Networking & Transportation

Logistics Strategy Triangle

Inventory Strategy
 Forecasting
Transport Strategy
 Storage fundamentals
 Transport fundamentals
 Inventory decisions
 Purchasing and supply  Transport decisions
scheduling decisions
Customer
 Storage decisions
service goals
 The product
 Logistics service
 Information sys.

Location Strategy
 Location decisions
 The network planning process

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 Facilities & Location
To improve responsiveness /service
level
To reduce costs significantly
Managing Inventories efficiently
No of Facilities

Responsiveness

No of Facilities
Response Time

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Transportation

Inventory Costs
Facility Costs
Costs

No of Facilities No of Facilities No of Facilities

Total Costs

F
I
T

No of Facilities
4/17/2023 4
 Response Time

Total Logistics Cost

No of Facilities
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 Design Options – For Distribution Network
Manufacturer Storage with Direct Shipping
# Direct shipping to the customer – without any retailer
# Inventories are managed by the manufacturer (VMI)
# Information direct from customer
# Suitable for stable demand
# Higher order visibility is required

Manufacturer Storage with Direct Shipping and In-transit merge

# Orders/parts from different locations are consolidated and delivered as single
shipment
# Transportation costs are lower due to consolidation
# Very much suitable for high value items where demand forecasting is difficult

Distributor Storage with Carrier Delivery

# Inventory is held by distributors/retailers in intermediate warehouses
# Distributor storage is suitable for higher demand
# Reduction in transportation costs
# Responsiveness is higher

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 Distributor Storage with Last Mile delivery
# Distributor/retailer delivering the product to the customer’s home instead of using a
carrier
# Requires high levels of inventory – aggregation is low
# Transportation costs are higher

Distributor Storage with Consumer pickup

# Inventory stored at the manufacturer/distributor warehouse
# Pickup by customer/consumer
# Orders made online and pick up at stores
# Inventory cost is kept low – fast moving items are kept at pick-up locations and
slow moving items at central warehouse
# Transportation cost is low – as aggregation is possible

Retail storage with consumer pick-up

# Inventory stored at the local retail stores
# Consumers pick up from the retail stores
# Facility costs are high
# Inventory costs are very high

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 Von Thὓnens Rent Curve for Land  The first to develop a basic analytical model of the
relationships between markets, production & distance
Prices – Transport cost  Most productive activities will compete for the closest land to
= Profit = Land Cost the market and activities not productive enough will locate
Land Rent

further away

Diaries/
Malls Vegetables Wheat and Corn Maximum rent, or profit, that any economic
development could pay for land was the
Distance from Market difference between the price for the goods in
the marketplace and the cost of transporting
the goods to the marketplace

Economic activity would locate itself around

the city-state according to its ability to pay
for the land

Retail, Residential, Manufacturing and

Agricultural locations which can pay the
19th Century most for the land will be located nearest the
German Economist city centre and along major transportation
links
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Weber’s Classification of Industries Material Weight Location to
during production Draw toward

Type of Weight before Weight after Source of RM Markets

Process processing processing

Weight
losing

Weight
gaining

Neither Weight Losing

nor
Weight gaining

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Location Factors for Site Selection

4/17/2023 10
 Location Strategy
# Decision regarding location of plants, suppliers and distribution centres
# To serve customers in cost-effective way
# Significant impact on SCP – as most customers work with multiple plants and operate
in multiple markets
# Allocation of volumes to plants & Allocation of plants to market

Network Planning NA
W1

S1 As
P1
between various entities in SC
To establish appropriate links

W2

S2 Eu
W3
P2
S3
Af
W4
P3
S4
Aus
4/17/2023
W5 11
 Plants
USA Austin, Texas To All Global Locations

Nashville, Tennessee

Winston – Salem, NC

Eldorado do Sul - Brazil

Limerick - Ireland

Penang - Malaysia
Asia

Xiamen - China

4/17/2023 12
 Network Operations Optimization
1. Cost Optimization Model i
M – Number of plants and let i = 1,…..,m
N – Number of Markets and let j = 1,…., n
Demj – Quarterly demand at Market j
Capi – Quarterly Production capacity at plant i
Costij – Cost of producing and transporting one unit from plant i to market j
j
Fcosti – Fixed cost of facility i
Quantij – Quantity shipped from plant i to market j

Objective
Allocation of demand from different markets to various plants
Minimize total cost
m n
Minimize  Cost
i 1 j 1
ij xQuantij
Relevant Costs
Fixed Facility Cost
Variable Production Costs
Total Variable Cost Transportation Costs

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 Subject to the following constraints:
Demand at each
m market is
 Quant
i 1
ij  Dem j forj  1,...n satisfied

 Quant
j 1
ij  Capi fori  1,...., m Production not
violating
capacity

Quantij  0 forj  1,..., n & i  1,..., m Supply will always be

non-negative

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 2. Profit Maximization Model
Objective Maximize profit

m n

 Pr ice xQuant - 
m n

Maximise j ij
Costij xQuantij
i 1 j 1 i 1 j 1

Revenue Variable Cost

Where Price j – Price at market j

Revenue – Variable Cost = Gross Profit

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 Subject to the following constraints:
Demand met will m

 Quant
be less than or
equal to actual ij  Dem j forj1,...n
demand i 1

n Production
 Quant
j 1
ij  Capi fori  1,...., m not violating
capacity

Supply will always be

non-negative Quantij  0 forj  1,..., n & i  1,..., m

4/17/2023 16
 Network Designs Optimization
To optimize networks to leverage business and reduce/save fixed costs
Decision to be taken to either open or close certain facilities

1. Cost Optimization Model

Objective
Allocation of demand from different markets to various plants
Minimize total cost
Fixed costs added – as this is relevant costs for decision making

Minimize
m n

 Fac  open i
x F cos ti +  Cost
i 1 j 1
ij xQuantij

Fixed Cost Variable Cost

Where F cos ti Fixed Cost of the plant

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 m

 Quant
i 1
ij  Dem j forj  1,...n

 Quant
j 1
ij  Fac  openi xCapi fori  1,...., m

Quantij  0 forj  1,..., n & i  1,..., m

Fac  openi = 0 or 1 binary variable for i = 1,…..,m

Factory will be closed if Fac – openi = 0

Factory will be open if Fac – openi = 1

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 2. Profit Maximisation model

Objective Maximise Profit

m n

  Pr ice j xQuant ij -  Fac  open i x F cos ti -  Cost

i 1 j 1
ij xQuantij

Revenue Fixed Costs

Variable Cost
m

 Quant
i 1
ij  Dem j forj1,...n

Fac  openi = 0 or 1 binary variable for i = 1,…..,m

Factory will be closed if Fac – openi = 0

Factory will be open if Fac – openi = 1
4/17/2023 19
Auto Parts Manufacturer:

v Dehradun
Delhi
Lucknow

Ahmedabad
Kolkata
Aurangabad
Bhubaneshwar
Mumbai
Hampi

Market Bangalore Chennai

Plant

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 Methodology
 The marketing group prepares market estimates every quarter
 SC plans its operations to deliver the products to six markets at the lowest possible
cost
 Keeping capacity constraints of each plant and the existing cost structure, SC decides
volume of production at each plant and allocates market demands
Plant Data
Fixed Facility Unit Variable
Plant Capacity
Cost Production Cost
Ahmedabad 350 78000 675
Dehradun 400 42000 525
Hampi 450 36000 650
Aurangabad 300 38000 625
Bhubaneshwar 400 34000 675

Market Data
Market Bangalore Chennai Delhi Mumbai Lucknow Kolkatta
Quarterly
Demand 165 135 280 200 125 155
Price per unit 1030 950 1000 975 900 850

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 Transportation Matrix

Plants/Markets Bangalore Chennai Delhi Mumbai Lucknow Kolkatta

Ahmedabad 235 278 100 65 189 261

Dehradun 511 558 97 328 216 305

Hampi 77 138 327 105 372 326

Aurangabad 165 160 183 117 148 235

Bhubaneshwar 163 107 328 217 303 203

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 Transportation Strategy
# A significant link between various stages in supply chain
# Decisions significantly affect cost as well as responsiveness
# Except for the cost of purchased goods, a higher % of logistics costs is absorbed by
transportation

Key Decisions Deliverables

# Mode Selection ¤ Timeliness & Availability
# Carrier Routing ¤ Transit Time (Speed)
# Vehicle Scheduling ¤ Transit Time variability
# Shipment Consolidation (Dependability)
¤ Cost
¤ Service
Mode Selection:
Six variables are key to transport service choice
# Freight Rates
# Reliability
# Transit time
# Loss, Damage, Claims processing and Tracing
# Shipper Market Considerations
# Carrier Considerations
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 Drivers of Transportation Decisions
# Transportation cost is the significant component of the supply chain cost for most mfg
firms
# Influenced by the demand supply gap between the points on origin and destination

Transportation Cost Structures

# Function of the distance and quantity of goods shipped
# Transport rates taper with increasing distance
# For longer distances travelled – Fixed Costs at destination/origin are distributed
over more kilometers
# Overall utilization of the vehicle will be higher
# This is called economies of distance in transportation
# Similarly, transportation costs decrease with increase in shipment weight
# FTL/FCL will always lead to lesser transportation cost as compared to LTL/LCL
# Transportation costs can be reduced by better utilisation of existing assets

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 0.35

Freight (in Rs/Kg/Km)

0.3
0.25
0.2 10 Kg
0.15 50 Kg
500 Kg
0.1
0.05
0
3900 4700 6500 7500 12500

Distance (in Kilometers)

Weight/ Freight From Mumbai to

Distance Singapore Beijing Frankfurt London New York
(kms)
3900 4700 6500 7500 12500
10 Kg 1.3 1.28 1.2 1.18 1.11
50 Kg 0.5 0.60 0.50 0.80 0.13
500 Kg 0.15 0.14 0.08 0.06 0.01

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 Value Density
# Ratio of rupee value of a product to its weight
# This shows the importance of transportation costs to the product costs
SPF – Earlier ( An example to illustrate how freight costs play a significant role)
Total
Total Total
Annual
Input Finished Piece Piece Transportation Transport Annual
EAU Transport
Weight Weight Price Price Cost ation Product
Part No As % ation
Cost Cost
2015 - 2016

Cost
Onward Return
Nos Kgs Kgs $ Rs Rs Rs Rs
(Rs) (Rs)
228342 5200 0.114 0.1026 2.32 139.2 1.368 1.2312 2.5992 1.87% 723840 13515.84
073183 14960 0.355 0.3195 3.15 189 4.26 3.834 8.094 4.28% 2827440 121086.2
073182 14700 0.36 0.324 3.55 213 4.32 3.888 8.208 3.85% 3131100 120657.6
103085 10136 0.27 0.243 2.83 169.8 3.24 2.916 6.156 3.63% 1721093 62397.22
A01-M01 3000 0.725 0.6525 4.42 265.2 8.7 7.83 16.53 6.23% 795600 49590
A01-M61 2800 0.725 0.6525 4.04 242.4 8.7 7.83 16.53 6.82% 678720 46284
A02-M01 4200 0.529 0.4761 3.78 226.8 6.348 5.7132 12.0612 5.32% 952560 50657.04
A02-M04 900 1.066 0.9594 11.76 705.6 12.792 11.5128 24.3048 3.44% 635040 21874.32
A02-M06 175 1.066 0.9594 8.01 480.6 12.792 11.5128 24.3048 5.06% 84105 4253.34
4.50% 11549498 490315.6

Freight cost @ Rs 12/ kg

4/17/2023 Average 26
 Revised Freight cost @ Rs 7/ kg
Total
Total Total
Annual
Input Finished Piece Piece Transportation Transport Annual
EAU Transport
Weight Weight Price Price Cost ation Product
Part No As % ation
Cost Cost
Cost
Onward Return
Nos Kgs Kgs $ Rs Rs Rs Rs
(Rs) (Rs)
228342 5200 0.114 0.1026 2.32 139.2 0.798 0.7182 1.5162 1.09% 723840 7884.24
073183 14960 0.355 0.3195 3.15 189 2.485 2.2365 4.7215 2.50% 2827440 70633.64
2016 - 2017

073182 14700 0.36 0.324 3.55 213 2.52 2.268 4.788 2.25% 3131100 70383.6
103085 10136 0.27 0.243 2.83 169.8 1.89 1.701 3.591 2.11% 1721093 36398.38
A01-M01 3000 0.725 0.6525 4.42 265.2 5.075 4.5675 9.6425 3.64% 795600 28927.5
A01-M61 2800 0.725 0.6525 4.04 242.4 5.075 4.5675 9.6425 3.98% 678720 26999
A02-M01 4200 0.529 0.4761 3.78 226.8 3.703 3.3327 7.0357 3.10% 952560 29549.94
A02-M04 900 1.066 0.9594 11.76 705.6 7.462 6.7158 14.1778 2.01% 635040 12760.02
A02-M06 175 1.066 0.9594 8.01 480.6 7.462 6.7158 14.1778 2.95% 84105 2481.115
2.63% 11549498 286017.4

Average

4/17/2023 27
 Freight cost @ Rs 4.5/ kg
Total
Total Total Annual
Input Finished Annual
EAU Piece Price Piece Price Transportation Cost Transportat Transportation
Weight Weight Product
ion Cost As % Cost
Cost
2017 - 2018

Nos Onward
Kgs Kgs $ Rs (Rs) Return (Rs) Rs Rs Rs
5200 0.114 0.1026 2.32 139.2 0.513 0.4617 0.9747 0.70% 723840 5068.44
14960 0.355 0.3195 3.15 189 1.5975 1.43775 3.03525 1.61% 2827440 45407.34
14700 0.36 0.324 3.55 213 1.62 1.458 3.078 1.45% 3131100 45246.6
10136 0.27 0.243 2.83 169.8 1.215 1.0935 2.3085 1.36% 1721093 23398.956
3000 0.725 0.6525 4.42 265.2 3.2625 2.93625 6.19875 2.34% 795600 18596.25
2800 0.725 0.6525 4.04 242.4 3.2625 2.93625 6.19875 2.56% 678720 17356.5
4200 0.529 0.4761 3.78 226.8 2.3805 2.14245 4.52295 1.99% 952560 18996.39
900 1.066 0.9594 11.76 705.6 4.797 4.3173 9.1143 1.29% 635040 8202.87
175 1.066 0.9594 8.01 480.6 4.797 4.3173 9.1143 1.90% 84105 1595.0025
1.69% 11549498 183868.349

Summary
Freight cost/Kg - Transport Cost Savings YOY -
Year Transporter Total Value (Rs) Freight Cost Reduction Trans Cost as %
Rs (Rs) Rs

2015 - 16 A 11549498 12 490315.60 4.25%

2016 - 17 B 11549498 7 41.66% 286017.43 2.48% 204298.17
35.71%
2017 - 18 C 11549498 4.5 (62.5% - ac 2015) 183868.35 1.59% 102149.08
 Carrier/ Vehicle Routing
 Ship Directly from each plant to each market
 Aggregate Demand across depots and using a milk run from each plant
 Shipping Via Distribution Centre

Shipping Directly from Each plant to Each Market

A X

Depos
Plants

B Y

C Z

# This involves 9 trips (return trip idle)

# Works when there is high volume and low degree of demand uncertainty
# To get economies of scale, each trip involves FTL shipments, resulting in
high cycle stock at each depot for each product line
4/17/2023 29
 Aggregate demand across depots and using a milk run from each
plant
A X

Depos
Plants

B Y

C Z

# Aggregating product-wise demand across all 3 depots

# Each truck starts from a plant and visits depots and come backs to the plant
after serving the last depot
# Total trips – 3 and the depots gets served more often
# Transportation costs
# cycle stock inventory
# Effective if the depots are in close proximity

4/17/2023 30
 Shipping Via Distribution Centre

A X
Plants

Depos
B Y

DC

C Z

# 6 links
# Demand is aggregated across depots
# DC is the single point of contact
# Cycle stock will be equal to the milk run model
# Transportation costs will be higher than direct shipping but lower than milk run
# Most importantly, this involves additional facility, additional inventory at the DC
and additional loading and unloading costs at DC

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 Cross Docking
# All trips are coordinated
# Goods unloaded from incoming vehicles will be loaded on to trucks that originate
from DC
# No physical DC thereby reducing DC cost
# Transit of FTL of goods and frequent delivery of shipment
# All vehicles are to be available at the cross dock point at the same time
# Vehicle scheduling should be perfect

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Example
A Garment Manufacturing company Data
3 Plants A, B, C – Each manufacturing different product line
Weekly demand 100 units of each type
3 Markets X, Y, Z – Supplied through Depots
Container Capacity 300 Units/Shipment
A – Men’s Wear Case 1 Garment Price - Rs 200/- per piece
B – Ladies Wear Case 2 Garment Price - Rs 75/- per piece
C – Children’s wear ICC 20% p.a

Requirement: Tariff Rate Rs 2/- per km

Each Plant will be supplying to all the three depots Annual Facility Cost = Rs 15,000/-

kms 200 A X

Plant/DC/Depot locations 100 B O Y

C Z
0
4/17/2023 0 75 150 225 300 33
kms
Recap
 Logistics Triangle
 No of Facilities vs Responsiveness
 No of Facilities vs Response time
 Transportation Costs Vs No of Facilities
 Facility Costs Vs No of Facilities
 Inventory Costs Vs No of Facilities
 Total costs Vs No of Facilities
 Design options for Distribution Network
 Manufacturer Storage with direct shipping
 Manufacturer Storage with direct shipping and in-transit merge
 Distributor Storage with Carrier delivery
 Distributor storage with last mile delivery
 Distributor Storage with Consumer pick-up
 Retail storage with Consumer pick-up
 Von Thunen’s rent curve for land
 Weber’s Classification of Industries
 Location factors for site selection
 Location Strategy
 Network Operations Optimization
 Cost optimization
 Profit Maximisation
 Network Design Optimisation
 Cost Optimisation
 Profit Maximisation
 Practical Example – Auto parts manufacturer
 Transportation Strategy
 Key Decisions:
 Mode Selection
 Carrier Routing
 Vehicle Scheduling
 Shipment consolidation
 Drivers of transportation decisions
 Transportation Cost Structures
 Value Density
 Carrier Vehicle Routing
 Shipping Directly from Plant to Market
 Shipping via Milk run
 Shipping via Distribution Centre
 Cross Docking