Self-Study

➢ Chapter 6: Designing Global Supply Chain Networks

➢ Chapter 7: Demand Forecasting in a Supply Chain
➢ Chapter 8: Aggregate Planning in a Supply Chain
➢ Chapter 9: Sales And Operations Planning: Planning Supply
And Demand In A Supply Chain
➢ Chapter 11: Managing Economies Of Scale In A Supply
Chain: Cycle Inventory
➢ Chapter 12: Managing Uncertainty In A Supply Chain: Safety
Inventory
➢ Chapter 13: Determining The Optimal Level Of Product
Availability

© 2007 Pearson Education 14-1

 Supply Chain Management

Chapter 14
Transportation in the Supply Chain

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 Outline
▪ The role of transportation in the supply chain
▪ Factors affecting transportation decisions
▪ Modes of transportation and their performance
characteristics
▪ Design options for a transportation network
▪ Trade-offs in transportation design
▪ Tailored transportation
▪ Routing and scheduling in transportation
▪ Making transportation decisions in practice
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 Transportation Definition

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 Transportation Flow Types

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 Mode Selection Criteria

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 Role of Transportation
▪ Nowaday products are rarely produced or consumed
in the same location.

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 Role of Transportation
▪ Transportation always plays a very important
role in any fast, developed economy.
▪ Transportation activities represented 7.5% in
US GDP (2016, Bureau of Economic Analysis)
and more than 15% of total US occupational
employment.
▪ Transportation has a very critical role in
international trade and global supply chain
activities.
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 Key Word

Responsive Transportation System

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 4 Parties Affecting
Transportation Decisions

Shipper Carrier

Actions by all four

parties influence the
effectiveness of
transportation

Owners Bodies set

and policy
Operators worldwide

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 4 Parties Affecting
Transportation Decisions
▪ Shipper (party that requires the movement of the
product between two points in the supply chain)
– Transportation cost
– Inventory cost
– Facility cost
▪ Carrier (party that moves or transports the product)
– Vehicle-related cost
– Fixed operating cost
– Trip-related cost
Ex: Dell contracts UPS to deliver its products from factories to
customers ► Dell- shipper, UPS- carrier
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 4 Parties Affecting
Transportation Decisions
▪ Owners and Operators of transportation
infrastructure:
• Ports, roads, water ways, airports most are owned and
managed as public goods/ services
• Panama canal project, Suez canal,

▪ The Bodies that set transportation policy

worldwide

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 Transportation Modes

Truck Air
Rail

Water
Package Carrier Pipeline

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 Transportation Modes – Ex.

provide fast, reliable delivery times

provide less expensive transportation with

somewhat longer delivery times

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 Truckload (TL)
▪ The trucking industry consists of two major
segments—truckload (TL) or less than truckload (LTL)
▪ Low fixed and variable costs
▪ Major Issues
– Utilization
– Consistent service
– Backhauls

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 Average revenue per ton mile (US)

SOURCE: U.S. Department of Transportation, Bureau of Transportation Statistics, National Transportation

Statistics, table 3-21, available at www.bts.gov as of May 2016

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 FTL – LTL - PTL

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 Less Than Truckload (LTL)
▪ Higher fixed costs (terminals) and low variable
costs
▪ Major issues:
– Location of consolidation facilities
– Utilization
– Vehicle routing
– Customer service

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 Key Term

Backhaul is the return

of cargo or freight via truck
or transport from point B to
its origination or point A

Backhauling is an economically
viable solution to eliminate or
reduce empty truck miles, as the
longer a truck travels without freight,
the more money a carrier loses on
overhead costs.

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 Key Terms

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 Rail
▪ Move commodities over
large distances
▪ Key issues:
– Scheduling to minimize
delays /improve service
– Off-track delays (at pickup
and delivery end)
– Yard operations
– Variability of delivery
times
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 Air
▪ Key issues:
– Location/number of
hubs
– Location of fleet bases/
crew bases
– Schedule optimization
– Fleet assignment
– Crew scheduling
– Yield management
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 Package Carriers
▪ FedEx, UPS, USPS, DHL 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
▪ Consolidation of shipments
(especially important for package
carriers that use air as a primary
method of transport)
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 Water
▪ 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.)

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 Pipeline
▪ High fixed cost
▪ Primarily for crude petroleum,
refined petroleum products,
natural gas
▪ Best for large and predictable
demand
▪ Would be used for getting
crude oil to a port or refinery,
but not for getting refined
gasoline to a gasoline station
(why?)

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 Intermodal
▪ Use of more than one mode of
transportation to move a shipment to
its destination
▪ Most common: 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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 Key Term

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 TRANSPORTATION
INFRASTRUCTURE & POLICIES
▪ Owners of transportation infrastructure:
- Since most infrastructure as ports, roads, water ways,
airports are inherently having monopoly nature they
are owned and managed as public goods/ services
▪ Operators of transportation infrastructure:
- Can be public, private (BOT= Built-Operate-Transfer;
BT= Built-Transfer) or Public-Private Partnership (PPP)
▪ The country strategy and policies on developing infra
network significantly affect its future economic and
geopolitical development
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 Design Options for a
Transportation Network
Three basic questions:
1. Should transportation be direct or through an
intermediate site?
2. Should the intermediate site stock product or only
serve as a cross-docking location?
3. Should each delivery route supply a single
destination or multiple destinations (milk run)

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 Design Options for a
Transportation Network
▪ What are the transportation
options? Which one to select? On
what basis?
1. Direct shipping network
2. Direct shipping with milk runs
3. All shipments via central DC
4. Shipping via DC using milk runs
5. Tailored network

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 1. Direct shipping network

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 1. Direct shipping network

Benefit:
➢ Elimination of intermediate warehouses
➢ simplicity of operation and coordination

Consideration:
➢ Transportation time from supplier to buyer location is
short
➢ Demand at buyer locations is large enough

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 2. Direct Shipping with Milk Runs

Milk Runs to Multiple Milk Runs from

Buyers Multiple Suppliers
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 2. Direct Shipping with Milk Runs

Benefit:
➢ Eliminating intermediate warehouses
➢ Lower transportation cost

Consideration:
➢ Quantity for each location is too small
➢ Multiple locations are close enough to fill a truck

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 Milk Runs to Multiple Buyers-
Toyota Japan

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 Milk Runs from Multiple Suppliers-
Toyota USA

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 ZARA’s Legendary Milk-Run

• 7300 shops worldwide (88

countries)
• Turnover: 15 bil.USD/ 2016
• 12000 designs/year in small
quantities
• New supply:twice/week/shop
• Inventory: 10% compared to
18% industrial average
• Zara’s owned facilities control
85% total production

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 3. All Shipments via Central DC

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 Shipping with Cross Docking

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 4. Shipments via DC using Milk
Runs

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 Seven-Eleven Japan

▪ 20400 Seven-Eleven stores in Japan (2018)

▪ 66500 stores world-wide
▪ 7-Eleven Japan has much higher stores while
much smaller in size (110m2) ➔ Shipping via
DC using Milk Runs is a better choice

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 Pros and Cons of Different
Transportation Networks

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 Ex: Selecting a Transportation
Network
A retail chain has eight stores in a region supplied from four
supply sources. Trucks have a capacity of 40,000 units and cost
$1,000 per load plus $100 per delivery. Thus, a truck making two
deliveries charges $1,200. The cost of holding one unit in
inventory at retail for a year is $0.20.
The vice president of supply chain is considering whether to use
direct shipping from suppliers to retail stores or setting up milk
runs from suppliers to retail stores.
1. What network do you recommend if annual sales for each
product at each retail store are 960,000 units?
2. What network do you recommend if sales for each product at
each retail store are 120,000 units?
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 Trade-offs in Transportation Design
▪ Transportation and inventory cost trade-off
▪ Choice of transportation mode: planning
& operational decisions
▪ Inventory aggregation
▪ Transportation cost and responsiveness
trade-off

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 Choice of Transportation Mode

▪ 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

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 Choice of Transportation Mode

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 Inventory Aggregation: Inventory
vs. Transportation Cost
➢ Inventory aggregation decisions must account for
inventory and transportation costs.
➢ Inventory aggregation decreases supply chain costs if
the product has a high value-to-weight ratio, high
demand uncertainty, low transportation cost, and
customer orders are large.
➢ Inventory aggregation may increase supply chain
costs if a product has a low value-to-weight ratio, low
demand uncertainty, large transportation cost, or small
customer orders.

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 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

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 Temporal Aggregation

•2 trucks at the end of each day (one truck half full) or

•3 trucks at the end of 2nd day

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 Tailored Transportation
▪ The use of different transportation networks and modes
based on customer and product characteristics
▪ Factors affecting tailoring:
– Customer distance and density
– Customer size
– Product demand and value

allows a supply chain to achieve appropriate

responsiveness and low cost

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 Tailored Transportation

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 Tailored Transportation
Tailored Transportation by Size of Customer

➢ Large customers can be supplied using a TL carrier

➢ Smaller customers will require an LTL carrier or milk runs

When using milk runs, a shipper incurs two types of costs:

1. Transportation cost based on total route distance

2. Delivery cost based on number of deliveries

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 Tailored Transportation

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 Role of IT in Transportation
▪ The complexity of transportation decisions
demands to use of IT systems
▪ IT software can assist in:
– Identification of optimal routes by minimizing
costs subject to delivery constraints
– Optimal fleet utilization
– GPS applications: Location based services
(military, taxi, Grab Food…)

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 Risk Management in Transportation
▪ Three main risks to be considered in
transportation:
– Risk that the shipment is delayed
– Risk of disruptions/ pandemic
– Risk of hazardous material
Case of Lebanon’s port explosion Aug 2020
- 220 death
- 7000 injuries
- 300000 homeless
- 15bil usd in property damage

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 Risk Mitigation

▪ Risk mitigation strategies:

– Decrease the probability of disruptions
– Alternative routings
– In case of hazardous materials the use of
modified containers, low-risk transportation
models, modification of physical and
chemical properties can prove to be effective

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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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 Summary of Learning Objectives
▪ What is the role of transportation in a supply chain?
▪ What are the strengths and weaknesses of different
transport modes?
▪ What are the different network design options and
what are their strengths and weaknesses?
▪ What are the trade-offs in transportation network
design?

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 THANK FOR LISTENING

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