Transportation and Network

Planning
 A Cost Conflict in Logistics

Total cost
Cost, in dollars

Cost of
Inventory cost transportation
(includes service
storage and
intransit

Rail Truck Air

Transportation service
(greater speed and dependability)
 Transportation
Drivers of transportation decisions
1. Transportation Cost Structures:
• Transportation Cost is a function of distance and
quantity of goods shipped
• With increasing distance, rate of increase of
transportation costs will go down (economies of
distance in transportation)
• Transportation rates decrease with increase in
shipment weight (economies of scale)
• Also rates depend on point of origin and destination of
the freight (because demand and supply at both
points will have impact on freight rates)
2. Product Value Density
Value density captures the ratio of rupee value of the
product to its weight (shows importance of
transportation cost in total product cost)
• For products with higher value-density(like
electronics), firms can afford to work with faster
and more expensive modes of transport, as TC is a
small fraction of Total Cost (i.e. less effect on profit)
• Vice versa for low value density products (like
cement, coal)
• Sometimes need to consider by volume instead of
weight (like cyles,storage tanks etc.)
3. Demand Characteristics
• Involves volume of demand for the product and
nature of uncertainty associated with product
demand
• Cycle stock and Safety stock are based on this
• Lower volumes of demand may not allow firms
to benefit from economies of scale in
transportation as higher shipment sizes result in
high cycle stocks
• For high demand uncertainty products firms
should use faster modes of transport
 Choices Available

• Rail
• Road
• Water
• Air
• Pipeline
 Rail

• Ideal for low-value-density products

• Lower freight costs, but long and unreliable
lead times
 Road

• Expensive than rail but offers door-to-door

shipment and shorter delivery time
• Trucking Industry in India is low cost but low
service industry
• Out of 3.32 million kms of road network in
India, NH accounts only 2% of the length
Water

• One of cheapest but slowest

• Use for international cargos

Air
• Fairly fast but expensive
• Effective for time sensitive, high-value-density
goods
Total Cost Approach

• Total Cost= Transportation Cost+ Cycle-stock

inventory-carrying cost+ pipeline inventory-
carrying cost+ safety-stock inventory cost+ cost
of losses and damages

• Road is the least expensive mode

Relative Ranking* of Transportation
Mode by Performance Measures

*1 is most favourable & 5 is least favourable from shipper point of views

* * Delivery time variability in absolute terms
 Distribution Network Design Options

1. Direct Shipping
• Ship directly from each plant to each market
• Works best if each product line has high
volumes and low degree of demand uncertainty
– When retailers requires fully loaded trucks
– When mandated by powerful retailers
– When lead time is critical
– Manufacturer may be reluctant but may have no
choice
– In grocery industry (perishable goods)*
*Where Lead Times are critical due to perishable goods
2. Milk Run
• Aggregate product-wise demand across all
the depots.
• Instead of 9 visits there would be 3 visits
• May increase transportation costs but less
cycle stock inventory (fritolay,toyota)
Direct Shipping
Shipping Using Milk Run
3. Shipping via a Central Distribution Centre
• Cycle stock at depots/retailers equal to that of
Milk run
• Transportation cost higher than direct but less
than Milk run
• But involves putting additional facility,
additional inventory at DC and additional
loading and unloading costs at DC
Shipping via a Central Distribution Centre
 Direct Shipment Distribution Strategies
• Manufacturer/Supplier delivers goods directly to retail
stores (bypassing warehouses & distribution centers)
Advantages:
• Expenses of operating a distribution centre can be
avoided
• Lead Times are reduced
Disadvantages:
• Risk Pooling effects negated as no central warehouse
• Manufacturer and distributor transportation Costs
increase because need to send smaller trucks to more
locations
 2. Cross-Docking
• Strategy made famous by Wal-Mart
• Warehouses act as inventory coordination points
rather than as inventory storage points
• Goods arrive at warehouses from manufacturer,
spend very little time in warehouse (<12 hrs),are
transferred to vehicles serving retailers &
delivered to retailers as rapidly as possible
• System Limits inventory Costs and decreases lead
times by decreasing storage time
Cross-Docking require significant start-up
investment & are difficult to manage:
• Distribution centers, retailers, suppliers m/b
linked with advanced Information System to
ensure timely pick-ups & deliveries
• Fast & responsive transportation system
• Forecasts are essential, necessitating sharing of
information
• Effective only for large distribution systems where
full truck loads can be sent, more retailers and
product demand should be sufficient
Intermodal Transportation
– Use of two or more different modes in movement
– Greater accessibility
– Overall cost efficiency
– Development of standardized containers that are
compatible with multiple modes.
Modes of Transportation
 Intermodal
• Use of more than one mode of transportation to move a
shipment to its destination
• Most common example: 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
Types of Intermodal Services
 Intermodal Transportation:
Containerization
• Referred to as Container-on-Flat-Car (COFC);
goods are placed in a large box, where they are
untouched until they arrive at the consigee’s
unloading dock.
• Reduces theft, damage, multiple handling costs
and intermodal transfer time.
• Changes materials handling from labor intensive
to capital intensive and may reduce costs from 10
to 20%.
 Intermodal Transportation:
Piggyback
• Trailer-on-Flat-Car (TOFC)
• Over the road trailers ride in special rail cars.
• Takes advantage of motor flexibility and rail’s long haul
economic advantage.
• Multiple service plans for shippers.
• Some railroads provide varying levels of service, differentially
priced.
 Intermodal Transportation: RoadRailers
• Newest concept referred to as a “RoadRailer”
• Roadrailer is essentially a road trailer that can also roll on rail
tracks.
• Essentially a trailer that has been reinforced to ride on a rail
bogey and be coupled together directly without first being placed
on a rail flat car
• Saves weight and locomotive power and thus fuel for the railroad
• Special lower rates
• Motor competitive transit times
Benefits of Intermodal Transport
–utilizes the inherent advantages of modes
–minimizes impact of modes' disadvantages
–creates cost and operating efficiencies
–becoming niche oriented - increased options
–reduces duplicate functions
–improves global access improves global access
 Features

• The nature and quantity of the transported cargo.

Usually suitable for intermediate and finished goods in
load units of less than 25 tons.
• The modes of transportation being used.
• The origins and destinations: Distances above 500 km
(longer than one day of trucking) usually require
intermodal transportation.
• The value of the cargo: Suitable for intermediate cargo
values (High value shipments will tend to use the most
direct options (such as air cargo) while low value
shipments are usually point to point and relying on one
mode such as rail or maritime)