VIETNAM NATIONAL UNIVERSITY HO CHI MINH CITY

HO CHI MINH CITY UNIVERSITY OF TECHNOLOGY

SCHOOL OF INDUSTRIAL MANAGEMENT
🙞···☼···🙜

GROUP ASSIGNMENT REPORT

CASE STUDY AND SUMMARY OF CHAPTER 06: ADDING
OUTBOUND TRANSPORTATION TO THE MODEL

Course: Supply Chain Design and Analysis (IM3091)

Class: CC01 - Group: 02
Instructor: Ph.D. Lê Phước Luông

Ho Chi Minh City, March 18th 2024

 GROUP MEMBER’S INFORMATION

No. Full name Student’s ID Task assigned

1 Nguyễn Ngọc Vân Anh 2153165 Case study’s solving and explanation

2 Đặng Quốc Bảo 2153198 Theory review and report compose

3 Bùi Thái Cơ 2153237 Case study’s solving and explanation

4 Phạm Hiếu Hạnh 2153333 Case study’s solving and explanation

5 Bành Khánh Linh 2153519 Theory and case study review

6 Nguyễn Hữu Sang 2114636 Theory and case study review

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 TABLE OF CONTENT
I. Chapter 06 Summary ............................................................................................1

1.1. Definition ...........................................................................................................1

1.1.1. Transportation Costs....................................................................................1

1.1.2. Inbound Transportation ...............................................................................1

1.1.3. Outbound Transportation ............................................................................1

1.2. Benefits of adding outbound tranportation to mathematical model ...............1

1.3. Transportation model fomulization ..................................................................2

1.4. Formulating and solution to the problem ........................................................3

II. Case Study: Transportation Costs and Oil Price................................................5

2.1. Backgrounds and problem issues .....................................................................5

2.2. Practice on Excel programme ..........................................................................7

2.3. Solution and Explaination ................................................................................7

2.3.1. Run a regression in Excel on this data with the diesel price as the
dependent variable. What is the regression equation that relates the price of
diesel to the price of oil? What is the R squared value? What is the p-value for the
independent variable, te price of oil? ......................................................................7

2.3.2. How much does this model predict that diesel will increase for every $10
increase in the price of oil? .....................................................................................8

2.3.3. Build a chart that shows the expected price of diesel for every $10
increment in the price of oil from $20 a barrel to $200 a barrel. ...........................8

2.3.4. If oil is currently $100 a barrel and you expect it to increase by 40% to
$140, what percent increase would you expect in the price of diesel fuel? ............8

2.3.5. If oil is currently $40 a barrel and you expect it to increase by 100% to
$80, what percent increase would you expect in the price of diesel fuel? ..............9

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 2.3.6. How would you use this information when running different network
modeling scenarios? ................................................................................................ 9

III. Lesson Learned and Conclusion to Case Study ................................................10

IV. References............................................................................................................. 11

V. Appendix ..............................................................................................................12

5.1. Sample Problem and Model Formulation (Section 1.4)................................ 12

5.1.1. Solution to Question 01: ............................................................................13

5.1.2. Solution to Question 02: ............................................................................16

5.2. Practice on Excel (Case Study: Transportation Costs and Oil Price) ..........19

5.2.1. Run a regression in Excel on this data with the diesel price as the
dependent variable. What is the regression equation that relates the price of
diesel to the price of oil? What is the R squared value? What is the p-value for the
independent variable, the price of oil? ..................................................................19

5.2.2. How much does this model predict that diesel will increase for every $10
increase in the price of oil? ...................................................................................20

5.2.3. Build a chart that shows the expected price of diesel for every $10
increment in the price of oil from $20 a barrel to $200 a barrel. .........................20

5.2.4. If oil is currently $100 a barrel and you expect it to increase by 40% to
$140, what percent increase would you expect in the price of diesel fuel? ..........20

5.2.5. If oil is currently $40 a barrel and you expect it to increase by 100% to
$80, what percent increase would you expect in the price of diesel fuel? ............20

5.2.6. How would you use this information when running different network
modeling scenarios? .............................................................................................. 21

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 TABLE OF FIGURE
Figure 1. Model formula and its constraints ....................................................................2
Figure 2. Cost per unit formula .......................................................................................5
Figure 3. Cost per unit formula .......................................................................................5
Figure 4. Diesel's price line chart ....................................................................................8
Figure 5. Oil and diesel price with 40% increase ............................................................9
Figure 6. Oil and diesel price with 100% increase ..........................................................9
Figure 7. Model for calculating total demand weighted distance .................................13
Figure 8. Regression Analysis Based on All Shipments ...............................................19
Figure 9. Summary Output of Case Study ....................................................................21

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I. Chapter 06 Summary
1.1. Definition
1.1.1. Transportation Costs
Transportation costs are the expenses incurred in moving goods or people from
one place to another. They encompass various elements such as fuel costs, vehicle
maintenance, labor costs, insurance, and any other expenses associated with the
transportation process.

1.1.2. Inbound Transportation

This refers to the movement of materials, goods, or resources into a facility or
organization. It typically involves the transportation of raw materials, components, or
finished goods from suppliers or vendors to the production or storage facilities of a
company.

1.1.3. Outbound Transportation

On the other hand, outbound transportation involves the movement of finished
products or goods from a company's production or storage facilities to its customers or
distribution centers. It includes activities such as order processing, picking, packing,
and delivering the products to the end customers or retailers.

1.2. Benefits of adding outbound tranportation to mathematical model

Here are some reasons why outbound transportation needs to be included in
transportation cost models. First, it can provide a overview analysis of the total cost.
By considering both inbound and outbound transportation costs, companies can
conduct a comprehensive analysis of their total transportation expenses. This enables
them to make informed decisions regarding transportation strategies, route
optimization, carrier selection, and pricing strategies. Second, it insures customers’
satisfaction while increase and fulfill the service level of customers. Outbound
transportation directly impacts customer service levels and satisfaction. Timely
delivery, accurate order fulfillment, and efficient transportation processes contribute to
positive customer experiences. Including outbound transportation in cost models
allows companies to evaluate the cost-effectiveness of different delivery options while
maintaining high service levels. Third, outbound transportation can give an

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optimization towards the supply chain. Integrating both inbound and outbound
transportation in cost models facilitates supply chain optimization efforts. Companies
can identify opportunities for consolidation, backhauling, mode shifting, and network
redesign to minimize transportation costs while meeting customer demand and service
requirements. Finally, the cost can demonstrate an analysis of revenue and profitability
collected. Outbound transportation costs are directly tied to sales and revenue
generation. Understanding the cost implications of different delivery options helps
companies assess the profitability of customer orders, product lines, or market
segments. This information enables them to adjust pricing strategies, promotional
offers, and distribution channels to enhance overall profitability.

1.3. Transportation model fomulization

When formulating the model, the total transportation spend is minimized by
choosing the optimized number of facilities:

Figure 1. Model formula and its constraints

Additionally, the model includes a cost matrix instead of a distance matrix due to
the purpose of adding outbound transportation in the model is to minimize cost, not the
average distance. In this case, the matrix transi,j represents the cost to send one unit of
demand from facility i to customer j. The main purpose of the transportation model is

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to minimize the total transportation costs from the facilities (plants or warehouses) to
the customers. However, the model has to make sure that all of the demands have to be
met and the number of facilities to P must be limited.

Whether to use the warehouse at location i is decided by the binary variable Xi,
which means if Xi = 1 then we use the facility at location i and if Xi = 0 then we don’t
use that facility. Similar to facility i serving customer j or not depends on binary
variable Yi,j; if Yi,j = 1, facility i serves customer j and vice versa.

1.4. Formulating and solution to the problem

The formula of transportation cost is slightly the same as the model of distance
weighted. The difference is that it represents the cost to send one unit off demand from
facility i to j. The objective of this formula is to minimize the total transportation cost
from facility to customer.

Some important notes in these constraints of this model such as the demand is
expressed in total, not shipment by shipment. Comprehensively, the demand is
expressed in single value and not shipment by shipment. The reason is we have to
create a model with potentially hundreds of thousands shipments points instead of
several hundred points which causes the render model to be unsolved. Running a
model with many shipments rolled into a single demand point will be as accurate as
one with individual shipments.

Next is the transportation cost per unit (multiplying transportation costs by units
of demand instead of shipments). If the formula expresses the transportation cost in
demand, it will lead to the similar issue as the case of demand in total shipments.
There are several types of rates in the transportation model. Many different
transportation providers may make multiple stops between picking up product at
facility i and delivering it to customer j. But, for the sake of modeling, the retailer is
only concerned about the single rate that charges them for the delivery and not all the
internal movements that take place to ensure that delivery.

Continuely is the commercial truckload or full truckload (TL or FTL). Whether

the vehicle is filled to the full or only 25%, the company is still charged for using it.

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Generally speaking, these rates are set either as a fee per mile or kilometer or as a flat
rate from one location to another.

Moreover, how the firm gets control partially or completely of its transportation
or its private/dedicted status. A private fleet is one in which a firm owns its own trucks.
These trucks are used to either deliver full loads to the customer or make multiple
stops. The rates for private or dedicated are usually a cost per mile with an optional
fixed cost with no affecting the directions of the movements. A dedicated fleet is
similar to a private fleet except that it is owned (and maybe operated) by a third party
but dedicated to a single client. This shipping will increase the probability of delay
schedule because there are transit times between multiple customers destinations or
suppliers.

Less-than-Truckload (LTL) is also in strictly controlled. When a company needs

to ship a little load to a location where hiring a full truck is not cost-effective, it enters
the LTL market. After that, this load travels through a number of hubs with other loads,
riding on various vehicles carrying loads that have comparable geographic
destinations, until loads are finally loaded onto a truck that is leaving a final hub. The
LTL trucking firm routes the merchandise through various hubs on each trip, yet they
only charge a single fee from origin to destination.

Furthermore, there are other factors influencing the constraints of the model.
Parcel is the first one, the parcel mode is a smaller lot than LTL. A firm is typically
charged based on the source, destination and package weight. Next is the form of
transportation such as ocean, similar to truckload transport, ocean transport involves
moving a company's goods between port towns across the ocean in containers rather
than truck trailers. The price of shipping a single container from one place to another is
how ocean rates are typically quoted. From port to port or door to door, the expenses
may vary. Rail is the second one, rail transport moves a firm’s product from one
railhead (railcar loading/unloading location) to another. Rail rates are typically
expressed in terms of the cost of a rail car to get from one point to another. Intermodal
or TL and rail transit are combined in intermodal transportation. An intermodal move
is when a company loads its shipment into a truck trailer first, then it is delivered to a
railhead where it is partially transferred to a flatbed rail car. Because the shipping
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company handles the entire move from the point of origin to the destination, these
rates are usually described as door-to-door rates. Finally is the multistop. The cost of
the multistop mode is in the range of TL and LTL above. A company has multiple
shipments to deliver in this scenario. Not every package is big enough to fill a whole
TL. A truck that uses multistop transportation picks up a load from a company at one
location and delivers it to multiple locations. With a stop-off fee, the prices are
typically stated as a cost per mile or kilometer.

The basic formula for the cost-per-unit is shown as follows:

Figure 3.
2. Cost per unit formula

Noted that transi,j is the unit transportation cost we need for our optimization problem,
loadi,j is the cost for the load to move from point i to j, and avgi,j is the average size of
the load.

To illustrate the model and calculate its application, the team formulated a
problem and solved a sample model based on the problem, the results of which are
shown in the Appendix.

II. Case Study: Transportation Costs and Oil Price

2.1. Backgrounds and problem issues
Oil price volatility significantly influences supply chain expenses. Rising oil
prices correspondingly inflate transportation costs. Supply chain managers have
learned from recent oil price volatility the importance of crafting a resilient supply
chain strategy that is effective regardless of whether oil prices are elevated or
depressed. Additionally, they must be adept at forecasting their transportation
expenditures in response to oil price shifts. Such concerns command the attention of a
company’s upper echelon.

For companies predominantly utilizing trucking for shipping, understanding the

relationship between oil prices and diesel fuel costs is the first step in addressing these
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 concerns. Once this relationship is established, estimating the proportion of
expenses attributable to diesel costs becomes possible. A comparable approach can be
applied to other transportation methods.

Figure 2.1 shows a scatter plot of the price of diesel versus oil. This represents
weekly data from December 30, 2005, to March 30, 2012.

Figure 3. Scatter plot diagram of diesel and oil price

A regression analysis can help us determine the relationship. Below is the requirement
of the case study:
a. Run a regression in Excel on this data with the price of diesel as the dependent
variable. What is the regression equation that relates the price of diesel to the price of
oil? What is the R squared value? What is the p-value for the independent variable, the
price of oil?
b. How much does this model predict that diesel will increase for every $10
increase in the price of oil?
c. Build a chart that shows the expected price of diesel for every $10 increment in
the price of oil from $20 a barrel to $200 a barrel.
d. If oil is currently $100 a barrel and you expect it to increase by 40% to $140,
what percent increase would you expect in the price of diesel fuel?
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 e. If oil is currently $40 a barrel and you expect it to increase by 100% to $80,
what percent increase would you expect in the price of diesel fuel?
f. How would you use this information when running different network modeling
scenarios?

2.2. Practice on Excel programme

The practice is presented in the Appendix section.
2.3. Solution and Explaination
2.3.1. Run a regression in Excel on this data with the diesel price as the dependent
variable. What is the regression equation that relates the price of diesel to the
price of oil? What is the R squared value? What is the p-value for the
independent variable, the price of oil?
After running regression on Excel, we can find out the answers to this question
based on Figure 7 in the Appendix section. The regression equation that relates the
price of diesel to the price of oil: 𝑦 = 0.0294𝑥 + 0.7907.
The intercept = 0.7907 represents the expected value of the dependent variable
(y) (which could be the price of diesel in this context) when the independent variable
(x) (the price of oil) is zero. It’s the starting point of the regression line on the (y) axis.
In real-world terms, it’s the base price of diesel when the price of oil has no effect,
although practically, the price of oil will never be zero.
The slope = 0.0294 indicates the rate at which the dependent variable (y)
changes to a one-unit change in the independent variable (x). In this case, for every
one-unit increase in the price of oil, the price of diesel is expected to increase by
0.0294 units. The regression equation tells that if the price of oil increases , the price of
diesel will also increase proportionally, and even if the price of oil does not change,
there is an inherent base price for diesel. This model is useful for predicting the price
of diesel based on changes in the price of oil.
R squared value = 0.8773 means that approximately 87.73% of the variation in
the dependent variable can be explained by the model’s inputs. A higher R-squared
value indicates a better fit of the model to the data. An R-squared value of 0.8773
suggests that the model explains a large majority of the variability in the outcome

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variable, making it a strong model for the prediction or explanation of the dependent
variable’s behavior.
The p-value for the independent variable (the price of oil) = 0 indicates that
there is a statistically significant relationship between the independent variable and the
dependent variable. It suggests that the likelihood of observing the data if there were
no actual relationship (the null hypothesis) is extremely low, to the point of being
virtually impossible.
2.3.2. How much does this model predict that diesel will increase for every $10
increase in the price of oil?
Using the regression equation 𝑦 = 0.0294𝑥 + 0.7907, where (y) represents the
price of diesel and (x) represents the price of oil, we can predict the increase in diesel
price for every $10 increase in the price of oil.
The slope of the equation, 0.0294, tells us how much the price of diesel is
expected to increase for each single unit increase in the price of oil. To find out the
increase for a $10 increase in oil price, we multiply the slope by 10:
𝐼𝑛𝑐𝑟𝑒𝑎𝑠𝑒 𝑖𝑛 𝑑𝑖𝑒𝑠𝑒𝑙 𝑝𝑟𝑖𝑐𝑒 = 0.0294 × $10 = $0.294
So, for every $10 increase in the price of oil, the model predicts that the price of
diesel will increase by approximately $0.294.

2.3.3. Build a chart that shows the expected price of diesel for every $10 increment in
the price of oil from $20 a barrel to $200 a barrel.

Figure 4. Diesel's price line chart

2.3.4. If oil is currently $100 a barrel and you expect it to increase by 40% to $140,
what percent increase would you expect in the price of diesel fuel?
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 Using the regression equation to calculate the price of diesel. With the price of oil
is $100, the price of diesel = 0.0294 × 100 + 0.7907 = 3.731 and with $140 so price
of diesel is 4.9067. Depending on the price of diesel we can calculate the percent
increase is 31,52% so we would expect the price of diesel to increase by 31,52% when
the price of oil by 40%.

Figure 5. Oil and diesel price with 40% increase

2.3.5. If oil is currently $40 a barrel and you expect it to increase by 100% to $80,
what percent increase would you expect in the price of diesel fuel?
Using the regression equation to calculate the price of diesel. With the price of oil
is $40, the price of diesel = 0.0294 × 40 + 0.7907 = $1.9667 and with $80 the price
of diesel is $3.4127. Depending on the price of diesel we can calculate the percent
increase is 59,97560% so we would expect the price of diesel to increase by
59.79560% when the price of oil by 100%.

Figure 6. Oil and diesel price with 100% increase

2.3.6. How would you use this information when running different network modeling
scenarios?
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 As b, we have the formula 𝑦 = 0.0294𝑥 + 0.7907 so if the price of oil
increases, the price of diesel increases the same. When simulating different scenarios,
you can adjust the expected oil prices and use the regression equation to estimate the
impact on diesel prices, thus allowing for more accurate cost projections in supply
chain management. For example, if 50% of our costs are fuel-related and $20/bbl is
our starting point, we might have a series of scenarios that increase transportation
costs.

III. Lesson Learned and Conclusion to Case Study

Similar to the weighted-average distance, transportation costs tend to push
facilities closer to the clients who are in high demand. This goal differs from the
solutions found by minimizing weighted-average distance, but it is still achieved when
there are large minimum charges or relatively flat rates (feasible when in large point
radius) or when the rates are not symmetrical (it draws the locations closer to both
high demand and lower transportation rates).

In a network design study, transportation expenses are frequently the most

significant to be included in the model initially. Depending on how the product is
carried through the supply chain, these expenses take different forms. Transportation
expenses essentially boil down to the requirement of applying the proper cost per unit
to go from Point A to Point B, even though there are certain particular instances to take
into account, such as multistop routes and the use of regression to fill in missing rates.

Transportation-related aspects can get very complicated, the model will not
measure accurately enough to discuss expenses precisely. Running numerous scenarios
is also an ideal method since the service metrics remain applicable and the extra
scenarios can help determining the value of an additional facility.

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IV. References

Part II: Adding Costs to Two Echelon Supply Chains - Chapter 06: Adding Outbound
Transportation to the Model. (08/2012). In S. L. Michael Watson, Supply Chain
Network Design: Applying Optimization and Analytics to the Global Supply
Chain. New Jersey: Pearson Education LTD.

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V. Appendix
5.1. Sample Problem and Model Formulation (Section 1.4)

Problem 01: The fashion company considers opening stores to serve customers
in 5 markets. The distances (disti,j) and unit transportation costs (transi,j) between the
markets are presented in the following table. For example From A to B is 35 (0.4)
which means the distance is 35km and the unit transportation cost is $0.4. The
demands of the 5 markets are: A (150.000), B (45.000), C (35.000), D (55.000) and E
(45.000). The supply chain design must consider the constraints: (1) All the demands
of the 5 markets must be served; (2) The company wants to open 3 stores to serve the
markets; (3) Only opened stores can serve the markets; and (4, 5) other binary
constraints.

Disti,j (transi,j) A B C D E
A 0 (0) 35 (0.4) 70 (0.5) 35 (0.4) 55 (0.45)
B 35 (0.4) 0 (0) 30 (0.3) 80 (0.6) 100 (0.7)
C 70 (0.5) 30 (0.3) 0 (0) 100 (0.7) 130 (0.75)
D 35 (0.4) 80 (0.6) 100 (0.7) 0 (0) 30 (0.3)
E 55 (0.45) 100 (0.7) 130 (0.75) 30 (0.3) 0 (0)

Table 1. Distance and unit transportation cost (in bracket) between the markets

Questions:1. If the company wants to minimize the total demand-weighted distance

(model A):
a. Establish the mathematical model (objective function and constraints with
indexes).
b.What is the value of total demand-weighted distance? Explain your solution (which
stores are opened and which markets they serve?)
c. Based on your solution, calculate the total transportation cost.
2. If the company wants to minimize the total transportation cost (model B):
a. Establish the mathematical model (objective function and constraints with
indexes).

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 b.What is the value of total transportation cost? Explain your solution (which stores
are opened and which markets they serve?)
c. Based on your solution, calculate the total demand-weighted distance.
3. Which model is better if you consider:
a. The total transportation cost
b. The total demand-weighted distance.

5.1.1. Solution to Question 01:

a. Establish the mathematical model (objective function and constraints with indexes).
The model is set up with the constraints:

Figure 7. Model for calculating total demand weighted distance

b. What is the value of total demand-weighted distance? Explain your solution (which
stores are opened and which markets they serve?)
First, we establish the distance (Disti,j) and unit transportation cost (Transi,j) table
by seperating the table above.

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 Disti,j A B C D E
A 0 35 70 35 55
B 35 0 30 80 100
C 70 30 0 100 130
D 35 80 100 0 30
E 55 100 130 30 0

Table 2. Distances (Disti,j) between the markets

Transi,j A B C D E
A 0 0,4 0,5 0,4 0,45
B 0,4 0 0,3 0,6 0,7
C 0,5 0,3 0 0,7 0,75
D 0,4 0,6 0,7 0 0,3
E 0,45 0,7 0,75 0,3 0
Table 3. Unit transportation costs (Transi,j) between the markets

After running the model with constraints given in the chapter’s theory, the result
is given below:

Set of Cities Demand-j X-i (use = 1)

A 150.000 1
B 45.000 1
C 35.000 -
D 55.000 1
E 45.000 -
Total Facilites 3
Total Allowed 3

Table 4. Cities allowed to open stores

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 Y- i,j A B C D E
A 1 0 0 0 0
B 0 1 1 0 0
C 0 0 0 0 0
D 0 0 0 1 1
E 0 0 0 0 0
Must Be Supplied 1 1 1 1 1

Table 5. Customer demands that must be served (If Y-i,j = 0, the demand can't be served
and if Y-i,j = 1, the demand can be served)

Set of Cities Objective

A -
B -
C 1.050.000
D -
E 1.350.000
Total Distance × Demand 2.400.000
Average Demand Weighted Distance 7

Table 6. Total demand-weighted distance

The total demand-weighted distance would be 2.400.000 km. Based on the result,
store A, B and D will be opened to served the customers. In which, all 03 store will
serve itself, additionally, store B will also serve market C and store D will serve
market E.
c. Based on your solution, calculate the total transportation cost.

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 Transportation cost A B C D E
A 0
B 0 10.500
C
D 0 13.500
E
Total transportation cost 24.000

Table 7. Total transportation cost of serving the customer

Based on table 5., only the market with a result of 01 can the store serve that
market. Therefore, we rely on the cell with value 01 to calculate the total
transportation cost using the formula
𝑻𝒓𝒂𝒏𝒔𝒑𝒐𝒓𝒕𝒂𝒕𝒊𝒐𝒏 𝒄𝒐𝒔𝒕 = 𝑫𝒆𝒎𝒂𝒏𝒅 × 𝑼𝒏𝒊𝒕 𝑻𝒓𝒂𝒏𝒔𝒑𝒐𝒓𝒕𝒂𝒕𝒊𝒐𝒏 𝑪𝒐𝒔𝒕
The result would be
150.000 × $0 + 45.000 × $0 + 45.000 × $0.3 + 55.000 × $0 + 55.000 × $0.3 = $24.000

5.1.2. Solution to Question 02:

a. Establish the mathematical model (objective function and constraints with indexes).
We use the model which was introduced in chapter 06 summary:

b. What is the value of total transportation cost? Explain your solution (which stores
are opened and which markets they serve?)

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 Again, we use the same data from the previous question, using the Table 02 and
Table 03 to calculate the total transportation cost. The results show the same answer as
Table 04 and Table 05, showing which city is allowed to open the store and which
market it serves. However, question 02 ask the total transportation cost, therefore, we
having the following result:

Set of Cities Objective

A -
B -
C 10.500
D -
E 13.500
Total Transportation Cost 24.000
Average Transportation Cost 0

Table 8. Total Transportation Cost

c. Based on your solution, calculate the total demand weighted distance.

Based on Table 08, only city C and E accounts for transportation cost, therefore,
we use the following formula to calculate total demand-weighted distance

Total demand weighted distance = 𝐷𝑒𝑚𝑎𝑛𝑑 × ∑ 𝑌𝑖,𝑗 𝐷𝑖𝑠𝑡𝑖,𝑗

The result is
Total demand weighted distance = 35.000 × 30𝑘𝑚 + 45.000 × 30𝑘𝑚
= 2.400.000
3. Which model is better if you consider:
a. The total transportation cost.
b. The total demand-weighted distance.
The choice between Model A and Model B depends on the priorities. If we focus
on cost reduction, total transportation cost model would be the best option because it
minimizes total transportation cost. Oppositely, if we focus on balancing cost and
distance, the total demand-weighted distance model would be an option can it
minimizes the total demand-weighted distance. This is preferable when ransportation
cost is directly proportional to distance, and higher demand deliveries have a bigger
cost impact.

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 Problem 02: The transportation data are presented in the following table
Region Origin city Destination city Shipment (Kg) Freight cost ($) Distance (Km)
South A B 39800 1286 663
A C 33503 1043 567
A D 38138 1149 586
A E 30500 1376 740
A F 34313 890 461
North A G 32175 625 393
A H 37409 417 245
A I 34305 730 415
A J 36695 996 576
A L 39253 742 464

1. Calculate the unit transportation cost ($/km) for both regions and the average unit
transportation cost estimated from city A to all the destination cities?
2. Use the regression to estimate the average unit transportation cost ($/km) from city
A to all the destination cities?
Solution to Question 01:
Region Origin city Destination cityUnit transportation cost ($) Average $/km
South A B $1,94
A C $1,84
A D $1,96 $1,91
A E $1,86
A F $1,93
North A G $1,59
A H $1,70
A I $1,76 $1,68
A J $1,73
A L $1,60
The average unit transportation cost $1,79

Table 9. Unit transportation cost ($/km) for both regions

To calculate the unit transportation cost ($/km) for both regions, we simply take
the freight cost ($) and divide by distance (km) using the formula
𝐹𝑟𝑒𝑖𝑔ℎ𝑡 𝑐𝑜𝑠𝑡 ($)
Unit transportation cost ($/𝑘𝑚) =
𝐷𝑖𝑠𝑡𝑎𝑛𝑐𝑒 (𝑘𝑚)
The avergae $/km is the average of the total unit transportation cost of each
regions. Similar with the average $/km, the average unit transportation cost.

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Solution to Question 02:

REGRESSION ANALYSIS - ALL SHIPMENTS

$1.600
$1.400
y = 1.83x
R² = 0.95
Freight Cost ($)

$1.200
$1.000
$800
$600
$400
$200
$0
0 100 200 300 400 500 600 700 800
Distance (Km)

Figure 8. Regression Analysis Based on All Shipments

The chart shows that the data fits well along a linear line based on the regression
analysis. This shows a calculated rate of $1.83/mile. The regression yields an R2 value
of 0.95 and statistically significant variables.
5.2. Practice on Excel (Case Study: Transportation Costs and Oil Price)

5.2.1. Run a regression in Excel on this data with the diesel price as the dependent
variable. What is the regression equation that relates the price of diesel to the price
of oil? What is the R squared value? What is the p-value for the independent
variable, the price of oil?
- Step 1: On the Data tab, in the Analysis group, click Data Analysis.
- Step 2: Select Regression and click OK.
- Step 3: Select the Y Range (C2:C329). This is the dependent variable (the price of
diesel).
- Step 4: Select the X Range (B2:B329). This is the independent variable (the price of
oil).
- Step 5: Check Labels if your data has column headers.
- Step 6: Click in the Output Range box and select a cell where you want the output to
appear.
- Step 7: Click OK.

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5.2.2. How much does this model predict that diesel will increase for every $10
increase in the price of oil?
Using the regression equation, we can predict how much the price of diesel will
increase for every $10 increase in the price of oil. We simply multiply the coefficient
of the price of oil by 10: 0.029 × 10 = 0.29

5.2.3. Build a chart that shows the expected price of diesel for every $10 increment in
the price of oil from $20 a barrel to $200 a barrel.
To build a chart that shows the expected price of diesel for every $10 increment
in the price of oil from $20 a barrel to $200 a barrel, we can use the following steps:
- Step 1: Create a new column (D) with the values 20, 30, 40, …, 200. These are the
increments of the price of oil.
- Step 2: Create another column (E) with the formula 0.717 + 0.038 × D2. This is the
predicted price of diesel for each increment of the price of oil. Copy this formula
down to the rest of the column.
- Step 3: Select the data in columns (D) and (E), and click Insert → Scatter → Scatter
with Straight Lines. This will create a scatter plot with a linear trendline.
- Step 4: Add axis titles, chart titles, and legends as desired.

5.2.4. If oil is currently $100 a barrel and you expect it to increase by 40% to $140,
what percent increase would you expect in the price of diesel fuel?
To calculate the percent increase which I expect in the price of diesel fuel, if oil
is currently $100 a barrel and I expect it to increase by 40% to $140.
- Step 1: Use the regression equation ( the number of Slope and intercept to calculate
the price of diesel depending on the price of oil.)
- Step 2: Apply this formula
Price of diesel = Slope × Price of oil + Intercept with the oil price applied respectively
- Step 3: to create a percent increase we use this formula
(𝑁𝑒𝑤 𝑝𝑟𝑖𝑐𝑒 − 𝑂𝑙𝑑 𝑝𝑟𝑖𝑐𝑒)
𝑃𝑒𝑟𝑐𝑒𝑛𝑡 𝑖𝑛𝑐𝑟𝑒𝑎𝑠𝑒 = [ ] 𝑥 100%
𝑂𝑙𝑑 𝑝𝑟𝑖𝑐𝑒

5.2.5. If oil is currently $40 a barrel and you expect it to increase by 100% to $80,
what percent increase would you expect in the price of diesel fuel?

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 - To calculate the percent increase which I expect in the price of diesel fuel, if oil is currently $100 a barrel and I expect it to increase
by 40% to $140.
- Step 1: Use the regression equation (the number of Slope and intercept to calculate the price of diesel depending on the price of oil.)
- Step 2: Apply this formula Price of diesel = SLOPE x Price of oil + intercept with the oil price applied respectively.
- Step 3: to create a percent increase we use this formula
(𝑁𝑒𝑤 𝑝𝑟𝑖𝑐𝑒 − 𝑂𝑙𝑑 𝑝𝑟𝑖𝑐𝑒)
𝑃𝑒𝑟𝑐𝑒𝑛𝑡 𝑖𝑛𝑐𝑟𝑒𝑎𝑠𝑒 = [ ] 𝑥 100%
𝑂𝑙𝑑 𝑝𝑟𝑖𝑐𝑒
5.2.6. How would you use this information when running different network modeling scenarios?
The answer is presented in section 2.3
Under the following figure is the summary output of the case study’result.

Figure 9. Summary Output of Case Study

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