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Discussion 3

14

Transportation in a Supply Chain

PowerPoint presentation to accompany

Chopra and Meindl Supply Chain Management, 5e

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Learning Objectives

Understand the role of transportation in a supply chain

Evaluate the strengths and weaknesses of different modes of transportation

Discuss the role of infrastructure and policies in transportation

Identify the relative strengths and weaknesses of various transportation network design options

Identify trade-offs that shippers need to consider when designing a transportation network

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The Role of Transportation
in a Supply Chain

Movement of product from one location to another

Products rarely produced and consumed in the same location

Significant cost component

Shipper requires the movement of the product

Carrier moves or transports the product

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Modes of Transportation and their Performance Characteristics

Air

Package carriers

Truck

Rail

Water

Pipeline

Intermodal

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Notes:

Modes of Transportation and their Performance Characteristics

Mode Freight Value
($ billions)
in 2002
Freight Tons (billions)
in 2002
Freight
Ton-Miles (millions)
in 2002
Value Added to GNP
(billion $)
in 2009
Air (includes truck and air) 563 6 13 61.9
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

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Notes:

Air

Cost components

Fixed infrastructure and equipment

Labor and fuel

Variable – passenger/cargo

Key issues

Location/number of hubs

Fleet assignment

Maintenance schedules

Crew scheduling

Prices and availability

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Notes:

Package Carriers

Small packages up to about 150 pounds

Expensive

Rapid and reliable delivery

Small and time-sensitive shipments

Provide other value-added services

Consolidation of shipments a key factor

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Truck

Significant fraction of the goods moved

Truckload (TL)

Low fixed cost

Imbalance between flows

Less than truckload (LTL)

Small lots

Hub and spoke system

May take longer than TL

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Notes:

Rail

Move commodities over large distances

High fixed costs in equipment and facilities

Scheduled to maximize utilization

Transportation time can be long

Trains ‘built’ not scheduled

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Notes:

Water

Limited to certain geographic areas

Ocean, inland waterway system, coastal waters

Very large loads at very low cost

Slowest

Dominant in global trade

Containers

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Pipeline

High fixed cost

Primarily for crude petroleum, refined petroleum products, natural gas

Best for large and stable flows

Pricing structure encourages use for predicable component of demand

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Intermodal

Use of more than one mode of transportation to move a shipment

Grown considerably with increased use of containers

May be the only option for global trade

More convenient for shippers – one entity

Key issue – exchange of information to facilitate transfer between different modes

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Transportation Infrastructure
and Policies

Governments generally take full responsibility or played a significant role in building and managing infrastructure elements

Without a monopoly, deregulation and market forces help create an effective industry structure

Pricing should reflect the marginal impact on the cost to society

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Transportation Infrastructure
and Policies

Figure 14-1

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Design Options for a
Transportation Network

When designing a transportation network

Should transportation be direct or through an intermediate site?

Should the intermediate site stock product or only serve as a cross-docking location?

Should each delivery route supply a single destination or multiple destinations (milk run)?

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15

Notes:

Direct Shipment Network
to Single Destination

Figure 14-2

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Direct Shipping with Milk Runs

Figure 14-3

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All Shipments via Intermediate Distribution Center with Storage

Figure 14-4

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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

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Shipping via DC Using Milk Runs

Figure 14-5

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Tailored Network

Network Structure Pros Cons
Direct shipping No intermediate warehouse
Simple to coordinate
High inventories (due to large lot size)
Significant receiving expense
Direct shipping with milk runs Lower transportation costs for small lots Lower inventories Increased coordination complexity
All shipments via central DC with inventory storage Lower inbound transportation cost through consolidation Increased inventory cost Increased handling at DC
All shipments via central DC with cross-dock Low inventory requirement
Lower transportation cost through
consolidation
Increased coordination complexity
Shipping via DC using milk runs Lower outbound transportation cost for small lots Further increase in coordination complexity
Tailored network Transportation choice best matches needs of individual product and store Highest coordination complexity

Table 14-2

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Selecting a Transportation Network

Eight stores, four supply sources

Truck capacity = 40,000 units

Cost $1,000 per load, $100 per delivery

Holding cost = $0.20/year

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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

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Selecting a Transportation Network

Annual sales = 960,000/store Milk runs

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

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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

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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

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Trade-offs in Transportation Design

Transportation and inventory cost trade-off

Choice of transportation mode

Inventory aggregation

Transportation cost and responsiveness trade-off

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Trade-offs in Transportation Design

Mode Cycle Inventory Safety Inventory In-Transit Cost Transportation Time Transportation 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

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Trade-offs When Selecting Transportation Mode

Demand = 120,000 motors, Cost = $120/motor,

Weight = 10 lbs/motor, Lot size = 3,000,

Safety stock = 50% ddlt

Carrier Range of Quantity Shipped (cwt) Shipping Cost ($/cwt)
AM Railroad 200+ 6.50
Northeast Trucking 100+ 7.50
Golden Freightways 50–150 8.00
Golden Freightways 150–250 6.00
Golden Freightways 250+ 4.00

Table 14-4

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Trade-offs When Selecting Transportation Mode

Cycle inventory = Q/2 = 2,000/2 = 1,000 motors

Safety inventory = L/2 days of demand
= (6/2)(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
using AM Rail = 3,630 x $30 = $108,900

Annual transportation
cost using AM Rail = 120,000 x 0.65 = $78,000

The total annual cost for
inventory and transportation
using AM Rail = $186,900

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Trade-offs When Selecting Transportation Mode

Alternative Lot Size (Motors) Transpor-
tation
Cost
Cycle Inventory Safety Inventory In-Transit Inventory Inventory Cost Total Cost
AM Rail 2,000 $78,000 1,000 986 1,644 $108,900 $186,900
Northeast 1,000 $90,000 500 658 986 $64,320 $154,320
Golden 500 $96,000 250 658 986 $56,820 $152,820
Golden 1,500 $96,000 750 658 986 $71,820 $167,820
Golden 2,500 $86,400 1,250 658 986 $86,820 $173,220
Golden 3,000 $80,000 1,500 658 986 $94,320 $174,320
Golden (old proposal) 4,000 $72,000 2,000 658 986 $109,320 $181,320
Golden (new proposal) 4,000 $67,000 2,000 658 986 $109,320 $176,820

Table 14-5

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Tradeoffs When
Aggregating Inventory

Highval – weekly demand μH = 2, σH = 5, weight = 0.1 lbs, cost = $200

Lowval – weekly demand μL = 20, σL = 5, weight = 0.04 lbs, cost = $30

CSL = 0.997, holding cost = 25%, L = 1 week, T = 4 weeks

UPS lead time = 1 week, $0.66 + 0.26x

FedEx lead time = overnight, $5.53 + 0.53x

Option A. Keep the current structure but replenish inventory once a week rather than once every four weeks

Option B. Eliminate inventories in the territories, aggregate all inventories in a finished-goods warehouse at Madison, and replenish the warehouse once a week

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Tradeoffs When
Aggregating Inventory

HighMed inventory costs (current scenario, HighVal)

All 24 territories, HighVal inventory = 24 x 34.7 = 832.8 units

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Tradeoffs When
Aggregating Inventory

HighMed inventory costs (current scenario, LowVal)

All 24 territories, LowVal inventory = 24 x 70.7 = 1696.8 units

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Tradeoffs When
Aggregating Inventory

Annual inventory

holding cost

for HighMed = (average HighVal inventory x $200

+ average LowVal inventory x $30) x 0.25

= (832.8 x $200 + 169.8 x $30) x 0.25

= $54,366 ($54,395 without rounding)

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Tradeoffs When
Aggregating Inventory

HighMed transportation cost (current scenario)

Average weight of each replenishment order

= 0.1QH + 0.04QL = 0.1 x 8 + 0.04 x 80 = 4 pounds

Shipping cost per replenishment order

= $0.66 + 0.26 x 4 = $1.70

Annual transportation cost = $1.70 x 13 x 24 = $530

HighMed total cost (current scenario)

Annual inventory and transportation cost at HighMed

= inventory cost + transportation cost

= $54,366 + $530 = $54,896

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Tradeoffs When
Aggregating Inventory

Current Scenario Option A Option B
Number of stocking locations 24 24 1.2 units
Reorder interval 4 weeks 1 week 1 week
HighVal cycle inventory 96 units 24 units 24 units
HighVal safety inventory 737.3 units 466.3 units 95.2 units
HighVal inventory 833.3 units 490.3 units 119.2 units
LowVal cycle inventory 960 units 240 units 240 units
LowVal safety inventory 737.3 units 466.3 units 95.2 units
LowVal inventory 1,697.3 units 706.3 units 335.2 units
Annual inventory cost $54,395 $29,813 $8,473
Shipment type Replenishment Replenishment Customer order
Shipment size 8 HighVal + 80 LowVal 2 HighVal + 20 LowVal 1 HighVal + 10 LowVal
Shipment weight 4 lbs. 1 lb. 0.5 lb.
Annual transport cost $530 $1,148 $13,464
Total annual cost $54,926 $30,961 $22,938

Table 14-6

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Tradeoffs When
Aggregating Inventory

Average weight of each customer order

= 0.1 x 0.5 + 0.04 x 5 = 0.25 pounds

Shipping cost per customer order

= $5.53 + 0.53 x 0.25 = $5.66

Number of customer orders per territory per week = 4

Total customer orders per year = 4 x 24 x 52 = 4

Annual transportation cost = 4,992 x $5.66 = $28,255

Total annual cost = inventory cost + transportation cost

= $8,474 + $28,255 = $36,729

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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

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Trade-off Between Transportation Cost and Responsiveness

Steel shipments LTL = $100 + 0.01x

Monday Tuesday Wednesday Thursday Friday Saturday Sunday
Week 1 19,970 17,470 11,316 26,192 20,263 8,381 25,377
Week 2 39,171 2,158 20,633 23,370 24,100 19,603 18,442

Table 14-8

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Trade-off Between Transportation Cost and Responsiveness

Two-Day Response Three-Day Response Four-Day Response
Day Demand Quantity Shipped Cost ($) Quantity Shipped Cost ($) Quantity Shipped Cost ($)
1 19,970 19,970 299.70 0 0
2 17,470 17,470 274.70 37,440 474.40 0
3 11,316 11,316 213.16 0 48,756 586.56
4 26,192 26,192 361.92 37,508 475.08 0
5 20,263 20,263 302.63 0 0
6 8,381 8,381 183.81 28,644 386.44 54,836 648.36
7 25,377 25,377 353.77 0 0
8 39,171 39,171 491.71 64,548 745.48 0
9 2,158 2,158 121.58 0 66,706 767.06
10 20,633 20,633 306.33 22,791 327.91 0
11 23,370 23,370 333.70 0 0
12 24,100 24,100 341.00 47,70 574.70 68,103 781.03
13 19,603 19,603 296.03 0 0
14 18,442 18,442 284.42 38,045 480.45 38,045 480.45
$4,164.46 3,464.46 3,264.46

Table 14-9

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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

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Tailored Transportation

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

Table 14-10

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Tailored Transportation

Table 14-11

Product Type High Value Low Value
High demand Disaggregate cycle inventory. Aggregate safety inventory. Inexpensive mode of transportation for replenishing cycle inventory and fast mode when using safety inventory. Disaggregate all inventories and use inexpensive mode of transportation for replenishment.
Low demand Aggregate all inventories. If needed, use fast mode of transportation for filling customer orders. Aggregate only safety inventory. Use inexpensive mode of transportation for replenishing cycle inventory.

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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

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Risk Management in Transportation

Three main risks to be considered in transportation are

Risk that the shipment is delayed

Risk of disruptions

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

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Making Transportation
Decisions in Practice

Align transportation strategy with competitive strategy

Consider both in-house and outsourced transportation

Use technology to improve transportation performance

Design flexibility into the transportation network

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