7/28/2019 SCM-Mod-3

1/97

SCM

MOD-3

Designing and planningtransportation networks

7/28/2019 SCM-Mod-3

2/97

Role of transportation in a supply chain:

Transportation refers to the movement ofproduct from one location to another as it makes

its way from the beginning of the supply chain tothe customer

Transportation is an important supply chaindriver because products are very rarely

produced and consumed in the Same location Transportation is a significant component of the

costs incurred by most supply chains

7/28/2019 SCM-Mod-3

3/97

Transportation activity represented more than10% of GDP of USA in 2002 & employs 16%of total occupational employment

The role of transportation is even more

significant in global supply chain. Dellsupplies its worldwide requirement from justfew plants and Wal-mart sells productsmanufactured all over the world in USA

The total international merchandise trade toand from the USA increased at annual rate of9.3% between 1990 and 2001

7/28/2019 SCM-Mod-3

4/97

The growth in international merchandisetrade was more than three times thegrowth of the US economy over the same

period Between 1970 and 2001 US international

merchandise trade grew by over 20 timeswhere US economy grew about 10 times.

With rapid growth in international trade,good multimodal freight transportationsystems to move the resulting cargo have

become even more significant

7/28/2019 SCM-Mod-3

5/97

7/28/2019 SCM-Mod-3

6/97

Seven-Eleven Japan replenishes its storeslocated at many geographical locationswith varying requirements, several times a

day to match the customers needs.

Products from different suppliers areaggregated on trucks according to

required temperature to help achieve veryfrequent deliveries at a reasonable cost

7/28/2019 SCM-Mod-3

7/97

Supply chains also use responsivetransportation to centralize inventories andoperate with fewer facilities

Ex. Amazon.com relies on package carriers andpostal system to deliver customer orders fromcentralised warehouses. Dell manufactures infew locations in US and uses responsive

transportation provided by package carriers toprovide customers with highly customizedproducts at reasonable price.

7/28/2019 SCM-Mod-3

8/97

7/28/2019 SCM-Mod-3

9/97

7/28/2019 SCM-Mod-3

10/97

7/28/2019 SCM-Mod-3

11/97

It is important that infrastructure be managed insuch a way that monies are available formaintenance and investment in further capacityas needed

Transportation policy sets direction for theamount of national resources that go intoimproving transportation infrastructure

Transportation policy also aims to preventmonopoly power, promote fair competition, andbalance environmental, energy, and socialconcerns in transportation

7/28/2019 SCM-Mod-3

12/97

7/28/2019 SCM-Mod-3

13/97

7/28/2019 SCM-Mod-3

14/97

The effectiveness of any mode of transport isaffected by equipment investments andoperating decision by carrier and availableinfrastructure and available infrastructure

policies The carriers primary objective is to ensure goodutilization of its assets while providing customerswith an acceptable level of service

Carrier decisions are affected by equipmentcost, fixed operating cost, variable operatingcost, the responsiveness the carrier seeks toprovide its target segment, and the prices that

the market will bear

7/28/2019 SCM-Mod-3

15/97

Ex. FedEx designed a hub-and-spoke airlinenetwork for transporting packages to providefast, reliable delivery times.

UPS in contrast uses a combination of aircrafts,rail and trucks to provide cheaper transportationwith some what longer delivery times

The difference is FedEx charges based on thesize of the packet, and UPS charges based onsize and destination

7/28/2019 SCM-Mod-3

16/97

7/28/2019 SCM-Mod-3

17/97

Air carriers offer a very fast and fairlyexpensive mode of transportation

Small high-value items or time-sensitive

emergency shipments that have to travel along distance are best suited for airtransport

Air carriers normally move shipmentsunder 500 pounds including high-value butlight weight high-tech products

7/28/2019 SCM-Mod-3

18/97

Given the growth in high technology, the weightof freight carried by air has diminished over thelast two decades even as the value of freight has

increased somewhat Key issues that aircarriers face include

identifying the location and number of hubs,assigning planes to routes, setting up

maintenance schedules for planes, schedulingcrews, and managing prices and availability atdifferent prices

7/28/2019 SCM-Mod-3

19/97

7/28/2019 SCM-Mod-3

20/97

7/28/2019 SCM-Mod-3

21/97

7/28/2019 SCM-Mod-3

22/97

Given small size of packages and severaldelivery points, consolidation ofshipments is a key factorin increasing

utilization and decreasing cost for packagecarriers

Package carriers have trucks that makelocal deliveries and pick up packages

Packages are then taken to large sortingcenters from which they are sent by fulltruck load, rail, or air to sorting centers

closest to the delivery point

7/28/2019 SCM-Mod-3

23/97

7/28/2019 SCM-Mod-3

24/97

7/28/2019 SCM-Mod-3

25/97

7/28/2019 SCM-Mod-3

26/97

7/28/2019 SCM-Mod-3

27/97

7/28/2019 SCM-Mod-3

28/97

Strong regional players have developed in theLTL industry because of the advantage offeredby a high density of pickup and delivery points ina geographic area

Key issues for the LTL industry include locationof consolidation centers, assigning of loads oftrucks and scheduling and routing of pickup anddelivery.

The goal is to minimize costs throughconsolidation without hurting delivery time andreliability

7/28/2019 SCM-Mod-3

29/97

Rail: in 2002, rail carried about 4% of USshipments by value, 12% by weight, andover 25% of total ton-miles

These figures reflect the use of rail tomove commodities over large distances Rail carriers incur a high fixed cost in

terms rails, locomotives, cars, and yards

There is also a significant trip related laborand fuel cost that is independent of thenumber of cars but does vary with thedistance traveled and the time taken

7/28/2019 SCM-Mod-3

30/97

Any idle time, once a train is powered isvery expensive because labor and fuelcosts are incurred even though trains arenot moving

Idle time occurs when trains exchangecars for different destinations

It also occurs because of track congestion

Labor and fuel together account for over60% of railroad expense

It is necessary for railroads to keeplocomotives and crew well utilized

7/28/2019 SCM-Mod-3

31/97

The price structure and heavy load capabilitymakes rail an ideal mode for carrying large,heavy or high-density products over long

distances Transportation time by rail can however be long

Rail is thus suitable for very heavy, low valueshipments that are not time sensitive. Ex. coal

Small time sensitive, short distance or short leadtime shipments rarely go by rail

7/28/2019 SCM-Mod-3

32/97

7/28/2019 SCM-Mod-3

33/97

Water: water transport is ideally suited forcarrying very large loads at low cost.

It is slowest among all modes of transport, delayoccur in ports and terminals

Water transport is not recommended for shorthauls, though used in Japan and parts of Europefor daily short-haul trips of a few-miles

Trend in maritime trade world wide has been

growth in containerization. Delays at ports, customs, security and the

management of containers used are majorissues in global shipping

7/28/2019 SCM-Mod-3

34/97

Pipeline: pipeline is primarily used for transportof crude petroleum, refined petroleum productsand natural gas

Significant initial fixed cost is incurred in setting

up the pipeline and related infrastructure thatdoes not vary significantly with diameter of thepipeline

Pipeline operations are optimized at about 80 to

90% pipeline capacity Pipelines are best suited when relatively stableand large flows are required

7/28/2019 SCM-Mod-3

35/97

7/28/2019 SCM-Mod-3

36/97

7/28/2019 SCM-Mod-3

37/97

7/28/2019 SCM-Mod-3

38/97

7/28/2019 SCM-Mod-3

39/97

Transportation infrastructure andpolicies: Roads, seaports, airports, rail andcanals are some of the major infrastructureelements that exist along nodes and links of atransportation network

In almost all countries government has played asignificant role in building and managing theseinfrastructure elements

Improved infrastructure has played a significantrole in the development of transportation and theresulting growth of trade

7/28/2019 SCM-Mod-3

40/97

Economists such as Vickrey have arguedfor public ownership of these assets butthe setting quasi-market prices to improveoverall efficiency

Quasi-market prices need to take intoaccount the discrepancy between theincentives of an individual using the

transportation infrastructure and public asa whole that owns infrastructure.

This discrepancy is illustrated in figure.

7/28/2019 SCM-Mod-3

41/97

Price of trip

marginal cost of

time + operation

Average cost of time + operation

P1 B

P0 A

Demand curve

Q1 Q0 Vehicle flow rate

7/28/2019 SCM-Mod-3

42/97

The user bases his decision to use a

highway on the cost and benefit of doingso The figure assumes that different people

have different value for making the trip and

this value is uniformly distributed over aninterval

The number of users whose value from atrip, exceeds a particular cost is thusdefined by the demand curve

The costs incurred by a motorist includethe cost of time spent on the highway andthe cost of operating and maintaining thevehicle

7/28/2019 SCM-Mod-3

43/97

7/28/2019 SCM-Mod-3

44/97

7/28/2019 SCM-Mod-3

45/97

In other words, the marginal impact of a motoriston the total cost is much higher than his share ofimpact

From marginal cost perspective, motorists

should be charged a toll P1-P0 so that the costthey bear is the true cost they are imposing onthe highway system

This toll lowers the vehicle flow rate to Q1.

In other words, the absence of a congestion tollresults in an overuse of the transportationinfrastructure and a resulting congestion cost onall users

7/28/2019 SCM-Mod-3

46/97

7/28/2019 SCM-Mod-3

47/97

7/28/2019 SCM-Mod-3

48/97

7/28/2019 SCM-Mod-3

49/97

7/28/2019 SCM-Mod-3

50/97

7/28/2019 SCM-Mod-3

51/97

With direct shipment network, the routing isspecified and supply manager only need todecide on the quantity to ship and the mode oftransportation to use

The major advantage is elimination ofintermediate warehouses and its simplicity ofoperation and coordination

The shipment decision is completely local anddoes not affect other shipping decisions

The transportation time from supplier to buyerlocation is short because each shipment goesdirect

7/28/2019 SCM-Mod-3

52/97

7/28/2019 SCM-Mod-3

53/97

If a LTL is used the transportation cost anddelivery time increase, though inventoriesare lower

If package carriers are used transportationcosts are very high

With direct deliveries from each supplier,

receiving costs are high because eachsupplier must make a separate delivery

7/28/2019 SCM-Mod-3

54/97

Direct shipping with milk runs:

A milk run is a route on which a truck eitherdelivers product from a single supplier to

multiple retailers or goes from multiple suppliersto a single buyer location as shown in figure

In direct shipping with milk runs, a supplierdelivers directly to the multiple buyer locations

on a truck or a truck picks up deliveries destinedfor the same buyer location from many suppliers

7/28/2019 SCM-Mod-3

55/97

7/28/2019 SCM-Mod-3

56/97

Direct shipping provides the benefit ofeliminating intermediate warehouses, whereasmilk runs lower transportation costs byconsolidating shipments to multiple locations on

a single truck Ex. Replenishment lot size for each buyer

location may be small and require LTL shippingif sent directly. Milk runs allows deliveries to

multiple locations to be consolidated on a singletruck, resulting in better utilisation of truck andsomewhat lower costs

7/28/2019 SCM-Mod-3

57/97

7/28/2019 SCM-Mod-3

58/97

Suppliers Buyer Locations

7/28/2019 SCM-Mod-3

59/97

7/28/2019 SCM-Mod-3

60/97

If transportation economies require very largeshipments on the inbound side, DCs holdinventory and send product to buyer locations insmaller replenishment lots

Ex. When Wal-mart sources from overseassupplier, the product is held in inventory at theDC, because inbound side is much larger thansum of lot sizes served by DC

If replenishment lots for the buyer locationsserved by a DC are large enough to achieveeconomies of scale on inbound transportation,DC need not hold inventory

7/28/2019 SCM-Mod-3

61/97

DC can cross-dock product arriving from manysuppliers on inbound trucks by breaking eachinbound shipment into smaller shipments that

are then loaded onto trucks going to each buyerlocation

When a DC cross-docks product, each inboundtruck contains product from a supplier for several

buyer locations, whereas each outbound truckcontains product for a buyer location fromseveral suppliers

7/28/2019 SCM-Mod-3

62/97

A major benefit of cross-docking is that littleinventory needs to be held and product flowsfaster in the supply chain

Cross-docking also saves on handling cost

because product does not have to be movedinto and out of storage Successful cross-docking require a significant

degree of coordination and synchronisationbetween incoming and outgoing shipments

Cross-docking is appropriate for products withlarge, predictable demands and requires thatDCs be set up such that economies of scale intransportation are achieved on both inbound and

outbound sides

7/28/2019 SCM-Mod-3

63/97

Shipping via DC using milk runs: Milk runs can be used from a DC if lot

sizes to be delivered to each buyer

location are small (see fig in next slide) Milk runs reduce outbound transportation

costs by consolidating small shipments

The use of cross-docking with milk runsrequires significant degree of coordinationand suitable routing and scheduling of milk

runs

7/28/2019 SCM-Mod-3

64/97

7/28/2019 SCM-Mod-3

65/97

Tailored network: the tailored network isa suitable combination of previous optionsthat reduces the cost and improvesresponsiveness of the supply chain

Here transportation uses a combination ofcross-docking, milk runs and TL and LTLcarriers along with package carriers insome cases

The goal is to use the appropriate option ineach situation High demand products to high demand

retail outlets are consolidated to and from

the DC

7/28/2019 SCM-Mod-3

66/97

7/28/2019 SCM-Mod-3

67/97

7/28/2019 SCM-Mod-3

68/97

7/28/2019 SCM-Mod-3

69/97

7/28/2019 SCM-Mod-3

70/97

Transportation and inventory costtrade-off:

The trade-off between transportation and

inventory costs is significant whendesigning a supply chain network

Two fundamental supply chain decisionsinvolving this trade-off are: Choice of transportation mode

Inventory aggregation

7/28/2019 SCM-Mod-3

71/97

Choice of transportation mode:

Selecting transportation mode is both a planningand an operational decision in a supply chain

The decision regarding carriers with which acompany contracts is a planning decision

the choice oftransportation mode for aparticular shipment is an operational decision

For both decisions, a shipper must balancetransportation and inventory costs

7/28/2019 SCM-Mod-3

72/97

The mode of transportation that results in lowesttransportation cost does not necessarily lowertotal cost for supply chain

Cheaper modes of transport typically have

longer lead times and larger minimum shipmentquantities, both of which result in higher levels ofinventory in the supply chain

Modes that allow for shipping in small quantitieslower inventory levels but tend to be moreexpensive

Impact of using different modes of transport isshown in next slide.

Ranking of transportation modes in

7/28/2019 SCM-Mod-3

73/97

Ranking of transportation modes interms of supply chain performance

Each transportation mode is ranked along variousdimensions with 1 being lowest and 6 being highest

Size Lotinventor

y

Safetyinventor

y

In-transitcost

Transportation

time(preference)

transportation

Rail 5 5 5 2 5

TL 4 4 4 3 3

LTL 3 3 3 4 4Package 1 1 1 6 1

Air 2 2 2 5 2

Water 6 6 6 1 6

7/28/2019 SCM-Mod-3

74/97

7/28/2019 SCM-Mod-3

75/97

7/28/2019 SCM-Mod-3

76/97

7/28/2019 SCM-Mod-3

77/97

Inventory aggregation is useful forproducts with a large value-to-weightratio and for products with high demand

uncertainty When products have a low value-to-weight ratio and customer orders aresmall, inventory aggregation may hurt a

supply chains performance because ofhigh transportation costs

7/28/2019 SCM-Mod-3

78/97

Trade off between transportation cost and

customer responsiveness: The transportation cost a supply chain incurs is

closely linked to the degree of responsivenessthe supply chain aims to provide

If a firm has high responsiveness and ships allorders within a day of receipt from the customer,it will have small outbound shipment resulting inhigh transportation cost

If it decreases its responsiveness andaggregates orders over a longer time horizonbefore shipping them out, it will be able exploiteconomies of scale and incur low transportationcost because of larger shipments

7/28/2019 SCM-Mod-3

79/97

Temporal aggregation: is the process ofcombining orders across time.

Temporal aggregation decreases a firmsresponsiveness because of shipping delay

but also decreases transportation costsbecause of economies of scale that resultfrom larger shipments

Thus firm must consider the trade-offbetween responsiveness andtransportation cost when designing itstransportation network

7/28/2019 SCM-Mod-3

80/97

In general a limited amount of temporalaggregation can be very effective inreducing transportation cost in a supplychain

In choosing response time firms musttrade-off the decrease in transportationcost upon temporal aggregation with theloss of revenue because poorer

responsiveness Temporal consolidation also improves

transportation performance because it

results in more stable shipments

7/28/2019 SCM-Mod-3

81/97

Tailored transportation: Tailored transportation is the use of different

transportation networks and modes based on

customer and product characteristics Most firms sells a variety of product and servemany different customer segments

Products vary in size and value and customer

vary, in the quantity purchased, responsivenessrequired, uncertainty of orders, and distancefrom branch outlets and DCs.

7/28/2019 SCM-Mod-3

82/97

7/28/2019 SCM-Mod-3

83/97

Tailored transportation by customerdensity and distance:

Firms must consider customer density and

distance from warehouse when designingtransportation networks

The ideal transportation option based on

density and distances are shown in nextslide

Transportation options based on

7/28/2019 SCM-Mod-3

84/97

Transportation options based oncustomer density and distance

Shortdistance

Mediumdistance

Longdistance

High density Private fleet

with milk runs

Cross-dock

with milk runs

Cross-dock

with milk runs

Medium

density

Third partywith milk runs

LTL carrier LTL orpackage

carrierLow density Third party

milk runs orLTL carrier

LTL orpackagecarrier

Packagecarrier

7/28/2019 SCM-Mod-3

85/97

When a firm serves a very high density ofcustomer close to DC, it is often best for the firmto own a fleet of trucks that are used with milkruns originating at the DC to supply customers,because this scenario makes very good use ofthe vehicles

If customer density is high but distance from the

warehouse is large, it does not pay to send milkruns from the warehouse because truck willtravel a long distance empty on the return trip

7/28/2019 SCM-Mod-3

86/97

In such a situation it is better to use a publiccarrier with large trucks to haul the shipments toa cross-dock center close to the customer area,where the shipments are loaded onto smallertrucks to deliver product to customer using milkruns.

In this situation, it may not be ideal for firm toown its own fleet

As customer density decreases, use of an LTL

carrier or third party doing milk runs is moreeconomical because third party carrier canaggregate shipments across many firms

7/28/2019 SCM-Mod-3

87/97

If a firm wants serve an area with a verylow density of customers far from thewarehouse, even LTL carriers may not be

feasible and use of package carriers maybe the best option

Customer density and distance should beconsidered when firms decide on the

degree of temporal aggregation to usewhen supplying customers

7/28/2019 SCM-Mod-3

88/97

7/28/2019 SCM-Mod-3

89/97

Tailored transportation by size of customer:

Firms must consider size and location whendesigning transportation networks

Very large customers can be supplied using aTL carrier, where as smaller customer willrequire LTL carrier or milk runs, a shipper incurstwo types of cost:

Transportation cost based on total route distance

Delivery cost based on number of deliveries

7/28/2019 SCM-Mod-3

90/97

7/28/2019 SCM-Mod-3

91/97

Thus it is not optimal to deliver to small and

large customers with the same frequency at thesame price

One option firms have is to charge a higherdelivery cost for smaller customers

Another option is to tailor milk runs so that theyvisit large customers with higher frequency thansmaller customers

Firms can partition customers into large (L),medium (M) and small (S), based on thedemand at each

The optimal frequency to visits can be evaluatedbased on the transportation and delivery costs

7/28/2019 SCM-Mod-3

92/97

If large customers are visited everymilk run, medium customers everyother milk run and low-demand

customers every three milk runs,suitable milk runs can be designed bycombining large, medium and small

customers on each run Medium customers would be

partitioned into two subsets (M1, M2)

and small (S1 S2 S3)

7/28/2019 SCM-Mod-3

93/97

The firm can sequence the following six

runs to ensure that each customer isvisited with appropriate frequency(L,M1,S1), (L,M2,S2), (L,M1,S3), (L,

M2,S1), (L,M1,S2), (L,M2,S3) This tailored sequence has the advantage

that each truck carries about the same

load and larger customers are providedmore frequent delivery than smallercustomer consistent with their relative

costs of delivery

7/28/2019 SCM-Mod-3

94/97

7/28/2019 SCM-Mod-3

95/97

Producttype

High value Low value

High

demand

1. Disaggregate cycle inventory.2. Aggregate safety inventory.3. Inexpensive mode of

transportation for replenishingcycle inventory and fast modewhen using safety inventory

1. Disaggregate allinventories and useinexpensive mode of

transportation forreplenishment

Low

demand

1. Aggregate all inventories. Ifneeded, use fast mode of

transportation for fillingcustomer orders

1. Aggregate only safetyinventory. Use

inexpensive mode oftransportation forreplenishing inventory

7/28/2019 SCM-Mod-3

96/97

7/28/2019 SCM-Mod-3

97/97

For low demand, low value products, cycleinventories can be held close to thecustomer and safety inventoriesaggregated to reduce transportation costswhile taking some advantage ofaggregation

Cycle inventories are replenished using an

inexpensive mode of transportation tosave costs