MM Lecture 4 - New Slides

Post Graduate Diploma in
Supply Chain
Management
TRANSPORTATION & DISTRIBUTION
OUT LINE
 The role of transportation in the supply chain

 Factors affecting transportation decisions
 Modes of transportation and their performance
characteristics
 Design options for a transportation network
 Trade-offs in transportation design
 Tailored transportation
 Routing and scheduling in transportation
 Making transportation decisions in practice
Role of Transportation in SCM
Plays important role in SC process since products are rarely produced

and consumed in same location.
Main purpose of transportation is to provide right quantity of
right quality goods at right time and place in least possible
cost.
Logistical cost can be reduced and customer service capabilities can be increased by:
 Reduction in transit time

 Reducing damages
 Curtailing productive packaging cost
Factors Affecting Transportation Decisions
Carrier (party that moves or transports the product)

Vehicle-related cost
Fixed operating cost
Trip-related cost
Shipper (party that requires the movement of the product

between two points in the supply chain)
Transportation cost
Inventory cost
Facility cost
Transportation Modes
 Trucks TL LTL
 Rail
 Air
 Package Carriers
 Water
 Pipeline
Rail
 low-value, high-density, bulk products, raw

materials, intermodal containers
 not as economical for small loads, slower,
less flexible than
Rail
Average revenue / ton-mile (1996) = 2.5 cents
Average haul = 720 miles
Average load = 80 tons
Key issues
• Scheduling to minimize delays / improve service

• Off-track delays (at pickup and delivery end)
• Yard operations
• Variability of delivery times
Trucking
 Main mode of freight transport in U.S.
 Small loads, point-to-point service, flexible
 More reliable, less damage than rails; more
expensive than rails for long distance
Truckload (TL) Less Than Truckload (LTL)
Average revenue per ton mile (1996) = 9.13 cents Average revenue per ton-mile (1996) = 25.08 cents
Average haul = 274 miles Average haul = 646 miles
Average Capacity = 42,000 - 50,000 lb. Higher fixed costs (terminals) and low variable costs
Low fixed and variable costs
Major issues
Major Issues
Location of consolidation facilities
Utilization Utilization
Consistent service Vehicle routing
Backhauls Customer service
Air
 most expensive and fastest, mode of freight
transport
 lightweight, small packages <500 lbs
 high-value, perishable and critical goods
 less theft
Air
Key issues
• Location/number of hubs
• Location of fleet bases/crew bases
• Schedule optimization
• Fleet assignment
• Crew scheduling
• Yield management
Package Delivery
 Small packages
 Fast and reliable
 Increased with e-Business
 Primary shipping mode for Internet
companies
Package Carriers
• Companies like FedEx, UPS, USPS, that carry small

packages ranging from letters to shipments of about 150
pounds
• Expensive
• Rapid and reliable delivery
• Small and time-sensitive shipments
• Preferred mode for e-businesses (e.g., Amazon, Dell,
McMaster-Carr)
• Consolidation of shipments (especially important for
package carriers that use air as a primary method of
transport)
Water
 low-cost shipping mode
 primary means of international shipping
 U.S. waterways
 slowest shipping mode
Water
• Limited to certain geographic areas
• Ocean, inland waterway system, coastal waters
• Very large loads at very low cost
• Slowest
• Dominant in global trade (autos, grain, apparel, etc.)
Intermodal
 combines several modes of shipping-truck, water and rail to
move a shipment to its destination
 key component is containers
• Use of more than one mode of transportation
• 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
Pipeline
 transport oil and products in liquid form
 high capital cost, economical use
 long life and low operating cost
• High fixed cost

• Primarily for crude petroleum, refined petroleum
products, natural gas
• Best for large and predictable demand
• Would be used for getting crude oil to a port or
refinery, but not for getting refined gasoline to a
gasoline station
(why?)
Design Options for a Transportation Network
 What are the transportation options? Which

one to select? On what basis?
 Direct shipping network
 Direct shipping with milk runs
 All shipments via central DC
 Shipping via DC using milk runs
 Tailored network
Trade-offs in Transportation Design
―Transportation and inventory cost trade-off

―Choice of transportation mode
―Inventory aggregation
―Transportation cost and responsiveness
trade-off
Choice of Transportation Mode
―A manager must account for inventory costs

when selecting a mode of transportation
―A mode with higher transportation costs can
be justified if it results in significantly lower
inventories
Inventory Aggregation: Inventory vs. Transportation Cost
As a result of physical aggregation

 Inventory costs decrease
 Inbound transportation cost decreases
 Outbound transportation cost increases
Inventory aggregation decreases supply chain costs if

the product has a high value to weight ratio, high
demand uncertainty, or customer orders are large
Inventory aggregation may increase supply chain costs if the

product has a low value to weight ratio, low demand
uncertainty, or customer orders are small
Trade-offs Between Transportation Cost and Customer Responsiveness
Temporal aggregation is the process of

combining orders across time
Temporal aggregation reduces transportation
cost because it results in larger shipments and
reduces variation in shipment sizes
However, temporal aggregation reduces
customer responsiveness
Tailored Transportation
The use of different transportation networks and modes based on
customer and product characteristics
Factors affecting tailoring:

― Customer distance and density
― Customer size
― Product demand and value
Role of IT in Transportation
The complexity of transportation decisions

demands to 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
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
Making Transportation Decisions in Practice
 Align transportation strategy with competitive strategy

 Consider both in-house and outsourced transportation
 Design a transportation network that can handle e-commerce
 Use technology to improve transportation performance
 Design flexibility into the transportation network
Summary of Learning Objectives
 What is the role of transportation in a supply

chain?
 What are the strengths and weaknesses of
different transport modes?
 What are the different network design
options and what are their strengths and
weaknesses?
 What are the trade-offs in transportation
network design?

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Post Graduate Diploma in

 The role of transportation in the supply chain

Plays important role in SC process since products are rarely produced

 Reduction in transit time

Carrier (party that moves or transports the product)

Shipper (party that requires the movement of the product

 low-value, high-density, bulk products, raw

• Scheduling to minimize delays / improve service

• Companies like FedEx, UPS, USPS, that carry small

• High fixed cost

 What are the transportation options? Which

―Transportation and inventory cost trade-off

―A manager must account for inventory costs

As a result of physical aggregation

Inventory aggregation decreases supply chain costs if

Inventory aggregation may increase supply chain costs if the

Temporal aggregation is the process of

Factors affecting tailoring:

The complexity of transportation decisions

IT software can assist in:

• Identification of optimal routes by minimizing

Three main risks to be considered in transportation are:

 Align transportation strategy with competitive strategy

 What is the role of transportation in a supply

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