Transportation in a

Supply Chain
Sessions 23, 24 and 25
December 2023
Managing Agricultural Supply Chain
BBAVIII Agribusiness
Fall 2023

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 14-1

 Learning Objectives
1. Understand the role of transportation in a supply
chain
2. Evaluate the strengths and weaknesses of
different modes of transportation
3. Discuss the role of infrastructure and policies in
transportation
4. Identify the relative strengths and weaknesses of
various transportation network design options
5. Identify trade-offs that shippers need to consider
when designing a transportation network
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 14-2
 The Role of Transportation
in a Supply Chain
• Transportation
– refers to the movement of a product from one location to another
– important because products are rarely produced and consumed in the same
location

• Significant cost component and core for responsiveness

• Parties
– Shipper requires the movement of the product
• To minimize the total cost while providing an appropriate level of responsiveness
– Carrier moves or transports the product
• To ensure maximum utilization of its assets while proving an acceptable level of service
– Owners and Operators of transportation infrastructure
– Transportation Policymaking Bodies – abuse of monopoly power; promote
fair competition and balance environmental energy, and social concerns.
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 14-3
 Modes of Transportation and their
Performance Characteristics

• Air
• Package carriers
• Truck
• Rail
• Water
• Pipeline
• Intermodal
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 14-4
 Modes of Transportation and their
Performance Characteristics
Value
Freight Freight Freight Added to
Value Tons Ton-Miles GNP
($ billions) (billions) (millions) (billion $)
Mode in 2002 in 2002 in 2002 in 2009
Air (includes 563 6 13 61.9
truck and air)
Truck 9,075 11,712 1,515 113.1
Rail 392 1,979 1,372 30.8
Water 673 1,668 485 14.3
Pipeline 896 3,529 688 12.0
Multimodal 1,121 229 233

Table 14-1

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 14-5

 Air
• Cost components
– Fixed infrastructure and equipment
– Labor and fuel (fixed for a flight)
– Variable – depends on passenger/cargo
• Objective
– maximize the revenue generated per fight
– suitable for small, high-value items for long-distance travel
• Key issues
– Location/number of hubs, Fleet assignment
– Maintenance schedules, Crew scheduling
– Prices and availability

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 14-6

 Package Carriers
• These are transportation companies like TCS,
Leopards, TRAX, etc., and handle relatively smaller
and time-sensitive packages -
– Preferred mode of transport for last-mile deliveries e.g., Daraz, etc.
– Rapid and reliable delivery
– Provide other value-added services and tracking

• Consolidation of shipments is a key objective

– Sorting centers
– Increasing utilization and decreasing costs for the package carriers

• Key issues
– Location and Capacity, Information capability
– Scheduling and Routing
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 14-7
 Truck
• Significant fraction of the goods moved
– More expensive than rail but offers door-to-door shipment and a shorter
delivery time
– Relatively low fixed cost

• Objective
– Schedule shipments that provide high revenue while minimizing trucks’
idle time and empty travel time (deadheading)

• Two Major Segments

– Truckload (TL)
• Low fixed cost, Imbalance between flows

– Less than truckload (LTL)

• Small lots, Hub and spoke system, May take longer than TL

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 14-8

 Rail
• Move commodities over large distances
– High fixed costs in terms of tracks, locomotives, cars, and yards
– Ideal for heavy, low-value/high-density shipments over long distances
that are not time sensitive

• Objective
– Keep locomotives and crews well utilized

• Key issues
– Vehicle and staff scheduling, track and terminal delays, a poor on-time
performance due to track congestion, idle time
– Transportation time can be long
• Trains ‘built’ not scheduled

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 14-9

 Water
• Limited to certain geographic areas
– Ocean, coastal waters, inland waterway system (
https://www.iwt.punjab.gov.pk/background)
– Primarily for large bulky commodity movement

• Very large loads at a very low cost

– Slowest
– Significant delays occur at ports and terminals

• Dominant in global trade – Maritime transportation

– Containers
– Issues
• Delays at ports, customs, and security, management of containers

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 14-10

 Pipeline

• High fixed cost

• Primarily for crude petroleum, refined
petroleum products, natural gas
• Best for large and stable flows
• Pricing structure encourages use for
predictable demand

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 14-11

 Intermodal
• Use of more than one mode of transportation
to move a shipment
• May be the only option for global trade
• More convenient for shippers – one entity
that together provides the intermodal service
• Key issue
– exchange of information to facilitate transfer
between different modes

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 14-12

 Transportation Infrastructure
and Policies
• Transportation infrastructure is viewed as a public good.
• Governments generally take full responsibility or play a
significant role in building and managing infrastructure
elements
• Toll-free highways using taxes or private toll roads
• Without a monopoly, deregulation and market forces
help create an effective industry structure
• To improve overall efficiency,
• public ownership of these assets must be accompanied by
the setting of quasi-market prices (higher prices at peak
locations and times and lower prices otherwise)
• Other examples, like why the petrol levy is the same for all
customers.

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 14-13

 Design Options for a
Transportation Network

• A well-designed transportation network allows a supply

chain to achieve the desired degree of responsiveness
at a low cost
• When designing a transportation network
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)?

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 14-14

 Direct Shipment Network
to Single Destination

Figure 14-2

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 14-15

 Direct Shipping with Milk Runs

Figure 14-3

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 14-16

 All Shipments via Intermediate
Distribution Center with Storage

Figure 14-4

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 14-17

 All Shipments via Intermediate Transit
Point with Cross-Docking

• Suppliers send their shipments to an

intermediate transit point
• They are cross-docked and sent to
buyer locations without storing them

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 14-18

 Shipping via DC Using Milk Runs

Figure 14-5

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 14-19

 Tailored Network
Network Structure Pros Cons

Direct shipping No intermediate warehouse High inventories (due to large

Simple to coordinate lot size)
Significant receiving expense
Direct shipping with milk Lower transportation costs for small lots Increased coordination
runs Lower inventories complexity
All shipments via Lower inbound transportation cost Increased inventory cost
central DC with through consolidation Increased handling at DC
inventory storage
All shipments via Low inventory requirement Increased coordination
central DC with cross- Lower transportation cost through complexity
dock consolidation
Shipping via DC using Lower outbound transportation cost for Further increase in coordination
milk runs small lots complexity
Tailored network Transportation choice best matches Highest coordination complexity
needs of individual product and store

Table 14-2

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 14-20

 Selecting a Transportation Network

• Consider the following network needs

and constraints and determine which
transportation network, Direct shipping
or Milk runs (two stores/truck) will be
more cost efficient?
– Eight stores, four supply sources
– Truck capacity = 40,000 units
– Cost $1,000 per load, $100 per delivery
– Holding cost = $0.20/year
– Annual sales = 960,000/store
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 14-21
 Selecting a Transportation Network
Annual sales = 960,000/store Direct shipping
Batch size shipped from each
supplier to each store = 40,000 units
Number of shipments/yr from
each supplier to each store = 960,000/40,000 = 24
Annual trucking cost
for direct network = 24 x 1,100 x 4 x 8 = $844,800
Average inventory at each
store for each product = 40,000/2 = 20,000 units
Annual inventory cost
for direct network = 20,000 x 0.2 x 4 x 8 = $128,000
Total annual cost of
direct network = $844,800 + $128,000 = $972,800

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 14-22

 Selecting a Transportation Network
Annual sales = 960,000/store Milk runs (two stores/truck)
Batch size shipped from each
supplier to each store = 40,000/2 = 20,000 units
Number of shipments/yr from
each supplier to each store = 960,000/20,000 = 48
Transportation cost per shipment
per store (two stores/truck) = 1,000/2 + 100 = $600
Annual trucking cost
for direct network = 48 x 600 x 4 x 8 = $921,600
Average inventory at each
store for each product = 20,000/2 = 10,000 units
Annual inventory cost
for direct network = 10,000 x 0.2 x 4 x 8 = $64,000
Total annual cost of
direct network = $921,600 + $64,000 = $985,600
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 14-23
 Selecting a Transportation Network
Annual sales = 120,000/store Direct shipping
Batch size shipped from each
supplier to each store = 40,000 units
Number of shipments/yr from
each supplier to each store = 120,000/40,000 = 3
Annual trucking cost
for direct network = 3 x 1,100 x 4 x 8 = $105,600
Average inventory at each
store for each product = 40,000/2 = 20,000 units
Annual inventory cost
for direct network = 20,000 x 0.2 x 4 x 8 = $128,000
Total annual cost of
direct network = $105,600 + $128,000 = $233,600

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 14-24

 Selecting a Transportation Network
Annual sales = 120,000/store Milk runs
Batch size shipped from each
supplier to each store = 40,000/4 = 10,000 units
Number of shipments/yr from
each supplier to each store = 120,000/10,000 = 12
Transportation cost per shipment
per store (two stores/truck) = 1,000/4 + 100 = $350
Annual trucking cost
for direct network = 12 x 350 x 4 x 8 = $134,400
Average inventory at each
store for each product = 10,000/2 = 5,000 units
Annual inventory cost
for direct network = 5,000 x 0.2 x 4 x 8 = $32,000
Total annual cost of
direct network = $134,400 + $32,000 = $166,400
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 14-25
 Trade-offs in Transportation Design

• Transportation and inventory cost

trade-off
– Choice of transportation mode
– Inventory aggregation
• Transportation cost and
responsiveness trade-off

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 14-26

 Trade-offs in Transportation Design
Choice of Transportation Mode -
Inventory Costs vs. Transportation Costs
Cycle Safety In-Transit Transportation Transportation
Mode Inventory Inventory Cost Time Cost
Rail 5 5 5 2 5
TL 4 4 4 3 3
LTL 3 3 3 4 4
Package 1 1 1 6 1
Air 2 2 2 5 2
Water 6 6 6 1 6

Table 14-3

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 14-27

 Case Dabbawala System: On-
time Delivery Everytime
• One Page Case Reading
• https://www.youtube.com/watch?v=dX-0el
2wuEU

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 14-28

 Tradeoffs When
Aggregating Inventory

Aggregate Disaggregate
Transport cost Low High
Demand uncertainty High Low
Holding cost High Low
Customer order size Large Small

Table 14-7

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 14-29

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

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 14-30

 Tailored Transportation

Short Distance Medium Distance Long Distance

High density Private fleet with Cross-dock with Cross-dock with
milk runs milk runs milk runs
Medium density Third-party milk LTL carrier LTL or package
runs carrier
Low density Third-party milk LTL or package Package carrier
runs or LTL carrier carrier

Table 14-10

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 14-31

 Tailored Transportation
Product Type High Value
High demand Disaggregate cycle inventory.
Aggregate safety inventory.
Inexpensive mode of
transportation for replenishing
cycle inventory and fast mode
when using safety inventory.
Low demand Aggregate all inventories. If
needed, use fast mode of
transportation for filling
customer orders.
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall.
Low Value
Disaggregate all inventories
and use inexpensive mode of
transportation for
replenishment.
Aggregate only safety
inventory. Use inexpensive
mode of transportation for
replenishing cycle inventory.
Table 14-11
14-32
 Role of IT in Transportation
• The complexity of transportation decisions
demands 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

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 14-33

 Risk Management in
Transportation
• Three main risks to be considered in transportation are
1. Risk that the shipment is delayed
2. Risk of disruptions
3. Risk of hazardous material
• 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
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 14-34
 Making Transportation
Decisions in Practice

1. Align transportation strategy with

competitive strategy
2. Consider both in-house and outsourced
transportation
3. Use technology to improve transportation
performance
4. Design flexibility into the transportation
network

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 14-35

 Summary of Learning Objectives

1. Understand the role of transportation in a supply

chain
2. Evaluate the strengths and weaknesses of
different modes of transportation
3. Discuss the role of infrastructure and policies in
transportation
4. Identify the relative strengths and weaknesses of
various transportation network design options
5. Identify trade-offs that shippers need to consider
when designing a transportation network

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 14-36