Transportation in a Supply Chain

Transportation refers to the movement of product from one location to another as it makes its way
from the beginning of a supply chain to the customer. Transportation is an important supply chain
driver because products are rarely produced and consumed in the same l9cation. Transportation is a
significant component of the costs incurred by most supply chains.
The shipper is the party that requires the movement of the product between two points in the
supply chain. The carrier is the party that moves or transports the product. A carrier makes
investment decisions regarding the transportation equipment (locomotives, trucks, airplanes, etc.)
and in some cases infrastructure (rail), and then makes operating decisions to try to maximize the
return from these assets. A shipper, in contrast, uses transportation to minimize the total cost
(transportation, inventory, information, sourcing, and facility) while providing an appropriate level of
responsiveness to the customer.

Modes of Transportation and their Performance Characteristics

Air:

Very fast and fairly expensive mode of transportation.

Used for small, high-value items or time-sensitive emergency shipments that have to travel a
long distance

Package Carriers: Package carriers are transportation companies such as FedEx, UPS, and the U.S.
Postal Service, which carry small packages ranging from letters to shipments weighing about 150
pounds.

Expensive and cannot compete with LTL carriers on price for large shipments. T
Rapid and reliable delivery- used for time sensitive products
Provide other value-added services, allow shippers to speed inventory flow and track order
status.
Package carriers are the preferred mode of transport for e-businesses

Key issues in this industry include the location and capacity of transfer points as well as information
capability to facilitate and track package flow.
Truck: The trucking industry consists of two major segments- TL or LTL

More expensive than rail but offers the advantage of door-to-door shipment and a shorter
delivery time.
Requires no transfer between pickup and-delivery and have low relatively low fixed costs
LTL shipments take longer than TL shipments because of other loads that need to be picked
up and dropped off.
A key to reducing LTL costs is the degree of consolidation
Key issues for the LTL industry include location of consolidation centres, assigning of loads to
trucks, and scheduling and routing of pickup and delivery.

Rail:

Incur a high fixed cost in terms of rails, locomotives, cars, and yards.
Significant trip-related labour and fuel cost, independent of the number of cars but does
vary with the distance travelled and the time taken.
The price structure and the heavy load capability makes rail an ideal mode for carrying large,
heavy, or high-density products over long distances
Transportation time by rail can be long. Ideal for very heavy, low-value shipments that are
not very time sensitive.

Water:

Water transport is ideally suited for carrying very large loads at low cost.
Difficult to operate for short-haul trips.
Delays at ports, customs, security, and the management of containers used are major issues
in global shipping

Intermodal: Intermodal transportation is the use of more than one mode of transport to move a
shipment to its destination. On land, the rail/truck intermodal system offers the benefit of lower
cost than TL and delivery times that are better than rail, thereby bringing together different modes
of transport to create a price/service offering that cannot be matched by any single mode.

Key issues involve the exchange of information to facilitate shipment transfers between
different modes because these transfers often involve considerable delays, hurting delivery
time performance.

Design Options for a Transportation Network

The design of a transportation network affects the performance of a supply chain by establishing the
infrastructure within which operational transportation decisions regarding scheduling and routing
are made.

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. (trade off between
transportation and inventory costs)
Used if demand at buyer locations is large enough

Advantage:

Eliminates intermediate warehouses and simple in operation and coordination.

The transportation time from supplier to buyer location is short because each shipment goes
direct.

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.
Major decision supply chain manager has to decide on the routing of each milk run.

Advantage:

Eliminates intermediate warehouses. Lower transportation cost and increases utilization by

consolidating shipments to multiple locations on a single truck.

All Shipments via Central DC

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 plays two roles - one is to store
inventory and the other is to serve as a transfer location.
Advantage:

DCs can help reduce supply chain costs when suppliers are located far from the buyer
locations and transportation costs are high.
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 product for all locations the DC serves.
Because DCs serve locations nearby, the outbound transportation cost is not very large.
Cross docking at DCs help to reduce inventory and saves handling costs. (Used for products
with large, predictable demands)

Shipping via DC Using Milk Runs

Can be used from a DC if lot sizes to be delivered to each buyer location are small.
Advantage:
Reduce outbound transportation costs by consolidating small shipments.

Tailored Network
Here transportation uses a combination of cross-docking, milk runs, and TL and LTL carriers, along
with package carriers in some cases.
Requires significant investment in information infrastructure to facilitate the coordination.
Advantage:
Allows for the selective use of a shipment method to minimize the transportation as well as
inventory costs.

Pros and Cons of Different Transport Networks

Network Structure
Direct shipping

Pros
No intermediate warehouse
Simple to coordinate

Direct shipping with

milk runs

Lower transportation costs for small

lots
Lower inventories
Lower inbound transportation cost
through consolidation

All shipments via central DC

with inventory storage

Cons
High inventories (due to large lot
size)
Significant receiving expense
Increased coordination
complexity
Increased inventory cost
Increased handling at DC

All shipments via central DC

with cross-dock

Very low inventory requirement

Lower transportation cost through
Consolidation

Increased coordination
complexity

Shipping via DC using

milk runs

Lower outbound transportation cost

for small lots

Further increase in coordination

Complexity

Tailored network

Transportation choice best matches

needs of individual product and store

Highest coordination complexity

Trade-Offs in Transportation Design

Transportation and Inventory Cost Trade-Off
Choice of Transportation Mode
The mode of transportation that results in the lowest transportation cost does not necessarily lower
total costs for a supply chain as cheaper mode of transportation have longer lead times and larger
minimum shipment quantities resulting in higher inventories. Faster modes of transportation are
preferred for products with a high value-to weight ratio, reducing inventories is important, whereas
cheaper modes are preferred for products with a small value-to-weight ratio, for which reducing
transportation cost is important.
Inventory Aggregation
If inventories are highly disaggregated, some aggregation can also lower transportation costs.
Transportation cost, however, generally increases when inventory is aggregated. Inventory
aggregation is a good idea when inventory and facility costs form a large fraction of a supply chain's
total costs. Inventory aggregation is useful for products with a large value-to-weight ratio and for
products with high demand uncertainty. Inventory aggregation is also a good idea if customer orders
are large enough to ensure sufficient economies of scale on outbound transportation.
Inventory aggregation decreases supply chain costs if the product has high value to weight ratio,
high demand uncertainty and customer orders are large. If the product has low value to weight ratio,
low demand uncertainty or customer orders are small, inventory aggregation may increase supply
chain costs.

Trade-Off between Transportation Cost and Customer Responsiveness

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 a lower transportation cost because of larger shipments.

Transportation Options based on Customer Distance and Density

High density
Medium density
Low density

Short Distance
Private fleet with milk runs
Third-party milk runs
Third-party milk runs or LTL
carrier

Medium Distance
Cross-dock with milk runs
LTL carrier
LTL or package carrier

Long Distance
Cross-dock with milk runs
LTL or package carrier
Package carrier

Aggregation Strategies based on Value/ Demand

Product Type
High demand

Low Demand

High Value
Disaggregate cycle inventory. Aggregate safety
inventory. Inexpensive mode of transportation
for replenishing cycle inventory and fast
mode when using safety inventory.
Aggregate all inventories. If needed, use fast
mode of transportation for filling customer
orders.

Low Value
Disaggregate all inventories and use
inexpensive mode of transportation for
replenishment.
Aggregate only safety inventory. Use
inexpensive mode of transportation for
replenishing cycle inventory.

Risk Management & Mitigation in Transportation

There are three main types of risk to consider when transporting a shipment between two nodes on
the network:
The risk that the shipment is delayed

Congestion along links

mitigation strategies: moving inventories closer to the destination, using alternative
lanes, and building a buffer into the lead time, designing a network with multiple
routes, use of congestion pricing by the owner of the transportation node or link
Limited availability of transportation or infrastructure capacity
mitigation strategies : own some transportation capacity or by sign long-term
contracts for transportation capacity with the third party

Intermediate nodes or links are disrupted by external forces

natural events such as hurricanes or man-made events such as terrorism

mitigation strategies: design alternative routings into the transportation network,
identify sources that are likely to be correlated across the network.

Distribution Networks
Distribution refers to the steps taken to move and store a product from the supplier stage to a
customer stage in the supply chain. Distribution is a key driver of the overall profitability of a firm
because it affects both the supply chain cost and the customer experience directly.

Factors Influencing Distribution Network Design

Response time is the amount of time it takes for a customer to receive an order. A decrease in the
response time customers desire increases the number of facilities required in the network.
Product variety is the number of different products/configurations that are offered by the
distribution network.
Product availability is the probability of having a product in stock when a customer order arrives.
Customer experience includes the ease with which customers can place and receive orders as well
as the extent to which this experience is customized. It also includes purely experiential aspects.
Time to market is the time it takes to bring a new product to the market.
Order visibility is the ability of customers to track their orders from placement to delivery.
Returnability is the ease with which a customer can return unsatisfactory merchandise and the
ability of the network to handle such returns.

Relationship between required number of facilities and different supply

chain factors

Decrease in the response time customers desire increases the number of facilities required
in the network.
As the number of facilities in a supply chain increases, the inventory and resulting inventory
costs also increase
If the number of facilities is increased to a point where inbound lot sizes are also very small
and result in a significant loss of economies of scale in inbound transportation, increasing
the number of facilities increases total transportation cost.
Facility costs decrease as the number of facilities is reduced
As the number of facilities increases, total logistics costs first decrease and then increase

Manufacturer Storage With Direct Shipping Network

In this option, product is shipped directly from the manufacturer to the end customer, bypassing the
retailer (who takes the order and initiates the delivery request). This option is also referred to as
drop-shipping, with product delivered directly from the manufacturer to the customer.

Online retailers mostly use drop ship to deliver goods to customers.

Best suited for a large variety of low-demand, high-value items for which customers are
willing to wait for delivery and accept several partial shipments.

Cost Factor

Performance

Inventory

Lower costs because of aggregation. Benefits of aggregation are highest for low-demand,
high-value items. Benefits are very large if product customization can be postponed at
the manufacturer.
Higher transportation costs because of increased distance and disaggregate shipping.
Lower facility costs because of aggregation. Some saving on handling costs if
manufacturer can manage small shipments or ship
from production line.
Significant investment in information infrastructure to integrate manufacturer and
retailer.

Transportation
Facilities and
handling
Information

Service Factor
Response time

Product variety
Product availability
Customer
experience
Time to market
Order visibility
Returnability

Performance
Long response time of one to two weeks because of increased distance and two
stages for order processing. Response time may vary by product, thus complicating
receiving
Easy to provide a very high level of variety.
Easy to provide a high level of product availability because of aggregation at
manufacturer.
Good in terms of home delivery but can suffer if order from several manufacturers is
sent as partial shipments
Fast, with the product available as soon as the first unit is produced
More difficult but also more important from a customer service perspective.
Expensive and difficult to implement

Manufacturer Storage with Direct Shipping and In-Transit Merge

Unlike pure drop-shipping, under which each product in the order is sent directly from its
manufacturer to the end customer, in-transit merge combines pieces of the order coming from
different locations so that the customer gets a single delivery.

In-transit merge has been used by direct sellers such as Dell

Best suited for low- to medium-demand, high-value items the retailer is sourcing from a
limited number of manufacturers.
Best implemented if there are no more than four or five sourcing locations.

Cost Factor

Performance

Inventory

Similar to drop-shipping.

Transportation
Facilities and
handling
Information

Somewhat lower transportation costs than drop-shipping.

Handling costs higher than drop-shipping at carrier; receiving costs lower at customer
Investment is somewhat higher than for drop-shipping.

Service Factor
Response time
Product variety
Product availability
Customer
experience
Time to market
Order visibility
Returnability

Performance
Similar to drop-shipping; may be marginally higher.
Similar to drop-shipping
Similar to drop-shipping
Better than drop-shipping because a single delivery has to be received.
Similar to drop-shipping
Similar to drop-shipping
Similar to drop-shipping

Distributor Storage With Carrier Delivery

Under this option, inventory is not held by manufacturers at the factories but is held by
distributors/retailers in intermediate warehouses, and package carriers are used to transport
products from the intermediate location to the final customer.

Suitable for medium- to fast moving items and when customers want delivery faster than is
offered by manufacturer storage but do not need it immediately.

Cost Factor

Performance

Inventory

Higher than manufacturer storage. Difference is not large for faster-moving items.

Transportation
Facilities and
handling
Information

Lower than manufacturer storage. Reduction is highest for faster-moving items.

Somewhat higher than manufacturer storage. The difference can be large for very slowmoving items.
Simpler infrastructure compared to manufacturer storage

Service Factor
Response time
Product variety
Product availability
Customer
experience
Time to market
Order visibility
Returnability

Performance
Faster than manufacturer storage.
Lower than manufacturer storage
Higher cost to provide the same level of availability as manufacturer storage.
Better than manufacturer storage with drop-shipping
Higher than manufacturer storage.
Easier than manufacturer storage.
Easier than manufacturer storage.

Distributor Storage with Last-Mile Delivery

Last-mile delivery refers to the distributor/retailer delivering the product to the customer's home
instead of using a package carrier. Last-mile delivery requires the distributor warehouse to be much
closer to the customer. Given the limited radius that can be served with last-mile delivery, more
warehouses are required compared to the case when package delivery is used.

Can only be justified if there is a large customer segment willing to pay for this convenience.
Hence, used if customer orders are large enough to provide economies of scale.

Cost Factor

Performance

Inventory

Higher than distributor storage with package carrier delivery.

Transportation

Very high cost given minimal scale economies. Higher than any
other distribution option
Facility costs higher than manufacturer storage or distributor
storage with package carrier delivery, but lower than a chain
of retail stores.
Similar to distributor storage with package carrier delivery

Facilities and
handling
Information

Service Factor
Response time
Product variety
Product availability
Customer
experience
Time to market
Order visibility
Returnability

Performance
Very quick. Same day to next-day delivery.
Somewhat less than distributor storage with package carrier delivery but larger than
retail stores.
More expensive to provide availability than any other option except retail stores.
Very good, particularly for bulky items
Slightly higher than distributor storage with package carrier delivery.
Less of an issue and easier to implement than manufacturer storage or distributor
storage with package carrier delivery
Easier to implement than other options. Harder and more
expensive than a retail network

Manufacturer Or Distributor Storage With Customer Pickup

In this approach, inventory is stored at the manufacturer or distributor warehouse but customers
place their orders online or on the phone and then travel to designated pickup points to collect their
merchandise. Orders are shipped from the storage site to the pickup points as needed.

Such a network is likely to be most effective if existing locations such as coffee shops,
convenience stores, or grocery stores are used as pickup sites, because this type of network
improves the economies from existing infrastructure.

Cost Factor

Performance

Inventory

Can match any other option, depending on the location of inventory

Transportation
Facilities and
handling
Information

Lower than the use of package carriers, especially if using an existing delivery network.
Facility costs can be very high if new facilities have to be built. Costs are lower if existing
facilities are used. The increase in handling cost at the pickup site can be significant.
Significant investment in infrastructure required

Service Factor
Response time
Product variety
Product availability
Customer
experience
Time to market
Order visibility
Returnability

Performance
Similar to package carrier delivery with manufacturer or distributor storage. Sameday delivery possible for items stored locally at pickup site.
Similar to other manufacturer or distributor storage options.
Similar to other manufacturer or distributor storage options..
Lower than other options because of the lack of home delivery. In areas with high
density of population, loss of convenience may be small.
Similar to manufacturer storage options
Difficult but essential
Somewhat easier given that pickup location can handle returns

Retail Storage with Customer Pickup

In this option, often viewed as the most traditional type of supply chain, inventory is stored locally at
retail stores. Customers walk into the retail store or place an order online or by phone and pick it up
at the retail store.

Suitable for fast-moving items or items for which customers value rapid response.

Cost Factor

Performance

Inventory

Higher than all other options

Transportation
Facilities and
handling
Information

Lower than all other options

Higher than other options. The increase in handling cost at the pickup site can be
significant for online and phone orders
Some investment in infrastructure required for online and phone orders.

Service Factor
Response time
Product variety
Product availability
Customer
experience
Time to market
Order visibility
Returnability

Performance
Same-day (immediate) pickup possible for items stored locally at pickup site.
Lower than all other options.
More expensive to provide than all other options
Related to whether shopping is viewed as a positive or negative experience by
customer.
Highest among distribution options
Trivial for in-store orders. Difficult, but essential, for online and phone orders
Easier than other options given that pickup location can handle returns.