Logistics and Freight Transportation

Review of Concepts Affecting Bulk Transportation

Presentation to The World Bank

Supply Chain Management Course

by
Paul O. Roberts

February 10, 1999

 Supply Chains: What Are They?

In-Process
Inventory

Finished Goods Inventory Raw Finished Inhouse Inventory

Materials Goods

Usage Forecast
Sales Forecasts

Orders
Supplier/ Manufacturer/ Orders Retailer/User
Vendor Distributor
Transportation
Transportation

To understand logistics and supply chain operation, you must view

it through the eyes of the management at each level in the chain

2
The key decisionmaker in a supply
chain is downstream

z It is his production facility, his retail store, his

warehouse, his operation that must deal with the
product.
z The receiver decides who to order from, how much
should be ordered, what mode to use for shipping
z Common law gives ownership to the receiver at
the time the goods are loaded for transport
z If he fails to get what he wants he can always
switch to another vendor

3
The very simplest of logistics activities...

Supplier Customer

The movement of a truckload of product

from a shipper to a receiver…….

4
…generates an enormous amount of
logistics activity
Catalog Price Receive price, specs. And
List SKU no.
Place order
Receive acknowledgment
Quote a price or Trace shipment
publish a catalog Receive shipment
of prices Pay invoice

Shipper Acknowledge tender

Receiver
Tender shipment Dispatch truck Receive notice of arrival
Vehicle
Receive response Trace shipment Schedule dock space
Schedule shipment Get delivery receipt Unload product
Pick and pack shipment Send freight bill Receive shipment
Load shipment Receive payment Receive freight bill
Trace shipment Pay freight bill
Issue invoice Freight accounting

Shipper Functions
Carrier Receiver Functions
Network Planning
Demand Planning
Demand Planning
Transportation Planning Established
Transportation Planning
Transportation Mgt. Rates
Inventory Mgt.
Freight Accounting
Freight Accounting
Carrier Functions
Product Flow Warehouse Mgt.
Transportation Planning
Information Flow Transportation Mgt.
Freight Accounting

5
 A few key relationships drive the
economics of most supply chains

2
4
5

2
1 3

1 Vendor
2 Transportation
3 Storage
4 Outbound distribution
5 Store

6
The choice of vendor is an important
determinant of final delivered cost

z It not only determines the cost of the product

z It sets the origin location, which directly impacts
transport cost and service levels
z It also determines quality, which may vary
dramatically by source
z There can be differences in product availability
and lead time
z Choice of vendor impacts other inputs

7
There is a dramatic reduction in cost
with increased shipment size

parcel 1000

LTL truck

100
truckload
Transport Charges
carload ($/ton)
multi-car
10
unit train

barge load

1
11 1,000 40,000 100,000 600,000 100,000,000 200,000,000

Shipment Size (lbs)

8
 Holding costs depend upon shipment
size and rate of usage

Annual Holding Costs per Pound

Interest rate = 15% value/lb = $1.00

10,000,000 0.00 0.00 0.00 0.00 0.00 0.00

1,000,000 0.00 0.00 0.00 0.00 0.00 0.11
100,000 0.00 0.00 0.00 0.01 0.30 10.80
Use Rate (lbs/yr) 10,000 0.00 0.00 0.02 1.20 30.00 1,080.00
1,000 0.00 0.08 1.88 120.00 3,000.00 108,000.00
100 0.00 7.50 187.50 12,000.00 300,000.00 10,800,000.00
10 0.08 750.00 18,750.00 1,200,000.00 30,000,000.00 1,080,000,000.00
10 1,000 5,000 40,000 200,000 1,200,000
Parcel LTL Truck LTL Truck Truckload Rail Carload Multi-car

Shipment Size (lbs)

9
Transport charges and capital carrying
costs are only two of the cost elements

z Users are trying to minimize total logistics costs

y Ordering, loading and unloading
y Capital carrying in both transit and storage
y Storage costs
y Safety stock carrying charges
y Loss & damage
y Spoilage due to shelf life
y Transportation charges
z These depend on both product and transport
level of service attributes

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Bulk goods have typical characteristics

z Identifiable commodity attributes

y density
y value
y shelf life
z Special equipment requirements
y solid
y liquid
y particulate
y gas

11
Bulk handling and storage are major
reasons why rates are typically low

z Transfer costs
y Solids - overhead cranes, conveyors
y Liquids - pumps, gravity flow
y Particulates - gravity flow, augers, conveyors
y Gases - compression, liquefaction
z Storage costs
y Open
y Covered
y Temperature controlled
y Tank or hopper

12
Another type of holding cost involves
the use of safety stock

z Safety stock is inventory held in anticipation of

an unforeseen event
z If there are no adverse impacts of a stockout, it is
not necessary to carry safety stock
z Safety stock is held continuously
z Sharing safety stock over many users can reduce
the cost

13
Delivering small amounts of product to
many retail points is a challenge

The answer is:

Supplier 1 User 1
Wholesale
Supplier 2 Distributor
User 2
Supplier 3

Supplier 4 User 3

Supplier 5
User 4

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Finally, there are costs at the point of
sale (or use) of the product

z Inventory holding cost is managed by inventory

control systems
z Annual use A = Q (quantity) x F (frequency)
z In a quantity-determined system the size of
shipment is specified
z In a frequency-determined system the time
between shipments is specified
z Each lends itself to a different situation

15
 Most products are sold in highly
competitive markets…to realize savings
you must be able to control inventory, ...
Which requires you to:
1. Forecast demand
2. Control transport
3. Trace delivery
4. Manage order entry
5. Monitor inventory
6. Manage the process

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The annual use of an input is managed
by an inventory control system

z Inventory holding costs and transport cost are

both determined by the relationship below:
z Annual use A = Q (quantity) x F (frequency)
z This leads to two different inventory control
systems
z In a quantity-determined system the size of
shipment is specified
z In a frequency-determined system the time
between shipments is specified
z Each lends itself to a different situation

17
Inventory can be managed in one of
two ways...
Comparison of Quantity-Driven versus Frequency-Driven Inventory Schemes

Week Use On Hand Order On-Hand Order

0 - 0 50000 27000
1 6,750 43,250 20,250
2 5,506 37,745 14,745 12,255
3 5,211 32,533 21,789
4 6,015 26,518 15,773 11,227
5 7,238 19,280 19,762
6 11,738 7,542 50000 8,024 18,976
7 12,468 45,074 14,532
8 14,130 30,944 403 26,597
9 11,063 19,881 15,937

1 10
11
12
13
14,934
6,028
9,262
7,958
4,947
48,920
39,657
31,699
50000 1,003
20,972
11,710
19,042
25,997

15,290
2
14 7,501 24,198 11,541 15,459

Specify Q Specify F
15 5,075 19,123 21,925
16 5,916 13,207 16,009 10,991
17 8,451 4,756 50000 18,549
18 10,552 44,205 7,997 19,003
19 11,367 32,837 15,633
20 11,998 20,839 3,635 23,365
21 14,822 6,017 50000 12,178
22 11,446 44,571 732 26,268
23 14,854 29,717 12,146
24 9,692 20,025 2,454 24,546
25 7,831 12,194 19,169
26 8,895 3,300 50000 10,275 16,725
27 8,577 44,723 18,423
28 6,097 38,626 12,326 14,674
29 10,715 27,911 16,285
30 14,033 13,877 50000 2,252 24,748
31 14,083 49,794 12,917
32 11,594 38,200 1,323 25,677
33 12,799 25,402 14,201
34 12,909 12,492 1,292 25,708
35 12,903 (410) 50000 14,097
36 13,197 36,392 900 26,100
37 9,220 27,173 17,780
38 6,881 20,292 10,899 16,101
39 6,448 13,844 20,552
40 8,730 5,114 50000 11,823 15,177
41 13,506 41,608 13,494
42 13,555 28,053 (62) 27,062
43 7,255 20,798 19,745
44 5,809 14,989 13,936 13,064
45 7,438 7,551 50000 19,562
46 14,121 43,430 5,441 21,559
47 11,275 32,155 15,725
48 14,303 17,852 1,422 25,578
49 10,733 7,119 16,267
50 6,591 528 50000 9,676 17,324
51 7,446 43,082 19,554
52 13,082 29,999 6,471 20,529
Total 520,001
Average 10,000
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 Quantity-determined systems order
the same amount each time

Quantity-Driven Inventory Scheme

60000

50000
Order/On-Hand

40000 On Hand

30000 Order

20000

10000

0
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52
-10000

Week
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 Frequency-determined systems order
on the same day each time period

Frequency-Driven Inventory Scheme

30000

25000
Order Size/Stock-On-

20000

15000 On-Hand
Hand

Order
10000

5000

0
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53
-5000

Week
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These two inventory control systems
serve different needs
z Quantity-determined systems work best for:
y A single item from one vendor
y Significant input to the process
y Vendor direct to warehouse
y Order size is full truckload or carload
z Frequency-determined systems handle:
y Multiple items from the same vendor
y Minor inputs to the process
y Movements from mixing warehouse to the stores
y Order size is what was used since the last order

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That covers the 5 cost points, but it is
useful to note that...

z There are no “pure plays” in logistics

z There are only tradeoffs between these key
economic relationships
z Supply chain design must take into account these
tradeoffs
z A good system must be continuously adjusted to
keep it in balance
z Let’s look at a few factors involved in the design
of a logistics system

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 To minimize total logistics cost
a hierarchy of decisions must be made

z Choice of vendor z Number of centers?

z Transport cost z Locations?

z Stores served?
z Capital carrying cost
z Choice of vendor?
z Product attributes
z Ship direct or cross-dock?
z Safety stock z Shipment size/frequency?
z Store delivery z Shipment makeup?
z Shipment routing?

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Inbound to the DC is in bulk…outbound is
typically in less than full load quantities
Vendor 1

Vendor 2

Distribution Center
100 miles
90% LTL

Vendor 4 200 miles

70% LTL

400 miles
50% LTL

Vendor 3

800 miles
30% LTL
Vendor 5

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A central question is how many DCs to
have and where they should be located?

DC 3
DC 2

Hub

DC 4

DC 3

DC 5

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A second question is should shipments
from vendors be direct…or through a hub?

DC 3
Vendor DC 2

Hub

DC 4

DC 3

DC 5

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A Network Logistics Planning Process can
be used to answer these planning questions
Model Components

Inbound
Cost
Vendor Module

Database
On-Line

Transfer
Cost
Data SKU-Level
Module
Model
Output

Store Distribution
Center Cost
Database Module

Summary
Output
Outbound
Cost
Module

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In a study for a food distributor the optimal
scenario had 6 hubs and 20 centers

Hub

Regional Center

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Results from the Logistics Cost Model
for some typical bulk rail moves
z Wheat - Kansas City to Mexico City 1736 miles
y Annual use = 10,500 tons
y Density 144lbs/cuft, value $.06/lb, life 900 days
y TransCost Rail = $3974 Truck = $3888
y TotLogCost Rail = $33/ton Truck = $163/ton
z Sodium Compounds -Ft Worth TX to Queretaro MX
1039 miles
y Annual use = 9,000 tons
y Density 101lbs/cuft, value $.04/lb, life 900 days
y TransCost Rail = $1087 Truck = $2382
y TotLogCost Rail = $10/ton Truck = $101/ton

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Results from the Logistics Cost Model
for some typical truck moves
z Misc electronic components - Springfield IL to San
Luis Potosi 1753 miles
y Annual use = 1,000 tons
y Density 12lbs/cuft, value $37.78/lb, life 900 days
y TransCost Rail = $5465 Truck = $2166
y TotLogCost Rail = $720/ton Truck = $366/ton
z Frozen vegetables - Saltillo MX to Baltimore MD
1980 miles
y Annual use = 200 tons
y Density 27lbs/cuft, value $.37/lb, life 180 days
y TransCost Rail = $3083 Truck = $2477
y TotLogCost Rail = $134/ton Truck = $127/ton
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A big part of the difference is in the
amount of product used annually

z Frozen vegetables used at 200 tons per year goes

by truck
z If frozen vegetables were used at 2000 tons per
year the lowest total logistics cost is rail
z The higher use allows a larger shipment to be
accepted--consequently rail is chosen
z For wheat, the value of the product is so low to
begin with that using smaller quantities 10,500
tons versus 1,050 or 550 tons can be carried as
inventory without difficulty

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Transportation services incur costs at
different points in time

z Fixed costs occur at significant intervals

y Original purchase price
y Annual cost for licensing and taxes
y Capital cost to overhaul the engine or power train
y Cost for new tires, etc.
y Cost of loading/unloading
z Variable costs occur on a mileage basis
y Fuel
y Crew
y Maintenance

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Costs are most easily accounted for
on a mileage basis

z The fixed costs must be translated into costs per

mile
z To make this transformation one must be able to
predict utilization
z Utilization = number of miles of use per year
z Once fixed costs have been converted to costs
per mile they can be added to variable costs
z Variable costs per mile include the cost of crew,
fuel, etc.
z Finally, the costs for repositioning must be added

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Repositioning costs account for moving the
vehicle to a point where it can be reused

z For short trips this may be the home base, but for
long trips it is important to find another load
z If the trip home is empty, the entire cost of the
trip must be borne by the original load
z If a load can be found to pay part of the costs of
the trip home, the balance of the trip costs must
be borne by the outbound load
z This all means that costs cannot be fully assigned
until the trip is completed
z One approximation is to use the ratio of loaded
miles to total miles, referred to as the load ratio

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 Repositioning strategies differ for
longhaul and shorthaul transportation

z Longhaul carriers try to keep the vehicle and the

crew together over several loaded moves,
z Or, design balanced movements so that rested crews
can return home on a reverse movement
z Truckload carriers, or tramp steamers can do this by
dispatching vehicles on “targets of opportunity”
z This is most easily done with a large fleet and many
loads
z The problem of minimizing empty movement is
worked on a system-wide basis

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For a fleet, where to move empty vehicles
can be solved by math programming

z The solution to the problem is given by the classic

“Transportation Problem”
z The problem is stated as:
minimize: C(I,J) x X(I,J)
given: Sum over J of X(I,J) = S(I)
and : Sum over I of X(I,J) = D(J)
S.T. X(I,J) > 0
where: C(I,J) = cost from I to J, X(I,J) = empties from
I to J, S(I) = supply of empties at I and D(J) =
Demand for empties at J

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The transportation problem has a dual
problem which is just as interesting

z The dual problem maximizes the location rent on

vehicles
z The dual is maximized as the primal is minimized
z Dual variables tell what the value of an empty
vehicles will be at each place in the network
z They can also be interpreted as “repositioning
costs”
z Prices should exceed costs to remain profitable
z In a perfectly competitive market prices will equal
costs plus a modest return on investment (profit)

37
 Break-bulk terminals (hubs) are used
to lower costs in “thin” markets

z A hub allows movements to many destinations from

a single origin to be carried together
z Then, after sorting, movements from many origins
are carried from the hub to a single destination
z This technique for handling less-than-full loads is
familiar to airline passengers
z It is also widely used in less-than-truckload
trucking, railroad classification yards, barge
movements on rivers and for ocean container service

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Costs for rail movement are more
difficult to determine

z Rail operations are complex

y Crews
y Locomotives
y Equipment
y Yards
y Track
z Rails use operating plans
z Joint costs are more prevalent than in truck
z Fixed cost allocation is more difficult

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The short haul problem is also solvable

z The solution is given by the “Traveling Salesman

Problem”
z The “Traveling Salesman Problem” cannot be
solved analytically for an optimal solution
z There exist a number of computer algorithms for
finding good solutions
z These can be used to provide very good solutions
for practical purposes
z Many allow constraints on hours of operation,
type of vehicle, qualification of the crew to be
taken into account

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