MA4850 Supply Chain &

Logistics Management

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 Lesson Overview
T1 Introduction T4 Warehousing, Packaging & Material Handling

T2.1 Forecasting Time Series T5.1 Transportation

T2.2 Forecasting Causal Models
T5.2 Transportation Costs & Logistics Network
T3.1 Inventory Management Introduction
T6.1 Supply Chain & Contracting
T3.2 EOQ Models
T6.2 Supply Chain & Product Architecture
T3.3 Newsvendor Model
T7 Global Supply Chain & Logistics
T3.4 QR Model

T3.5 Base Stock Policy T8 Supply Chain & Risk Management

T3.6 Inventory Management & Accounting T9 Information Technology

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 Topic 5.1
Transportation

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 Learning Objectives
By the end of this course, you should be able to:
• Describe transportation
• State the primary mode of transportation
• State the latest development of transportation
• Explain the key principles of transportation

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 Transportation

CSCMP, 2007, The 18th Annual

State of Logistics Report
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 Transport Industry Structure
Public

Government

Carrier
Consignee
Shipper and
(Receiver)
agents

Internet

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 Transportation Modes

Truck Rail

Air Water Pipeline

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 Relative Operating Characteristics by Mode

Operating
Rail Truck Water Pipeline Air
Characteristics
Speed 3 2 4 5 1
not so easy
Availability 2 1 4 5 to build 3

Dependability 3 2 4 1 5

Capability 2 3 1 5 4

Frequency 4 2 5 1 3

Composite Score 14 10 18 17 16

Lowest rank is best

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 Cost Structure of Different Transport Modes
Mode Fixed Cost Variable Cost

Air Low Highest

Truck Lowest Medium

Sea Medium Low

Rail High Low

Pipeline Highest Lowest

• Fixed cost due to require big land, more
time to build the pipeline

− Costs incurred even when company is not operating, including vehicles,

terminals, rights-of-way, etc
• Variable cost
− Costs that change proportionally to product shipment size, distance, or weight
− Typically measured in $/distance, $/weight or $/distance-weight
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 Transportation Cost
Freight Bill of USA (US $ billions)
1960 1970 1980 1990 2000 2007
Truck 32.3 62.5 155.3 270.1 481.0 671.0
Railroad 9.0 11.9 27.9 30.0 36.0 58.0
Water 3.4 5.3 15.3 20.1 26.0 38.0
Pipeline 0.9 1.4 7.6 8.3 9.0 10.0
Air 0.4 1.2 4.0 13.7 27.0 41.0
Other carriers 0.4 0.4 1.1 4.0 10.0 31.0
Other shipper cost 1.3 1.4 2.4 3.7 5.0 8.0
Grand total 47.8 83.9 213.7 350.8 594.0 857.0
GNP (trillions) 0.5 1,046 2,831 5,832 9,960 13,840
Grand total of GNP 9.00% 8.03% 7.55% 6.02% 5.92% 6.20%

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 Shipping Proportion by Mode
U.S. Domestic Shipments by Mode and Volume
Freight Volumes Mode Share
2003-2015
(millions of tons) Percent
Percent
2003 2015 2003 2015
Change
Truck 9,062 12,141 68.9% 69.8% 34.0%
Rail 1,700 2,166 12.9% 12.5% 27.4%

Rail intermodal 122 205 0.9% 1.2% 67.7%

Air 18 31 0.1% 0.2% 70.4%

Water 1,018 1,296 7.7% 7.4% 27.2%

Pipeline 1,238 1,556 9.4% 8.9% 25.7%

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 Typical Statistics

Air Truck Rail Pipeline Water

Distance (miles) 1000 300 500 300 1000

Capacity (tons) 10-200 2-15 50-12k N.A. 1-10k

Speed (miles/hour) 400 40 20 5 10

Cost (cents/ton-mile) 21.9 7.5 1.4 0.27 0.3

Energy (BTU/ton-mile) 42k 2.8k 670 490 680

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 Combining Transportation Modes
• Traditional carriers are firms that use only one basic transport mode
• Intermodal transportation combines two or more modes to provide an
integrated service at a lower total cost
• Non-operating intermediaries do not own or operate equipment but
integrate two or more modes for others

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 Coordinated Air-Truck
directly ship from flight to the truck, then
to ship to the next location

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 Coordinated Sea-Truck-Rail
popular in big country
MA4850: Supply Chain & Logistics Management
unload from sea, then load into
the truck, then transport to train.
after reaching the destination,
unload from train then can deliver
able to improve efficiency, reduce
transportation costs
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 Transshipment
Transshipment (or transshipment) is the shipment of goods or containers
to an intermediate destination, and then from there to another destination
SEA pros: ship no PORT LAND
need to travel
so far
e.g. shipment
from country
such as China,
then stack at Hinterland transport
Transhipment Stack the port, then (Rail, road, waterway)
transport to
other country
such as
Europe
e.g. from
malaysia
Outbound (export) Export

Import
Inbound (import)
e.g. from China / Vietnam
Container port / terminal throughput
(number of handled containers / year)

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 Typical Sea Ports
Container
Yard Yard
Quay Crane
Crane

Prime Mover
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 Transport Cost W.R.T Distance
• Cost per unit weight decreases as distance increases, also called
tapering principle
− Cost curve starts above zero because of fixed costs
− Cost rate decreases as distance increases due to variable expenses
like labor, fuel and maintenance etc.

Cost

Distance
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 Weight
• Cost per unit weight decreases as shipment size increases
• Small loads should be consolidated into larger loads to maximize scale
economies

Cost per pound

Weight of load
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 Product Density
• Cost per unit of weight declines as product density increases
• Vehicles are typically constrained more by cubic capacity than by weight
• Higher density products allow fixed transport costs to be spread over
more weight

Cost per pound

Product density
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 Stowability
• Odd package shapes and sizes can waste cubic capacity
• Items with rectangular shapes are easier to stow

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 Handling
• Special equipment may be needed to load and unload trucks, railcars,
or ships
• The way that products are grouped together in boxes or pallets will also
impact handling cost

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 Liability lower liability, lower transportation costs

• Products may be damaged during transportation

• Carriers may need to pay for liability insurance or accept financial
responsibility

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 Scope (Balance)
• Reverse product flow significantly reduces repositioning cost
• The greater the balance in the flow of products in both directions, the
cheaper the per unit transport cost

Forward flow

A B
Reverse flow

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 Transport Pricing
• Freight-on-board (or Free-on-board)
Transportation cost billed separately from product cost
• Delivered pricing
Seller includes transportation cost in pricing

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 Freight on Board (F.O.B)
F.O.B. origin: seller loads a carrier but assumes no further responsibility.
Buyer selects carrier and mode, pays transportation and assumes the risk
for in-transit loss or damage.
F.O.B. destination: seller arranges for transportation and adds charges to
the sales invoice. Title does not pass to the buyer until delivery is
completed. FOB Shipping Point

Title Transfer

Seller Buyer’s Goods Buyer

FOB Destination

Title Transfer

Seller Seller’s Goods Buyer

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 Transportation Heuristics
• Quantity principle: Individual shipments should be as large as the
carrier can legally transport in vehicle
• Tapering principle: Large shipments should be transported with
distances as long as possible

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 Summary
• Transportation is a critical part of any logistic system
• There are a wide variety of transportation modes with different
capabilities and cost structures
• There are some generally accepted heuristics for transportation

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Thank you

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