TRANSPORTATION IN A SUPPLY CHAIN

Learning Objectives
To Understand : The role of transportation in a Supply Chain Type of transportation modes Transportation network design The trade off in transportation design Risk management in transportation

Role of Transportation in a Supply Chain
Movement of product from one location to another location. Its important driver because products are rarely produced and consumed in the same location Transportation decision impact to supply chain profitability and influence both inventory and facility decision within a supply chain 4 Parties that have significant impact to transportation : - Shipper - Carrier - Transportation infrastructures - Transportation policy (Gov body)

Modes Of Transportations
Air Package carriers Truck Rail Water Pipeline Intermodal

- Effectiveness of any mode of transport is effected by equipment
investment & operating decision by the carrier and available infrastructure & transportation policy. - Carrier objective is to ensure good utilization of its assets while providing customer with an acceptable level of service

Air
- Fast and very expensive mode of transportation - Usually to transport high value items, small size or time sensitive emergency shipment at long distance -Large fixed cost in infrastructure & equipment & relatively low variable cost - Labor and fuel cost are mostly trip related - Airline goal : Maximize the daily flying time of a plane and revenue generated per trip. - Key issues : - Identifying location and number of planes - assigning planes routes - setting up maintenance schedules for planes - scheduling crew - managing prices and availability at difference price

Package Carriers
- Package carriers are the transportation companies such as FedEx, UPS, which carry small packages ranging from letters to shipment weighing about 150 pounds - Package carriers usually use air, truck and rail - Shipper use for small size items and time sensitive shipments - Major service : rapid and reliable deliveries - Provide pick up service from the source and deliver it to the destination. - Allow shipper to track order status - Consolidation of shipments is the key factor in increasing utilization and decreasing cost of package carrier. - Key issues : - Location and capacity of transfer points - Information capability to facilitate and track the package flow

Truck
- Truck consist of 2 major segments : TL (Truck Load) and LTL (Less Truck Load) - Compare to rail : More expensive but provide door to door service and shorter delivery time, no transfer between pickup & delivery. - TL tend to be more cheaper for larger shipment than LTL - LTL usually for small lots (< ½ TL) - LTL carriers use the consolidation center - Key Success to reduce LTL cost is the degree of consolidation that carriers can achieve for the load carriers - Key issues of LTL : - Location of consolidation center - assigning of load to trucks - scheduling and routing of pick up and deliveries - LTL goal is to minimizing cost through consolidation without hurting delivery time & reliability

RAIL
- In 2002 rail carriers about 4% of US shipments by value, 12% by weight, >25% by total ton-miles. ton- Ideal mode for carrying large and heavy products for long distance and not vary time sensitive. - High fixed cost of rails, locomotives, cars and yards - Labor cost and fuel cost are about 60% of railroads expenses. Those cost are incurred even though the trains are not moving - Major goal for rail road firm is to keep locomotive and crew well utilized - Key issues : - vehicle and staff scheduling - Terminal delays - poor on time performance

Water
- Major ocean carriers : Maersk Sealand, evergreen group, American President Lines, Hanjin Shipping Co etc - Dominant mode for shipping all kinds of product. - Ideal for carrying very large loads at low cost. - The cheapest cost but the slowest and significant delays occur - Key issues : - Delays at port, customs, securities and the management of containers

Pipeline
- Use primary to transport crude petroleum, refined petroleum products and natural gas - Significant initial fix cost in setting up the pipelines infrastructure.

Intermodal
- Is the use of more than one mode of transport to move a shipment to its destination. - For Global trade, intermodal is often the only option because factories and markets may not be next to ports. Containerized freight often use truck/water/rail. - Key issues : - Exchange of information to facilitate shipment transfers between difference modes because the transfer often involve delays that hurting delivery time performance

Transportation design network
1. Direct Shipment Network
- All Shipment come directly from each supplier to each buyer location. - Strength : - Elimination of intermediate warehouses and its simplicity of operational and coordination, - Shorter transportation time - Efficient if demand at buyer location is large enough & lot size close to TL - Weaknesses : High cost for small qty, (If use TL carrier and order full truck will impact to inventory)

2. Direct Shipping with Milk Run
- Milk Run is a route on which a truck either delivers product from single supplier to multiple buyers or from multiple suppliers to a single buyer location. - Trade off between transportation cost and inventory cost. - Strength : - Elimination of intermediate warehouses - Lower transportation cost by consolidating shipments to multiple locations on single truck. - Weaknesses : - Longer delivery time - multi coordination with buyers or suppliers

3. All Shipment via Central DC
- Supplier do not ship directly to buyer location - The buyer divides location by geographic region and a DC is built for each region. - Suppliers send the shipments to DC then DC will forwards to each customers location. - Strength : - Reduce inbound transportation cost - Weakness : Require high degree of coordination

4. Shipping via DC Using Milk Run
- Milk run can be use from a DC if lots sized to be delivered to each buyer location are small. - Strength : Reduce transportation cost by consolidating small shipments. - Weakness : longer time of delivery

5. Tailored Transportation
The used of different transportation network and modes based on customer and product characteristics. 3 types : Tailored transportation by customer density and distance
Table 13.9 Transportation options based on Customer density and distance High density Private fleet and milk runs Cross Dock with milk runs Cross Dock with milk runs LTL carrier LTL or package carrier Package carrier

Medium density Third party milk runs Low density

Third party milk runs/ LTL carrier LTL or package carrier

Tailored transportation by size of customer - Very large customer can be supplied using a TL carrier - Small customer using LTL or milk runs Tailored transportation by product demand and value
Product Type High Value Low Value Disaggregated all inventories held close to the customer Aggregated safety inventory cycle inventory can be close to customer High Demand Disaggregated cycle inventory Aggregated safety inventory Low demand Ayggregated all inventory

Trade off in Transportation Design
Two important things to be consider when making transportation Decision - Transportation mode and Inventory cost trade off - Transportation cost and customer responsiveness trade off.

1. Transportation and Inventory cost trade off
- Two fundamental supply chain decisions for this trade off are choice of transportation mode and Inventory cost. - Faster mode are preferred for products with a high value to weight ratio - Slower or cheaper modes are preferred for product with small value to weight ratio.

Example : Eastern Electric (EE) Eastern Electric is a major major appliance manufacturer with a large plant in the Chicago area. EE purchases 120,000 motors each year from West view at price $120 per motor. Demand has been relatively constant for several years. Each motor average about 10 pounds in weight and EE has traditionally purchase lots of 3,000 motors. West view ships each EE order within a day. EE carriers a safety inventory equal to 50% of the average demand and for motors during the delivery lead time. Plant manager of EE receive several proposals for transportation. Golden offer marginal rate for the quantity >250 cwt , shipment cost will be reduce from $4/cwtto $3/cwt. Suggested EE to increase lot size to 4,000 motors. What should the plant manager do? (annual holding cost is 25%)
Transportation proposal for EE Electric Carrier Range of Qty shipped (cwt) Shipping cost ($/cwt)

AM Rail Nothest Trucking Golden Freigweys Golden Freigweys Golden Freigweys

200+ 100+ 50-150 150-250 250+

6.5 7.5 8 6 4

Analysis : GM decide to analyze total cost of both transportation cost and inventory cost of each transportation option Annual holding cost = 25% x $120 = $30 per motor Transit time by rail is 5 days, transit time by truck is 3 days. Rail : Minimum qty 20,000 ponds each shipment) Q : 20,000 pound or 2,000 motors L : 5 + 1 : 6 days Cycle inventory : Q/2 : 1,000 motors Safety Inventory : L/2x 120,000/365 : 986 motors In transit inventory : 120,000 (5/365) : 1,644 motors Total average inventory : 1,000 +986 +1,644 : 3,630 motors Annual holding cost : 3,630 x $30 : $108,900 Annual transportation cost : 120,000 x $0.65 : $78,000 Total annual inventory and transportation cost : $186,900

Alternative Transport Cost AM Rail $78,000 (2,000) Northeast $90,000 Trucking (1,000) Golden $96,000 (500) Golden $72,000 (2,500) Golden $36,000 (3,000) Golden $36,000 (4,000)

Cycle Safety Transit Inventory Total Inventory Inventory Inventory Cost Cost 1,000 986 1,644 $108,900 $186,900 500 658 986 $64,320 $154,320

250 1,250 1,500 2,000

658 658 658 658

986 986 986 986

$56,820 $86,820 $94,320 $109,320

$152,820 $161,714 $133.464 $148,964

Sign contract with Golden Freightways and order motors with lots 3,000 pcs, lowest overall cost.

2. Trade off between Transportation cost and customer responsiveness
- High responsiveness --- high transportation cost

-Decreasing responsiveness by temporary aggregating ---- lower
transportation cost

-Example : Alloy steel is steel service center. All orders are shipped to
customers using LTL that charge $100+0.01x, where x is the weight of steel ship per truck. Currently Alloy steel ship the orders on the day they received orders., 2 days in transit so total Lt is 2 days.Daily demand can be shown in Table 13.7. The GM feel that the customer do not value the 2 days LT. And would be satisfy with about 4 days. What are the cost advantage of increasing the response time?
Ta le 13.7 Dail Mon Week 1 19,970 Week2 39,171 T e 17,470 2,158 e and lloy steel over last two eriod We 11,316 20,633 T 26,192 23,370 Fri 20,263 24,100 Sat 8,381 19,603 S n 25,377 18,442

-Increase response time from 2 to 3 days will reduce transportation cost of
$700, reduce response time from 3 to 4 days will only reduce $200

Risk Management In Transportation
The risk that the shipment is delayed - moving inventory closer to the destination - building buffer stock - design network with multiple routes - long term contract for transportation The risk that the shipment does not reach the destination due to external forces : - to design alternative routes - decrease the possibility of such disruption The risk of hazardous material - to minimize probability of exposure - low risk transportation mode - use modified containers - selecting routes with less accident probability

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