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transport, firms end up with high amounts of safety stocks for products with high demand
uncertainty. So for high uncertainty products, firms should use faster modes of transport
and use slower modes of transport for products that have a stable demand.
4 PARTIES INFLUENCING EFFECTIVENESS
1. Shipper Party who wants the products to be moved / transported
2. Carrier Party who practically does the job of moving
3. Owners of Infrastructure ( roads, ports, Rail, airports)
4. Bodies setting transportation policies
Roads, seaports, airports, rail and canals are some of the major infrastructural elements that
exist along nodes and links of a transportation network.
In almost all countries, the government has either taken full responsibility or played a
significant role in building and managing these infrastructural elements.
Improved infrastructure has played a significant role in the development of transportation
and the resulting growth of trade.
Government has to either own or regulate a monopolistic transportation infrastructure
asset.
When there is competition, either with in a mode or across modes, private ownership,
deregulation and competition seem to work very well. In India private players have come
into construction of roads. For eg. NICE Road in Bangalore.
Roads, ports and airports are largely public not private.
Economist Vickrey recommended public ownership of assets( infrastructure) and setting
up of Quasi-market prices to improve overall efficiency.
Quasi market prices need to take into account the Discrepancy between incentives of an
individual, using the transportation infrastructure and the public as a whole, that owns the
infrastructure.
A vehicle driver bases his decision to use a high way on the cost and benefit of doing so.
No. of motorists using the road is represented by intersection of demand curve with the
Average cost curve(A)
This results in average cost of motorists (P0) and Traffic flow(Q0)
An additional motorist increases the average cost by a small amount but increases the total
cost across all motorists by a much larger amount.
Marginal cost curve is higher than the average cost curve.
Motorists should be charged a toll P1 P0 so that the cost they bear is the true cost they
are imposing on the highway system.
This toll lowers the vehicle flow rate to Q1.
The absence of a congestion toll results in an overuse of the transportation infrastructure
and a resulting congestion cost on all users.
QUASI MARKET PRICE
Motorist to be charged = P1 P0 i.e, the true
cost they are imposing
on the high way
This toll lowers the vehicle flow, from Q0 to Q1
Absence of Toll results in over use of transportation infrastructure and resulting congestion
cost on all users.
Quasi-market Price results in high price, at peak location and times, and lower price
otherwise.
Congestion is a major factor at several ports and airports (Lack of Capacity, Labor and
Technological issues)
DESIGN OPTIONS FOR A TRANSPORTATION NETWORK
Direct Shipment Network The buyer structures his transportation network so that all
shipments come directly from each supplier to each buyer location.
The routing of each shipment is specified and the supply chain manager only needs to decide
on the quantity to ship and the mode of transportation to use.
It is justified if demand at buyer locations is large enough that optimal replenishment lot
sizes are close to a TL from each supplier to each location.
With small buyer locations, however a direct shipment network tends to have high costs.
Eliminate intermediate warehouses and simple to operate and coordinate.
Shipment decision is completely local and the decision made for one shipment does not
influence others.
Direct Shipping with Milk Runs A milk run is a route on which a truck either delivers
product from a single supplier to multiple retailers or goes from multiple suppliers to a single
buyer location.
A supplier delivers directly to multiple buyer locations on a truck or a truck picks up
deliveries destined for the same buyer location from many suppliers.
Supply chain manager has to decide on the routing of each milk run.
Lower transportation cost by consolidating shipments to multiple locations on a single truck.
Use of milk run allows deliveries to multiple locations to be consolidated on a single truck,
resulting in better utilization of the truck and somewhat lower costs. ( Frito Lay )
All Shipments via Central DC (Distribution Centre) Suppliers do not send shipments
directly to buyer locations. The buyer divides locations by geographic region and a DC is built
for each region. Suppliers send their shipments to the DC and the Dc then forwards
appropriate shipments to each buyer location.
DC is an extra layer between suppliers and buyer locations and can play two different roles.
One is to store inventory and the other is to serve as a transfer location.
The presence of DCs can help reduce supply chain costs when suppliers are located far from
the buyer locations and transportation costs are high. ( W.W Grainger )
The presence of a DC allows a supply chain to achieve economies of scale for inbound
transportation to a point close to the final destination, because each supplier sends a large
shipment to the DC that contains products for all locations the DC serves.
If transportation economies require very large shipments on the inbound side, DCs hold
inventory and send product to buyer locations in smaller replenishment lots. For e.g.
Walmart sources from an overseas supplier in large lot size and the product is held in
inventory at the DC.
CROSS DOCKING
Products arriving from many suppliers on Inbound Trucks, by breaking each inbound into
smaller shipments, that are then loaded onto trucks going to each buyer locations.
Inventory needs to be held, product flows faster
Applicable for large predictable demands and requires that DCs to be set up.
Economies of scale both for in-bound and outbound - to be maintained
Wal-mart uses cross docking successfully All In-bounds , full TLs. Sum of lot sizes- fills up TL
to stores
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.
Milk runs reduce outbound transportation costs by consolidating small shipments. For eg.
Seven Eleven Japan cross docks deliveries from its fresh food suppliers at its DCs and sends
out milk runs to the retail outlets because the total shipment to a store from all suppliers
does not fill a truck.
1.
2.
3.
4.
Sl
No.
Network
Structure
Pros
Direct shipping
No Warehouse,
Simple
to
coordinate
High Inventories
due to large lot
size
High receiving cost
Direct
shipping
with Milk runs
Low transport
cost
Low Inventory
Increased
coordination
complexity
Low
in-bound
cost
thro
consolidation
Increased
inventory cost
Increased
Handling Cost
Very
low
inventory
requirement
Low
transportation
cost
thro
consolidation
Increased
coordination
complexity
Shipments via DC
using milk runs
Low out-bound
transport cost
Further Increase in
coordination
complexity
Tailored Network
Transport
choices best
match needs for
product& store
High coordination
complexity
Cons
shipment quantities, both of which result in higher levels of inventory in the supply
chain. Modes that allow for shipping in small quantities lower inventory levels but
tend to be more expensive. Faster modes Products with high value to weight ratio.
Cheaper modes Products with a small value to weight ratio.
Inventory aggregation firms can significantly reduce the safety inventory they
require by physically aggregating inventories in one location. Most e-businesses use
this technique to gain advantage over firms with facilities in many locations.
Transportation cost, however generally increases when inventory is aggregated.
Transportation cost and customer responsiveness
trade-off :If a firm has high responsiveness and ships all orders within a day of
receipt from the customer, it will have small outbound shipments resulting in a high
Transportation cost. If it decreases its responsiveness and aggregates orders over a
longer time horizon before shipping them out, it will be able to exploit economies of
scale and incur lower transportation cost because of larger shipments. Temporal
aggregation is the process of combining orders across time.
TAILORED TRANSPORTATION
Use of different transportation networks and modes based on customer and product
characteristics.
1. By customer density and distance
2. By size of customer
3. By product demand and value
Tailored Transportation by Customer Density and Distance When a firm serves a very
high density of customers close to the DC, it is often best for the firm to own a fleet of trucks
that are used with milk runs originating at the DC to supply customers , because this
scenario makes very good use of the vehicles.
If customer density is high but distance from the warehouse is large, it is better to use a
public carrier with large trucks to haul the shipments to a cross-dock center close to the
customer area, where the shipment are loaded onto smaller trucks that deliver product to
customers using milk runs.
As customer density decreases, use of an LTL carrier or a third party doing milk runs is more
economical because the third party carrier can aggregate shipments across many firms.
Firms should serve areas with high customer density more frequently because these areas
are likely to provide sufficient economies of scale in transportation. To lower transportation
costs, firms should use a higher degree of temporal aggregation when serving areas with a
low customer density.
1.TRANSPORTATION OPTIONS BASED ON CUSTOMER DENSITY AND DISTANCE
Sl No
Customer
Sort distance
Medium Distance
Long Distance
Density
(from W/H)
(from W/H)
(from W/H)
High Density
Cross-dock with
milk runs
Cross-dock with
milk runs
carrier)
2
Medium
Density
LTL carrier
LTL or Package
carrier
Low density
Or
LTL carrier
LTL
Or
Package Carrier
Package carriers
Very large customers can be supplied using a TL carrier, whereas for small customers use LTL
carrier or milk runs. 2 types of costs:
Product Type
High Value
Low Value
High Demand
of transportation for
replenishment.
Low Demand
orders.
mode of transportation f
For high-demand products with low value, all inventories should be disaggregated and held
close to the customer to reduce transportation cost. For low demand, high value products,
all inventories should be aggregated to save on inventory costs. For low, low value products,
cycle inventories can be held close to the customer and safety inventories aggregated to
reduce transportation cost while taking some advantage of aggregation. Cycle inventories
are replenished using an inexpensive mode of transportation to save costs.
Thank you