Semester Assignment

Identify an organization of your choice and prepare

Designing Distribution Networks and
Applications to E-Business
the Supply Chain process of that organization. SCA
methods/ techniques used by the organization should
be discussed.
The pre and post application of SCA can be added.
Brief about the organization
A case about the organization with some data to
support the study.

DISTRIBUTION DISTRIBUTION
NAME SOME TYPES!!! NAME SOME TYPES!!!

– Wal-Mart
– Dell
– HP
– Direct to Customer –P&G
– Storage/ warehouse/ distributors
– Channels
– E-distribution –No intermediaries

The Role of Distribution Factors Influencing

in the Supply Chain Distribution Network Design
 Evaluation on two basis:
Distribution: the steps taken to move and store a – Customer needs that are met
– Cost of meeting customer needs
product from the supplier stage to the customer stage  Elements of customer service influenced by network structure:
in a supply chain – Response time
– Product variety
Distribution directly affects cost and the customer – Product availability
experience and therefore drives profitability – Customer experience: core as well as add ones like ambience, response……
– Time to market
Choice of distribution network can achieve supply – Order visibility
chain objectives from low cost to high responsiveness – Returnability
 Supply chain costs affected by network structure:
Examples: Wal-Mart, Dell, Proctor & Gamble (direct/ – Inventories
distributor both), Grainger (fast moving/ slow moving – Transportation
– Facilities and handling
are separated) – Information

1
 Inventory Costs and Number
Service and Number of Facilities of Facilities

Number of Inventory
Facilities Costs

Number of facilities
Response Time

Transportation Costs and Facility Costs and Number

Number of Facilities of Facilities

Transportation Facility
Costs Costs

• Inbound
Transportation
Cost
• Outbound
Transportation
Costs-normally
higher than
inbou
Number of facilities Number of facilities

Variation in Logistics Costs and Response Design Options for a

Time with Number of Facilities Distribution Network
Response Time Manufacturer Storage with Direct Shipping
Manufacturer Storage with Direct Shipping and In-
Total Logistics Costs=
Sum of inventory, transportation
Transit Merge
and facility cost Distributor Storage with Carrier Delivery
Distributor Storage with Last Mile Delivery
Manufacturer or Distributor Storage with Customer
Pickup
Retail Storage with Customer Pickup
Selecting a Distribution Network Design
Number of Facilities

2
 Manufacturer Storage with
Direct Shipping
Centralization case, High outbound
transportation cost; low demand with
unpredictable demand. More
customization; Low inventory costs (only
in case of aggregation);
Need for retailer only for order collection;
More variety/ choices available.
Manufacturer Storage with Direct
Shipping In-Transit Merge Network
Retailer
Merge combines orders from
different suppliers; customer
receives a single delivery
High value, customization
postponed; high uncertainty items,
increased coordination
Distributor Storage with
Carrier Delivery
Higher inventory at distributor but lesser than
retail network; Transportation Cost Saving;
Medium to fast moving items
Outbound orders to a single customer can be
bundled together
Real time visibility between customer and
warehouse needed
Performance Characteristics
 Elements of customer service influenced by network structure:
– Response time: Long response time
Manufacturer
– Product variety: Higher variety
– Product availability: Higher level of availability
Retailer – Customer experience: Good if single shipment from single manufacturer
– Time to market: fast as product available just after production
Drop Shipping – Order visibility: More difficult
– Returnability: Expensive and difficult
Customers  Supply chain costs affected by network structure:
– Inventories: Lower cost (aggregation)
– Transportation: Higher cost (distance and disaggregation)
Product Flow
– Facilities and handling: Lower facility costs
Information Flow – Information: More investment
Performance Characteristics
Factories  Elements of customer service influenced by network structure:
– Response time: Marginally higher than drop shipping
– Product variety: Similar to drop shipping.
– Product availability: Similar to drop shipping.
In-Transit Merge by – Customer experience: Better than drop shipping as only single delivery
Carrier:
Response time little higher than – Time to market: Similar to drop shipping
direct shipping – Order visibility: Similar to drop shipping.
– Return-ability: Expensive and difficult
Customers  Supply chain costs affected by network structure:
– Inventories: Similar as drop shipping Lower cost (aggregation)
– Transportation: Somewhat lower
Product Flow
– Facilities and handling: Handling costs are higher
Information Flow
– Information: More investment than drop shopping
Suitable only in case of few suppliers
Performance Characteristics
 Elements of customer service influenced by network structure:
– Response time: Faster than manufacture storage
Factories
– Product variety: Lower than manu. storg
– Product availability: Higher cost for same level of availability
– Customer experience: Better
Warehouse Storage by
– Time to market: Higher than manu. storg
Distributor/Retailer
– Order visibility: Easier
– Return-ability: Easier
 Supply chain costs affected by network structure:
– Inventories: Higher
Customers
– Transportation: Lower
Product Flow
– Facilities and handling: Somewhat higher
Information Flow
– Information: Simper than manu. Storg.
Response time better due to nearness to customer;
easy aggregation
3
 Distributor Storage with
Last Mile Delivery Performance Characteristics
Factories  Elements of customer service influenced by network structure:
– Response time: Fast/ quick
– Product variety: lesser
– Product availability: expensive
Distributor/Retailer – Customer experience: Good
Warehouse: (Auto spare – Time to market: Slightly higher
parts stores/ dealers)
– Order visibility: easier
– Return-ability: easier
Customers  Supply chain costs affected by network structure:
Delivery at customers home; needs – Inventories: Higher than distributor storage
more outlets/ warehouses as delivery
Product Flow – Transportation: Very high due to minimal scale economy
place needs to be nearer to customers
place; requires higher inventory; Information Flow – Facilities and handling: Higher
Used for fast moving products, with
– Information: Similar to distributor storage
disaggregation not leading to significant
increase in cost.

Manufacturer or Distributor Storage

with Customer Pickup
Cross Dock DC
Retailer
Transportation costs are lesser that package
carrier, aggregation for each pick site possible,
processing costs are higher, better for fast
moving items
Performance Characteristics
 Elements of customer service influenced by network structure:
Factories
– Response time: Similar to package delivery, same day possible
– Product variety: Similar to previous
– Product availability: similar
– Customer experience: Lower then prior due to lack of home delivery
– Time to market: same as manu. storage
– Order visibility: Difficult
– Return-ability: Easier
Pickup Sites  Supply chain costs affected by network structure:
– Inventories: Can match any option
– Transportation: Lower
Customers
– Facilities and handling: If new facilities made higher cost if existing used cost
Customer Flow lower. Handling cost higher
Product Flow – Information: more investment
Information Flow

Comparative Performance of Delivery

Retail store with customer pick up Network Designs
Retail Storage Manufacturer Manufacturer Distributor Storage Distributor Manufacturer
 Elements of customer service influenced by network structure: with Customer
Pickup
Storage with Direct
Shipping
Storage with In-
Transit Merge
with Package
Carrier Delivery
storage with last
mile delivery
storage with pickup

– Response time: Immediate/ same day pickup possible Response Time 1 4 4 3 2 4

– Product variety: lowest
Product Variety
– Product availability: expensive 4 1 1 2 3 1

– Customer experience: customer dependent Product Availability

4 1 1 2 3 1
– Time to market: Highest amongst all Customer Experience Varies from
4 3 2 1 5
1-5
– Order visibility: Trivial for instore but important for online 5
Order Visibility 1 4 3 2 6
– Return-ability: Easier
Returnability
 Supply chain costs affected by network structure: 1 5 5 4 3 2

– Inventories: Highest Inventory 4 1 1 2 3 1

– Transportation: Lowest Transportation 1 4 3 2 5 1
– Facilities and handling: Higher than other options. Handling cost higher
Facility & Handling 6 1 2 3 4 5
– Information: some investment for online and phone orders
Information 1 4 4 3 2 5
1 the strongest and 6 the weakest

4
Performance of Delivery Networks for Different E-Business and the Distribution
Product/Customer Characteristics Network
Retail Storage Manufacturer Manufacturer Distributor Storage Distributor storage Manufacturer
with Storage with Storage with In- with Package Carrier with last mile delivery storage with
Customer
Pickup
Direct Shipping Transit Merge Delivery pickup
Impact of E-Business on Customer Service
High demand product
+2 -2 -1 0 +1 -1 Impact of E-Business on Cost
Medium demand product
+1 -1 0 +1 0 0
Low demand product
-1 +1 0 +1 -1 +1
Very low demand product
-2 +2 +1 0 -2 +1
Many product sources
+1 -1 -1 +2 +1 0
High product value
-1 +2 +1 +1 0 -2
Quick desired response
+2 -2 -2 -1 +1 -2
High product variety
-1 +2 0 +1 0 +2
Low customer effort
-2 +1 +2 +2 +2 -1

+2 most suitable; +1 somewhat suitable; 0- Neutral; -1: somewhat unsuitable; -2: very unsuitable

Impact of E-Business on
Customer Service Impact of E-Business on Cost
Response time: High for manufactured products/ Low for
information goods Inventory
Product variety: High Facilities
Product Availability: Improved Transportation
Customer experience- product visualization after Information
customization; increased now due to AI; ML
Time to market
Order Visibility
Returnability-increased reverse flow
Direct Sales to Customers-increased revenue!!
Flexible Pricing, Product Portfolio, and Promotions
Efficient Funds Transfer

Reading Assignment Distribution Networks in Practice

DELL-PC Industry The ownership structure of the distribution network
can have as big as an impact as the type of distribution
AMAZON-BOOKS network
The choice of a distribution network has very long-
term consequences
PEAPOD-GROCERIES
Consider whether an exclusive distribution strategy is
advantageous
NETFLIX Product, price, commoditization, and criticality have
an impact on the type of distribution system preferred
by customers

5
 Network Design Decisions The Cost-Response Time Frontier
Facility role
Local FG
High
Facility location Mix

Capacity allocation
Regional FG

Local WIP
Market and supply allocation Cost Central FG

Central WIP

Central Raw Material and Custom production

Custom production with raw material at suppliers

Low
Low Response Time High

Framework for Network Design

Cost Buildup as a Function of Facilities
Decisions
Total Costs
Phase I – Supply Chain Strategy
Phase II – Regional Facility Configuration
Cost of Operations

Percent Service
Level Within Phase III – Desirable Sites
Promised Time
Phase IV – Location Choices
Facilities
Inventory
Transportation
Labor

Number of Facilities

Market Requirements Operations Requirements

Suitability of Site: Manufacturing/ Service Land and facilities investment:
– Infrastructure support needed
Image of the location: Important for Services Resource Costs:
– Labour
– Energy
Service Level:
– Transportation
– Type of service: Emergency; High contact/ Low
contact facility Community Factors: social, political and
– Speed; Dependability: Customer/ Supplier economic environment

6
 Factors in Heavy Manufacturing
Location Factors in Light Industry Location
 Construction costs Transportation costs
 Land costs Proximity to markets
 Raw material and finished goods shipment Frequency of delivery required by customer
modes Land costs
 Proximity to raw materials Easily accessible geographic region
 Utilities Education and training capabilities
 Labor availability

A Framework for
Factors in Retail Location Network Design Decisions
 Proximity to customers Competitive STRATEGY GLOBAL COMPETITION
PHASE I
Supply Chain
 Location is everything INTERNAL CONSTRAINTS
Capital, growth strategy,
Strategy TARIFFS AND TAX
INCENTIVES
existing network

PRODUCTION TECHNOLOGIES REGIONAL DEMAND

Cost, economies of Scale/Scope PHASE II Size, growth, homogeneity,
impact, support required, flexibility Regional Facility local specifications
Configuration
COMPETITIVE
ENVIRONMENT POLITICAL, EXCHANGE
RATE AND DEMAND RISK

PHASE III
Desirable Sites AVAILABLE
INFRASTRUCTURE
PRODUCTION METHODS
Skill needs, response time

FACTOR COSTS PHASE IV LOGISTICS COSTS

Labor, materials, site specific Location Choices Transport, inventory, coordination

Center-of-Gravity Technique Load-Distance Technique

 Locate facility at center of geographic area
 Based on weight and distance traveled
establish grid-map of area
 Identify coordinates and weights shipped Compute (Load x Distance) for each site
for each location Choose site with lowest (Load x Distance)
Distance can be actual or straight-line

7
 Load-Distance Calculations Gravity Methods for Location
n Ton Mile-Center Solution
LD =  li di – x,y: Warehouse Coordinates
– xn, yn : Coordinates of delivery
d n( x  x n)  ( y  y n)

2 2

i=1 x
 Dn F d
k
location n n n
where,
LD = load-distance value – dn : Distance to delivery x n 1 n

F
 Dn d
k
li = load expressed as a weight, number of trips or units
location n n
being shipped from proposed site and location i – Dn : Annual tonnage to delivery n 1 n

di = distance between proposed site and location i location n y

 Dn F d
k
n n
di (straight line) = √ (xi - x)2 + (yi - y)2 – Fn : Cost of shipping one unit
y n 1 n
per mile/ km
where, F
 Dn d
k

(x,y) = coordinates of proposed site Min  d n Dn F n n 1

n

n
(xi , yi) = coordinates of existing facility
di (rectilinear distance) = (xi – x) + (yi – y)

Gravity Methods for Location

1. For each supply source or market n; evaluate dn as
defined in the previous equation
2. Obtain a new location (x’, y’) for the facility, where
the values are obtained as per previous equation.
3. If the new location (x’, y’) is almost the same as (x, y)
stop. Otherwise, set (x, y) = (x’, y’) and go to step 1.

 The Burger Doodle restaurant chain purchases ingredients from

four different food suppliers. The company wants to construct a
new central distribution centre to process and package the
ingredients before shipping them to their various restaurants. The
supplies transport ingredient items in 40-foot truck trailers, each
Coordinate with a capacity of 38,000 lb. The locations of four suppliers A, B,
Sources/ $/Ton Mile Tons s C and D and the annual number of trailer loads that will be
transported to the distribution centre are shown in the following
Markets Fn Dn xn yn
table:
Buffalo 0.90 500 700 1200
Sources Memphis 0.95 300 250 600 A B C D
St. Louis 0.85 700 225 825 X – coordinate 200 100 250 500
Atlanta 1.50 225 600 500 Y – coordinate 200 500 600 300
Boston 1.50 150 1050 1200 Annual no. of trailer loads 75 105 135 60
Markets Jacksonville 1.50 250 800 300 that will be transported
Philadelphia 1.50 175 925 975
» Using centre of gravity method, determine a possible
New York 1.50 300 1000 1080
location for the distribution centre

8
The management of Burger doodle was not
convinced with location obtained in Part (a).
Hence they further analysed and identified three
new sites. Now, they want to evaluate these  A manufacturer of a certain industrial component is interested in
locating a new facility in a target market and would like to know the
three different sites it has identified for its new most appropriate place in the target market. There are four supply
points: A, B, C and D in the locality that will provide key inputs to
distribution centre relative to the four suppliers the new facility, which are located at the following coordinates:
(125, 550), (350, 400), (450, 125) and (700, 300) respectively.
A,B,C and D mentioned above. The coordinates Similarly, the annual supply from these four points to the proposed
of the new sites under consideration are as facility is 200, 450, 175 and 150 respectively.
Site 1 Site 2 Site 3  Show them in a two dimensional grid and identify the location based
follows on the centre of gravity method. Unfortunately, the location
identified from the above method is not feasible. Hence to locate the
X - coordinate 360 420 250 new facility, the manufacturer has identified four possible alternative
locations: 1, 2, 3, and 4. the coordinates for them are (300, 500),
(200, 500), (500, 350) and (400, 200) respectively. Represent the
Y – coordinate 180 450 400 whole in a two-dimensional grid and identify the best location for
the proposed new facility using a suitable location decision method.
Make necessary assumptions and highlight the same
– Identify the best site based on the load distance
method.

Demand Allocation Model Locating Multiple Facilities

 Which market is served by 1. Find the desired number of locations and arbitrarily
which plant? n m
Min cij xij select an initial set from those available
 Which supply sources are i 1 j 1
used by a plant? s.t. 2. Assign each customer to its nearest facility
xij = Quantity shipped from n 3. Calculate the total cost, which is the sum of weights
plant site i to customer j x  D
i 1
ij j
, j  1,..., m
moved multiplied by distances through which they
n= number of factory locations m
are moved
m= number of market or x  K ij i
, i  1,..., n
demand points j 1 4. If the solution is not acceptable, change one of the
Dj=Annual demand from market x ij
0 locations and repeat the process from step 2,
j otherwise continue with step 5
Ki=capacity of factory I
Cij=cost of producing and 5. Calculate the capacity needed by each facility and
shipping one unit from stop
factory I to market j

 Eight areas are to be served by two depots. Limited access

means that only four areas are suitable for depot. The distances
between areas W(i) are given in the table. The company is Single Median Problem
willing to pay upto 800 units for distribution, with the
conditions that no depot should meet a total demand of more Calculate the minimum distance between nodes
than 90 units. Find a suitable combination of two depot and put these in a distance matrix
location.
Multiply each column, i, of this matrix by the
Area A B C D Wi
demand in the town i.
A 0 6 20 7 10
B 6 0 12 15 20
Add all the terms in each row
C 20 12 0 4 15 The single median is identified by the row with
D 7 15 4 0 30 the smallest sum.
E 12 8 10 11 5
F 22 12 17 27 25
G 30 24 32 6 10
H 6 5 9 11 20

9
 Set Covering Algorithm
 The following table shows a matrix of travel times between
1. Calculate the minimum distance between nodes and put these in a distance possible locations for ambulance stations and areas in the city.
matrix
Government policy suggests that ambulance stations must be at
2. create a coverage matrix. This is made up of zeros and ones with
1. Element=1 if the distance is less than the specified maximum most 30 minutes away from all population areas. Find the best
2. Element=0 if the the distance is more than the specified maximum location for achieving this:
3. If there is one column with all zeros, stop. No feasible solution exists and
the maximum allowed distance must be increased or more potential
locations added. Areas
4. If any column has only a single “1” the row containing this “1” must
receive a facility. Add the row to the list of facilities and then eliminate the A B C D E F G

possible locations
row and all column with “1” in this row from the matrix. V 5 11 20 33 27 36 33
5. If any row is dominated by another (i.e. the entry is always ≤ the entries in W 33 35 17 10 53 41 18
another row) remove the dominated row.
6. If any column dominates another column(i.e. the entry is always ≥ the X 18 39 41 12 33 22 37
entries in another column) remove the dominating column. Y 13 6 43 25 38 33 20
7. Repeat step 4-6 until Z 35 47 41 44 15 51 43
1. The coverage becomes complete-optimal solution is found
2. No rows or columns are eliminated during a pass-obtain a solution by inspection.

Models for Facility Location and

Capacity Allocation Network Optimization Models
Phase II
Allocating demand to production facilities
– Capacitated Plant location model
Locating facilities and allocating capacity
Phase III
– Gravity location models Key Costs:

• Fixed facility cost

• Transportation cost
• Production cost
• Inventory cost
• Coordination cost

Which plants to establish? How to configure the network?

Plant Location with Multiple Sourcing Cost and Demand Data

yi = 1 if plant is located at site i,
n n m
0 otherwise
xij = Quantity shipped from Min f y   c x ij ij
Inputs - Costs, Capacities, Demands
i i Demand Region
i 1 i 1 j 1
plant site i to customer j Production and Transportation Cost per 1,000,000 Units Fixed
Supply Region N. America S. America Europe Asia Africa
Low Fixed High
Cost ($) Capacity Cost ($) Capacity
n= number of factory locations s.t. N. America 81 92 101 130 115 6,000 10 9,000 20
S. America 117 77 108 98 100 4,500 10 6,750 20
m= number of market or n

 x  D , j  1,...,m
Europe 102 105 95 119 111 6,500 10 9,750 20
demand points ij j (5.1) Asia
Africa
115
142
125
100
90
103
59
105
74
71
4,100
4,000
10 6,150
10 6,000
20
20
Dj=Annual demand from market i 1 Demand 12 8 14 16 7
j n

Ki=capacity of factory i  x  K y , i  1,...,n (5.2)

j 1
ij i i
Cij=cost of producing and
m
shipping one unit from
factory i to market j  y  k ; y {0,1}
i 1
i i
(5.3)
fi = annualized fixed cost of
keeping plant “i”open

10
 Excel Spreadsheet Area for Constraints and Objective
Decision Variables Function
Inputs - Costs, Capacities, Demands
Demand Region
Production and Transportation Cost per 1,000,000 Units Fixed Low Fixed High
Supply Region N. America S. America Europe Asia Africa Cost ($) Capacity Cost ($) Capacity
N. America 81 92 101 130 115 6,000 10 9,000 20
S. America 117 77 108 98 100 4,500 10 6,750 20
Europe 102 105 95 119 111 6,500 10 9,750 20
Asia 115 125 90 59 74 4,100 10 6,150 20
Africa 142 100 103 105 71 4,000 10 6,000 20
Demand 12 8 14 16 7

Decision Variables
Small Large
Demand Region - Production Allocation (1000 Units) Plants Plants Total
Supply Region N. America S. America Europe Asia Africa (1=open) (1=open) Plants
N. America 0 0 0 0 0 0 0 0
S. America 0 0 0 0 0 0 0 0
Europe 0 0 0 0 0 0 0 0
Asia 0 0 0 0 0 0 0 0
Africa 0 0 0 0 0 0 0 0

Invoking Solver
Capacitated Plant Location Model

Some alternative scenarios to try Global Location Factors

 Raw material availability
 Number and proximity of
suppliers
1. What if a plant must be built in Europe? In this case add the
 Transportation and
constraint I16 ≥ 1 in Solver and rerun.
2. What if plants must be built in every market? In this case, we need to add distribution system
constraints I14:18 ≥ 1 in Solver and rerun.  Labor cost and education
3. What if Only 80% of Asia Demand and 75% of Africa Demand is met? (first try
 Available technology
with the constraint for having all >= )
 Commercial travel
 Technical expertise
 Cross-border trade
regulations
 Group trade agreements
 Government stability
 Government regulations
 Political and economic
systems
 Economic stability and
growth
 Exchange rates
 Culture
 Climate
 Export import
regulations, duties and
tariffs

11
 Regional Location Factors Regional Location Factors (cont.)
Labor (availability, Modes and quality of Business climate Infrastructure (e.g.,
education, cost, and transportation Community services roads, water, sewers)
unions) Transportation costs Incentive packages Quality of life
Proximity of customers Community Government regulations Taxes
Number of customers government Local Environmental Availability of sites
Construction/leasing business regulations regulations Financial services
costs Government services Raw material Community
Land cost (e.g., Chamber of availability inducements
Commerce)
Commercial travel Proximity of
Climate suppliers
Education system

Location Incentives
 Tax credits
 Relaxed government regulation
 Job training
Transportation in a Supply Chain
 Infrastructure improvement
 Money

Factors Affecting
Transportation Decisions Transportation Management
Carrier (party that moves or transports the product) Transportation happens to be the most fundamental
– Vehicle-related cost part of logistic management. Transport costs include
– Fixed operating cost all costs associated with movement of products from
– Trip-related cost one location to another.
Shipper (party that requires the movement of the The average transport costs ranges from 5% to 6% of
product between two points in the supply chain) the recommended retail price of the product.
– Transportation cost
– Inventory cost Transportation is the movement of products, materials
– Facility cost and services from one area to another, both inbound
and outbound.

12
 Modes of Transportation - Global
Transportation Management Supply Chain
 Road (Trucks – Truck Load & Less than Truck Load)
1. Mode of transports
 Rail
2. Method of selection
3. Transportation costs  Air
4. Fleet sizing and configuration
 Package Carriers
5. Routing and scheduling
 Water

 Pipeline

Road – TL & LTL

Road – TL & LTL You can either use your own vehicles, or a carrier. If you operate your own
vehicles, you will need to consider licenses, fuel costs, regulations, driver training
Road transport can be the most flexible option for your international business, and tax.
especially within the EU. The motorway network is good and crossing national
 Truckload shipping:
borders is usually quick and efficient.
– large amounts of homogeneous cargo; minimizes travel time
 Advantages: – Fill an entire semi-trailer or intermodal container;
– relatively low cost – Lower fixed cost; Economies of scale viz a viz distance travelled
– extensive road networks – A truckload carrier is a trucking company that generally contracts an entire trailer-load to a
single customer
– Schedule & track
– consignments can be secure and private  Less than truckload (LTL) shipping:
– The transportation of relatively small freight; consolidation is the key
– Door to door delivery
– The alternatives to LTL carriers are parcel carriers or full truckload carriers.
 Disadvantages: – Parcel carriers usually handle small packages and freight that can be broken down into units
– Long distances overland can take more time less than 150 pounds (68 kg)
– Traffic delays and breakdowns  Different types of carrier, include:
– Couriers
– Risk of goods being damaged
– Hauliers
– Toll charges are high in some countries
– Freight forwarders
– Different road and traffic regulations

Rails Rails
Rail transport is a cost-effective and efficient way to move your
goods. These are the conditions under which rail transport is undertaken,
 Advantages: including:
1) Fuel Efficiency
2) Manpower efficiency
 Classification of dangerous goods
3) Land-use efficiency  Dangerous goods lists and any special provisions or exemptions
4) Speed
5) Safety  Testing and use of packaging, intermediate bulk containers, large packaging
and tanks
• Disadvantages:
1) Cost & Maintenance
 Procedures relating to the consignment
2) Inconvenience  Conditions concerning the conditions of carriage, loading, unloading and
3) Inflexible handling
4) Expensive than road transport (total)
5) Mechanical failure or Industrial an disrupt services
6) Adding to costs and affecting delivery schedules

13
 Air Water
Air transport offers numerous advantages for international trade,
depending on the requirements of the organization. If your business needs to transport large quantities but there is no
pressure to deliver quickly, shipping by sea may be suitable.
 Advantages:
– Speed and Frequency  Advantages:
– Less Packing Required – Ship can carry large volumes at low costs
– Shipping containers can also be used for further
– High levels of security for sensitive items transportation by road or rail
– Wide range of goods – Dominant in global trade (autos, grain, apparel,
etc.)
 Disadvantages:  Disadvantages:
– Air transport can involve higher costs than other options, and is not suitable for – Limited to certain geographic areas
all goods – Routes and timetables are usually inflexible
– Flights are subject to delay or cancellation – Tracking your goods’ progress is difficult
– Pay Taxes at each airport you use – To pay port duties and taxes
– Further transportation overland
– Fuel and currency surcharges will be added to freight costs
– Basic freight rates are subject to fuel and
– Further transportation may be needed currency surcharges

Pipeline
Pipeline transport is the transportation of goods through a pipe. Liquids and
gases are transported in pipelines and any chemically stable substance can be sent
Pipeline
through a pipeline.
Uses of Pipeline:
 Advantages:
– They are ideally suited to transport the liquids
– Sewage, slurry, water
and gases. – Beer pipelines
– Pipelines can be laid through difficult terrains as – Transporting crude petroleum and refined petroleum product
well as under water.
including fuels
– It involves very low energy consumption.
– It needs very little maintenance. – Oil, natural gas, and biofuels
– Pipelines arc safe, accident-free and – Pneumatic tubes using compressed air can be used to transport solid
environmental friendly. capsules
 Disadvantages:
– It is not flexible, i.e., it can be used only for a
few fixed points. Types of Pipeline:
– Its capacity cannot be increased once it is laid. – Gathering pipelines
– It is difficult to make security arrangements for
pipelines. – Transportation pipelines
– Underground pipelines cannot be easily repaired – Distribution pipelines
and detection of leakage is also difficult.

Intermodal Package Carriers

 Companies like FedEx, UPS, USPS, that
 Use of more than one mode of transportation for carry small packages ranging from letters
move a shipment to its destination to shipments of about 150 pounds
 Most common example: rail/truck
 Expensive
 Also water/rail/truck or water/truck
 Grown considerably with increased use of  Rapid and reliable delivery
containers
 Increased global trade has also increased use of  Small and time-sensitive shipments
intermodal transportation
 Preferred mode for e-businesses (e.g.,
 More convenient for shippers (one entity provides Amazon, Dell, McMaster-Carr)
the complete service)
 Key issue involves the exchange of information to  Consolidation of shipments (especially
facilitate transfer between different transport modes important for package carriers that use air
as a primary method of transport)

14
 Selection of transport
Roles of transportation - Global Supply
Chain
 International trade is becoming a bigger
part of the world's economic activity.

 Any supply chains success is closely

linked to the appropriate use of
transportation.

 Supply chain also use responsive

transportation to centralize inventories
and operate with fewer facilities

Factors (and Parties) Affecting Transportation Design Options for a Transportation

Decisions
Network
 What do you want to distribute?
– Size and weight will affect the cost.
 Direct shipping network

 How quickly does the product need to reach its  Direct shipping with milk runs
destination?
– This will affect which type of delivery service you use
and the cost - sending goods by air is quicker but  All shipments via central DC
significantly more expensive than by sea.

 Where do the goods need to go?  Shipping via DC using milk runs
– For example, Europe has a large rail and inland
waterway network, but you may encounter problems if
 Tailored network
the destination is especially remote.

Direct Shipment Network Direct Shipping with Milk Runs

Elimination of intermediate warehouses
Simple operation
Shipment decision is local
Decision on one shipment does not effect other
shipments
Suitable when demand at buyers location is near
optimal replenishment lot sizes are close to TL
Single supplier to multiple retailers or multiple
supplier to single retailers
It lowers the cost by consloidating shipments of
multiple locations
Suitable when very frequent small deliveries are to be
made on a regular basis and either a set of suppliers or
a set of retailers are in geographic proximity
Toyotas JIT manufacturing system in Japan and US

15
 Shipping via DC using Milk
All Shipments via Central DC Runs
Buyer divides locations by geographic region and a DC is When lot sizes to be delivered to each buyer are small
built for each region
Supplier sends shipments to DC and buyer receives Reduce outbound transp. cost by consolidating small
shipments from DC shipments
DC stores inventory and also acts as an transfer location 7-11 , Japan crossdocks deliveries from its fresh food
It allows SC to have economies of scale for inbound side suppliers at its DCs and sends out milk runs to retail
W.W. Grainger has its suppliers ship products to one of
nine DCs which in turn replenish their almost 400 outlets
branches
Cross Docking is suitable for products with large
predictable demands and DCs should be located at such a
place that gives economies of scale in inbound and
outbound sides

Pros and Cons

Making Transportation Decisions in Practice
Network Structure Pros Cons
Direct shipping No intermediate High inv.
Align transportation strategy
warehouse
Direct shipping with Lower transp. Cost Inc. coordination with competitive strategy
milk runs for small lots complexity Consider both in-house and
All shipments via Lower inbound Inc. inv. and outsourced transportation
central DC with inv. transp. cost handling cost at DC
storage Design a transportation network
All shipments via Very low inv, low Inc. coordination that can handle e-commerce
central DC with transp cost complexity Use technology to improve
cross-dock transportation performance
Shipping via DC Lower outbound Further increase in
using milk runs transp. cost for small coordination Design flexibility into the
lots complexity transportation network

Trans. and Inv. Cost tradeoff:

Trade-offs in Transportation Design Choice of transportation mode
 Both planning & operational decision
Transportation and inventory cost trade-off
 Cheaper transp. mode has long lead times and larger
– Choice of transportation mode minimum shipping requirements resulting in higher levels of
– Inventory aggregation inventory
Transportation cost and responsiveness trade-off  Vice versa is true
Size Lot Safety On-Transit Transportation Transportation
Inventory Inventory Cost time Cost
Rail 5 5 5 2 5
TL 4 4 4 3 3
LTL 3 3 3 4 4
Package 1 1 1 6 1
Air 2 2 2 5 2
Water 6 6 6 1 6

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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
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

Trade-offs Between Transportation

Cost and Customer Responsiveness Trade Off
 Temporal aggregation is the process of combining orders
across time  All orders are shipped using LTL at transportation charge of
$100+0.01x where x is the number of pounds of material
 Temporal aggregation reduces transportation cost because it
shipped on the truck. Currently the company ships the material
results in larger shipments and reduces variation in shipment
on the day it is received. Allowing for two days in transit,
sizes
allows the company to achieve response time of two days.
 However, temporal aggregation reduces customer
 The manager also wants to explore the customer response for
responsiveness
four days response. Identify the cost advantage of increasing
Conditions Favoring Aggregation/ Disaggregation
the response time, IF ANY?
Aggregate Disaggregate
Transport Coat Low High
Demand Uncertainty High Low
Holding cost High Low
Customer Order size Large Small

Tailored Transportation Customer Density and distance

The use of different transportation networks and
modes based on customer and product characteristics Short Distance Medium Distance Long Distance
Factors affecting tailoring: High Density Private fleet with Cross dock with Cross dock with
– Customer distance and density Milk runs Milk runs Milk runs
– Customer size Medium Third party milk runs LTL carrier LTL or package
– Product demand and value Density carrier
Low Density Third party milk runs or LTL LTL or package Package carrier
carrier carrier

17
 Demand and Value Role of IT in Transportation
Product High Value Low Value The complexity of transportation decisions demands
Type
use of IT systems
High Disaggregate cycle inventory. Disaggregate all invent.
Demand Aggregate safety inventory. and use inexpensive mode of transp. IT software can assist in:
Inexpensive mode of for replenishment – Identification of optimal routes by minimizing costs subject
transportation for replenishing cycle to delivery constraints
inventory and fast mode when using
– Optimal fleet utilization
safety inventory
Low Aggregate all invent. If needed, use Aggregate only safety inv. use – GPS applications
Demand fast mode of transp. For filling inexpensive mode of transp. For
customer orders replenishing cycle inv.

Making Transportation
Risk Management in Transportation Decisions in Practice
Three main risks to be considered in transportation Align transportation strategy with competitive
are: strategy
– Risk that the shipment is delayed
– Risk of disruptions Consider both in-house and outsourced transportation
– Risk of hazardous material Design a transportation network that can handle
Risk mitigation strategies: e-commerce
– Decrease the probability of disruptions Use technology to improve transportation
– Alternative routings performance
– In case of hazardous materials the use of modified
containers, low-risk transportation models, modification of
Design flexibility into the transportation network
physical and chemical properties can prove to be effective

Challenges Plant Location with Multiple Sourcing

or Capacitated Plant Location Model
 Demographic trends yi = 1 if plant is located at site i,
n n m
0 otherwise
 Economic circumstances xij = Quantity shipped from Min f y   c x ij ij
i i
i 1 i 1 j 1
 Connectivity of existing networks
plant site i to customer j
n= number of factory locations s.t.
 Environmental issues m= number of market or n

 Existing transport infrastructure capacity demand points  x  D , j  1,...,m

i 1
ij j (5.1)
Dj=Annual demand from market
 Environmental issues j n

 Travel patterns and trip rates Ki=capacity of factory i  x  K y , i  1,...,n (5.2)

j 1
ij i i
 Air quality and noise pollution Cij=cost of producing and
m
shipping one unit from
 Socio-economic profile factory i to market j  y  k ; y {0,1}
i 1
i i
(5.3)
fi = annualized fixed cost of
keeping plant “i”open

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 Inputs - Costs, Capacities, Demands
Demand Region
Production and Transportation Cost per
1,000,000 Units
Supply N. S. Fixed Low Fixed High
Region America America Europe Asia Africa Cost ($) Capacity Cost ($) Capacity
N.
America 81 92 101 130 115 6,000 10 9,000 20
S.
America 117 77 108 98 100 4,500 10 6,750 20

Europe 102 105 95 119 111 6,500 10 9,750 20

Asia 115 125 90 59 74 4,100 10 6,150 20

Africa 142 100 103 105 71 4,000 10 6,000 20

Demand 12 8 14 16 7

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