Supply Chain Management

(3rd Edition)

Chapter 13
Transportation in the Supply Chain

© 2007 Pearson Education 14-1

 Factors Affecting
Transportation Decisions
1. Shipper - party that requires the movement of the
product between two points in the supply chain
– Transportation cost
– Inventory cost
– Facility cost
2. Carrier - party that moves or transports the product
– Vehicle-related cost
– Fixed operating cost
– Trip-related cost

© 2007 Pearson Education 14-2

 Other Factors Affecting
Transportation Decisions
3. Owners and operators of transportation infrastructure
such as roads, ports, canals, and airports

3. The bodies that set transportation policy worldwide

© 2007 Pearson Education 14-3

 Transportation Modes
Trucks
– Truckload (TL)
– Less Than Truckload (LTL)
Rail
Air
Package Carriers
Water
Pipeline
Intermodal

© 2007 Pearson Education 14-4

 Truckload (TL)
More expensive than rail but offers door-to-door
shipment and a shorter delivery time
Requires no transfer between pick-up and delivery
Suited for shipments between manufacturing
facilities and warehouses or between suppliers and
manufacturers
Low fixed and variable costs

© 2007 Pearson Education 14-5

 Truckload (TL)
Major Issues
– Utilization
– Consistent service
– Backhauls
Average Capacity = 42,000 - 50,000 lb.

© 2007 Pearson Education 14-6

 Less Than Truckload (LTL)
Operations are priced to encourage shipments in
small lots, usually less than half a TL
Shipment is longer compared to TL because of
other loads that need to picked up and dropped off
Suited for shipments that are too large to be
mailed as small packages but constitutes less than
half a TL

© 2007 Pearson Education 14-7

 Less Than Truckload (LTL)
Higher fixed costs (terminals) and low variable
costs
Major issues:
– Location of consolidation facilities
– Utilization
– Vehicle routing
– Customer service

© 2007 Pearson Education 14-8

 Rail
Ideal mode for carrying large, heavy, or high-
density products over long distances and very
heavy, low-value shipments
Average load = 80 tons
High fixed costs, long transportation time

© 2007 Pearson Education 14-9

 Rail
Key issues:
– Scheduling to minimize delays/improve service
– Off-track delays (at pickup and delivery end)
– Yard operations
– Variability of delivery times

© 2007 Pearson Education 14-10

 Air
High fixed costs in infrastructure and equipment
Labor and fuel costs is trip related
Offers a very fast and fairly expensive mode
Suited for small high-value items or time-sensitive
emergency shipments for long distances

© 2007 Pearson Education 14-11

 Air
Key issues:
– Location/number of hubs
– Location of fleet bases/crew bases
– Schedule optimization
– Fleet assignment
– Crew and maintenance scheduling
– Yield management

© 2007 Pearson Education 14-12

 Package Carriers
Companies like FedEx, UPS, US Postal Service, that carry
small packages ranging from letters to shipments of about
150 pounds
Rapid and reliable delivery
Small and time-sensitive shipments
Preferred mode for e-businesses (e.g., Amazon, Dell,
McMaster-Carr)
Consolidation of shipments (especially important for
package carriers that use air as a primary method of
transport)
Expensive
© 2007 Pearson Education 14-13
 Water
Ocean, inland waterway system, coastal waters
Suited for carrying very large loads at low cost
Ideal for movement of large bulk commodity
shipments
Limited to certain geographic areas
Slowest mode of transportation
Dominant in global trade (autos, grain, apparel, etc.)

© 2007 Pearson Education 14-14

 Pipeline
Primarily for crude petroleum, refined petroleum
products, natural gas
Best for large and predictable demand
Would be used for getting crude oil to a port or
refinery, but not for getting refined gasoline to a
gasoline station (TL)
High fixed cost

© 2007 Pearson Education 14-15

 Intermodal
Use of more than one mode of transportation to move a
shipment to its destination
Most common example: rail/truck
Also water/rail/truck or water/truck
Grown considerably with increased use of containers
Increased global trade has also increased use of
intermodal transportation
More convenient for shippers (one entity provides the
complete service)
Key issue involves the exchange of information to
facilitate transfer between different transport modes
© 2007 Pearson Education 14-16
 Design Options for a
Transportation Network
What are the transportation options? Which one to
select? On what basis?
Direct shipment network
Direct shipment with milk runs
All shipments via central DC
Shipment via DC using milk runs
Tailored network

© 2007 Pearson Education 14-17

 Direct shipment network

© 2007 Pearson Education 14-18

 Direct shipment 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 t a single buyer location
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 All shipments via central DC

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 Shipment via DC using milk runs

© 2007 Pearson Education 14-21

 Tailored Transportation
Combination of the different options to reduce cost
and improve responsiveness
Complexity in managing this type of network is high
because of different shipping procedures
Pros and Cons of Different Transportation Networks

© 2007 Pearson Education 14-22

 Tailored Transportation
Factors affecting tailoring:
– Customer distance and density
– Customer size
– Product demand and value

© 2007 Pearson Education 14-23

 Trade-offs in Transportation Design
1. Transportation and inventory cost trade-off
– Choice of transportation mode
– Inventory aggregation
2. Transportation cost and responsiveness trade-off

© 2007 Pearson Education 14-24

 1. Choice of Transportation Mode
A manager must account for inventory costs when
selecting a mode of transportation
A mode with higher transportation costs can be
justified if it results in significantly lower inventories

© 2007 Pearson Education 14-25

 Inventory Aggregation: Inventory
vs. Transportation Cost
As a result of physical aggregation
– Inventory costs decrease
– Inbound transportation cost decreases
– Outbound transportation cost increases
Inventory aggregation decreases supply chain costs if
the product has a high value to weight ratio, high
demand uncertainty, or customer orders are large
Inventory aggregation may increase supply chain
costs if the product has a low value to weight ratio,
low demand uncertainty, or customer orders are small
© 2007 Pearson Education 14-26
 2. Trade-offs Between Transportation
Cost and Customer Responsiveness

Temporal aggregation is the process of combining

orders across time
Temporal aggregation reduces transportation cost
because it results in larger shipments and reduces
variation in shipment sizes
However, temporal aggregation reduces customer
responsiveness

© 2007 Pearson Education 14-27

 Role of IT in Transportation
The complexity of transportation decisions demands
the use of IT systems
IT software can assist in:
– Identification of optimal routes by minimizing costs subject
to delivery constraints
– Optimal fleet utilization
– GPS applications

© 2007 Pearson Education 14-28

 Risk Management in Transportation
Three main risks to be considered in transportation are:
– Risk that the shipment is delayed
– Risk of disruptions
– Risk of hazardous material
Risk mitigation strategies:
– Decrease the probability of disruptions
– Alternative routings
– In case of hazardous materials the use of modified
containers, low-risk transportation models, modification of
physical and chemical properties can prove to be effective

© 2007 Pearson Education 14-29

 Making Transportation
Decisions in Practice
Align transportation strategy with competitive
strategy
Consider both in-house and outsourced transportation
Design a transportation network that can handle
e-commerce
Use technology to improve transportation
performance
Design flexibility into the transportation network

© 2007 Pearson Education 14-30

 Sample Transportation Problem
Eastern Electric is a major appliance manufacturer with a large
plant in Chicago area. EE purchases all the motors for its
appliances from Westview Motors, located near Dallas. EE
currently purchases 120,000 motors each year from WM at a price
of $120 per motor. Demand has been relatively constant for
several years and is expected to stay that way. Each motor
averages about 10 pounds in weight, and EE has traditionally
purchased lots of 3,000 motors. WM ships each EE order within a
day of receiving it. At its assembly plant, EE carries a safety
inventory equal to 50% of the average demand for motors during
the delivery lead time.

© 2007 Pearson Education 14-31

 Sample Transportation Problem
The plant manager at EE has received several proposals for
transportation and must decide on the one to accept. The details of
various proposals are presented in the table below, where 1 cwt =
100 pounds.

© 2007 Pearson Education 14-32

 Sample Transportation Problem
Golden’s pricing represents a marginal unit quantity discount.
Golden’s representative has proposed lowering the marginal rate
for the quantity over 250 cwt in a shipment from $4/cwt to $
3/cwt and suggested that EE increase its batch size to 4,000
motors to take advantage of the lower transportation cost. EE’s
annual cost of holding inventory is 25%.
Shipment lead time is as follows: rail = 5 days, truck = 3 days.
Evaluate the total transportation and inventory cost for each
option. If the plant manager decides to include inventory costs in
the transportation decision, which option should he chose?

© 2007 Pearson Education 14-33

 Solution: Eastern Electric
For this problem, 3 types of inventory will be considered:

1. cycle inventory - average inventory that builds up because a

supply chain stage either produces or purchases in lots that are
larger than those demanded by the customer
2. safety inventory (or buffer stock) - the level of extra stock that
is maintained to mitigate risk of run-out for raw materials or
finished goods due to uncertainties in supply or demand
3. in-transit inventory - inventory items that have been shipped
by the seller but have not yet reached the purchaser

© 2007 Pearson Education 14-34

 Solution: Eastern Electric
Given: D = 120,000 motors
C = $120 per motor
1 motor weighs 10 lbs
1 𝑚𝑜𝑡𝑜𝑟
1 cwt = 100 lbs x = 10 motors
10 𝑙𝑏𝑠
safety inventory level = 50%
h = 0.25
hC = 0.25 x $120 = $30
operating days = 365 days

© 2007 Pearson Education 14-35

 Solution: Eastern Electric
1) Let’s evaluate the proposal of AM Railroad.

10 𝑚𝑜𝑡𝑜𝑟𝑠
Using Qmin = 200 cwt x = 2,000 motors
1 𝑐𝑤𝑡
lead time (L) by rail = 5 days
1𝑐𝑤𝑡
shipment cost per motor = $6.50/cwt x
10 𝑚𝑜𝑡𝑜𝑟𝑠
= $0.65/motor

© 2007 Pearson Education 14-36

 Solution: Eastern Electric
𝑄 2,000
cycle inventory = = = 1,000 motors
2 2
safety inventory = 50% of replenishment lead time to
days of demand
𝐿+1 𝐷 5+1 120,000
= = ( )
2 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑑𝑎𝑦𝑠 2 365
safety inventory = 986.30  987 motors
𝐿
in-transit inventory = D ( )
𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑑𝑎𝑦𝑠
5
= 120,000 ( )
365
in-transit inventory = 1,643.83  1,644 motors
© 2007 Pearson Education 14-37
 Solution: Eastern Electric
total ave. inventory (Q) = CI + SI + II
= 1,000 + 987 + 1,644
total ave. inventory (Q) = 3,631 motors

Q = 3,631 > Qmin = 2,000; acceptable

annual holding cost = total ave. inventory x hC

= 3,631 x $30
annual holding cost = $108,930

© 2007 Pearson Education 14-38

 Solution: Eastern Electric
annual transportation cost = D x shipment cost
= 120,000 x $0.65
annual transportation cost = $78,000
total annual cost = inventory cost + transportation cost
= $108,930 + $78,000
total annual cost = $186,930

© 2007 Pearson Education 14-39

 Solution: Eastern Electric
2) Let’s evaluate the proposal of Northeast Trucking

10 𝑚𝑜𝑡𝑜𝑟𝑠
Using Qmin = 100 cwt x = 1,000 motors
1 𝑐𝑤𝑡
lead time (L) by truck = 3 days
1𝑐𝑤𝑡
shipment cost per motor = $7.50/cwt x
10 𝑚𝑜𝑡𝑜𝑟𝑠
= $0.75/motor

© 2007 Pearson Education 14-40

 Solution: Eastern Electric
𝑄 1,000
cycle inventory = = = 500 motors
2 2
𝐿+1 𝐷 3+1 120,000
safety inventory = = ( )
2 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑑𝑎𝑦𝑠 2 365
safety inventory = 657.53  658 motors
𝐿
in-transit inventory =D( )
𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑑𝑎𝑦𝑠
3
= 120,000 ( )
365
in-transit inventory = 986.30  987 motors

© 2007 Pearson Education 14-41

 Solution: Eastern Electric
total ave. inventory (Q) = CI + SI + II
= 500 + 658 + 987
total ave. inventory (Q) = 2,145 motors

Q = 2,145 > Qmin = 500; acceptable

annual holding cost = total ave. inventory x hC

= 2,145 x $30
annual holding cost = $64,350

© 2007 Pearson Education 14-42

 Solution: Eastern Electric
annual transportation cost = D x shipment cost
= 120,000 x $0.75
annual transportation cost = $90,000
total annual cost = inventory cost + transportation cost
= $64,350 + $90,000
total annual cost = $154,350

© 2007 Pearson Education 14-43

 Solution: Eastern Electric
3) Let’s evaluate the proposal of Golden Freightways @
minimum order of 50 cwt

10 𝑚𝑜𝑡𝑜𝑟𝑠
Using Qmin = 50 cwt x = 500 motors
1 𝑐𝑤𝑡
lead time (L) by truck = 3 days
1𝑐𝑤𝑡
shipment cost per motor = $8.00/cwt x
10 𝑚𝑜𝑡𝑜𝑟𝑠
© 2007 Pearson Education = $0.80/motor 14-44
 Solution: Eastern Electric
𝑄 500
cycle inventory = = =250 motors
2 2
safety inventory = 657.53  658 motors
in-transit inventory = 986.30  987 motors
total ave. inventory (Q) = CI + SI + II
= 250 + 658 + 987
total ave. inventory (Q) = 1,895 motors
Q = 1,895 > Qmin = 250; acceptable
annual holding cost = total ave. inventory x hC
= 1,895 x $30
annual holding cost = $56,850
© 2007 Pearson Education 14-45
 Solution: Eastern Electric
annual transportation cost = D x shipment cost
= 120,000 x $0.80
annual transportation cost = $96,000
total annual cost = inventory cost + transportation cost
= $56,850 + $96,000
total annual cost = $152,850

© 2007 Pearson Education 14-46

 Solution: Eastern Electric
4) Let’s evaluate the proposal of Golden Freightways @
minimum order of 150 cwt

10 𝑚𝑜𝑡𝑜𝑟𝑠
Using Qmin = 150 cwt x = 1,500 motors
1 𝑐𝑤𝑡
lead time (L) by truck = 3 days
1𝑐𝑤𝑡
shipment cost per motor = $6.00/cwt x
10 𝑚𝑜𝑡𝑜𝑟𝑠
= $0.60/motor
© 2007 Pearson Education 14-47
 Solution: Eastern Electric
𝑄 1,500
cycle inventory = = =750 motors
2 2
safety inventory = 657.53  658 motors
in-transit inventory = 986.30  987 motors
total ave. inventory (Q) = CI + SI + II
= 750 + 658 + 987
total ave. inventory (Q) = 2,395 motors
Q = 2,395 > Qmin = 750; acceptable
annual holding cost = total ave. inventory x hC
= 2,395 x $30
annual holding cost = $71,850
© 2007 Pearson Education 14-48
 Solution: Eastern Electric
annual transportation cost = D x shipment cost
= 120,000 x $0.60
annual transportation cost = $72,000
total annual cost = inventory cost + transportation cost
= $71,850 + $72,000
total annual cost = $143,850

© 2007 Pearson Education 14-49

 Solution: Eastern Electric
5) Let’s evaluate the proposal of Golden Freightways @
minimum order of 251 cwt

10 𝑚𝑜𝑡𝑜𝑟𝑠
Using Qmin = 251 cwt x = 2,510 motors
1 𝑐𝑤𝑡
lead time (L) by truck = 3 days
1𝑐𝑤𝑡
shipment cost per motor = $4.00/cwt x
10 𝑚𝑜𝑡𝑜𝑟𝑠
= $0.40/motor
© 2007 Pearson Education 14-50
 Solution: Eastern Electric
𝑄 2,510
cycle inventory = = =1,255 motors
2 2
safety inventory = 657.53  658 motors
in-transit inventory = 986.30  987 motors
total ave. inventory (Q) = CI + SI + II
= 1,255 + 658 + 987
total ave. inventory (Q) = 2, 900 motors
Q = 2,900 > Qmin = 2,510; acceptable
annual holding cost = total ave. inventory x hC
= 2,900 x $30
annual holding cost = $87,000
© 2007 Pearson Education 14-51
 Solution: Eastern Electric
annual transportation cost = D x shipment cost
= 120,000 x $0.40
annual transportation cost = $48,000
total annual cost = inventory cost + transportation cost
= $87,000 + $48,000
total annual cost = $135,000

© 2007 Pearson Education 14-52

 Solution: Eastern Electric
6) Let’s evaluate the new proposal of Golden
Freightways @ min order of 400 cwt for a discounted
price of $3.00/cwt
10 𝑚𝑜𝑡𝑜𝑟𝑠
Using Qmin = 400 cwt x = 4,000 motors
1 𝑐𝑤𝑡
lead time (L) by truck = 3 days
1𝑐𝑤𝑡
shipment cost per motor = $3.00/cwt x
10 𝑚𝑜𝑡𝑜𝑟𝑠
= $0.30/motor

© 2007 Pearson Education 14-53

 Solution: Eastern Electric
𝑄 4,000
cycle inventory = = =2,000 motors
2 2
safety inventory = 657.53  658 motors
in-transit inventory = 986.30  987 motors
total ave. inventory (Q) = CI + SI + II
= 2,0000 + 658 + 987
total ave. inventory (Q) = 3,645 motors

Q = 3,645 < Qmin = 4,000;

not acceptable and might be more costly
© 2007 Pearson Education 14-54
 Solution: Eastern Electric
annual holding cost = total ave. inventory x hC
= 3,645 x $30
annual holding cost = $109,350
annual transportation cost = D x shipment cost
= 120,000 x $0.30
annual transportation cost = $36,000
total annual cost = inventory cost + transportation cost
= $109,350 + $36,000
total annual cost = $145,350

© 2007 Pearson Education 14-55

 Solution: Eastern Electric
To summarize evaluation:

Shipment of more than 2,500 motors per lot is the best option
from Golden Freightways.
© 2007 Pearson Education 14-56