Supply Chain Management

Transportation in the Supply

Chain
 Factors Affecting Transportation
Decisions
 Carrier (party that moves or transports the product)
– Vehicle-related cost
– Fixed operating cost
– Trip-related cost

 Shipper (party that requires the movement of the

product between two points in the supply chain)
– Transportation cost
– Inventory cost
– Facility cost

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Transportation Modes

 Trucks
– TL
– LTL
 Rail
 Air
 Package Carriers
 Water
 Pipeline

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 Package Carriers
 Companies like FedEx, UPS, USPS, that carry small packages
ranging from letters to shipments of about 150 pounds.
 Expensive.
 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).

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

 Transportation cost and responsiveness trade-off

– Temporal aggregation

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!
 Eastern Electric Corporation
Alternative Transport Cycle Safety Transit Inventory Total
Cost Inventory Inventory Inventory Cost Cost
AM Rail $78,000 1,000 986 1,644 $108,900 $186,900
(2,000)
Northeast $90,000 500 658 986 $64,320 $154,320
Trucking
(1,000)
Golden $96,000 250 658 986 $56,820 $152,820
(500)
Golden $86,400 1,250 658 986 $86,820 $173,220
(2,500)
Golden $78,000 1,500 658 986 $94,320 $172,320
(3,000)
Golden $67,500 2,000 658 986 $109,320 $176,820
(4,000)

(120,000*3)/365 (120,000*5)/365
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 Physical 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.

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 Tailored Transportation
 Tailored Transportation is the use of different
transportation networks and modes based on customer
and product characteristics.
 W. W Grainger sells more than 200,000 MRO
products to both small contractors and very large
firms.
 Products vary in size and value and customers vary in
the quantity purchased, responsive required,
uncertainty of the orders and distance from Grainer
branches and DCs.

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 Tailored Transportation
 Given these differences, a firm like Grainger should
not design a common transportation network to meet
all needs.

A firm can meet customer needs at lower cost by

using tailored transportation to provide appropriate
choice based on customer and product
characteristics.

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Tailored transportation by customer
density and distance
Short distance Medium distance Long distance

High density Private fleet with Cross dock with Cross dock with
milk runs milk runs milk runs

Medium Third-party milk LTL Carrier LTL or Package

density runs carrier

Low density Third-party milk LTL or Package Package carrier

runs or LTL carrier carrier

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Tailored transportation by size of customer
 Firms must consider customer size and location when
designing transportation networks.
 Very large customers can be shipped using TL carrier,
whereas smaller customers will require an LTL carrier
or milk runs.
 When using milk runs, a shipper incurs two types of
costs:
 Transportation cost based on distance from warehouse
 Delivery cost based on number of deliveries.

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Tailored transportation by size of customer
 One option firms have is to charge a higher delivery cost
for small customers compared with large ones as the
delivery cost per unit is higher for large customers
compared to small ones.
 Second option is to tailor the milk run such a way that
the large customers should be visited with a higher
frequency than smaller ones.

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Tailored transportation by product demand and
value

Product High value Low value

Type
High Disaggregate the cycle inventory. Disaggregate all the
Aggregate the safety inventory. inventories and use
demand inexpensive mode
Inexpensive mode for replenishing transportation for
cycle inventory and fast mode when replenishment inventory.
using safety inventory

Low Aggregate all inventories. If needed Aggregate only safety

use fast mode of transportation for inventory. Use inexpensive
demand filling customer orders. mode transportation for
replenishing cycle
inventory.

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 Remarks

Tailored transportation based on customer

density and distance, customer size or product
demand and value allows a supply chain to
achieve appropriate responsiveness and cost

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Routing and Scheduling in Transportation
 Find the best routes and schedule to deliver goods to a
set of customers (with specified demands) from a
central depot using a fleet of (identical) vehicles.
 Typical objective when routing and scheduling the
vehicles is minimizing cost by decreasing the number
of vehicles needed, the total distance traveled as well
as eliminating service failures such as delay in
shipments.

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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.

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