Chapter- 4

Transportation and Distribution

Strategies
 Transportation Strategies
§ Transportation is defined as: movement of freight and
passengers from one place to another
§ Transportation is the means of conveyance or travel from one
place to another
§ The important common element in any definition of
transportation is movement.

§ Movement is changing of physical location of freight,

passenger or exchange of information.

§ Products must be moved to the location where they are needed

or deficient
§ Freight transportation is defined as the economic
movement of commodities and products and the effect of
such movement on the development and advancement of
business.

§ Passengers Transportation is defined as the movement

of human being from one place to the other
 Role in the Supply Chain

§ Moves the product between stages in the supply chain

§ Impact on responsiveness and efficiency

§ Faster transportation allows greater responsiveness

§ Also affects inventory and facilities

 Role in the Competitive Strategy
§ If responsiveness is a strategic competitive priority, then
faster transportation modes can provide greater
responsiveness to customers who are willing to pay for it

§ Can also use slower transportation modes for customers

whose priority is price (cost)

§ Can also consider both inventory and transportation to

find the right balance
Order Fulfillment Activities

Transportation
Management
 Order Fulfillment Activities
Placing facilities in the right location and leveraging
appropriate process technologies to reduce the
combined production and delivery time.
Carrying the right quantity and mix of inventory.
Streamlining order processing eliminating unnecessary
steps.
Ø Assure order-entry accuracy
Developing good relationships with reliable
transportation companies reduces transit times and
increases on-time delivery performance.
Adopting appropriate technologies and implementing
innovative materials handling processes can increase
flow speed through warehouses.
 Factors Affecting Transportation Decisions
1. Carrier (party that moves or transports the product)
I. Vehicle-related cost: The cost a carrier incurs for the
purchase or lease of the vehicle used to transport goods
Ø Proportional to the number of vehicles purchased.

II. Fixed operating cost: Any cost associated with terminals,

airport gates, and labor that are incurred whether
vehicles are in operation or not
Ø Proportional to the size of operating facilities
III. Trip-related cost: The price of labor and fuel
 …Cont´d
IV. Quantity-related cost: Includes. loading/unloading
costs and portion of the fuel cost

V. Overhead cost: This category includes the cost of

planning and scheduling a transportation network as
well as any investment in information technology.
 …Cont´d
2. Shipper (party that requires the movement of the
product between two points in the supply chain)

Ø Shipper´s decision include the design of the

transportation network, choice of means of transport,
and the assignment of each customer shipment to a
particular means of transport.

Ø A shipper´s goal is to minimize the total cost of

fulfilling a customer order while achieving the
responsive promised.
 …Cont´d

Ø Cost when making transportation decisions included:

§ Transportation cost

§ Inventory cost

§ Facility cost

§ Processing cost

§ Service level cost

 Components of Transportation Decisions
§ Mode of transportation:
Ø air, truck, rail, ship, pipeline, electronic transportation

Ø vary in cost, speed, size of shipment, flexibility

§ Route and network selection

Ø route: path along which a product is shipped

Ø network: collection of locations and routes

§ In-house or outsource

§ Overall trade-off: Responsiveness versus efficiency

 Transportation Modes
1. Trucks :The dominant mode of transportation for
many countries.

• Major Issues

ØLocation of consolidation facilities

ØUtilization

ØConsistent service

ØVehicle routing
 …cont´d
Motor Carriers
High variable (90%), low fixed (10%)
Cost
More expensive than rail

Speed Medium speed where sufficient roads exist, about twice as fast as rail

Limited capacity of about 80,000 lbs; larger capacity combination vehicles are
Quantities
geographically limited
Widespread on some continents; limited by roads, landmass
Geographical Coverage

Environmental High pollution, especially in developing countries, high impact of new roads
Concerns
Distances Short to Medium
Roads, vehicles
Required Infrastructure
Routing limited by road location
Product Variety Large variety of products

Reliability Limited loss, damage, more timely than rail

Routing limited to road locations, but still good for JIT, extensive access in countries
Flexibility with well-developed highway systems, door to door delivery possible with appropriate
roads
 2. Rail
• Rail is priced to encourage large shipments over a long
distance. Prices display economies of scale in the
quantity shipped as well as distance traveled.

• Key issues:
ØScheduling to minimize delays / improve service

ØOff-track delays (at pickup and delivery end)

ØYard operations

ØVariability of delivery times

 …cont´d

Rail
High fixed, low variable cost structure
Cost
Inexpensive, especially for bulk goods
Relatively slow, average car speed 320 -500km/h (unless utilizing double stack unit
Speed
trains, effectively doubling speed)
Quantities Large quantities; full car load increments most cost effective

Widespread on some continents; limited by tracks, landmass

Geographical Coverage

Environmental High impact of new tracks, low air pollution

Concerns
Distances Medium to long

Required Infrastructure Tracks, rolling stock

Product Variety Large variety of products; ideally suited for bulk goods

Reliability Low loss, damage, less timely (delays at sidings, terminals)

Routing limited to track location, little door to door delivery (side spur required)
Flexibility
 3. Airplane
• Air carriers offer a very fast and fairly expensive mode
of transportation
Key issues:
ØLocation/number of hubs

ØLocation of fleet bases/crew bases

ØSchedule optimization

ØFleet assignment

ØCrew scheduling
 …cont´d

Airplane
• High variable, low fixed
• Very expensive (2 to 3 times as high as motor carriers, 12 to 15 times as high as
Cost
rail); lower packing costs than ship

Speed • Fast speed within and between continents; measured in hours or days

Quantities Relatively small

Geographical Coverage Widespread on some continents; limited by air terminal availability

Environmental Noise pollution near major population centers

Concerns
Distances Medium to very long
Airports, navigational aids, airplanes
Required Infrastructure
Routing limited by airport location
Product Variety Large variety of small, high-value-by-weight, often perishable items
Flexibility Air terminal to air terminal
 5. Water (Ship)
§ Limited to certain geographic areas

§ Ocean, inland waterway system, coastal waters

§ Very large loads at very low cost

§ Slowest

§ Dominant in global trade (autos, grain, apparel, etc.)

 Water (Ship)
Ship
• High variable, low fixed
• Very inexpensive, about $.008 /ton mile (1/4 cost of railroad)
Cost
• Less fuel needed

• Inland waterway: Slow,

Speed
• Ocean: faster, fewer stops (10-12 days Pacific crossing)
Quantities Large. Container ships carry up to forty equivalent unit containers.

Geographical Coverage Global, but limited to natural and constructed waterways.

Environmental Spillage from accidents, leakage, high impact on fisheries

Concerns
Distances Long to very long

Required Ports, ships

Infrastructure Routing limited by waterway, ocean availability
Product Variety Low variety of heavy, bulk, or low-value-by-weight items, often commodities
Flexibility Port to port
 6. Pipeline

Ø High fixed cost

Ø Primarily for crude petroleum, refined petroleum

products, natural gas

Ø Best for large and predictable demand

 …cont´d
Pipeline
High fixed, low variable
Cost
Very inexpensive

Speed Nature of product makes speed a non-issue

Quantities Large quantities of limited products

Widespread on some continents; limited by unidirectional movement, and the

Geographical Coverage availability of landmass to support pipelines

Environmental Pipeline leakage, high impact on wildlife, scenic value

Concerns
Distances Medium most common
Pipeline between two points required
Required Infrastructure

Product Variety Primarily petroleum products; only practical for liquid, liquid-carried, or gas products

Reliability Very low loss or damage, usually timely

Routing limited to pipelines
Flexibility
 7. Internet

Internet
Extremely inexpensive, where infrastructure is in place.
Cost
Low fixed, low variable costs

Extremely fast
Speed

Quantities Limited by number of source transmission lines available, or satellite access

Geographical Coverage Widespread on some continents; limited by transmission capability availability

None except where new transmission line construction occurs, then less than other
Environmental Concerns modes

Distances Very short to very long

Telephone lines, satellite, cellular transmission capability
Required Infrastructure
Routing limited by transmission path
Product Variety Limited to digital information; software, music, video, documents, information
Flexibility Computer to computer
 Multi-modal and inter-modal transport
Multi-modal Transport
§ Concerns a variety of modes used in combination so that
the respective advantages of each mode are better
exploited under the responsibility of a single legal
company.

§ Although intermodal transportation applies for passenger

movements, such as the usage of the different, but
interconnected modes of a public transit system, it is over
freight transportation that the most significant impacts
• Intermodal transportation: The movements of
passengers or freight from one mode of transport to
another, commonly taking place at a terminal
specifically designed for such a purpose.

• Transmodal transportation: The movements of

passengers or freight within the same mode of transport.
Although "pure" transmodal transportation rarely exists
and an intermodal operation is often required (e.g. ship
to dockside to ship), the purpose is to insure continuity
within the same modal network.
 Intermodal Transportation Network
§ A logistically linked system using two or more transport
modes with a single rate.

§ Modes are having common handling characteristics,

permitting freight (or people) to be transferred between
modes during a movement between an origin and a
destination.

§ For freight, it also implies that the cargo does not need to
be handled, just the load unit such as a pallet or a
container.
 Design Options for a Transportation Network

Ø Majorly based on the supply chain network design option

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
 2. Inventory Aggregation: Inventory vs.
Transportation Cost
§ As a result of physical aggregation
ØInventory costs decrease
ØInbound transportation cost decreases
ØOutbound 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
 3. 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
 4. Tailored Transportation
§ The use of different transportation networks and modes
based on customer and product characteristics

§ Factors affecting tailoring:

ØCustomer distance and density

ØCustomer size

ØProduct demand and value

 5. Role of IT in Transportation
§ The complexity of transportation decisions demands to
use of IT systems

§ IT software can assist in:

ØIdentification of optimal routes by minimizing costs

subject to delivery constraints

ØOptimal fleet utilization

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

 Distribution Strategies
• The SC network consists of suppliers, warehouses,
distribution centers and retail outlets as well as raw
materials, work-in-process inventory and finished
products that flow between the facilities
 Distribution in the Supply Chain
• Distribution refers to the steps taken to move and store a
product from the supplier stage to a customer stage in a
SC
• Distribution occurs between every pair of stages in the SC
Ø Raw materials and components are moved from suppliers
to manufacturers, whereas finished products are moved
from the manufacturer to the end consumer.
 …Cont’d

Supplier Plants Warehouses Markets

Fig. Stages in a supply chain

 …Cont’d
§ Distribution is a key driver of the overall profitability of a
firm because it directly impacts both the supply chain cost
and the customer experience.
Ø Distribution related costs form about 10.5 percent of the
economy and about 20 percent of the cost of manufacturing for
some developed countries.

§ The choice of distribution network can be used to achieve

a variety of supply chain objectives ranging from low cost
to high responsiveness.
Ø As a result, companies in the same industry often select very
different distribution networks.
 Factors Influencing Distribution Network Design
Ø At the highest level, performance of a distribution
network should be evaluated along two dimensions:
1. Customer needs that are met.
2. Cost of meeting customer needs.
§ Distribution network design options must therefore be
compared according to their impact on customer
service and the cost to provide this level of service
Ø The customer needs that are met influence the
company’s revenues, which along with cost decide the
profitability of the delivery network.
 …Cont’d
• Although customer service consists of many components,
those measures that are influenced by the structure of
the distribution network are:
response time, product variety, product availability,
customer experience, order visibility, and return-ability.
1. Response time: is the time between when a customer places an
order and receives delivery.
2. Product variety: is the number of different products/configuration
that a customer desires from the distribution network.
3. Availability: is the probability of having a product in stock when a
customer order arrives.
 …Cont’d
4. Customer experience: includes the easy with which the
customer can place and receive their order.
5. Order visibility: is the ability of the customer to track
their order from placement to delivery.
6. Return-ability: is the easy with which a customer can
return unsatisfactory merchandise and the ability of the
network to handle such returns.

§ Changing the distribution network design affects the

supply chain costs of inventories, transportation,
facilities and handling, and information.
 Distribution Strategies
• Typically, three distinct outbound distribution strategies
are utilized:
1. Direct shipment: In this strategy, items are shipped
directly from the supplier to the retail stores without
going through distribution centers.
2. Warehousing: This is the classical strategy in which
warehouses keep stock and provide customers with
items as required.
3. Cross-docking: In this strategy, items are distributed
continuously from suppliers through warehouses to
customers. However, the warehouses rarely keep the
items for more than 10 to 15 hours.
 Design options for a Distribution Network
• There are six distinct distribution network designs that
may be used to move products from factory to customer.
These are:
i. Manufacturer storage with direct shipping
ii. Manufacturer storage with direct shipping and in-
transit merge
iii. Distributor storage with package carrier delivery
iv. Distributor storage with last mile delivery
v. Manufacturer/distributor storage with customer
pickup; and
vi. Retailer storage with customer pickup.
 …Cont’d
i. Manufacturer storage with direct shipping: in this option,
product is shipped directly from the manufacturer to the end
customer, bypassing the retailer. This option is also referred as
drop-shipping with product delivered directly from the
manufacturer to the customer location.

Manufacturer

Retailer

Customers

Product flow
Information Flow
Fig. Manufacturer Storage with Direct Shipping
 …Cont’d
ii. Manufacturer storage with direct shipping and In-
transit merge: Unlike pure drop-shipping where each product
in the order is sent directly from its manufacturer to the end
customers, in-transit merge combines pieces of the order
coming from different locations so that the customer gets a
single delivery.

Manufacturer

Retailer In-Transit Merge by Carrier

Customers
Product flow
Information Flow
Fig. In-Transit Merge Network
 …Cont’d
iii. Distribution Storage with Carrier Delivery: Under this
option, inventory is not held by manufacturers at the factories
but is held by distributors/retailers in intermediate warehouses
and package carriers are used to transport products from the
intermediate location to the final customer.

Manufacturer

Warehouse storage by
Distributor/Retailer
Customers

Product flow
Information Flow
Fig. Distributor storage with carrier Delivery
 …Cont’d
iv. Distributor storage with Last Mile Delivery: Last mile
delivery refers to the distributor/retailer delivering the product
to the customer’s home instead of using a package carrier.

Manufacturer

Distributor/Retailer
Warehouse

Customers
Product flow
Information Flow
Fig. Distributor storage with Last Mile Delivery
 …Cont’d
v. Manufacturer or Distributor Storage with Consumer
Pickup: In this option, inventory is stored at the manufacturer or
distributor warehouse but customers place their orders online or
on the phone and then come to designed pickup points as
needed. Manufacturer

Retailer Cross Dock DC

Customers

Customer Flow
Product flow
Information Flow
Fig. Manufacturer or distributor Warehouse Storage with
Consumer Pickup
 …Cont’d
vi. Retailer storage with Customer Pickup: In this

option, inventory is stored locally at retail stores.

ØCustomers walk into the retail store or place an order
online or on the phone and pick it up at the retail
store
 …Cont’d

v The performance characteristics of the distribution

design options are measured based on:

Cost factor Service factor

Ø Inventory Ø Response time
Ø Transportation Ø Product variety
Ø Facilities and handling Ø Customer experience
Ø Information Ø Order visibility
Ø Return-ability
§ What is the role of transportation in a supply chain?
§ What are the strengths and weaknesses of different
modes of transportation?
§ What is role of infrastructure and policies in
transportation?
§ What are the different network design options and what
are their strengths and weaknesses?
§ What are the trade-offs in transportation network
design?
§ Identify the key factors to be considered when designing
a distribution network.
§ Discuss the strengths and weaknesses of various
distribution options.
Thank You!