and bridgeswere often constructed as toll facilities




In many other country such as France, and Spain concessionwere granted to private companies that received toll revenue

From, these examples it is clear that the government has toeither own or regulate a Monopolistic Transportation

Infrastructure asset for its efficient performanceBut in case of private ownership and deregulation,competition within a mode or across modes seem to workwell in rail road transportation

Road, ports and airport are largely public and not privatebecause of its inherently monopolistic nature of thesetransportation infrastructure assets



Design options for transportation network

Typical supply chainupstream

downstream




Direct shipping networkDirect shipping with milk runsAll shipments via central DCShipping via DC using milk runsTailored network




Direct shipping network

Supplier/Plant Retailer/Base




Direct shipping network - - From shipper directly to retailers

Routing is specified

SCM only needs to decide quantity to ship

Mode of transport to be used

Decision involves trade off between inventory cost &transportation cost





Major advantage is

Elimination of intermediate warehouses

Simplicity of operation & coordination

Shipment decision is completely local

Decision made for one shipment doesn’t influence the other

Transportation time is short because each shipment goesdirectly





This is justified

If the demand at buyer location is large enough thatOptimal replenishment lot sizes are close to a TLfrom each supplier to each location

With smaller buyer location, this tends to havehigher cost




If TL carrier is used for transportationHigh fixed cost of each truck results in

Large lots moving from supplier to each buyer location

Resulting in high Supply Chain inventory

If LTL carrier is used for transportationTransportation cost & delivery time increases

Though inventories are lower

If package carrier is used for transportationTransportation cost is very high

With direct deliveries from each supplier, receiving cost is higherbecause each supplier has to make separate delivery




Direct shipping with milk runs

Supplier/Plant Retailer/Base Supplier/Plant Retailer/Base




A milk run is a route on which a truck Either delivers product from single supplier to multiple retailers

Or goes from multiple suppliers to a single buyer locationSupply Chain manager has to decide on the routing ofeach milk run

While Direct Shipping provide the benefit of eliminatingintermediate warehouses

Milk run lowers the transportation cost by consolidatingshipment to multiple location on a single truck

Direct shipping with milk runs




All Shipment via Central DC


DC




Supplier do not send shipment directly to buyer locationThe buyer divides locations by geographic region & DC isbuilt for each region

Supplier send their shipment to the DC

DC then forwards appropriate shipment to each buyerlocation

DC is an extra layer between supplier & buyer location

DC can play 2 different rolesTo store inventory

To serve as transfer location




In either case presence of DC can help in reducing SC costWhen suppliers are located far from the buyer locations

Transportation cost is too high

Presence of DC allows SC to achieve economy of scaleFor Eg: W W Grainger

Has its supplier ship products to one of nine DCs

Which in turn replenish their almost 400 branches




For transport economies it rquiresLarge shipment on the inbound side

DC hold the inventory & send the product to buyer location

For eg: Wall Mart

Lots size on the inbound is much larger than the sum of the lotsizes served by the DCIf replenishment lots are large enough, DC need not holdinventory

DC can cross dock product arriving from many suppliers oninbound trucksBy breaking each inbound shipment into smaller shipment




When DC cross docks productEach inbound truck contains product from a supplier for severalbuyer location

Each outbound truck contains product for a buyer location from

several supplierMajor benefit is little inventory needs to be held

Product flows faster in the SC

Saves handling cost as product does not have to be movedinto and out of storage

But requires significant degree of coordination &synchronization between incoming & outgoing shipment




Cross docking is appropriate for products with large,predictable demands

Eg: Wall mart




Shipping via DC using milk run


DC




Can be used if lot size to be delivered to each buyerlocation is small

Reduces outbound cost by consolidating small shipments

For Eg: Seven Eleven Cross docks deliveries from its fresh food supplier at DCs

Sends milk run to retail outlets

Because total shipment to a store from all suppliers doesnot fill a truck

It allows them to reduce the transport cost




Require significant amount of coordination, suitablerouting & scheduling

It can be used to deliver the item to customer home

Reduces outbound transport cost



TAILORED TRANSPORTATION

The use of different transportation networks and modesbased on customer and product characteristics

Most firms sell variety of products and serve manydifferent customer segments

Example: W.W.Grainger sells over products to both smallcontractors and very large firms

Products vary in size and value

Customers vary in the quantity purchased , responsivenessrequired

uncertainty of the orders, and distance from W.W.Grainger branches and DCs



Transportation Options Based onCustomer Density and Distance

Transportation Options Based onCustomer Density and Distance

Short distance Medium Distance Long Distance

High density Private fleet with milkruns

Cross-dock with milkruns

Cross-dock with milkruns

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

Low density Third party milk runsor LTL carrier

LTL or package carrier Package carrier



Tailored transportation By Size of Customer

Firms must consider customer size and location whendesigning transportation networks

Very large customer can be supplied using a TL carrier,where as smaller customer require an LTL carrier or milkruns

When using milk runs , a shipper incurs two types of costs

Transportation cost based on total route distance

Delivery cost based on number of delivers




The transportation cost is the same whether going to a largeor small customer

If a delivery is to be made to a large customer on the sametruck can save on transportation cost

For each small customer ,however the delivery cost per unit ishigher than for large customer

Thus it is not optimal to deliver to small & large customers withthe same frequency at the same price

One option firms have is to charge a higher delivery cost forsmaller customers

Another option is to tailor milk runs so that they visit largercustomer with a higher frequency than smaller customer



Tailored Transportation By ProductDemand And Value

The degree of inventory aggregation and the modes of transportation usedin a supply chain network should vary with the demand and value of aproduct, as shown in following table

Product Type High value Low value

High demand Disaggregate cycle inventory.Aggregate safety inventory.Inexpensive mode of T.P forreplenishing cycle inventory and fastmode when using safety inventory.

Disaggregate allinventories and useinexpensive mode of T.Pfor replenishment.

Low Demand Aggregate all inventories. If needed,use fast mode of T.P for fillingcustomer orders.

Aggregate only safetyinventory. Use inexpensivemode of T.P forreplenishing cycleinventory.



Trade Offs in Transport design

Transportation Cost & Inventory cost trade offChoice of transportation mode

Inventory aggregation

Transportation cost & Customer responsiveness trade off



Role of IT in Transportation

The complexity of transportation decisions demands to use of ITsystems

The use of software to determine transportation routes has beenmost common IT application in transportation

This software takes the location of the customers, shipment size,desired delivery times, information on the transportationinfrastructure , and vehicle capacity as input

These inputs are formulated into an organization problem whose

solution is a set of routings and a packing lists for each vehicle thatminimize the costs while meeting delivery constraints

Routing and vehicle packing software helps to improve fleetutilization



Role of IT in Transportation

By accounting for the size of container and the size and sequence ofeach delivery, this software develops a plan to pack the vehicleefficiently while allowing for the greatest ease of uploading orloading along the route

Synchronization between packing and routing software is animportant because how much is packed on a truck affect the routing, while routing affects what is packed on a truck

IT also comes into play in the use of global Positioning Systems(GPS)

and electronic notification of impending arrivals. GPS systemsmonitor the real time location of vehicles

This real time information improves a firm’s response to customerquestions regarding deliveries



Problems in the use of IT in transportation

It relates to cross enterprise collaboration and the narrow viewtaken by some transportation software

Collaboration across enterprises is crucial in transportation becausethis is a function that is often outsourced does not directly involve

either the shipper or customer thus successful collaboration intransportation requires 3 or more firms work together , making itmuch more difficult.

Much of transportation software is very focused on efficient

routings.The software often overlooks other factors such as customer serviceand promised delivery times , which should constrain the routeselected.



RISK MANAGEMENT IN TRANSPORTATION

There are three main types of Risk:1. The Risk that the shipment is delayed

2. The risk that ship does not reach its destination becauseintermediate nodes or links are disrupted by external forces.

3. The risk of hazardous material



RISK MANAGEMENT IN TRANSPORTATION

Delay arises either because of congestion along links such as roadsor nodes such as ports and airports

When congestion is the cause of delay, mitigation strategies for theshipper include moving inventories closer to the destination, using

alternative lanes, and building a buffer into the lead timeDelay may also arises because of the limited availability oftransportation and or infrastructure capacity

Such delays are more likely when the assets are owned by the third

party that is serving multiple customerDisruption at transportation links or nodes may occur because ofnatural events . The best mitigation strategy in this case is to designalternative routing in the transportation network

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