Department of Business Administration

SUPPLY CHAIN MANAGEMENT

Module III Designing & Planning Transportation Network

Role of Transportation..
Transportation refers to the movement of product from one location to another as it makes its way from the beginning of a supply chain to the customer Transportation is an important supply chain driver because products are rarely produced and consumed in the same location Transportation is a significant component of the costs incurred by most supply chains Transportation-related jobs employed nearly 20 million people, accounting for 16 percent of U.S. total occupational employment

Role of Transportation..
The role of transportation is even more significant in global supply chains Dell currently has suppliers worldwide and sells to customers all over the world from just a few plants Transportation allows products to move across Dells global network Similarly, global transportation allows Wal-Mart to sell products manufactured all over the world in the United States

Role of Transportation..
Any supply chains success is closely linked to the appropriate use of transportation IKEA, the Scandinavian home furnishings retailer, has built a global network with about 180 stores in 23 countries primarily on the basis of effective transportation IKEAs strategy is built around providing good-quality products at low prices. Their goal is to cut prices by 2 to 3 percent each year Modular design of its furniture allows IKEA to transport its goods worldwide much more cost effectively than a traditional furniture manufacturer.

Role of Transportation..
The large size of IKEA stores and shipments allows inexpensive transportation of home furnishings all the way to the retail store Effective sourcing and inexpensive transportation allow IKEA to provide high-quality home furnishings at low prices globally Seven-Eleven Japan is another firm that has used transportation to achieve its strategic goals The company has a goal of carrying products in its stores to match the needs of customers as they vary by geographic location or time of day

Role of Transportation..
To help achieve this goal, Seven-Eleven Japan uses a very responsive transportation system that replenishes its stores several times a day so that the products available match customers needs Products from different suppliers are aggregated on trucks according to the required temperature to help achieve very frequent deliveries at a reasonable cost Supply chains also use responsive transportation to centralize inventories and operate with fewer facilities

Role of Transportation..
Four Parties Influence the Effectiveness of Transportation The Shipper Party that requires the movement of the product between two points in the SC The Carrier- Party that moves or transports the product The Owners and Operators of Transportation Infrastructure such as roads, ports & airports The Bodies that set Transportation Policy Worldwide

MODES OF TRANSPORTATION AND THEIR PERFORMANCE CHARACTERISTICS

AIR

PACKAGE CARRIERS
TRUCK RAIL WATER PIPELINE

INTERMODAL/MULTIMODAL

MODES OF TRANSPORTATION AND THEIR PERFORMANCE CHARACTERISTICS

The effectiveness of any mode of transport is affected by equipment investments and operating decisions by the carrier as well as the available infrastructure and transportation policies The carriers primary objective is to ensure good utilization of its assets while providing customers with an acceptable level of service Carrier decisions are affected by equipment cost, fixed operating cost, variable operating costs, the responsiveness the carrier seeks to provide its target segment, and the prices that the market will bear

MODES OF TRANSPORTATION AND THEIR PERFORMANCE CHARACTERISTICS

FedEx designed a hub-and-spoke airline network for transporting packages to provide fast, reliable delivery times UPS, uses a combination of aircraft rail, and trucks to provide cheaper transportation with somewhat longer delivery times The difference between the two transportation networks is reflected in the pricing schedule FedEx charges for packages based primarily on size. UPS, charges based on both size and destination

MODES OF TRANSPORTATION AND THEIR PERFORMANCE CHARACTERISTICS

From a supply chain perspective, a hub-and-spoke air network is more appropriate when prices are independent of destination and rapid delivery is important Whereas a trucking network is more appropriate when prices vary with destination and a somewhat slower delivery is acceptable

MODES OF TRANSPORTATION -Air

Airlines have a high fixed cost in infrastructure and equipment Labor and fuel costs are largely trip related and independent of the number of passengers or amount of cargo carried on a flight An airlines goal is to maximize the daily flying time of a plane and the revenue generated per trip

Air carriers offer a very fast and fairly expensive mode of transportation

MODES OF TRANSPORTATION -Air

Small, high-value items or time-sensitive emergency shipments that have to travel a long distance are best suited for air transport Key issues that air carriers face include
Identifying the location and number of hubs
Assigning planes to routes Setting up maintenance schedules for planes

Scheduling crews and

Managing prices and availability at different prices.

MODES OF TRANSPORTATION Package Carriers

Package carriers are transportation companies such as FedEx, UPS, and the U.S. Postal Service, which carry small packages ranging from letters to shipments weighing about 150 pounds Package carriers use air, truck, and rail to transport timecritical smaller packages Package carriers are expensive and cannot compete with LTL carriers on price for large shipments

The major service they offer shippers is rapid and reliable delivery. Thus, shippers use package carriers for small and time-sensitive shipments

MODES OF TRANSPORTATION Package Carriers

Package carriers also provide other value-added services that allow shippers to speed inventory flow and track order status By tracking order status, shippers can proactively inform customers about their packages Package carriers also pick up the package from the source and deliver it to the destination site

With an increase in just-in-time (JIT) deliveries and focus on inventory reduction, demand for package carriers has grown

MODES OF TRANSPORTATION Package Carriers

Given the small size of packages and several delivery points, consolidation of shipments is a key factor in increasing utilization and decreasing costs for package carriers Package carriers have trucks that make local deliveries and pick up packages Packages are then taken to large sorting centers from which they are sent by full truckload, rail, or air to the sorting center closest to the delivery point From the delivery-point sorting center, the package is sent to customers on small trucks making milk runs

MODES OF TRANSPORTATION Package Carriers

Key issues in this industry include the location and capacity of transfer points as well as information capability to facilitate and track package flow For the final delivery to a customer, an important consideration is the scheduling and routing of the delivery trucks

MODES OF TRANSPORTATION Truck

The trucking industry consists of two major segments-TL or LTL Trucking is more expensive than rail but offers the advantage of door-to-door shipment and a shorter delivery time It also has the advantage of requiring no transfer between pickup and delivery TL operations have relatively low fixed costs, and owning a few trucks is often sufficient to enter the business The goal of a TL carrier is to schedule shipments to meet service requirements while minimizing both trucks idle and empty travel time TL shipping is suited for transportation between manufacturing facilities and warehouses or between suppliers and manufacturers

MODES OF TRANSPORTATION Truck

LTL operations are priced to encourage shipments in small lots, usually less than half a TL, as TL tends to be cheaper for larger shipments Prices display some economies of scale with the quantity shipped as well as the distance traveled LTL shipments take longer than TL shipments because of other loads that need to be picked up and dropped off

LTL shipping is suited for shipments that are too large to be mailed as small packages but that constitute less than half a TL

MODES OF TRANSPORTATION Truck

Key issues for the LTL industry include location of consolidation centers, assigning of loads to trucks, and scheduling and routing of pickup and delivery The goal is to minimize costs through consolidation without hurting delivery time and reliability

MODES OF TRANSPORTATION Rail

Rail carriers incur a high fixed cost in terms of rails, locomotives, cars, and yards There is also a significant trip-related labor and fuel cost that is independent of the number of cars (fuel costs do vary somewhat with the number of cars)

but does vary with the distance traveled and the time taken
Any idle time, once a train is powered, is very expensive because labor and fuel costs are incurred even though trains are not moving Idle time occurs when trains exchange cars for different destinations

MODES OF TRANSPORTATION Rail

The price structure and the heavy load capability makes rail an ideal mode for carrying large, heavy, or highdensity products over long distances Transportation time by rail, however, can be long Rail is thus ideal for very heavy, low-value shipments that are not very time sensitive Major operational issues at railroads include
Vehicle and staff scheduling Track and terminal delays Poor on-time performance

MODES OF TRANSPORTATION Pipeline

Pipeline is used primarily for the transport of crude petroleum, refined petroleum products, and natural gas A significant initial fixed cost is incurred in setting up the pipeline and related infrastructure that does not vary significantly with the diameter of the pipeline Pipeline may be an effective way of getting crude oil to a port or a refinery

MODES OF TRANSPORTATION Intermodal

Intermodal transportation is the use of more than one mode of transport to move a shipment to its destination A variety of intermodal combinations are possible, with the most common being truck/rail Intermodal traffic has grown considerably with the increased use of containers for shipping and the rise of global trade Containers are easy to transfer from one mode to another, and their use facilitates intermodal transportation Containerized freight often uses truck/water/rail combinations, particularly for global freight

MODES OF TRANSPORTATION Intermodal

Key issues in the intermodal industry involve the exchange of information to facilitate shipment transfers between different modes because these transfers often involve considerable delays, hurting delivery time performance

TRANSPORTATION INFRASTRUCTURE & POLICIES

Some of infrastructure elements that exist along nodes and links of a transportation network are : Roads Seaports

Airports
Rail Canals

TRANSPORTATION INFRASTRUCTURE & POLICIES

Improved Infrastructure has played a significant role in development of transportation and the growth of trade with in the country In most of the countries government has either taken the full responsibility or played significant role in building and managing the infrastructure elements Developed Country like USA and developing country like China is witnessing a tremendous growth in infrastructure development to attract trade and commerce in the country

TRANSPORTATION INFRASTRUCTURE & POLICIES

Case study Does deregulation improves or hammers the financial performs of the railroads industry Ellison Construction of railroads of US occurred rapidly in 1850s The railroads were private but were built with significant Govt. subsidy in the form land grants In 1870s this rail road connected most of the US Each railroad was the exclusive provider of carriage over its track The monopoly allowed railroads to determine the price Initial construction of news roads led to some competition

TRANSPORTATION INFRASTRUCTURE & POLICIES

When the competition increased between rail roads, the companies responded by entering into agreement with each other ,so that it ends the competition and raise the rates This was not acceptable by farmers and other user of railroads this led for the establishment of ICC (Interstate Commerce Commission) Prohibited discriminatory pricing by the railroad companies With response to this railroads formed cartel to restrict supply and service to public This led to passage of the Sherman Antitrust Act in 1890

TRANSPORTATION INFRASTRUCTURE & POLICIES

Government responding to financial difficulties of railways in 1940 allowed some degree of coordination and exempted them from the antitrust regulation The Staggers Rail Act of 1980 deregulated the railroads and allowed them some rate making powers and eased entry and exit This act also removed the antitrust immunity of the railroads Thus this deregulation in the US was followed by a wave of reorganization and mergers within railroads industry Thus overall deregulation has resulted in improved financial performance of the railroad industry and increased use of rail

TRANSPORTATION INFRASTRUCTURE & POLICIES

Case study -Financial assistance for infrastructure through taxes or toll charges By Levinson In 1700s turnpikes were built using public fund Virginia, Maryland & Pennsylvania in

But where turned over to private companies that collect tolls Over time, other turnpikes were built as a result of competition between the towns to gain trade These road where built by the local efforts and money, apart from some federal land grants

TRANSPORTATION INFRASTRUCTURE & POLICIES

Tolls on these turnpikes were generally structured to keep local travel free, pay if you are travelling across Later when new and new means of transport where introduced like rail ,roads canals turnpikes suffered loss Finally where converted into public roads But, the increasing changes in modes of transportation there raised a need for high quality roads At last a network of national toll free highways was built largely using gasoline taxes as the sources of funding At the same time other facilities such as tunnels and bridges were often constructed as toll facilities

TRANSPORTATION INFRASTRUCTURE & POLICIES

In many other country such as France, and Spain concession were granted to private companies that received toll revenue From, these examples it is clear that the government has to either own or regulate a Monopolistic Transportation Infrastructure asset for its efficient performance

But in case of private ownership and deregulation, competition within a mode or across modes seem to work well in rail road transportation
Road, ports and airport are largely public and not private because of its inherently monopolistic nature of these transportation infrastructure assets

Design options for transportation network

Typical supply chain
upstream

downstream

Design options for transportation network

Direct shipping network Direct shipping with milk runs All shipments via central DC Shipping via DC using milk runs Tailored network

Design options for transportation network

Direct shipping network

Supplier/Plant

Retailer/Base

Design options for transportation network

Direct shipping network - - From shipper directly to retailers Routing is specified SCM only needs to decide quantity to ship Mode of transport to be used

Decision involves trade off between inventory cost & transportation cost

Design options for transportation network

Direct shipping network - - From shipper directly to retailers Major advantage is Elimination of intermediate warehouses Simplicity of operation & coordination

Shipment decision is completely local

Decision made for one shipment doesnt influence the other Transportation time is short because each shipment goes directly

Design options for transportation network

Direct shipping network - - From shipper directly to retailers

This is justified
If the demand at buyer location is large enough that Optimal replenishment lot sizes are close to a TL from each supplier to each location With smaller buyer location, this tends to have higher cost

Design options for transportation network

If TL carrier is used for transportation
High fixed cost of each truck results in
Large lots moving from supplier to each buyer location Resulting in high Supply Chain inventory

If LTL carrier is used for transportation

Transportation cost & delivery time increases Though inventories are lower

If package carrier is used for transportation

Transportation cost is very high With direct deliveries from each supplier, receiving cost is higher because each supplier has to make separate delivery

Design options for transportation network

Direct shipping with milk runs

Supplier/Plant

Retailer/Base

Supplier/Plant

Retailer/Base

Design options for transportation network

Direct shipping with milk runs

A milk run is a route on which a truck

Either delivers product from single supplier to multiple retailers Or goes from multiple suppliers to a single buyer location

Supply Chain manager has to decide on the routing of each milk run
While Direct Shipping provide the benefit of eliminating intermediate warehouses Milk run lowers the transportation cost by consolidating shipment to multiple location on a single truck

Design options for transportation network

All Shipment via Central DC

DC

Supplier/Plant

Retailer/Base

Design options for transportation network

Supplier do not send shipment directly to buyer location

The buyer divides locations by geographic region & DC is built for each region
Supplier send their shipment to the DC

DC then forwards appropriate shipment to each buyer location

DC is an extra layer between supplier & buyer location

DC can play 2 different roles

To store inventory To serve as transfer location

Design options for transportation network

In either case presence of DC can help in reducing SC cost
When suppliers are located far from the buyer locations
Transportation cost is too high

Presence of DC allows SC to achieve economy of scale

For Eg: W W Grainger

Has its supplier ship products to one of nine DCs Which in turn replenish their almost 400 branches

Design options for transportation network

For transport economies it rquires
Large shipment on the inbound side DC hold the inventory & send the product to buyer location

For eg:Wall Mart Lots size on the inbound is much larger than the sum of the lot sizes served by the DC If replenishment lots are large enough, DC need not hold inventory DC can cross dock product arriving from many suppliers on inbound trucks By breaking each inbound shipment into smaller shipment

Design options for transportation network

When DC cross docks product
Each inbound truck contains product from a supplier for several buyer location
Each outbound truck contains product for a buyer location from several supplier

Major benefit is little inventory needs to be held

Product flows faster in the SC Saves handling cost as product does not have to be moved into and out of storage But requires significant degree of coordination & synchronization between incoming & outgoing shipment

Design options for transportation network

Cross docking is appropriate for products with large, predictable demands Eg: Wall mart

Design options for transportation network

Shipping via DC using milk run

DC

Supplier/Plant

Retailer/Base

Design options for transportation network

Can be used if lot size to be delivered to each buyer location is small Reduces outbound cost by consolidating small shipments For Eg: Seven Eleven

Cross docks deliveries from its fresh food supplier at DCs

Sends milk run to retail outlets Because total shipment to a store from all suppliers does not fill a truck It allows them to reduce the transport cost

Design options for transportation network

Require significant amount of coordination, suitable routing & scheduling It can be used to deliver the item to customer home Reduces outbound transport cost

TAILORED TRANSPORTATION
The use of different transportation networks and modes based on customer and product characteristics Most firms sell variety of products and serve many different customer segments Example: W.W.Grainger sells over products to both small contractors and very large firms Products vary in size and value Customers vary in the quantity purchased , responsiveness required uncertainty of the orders, and distance from W.W. Grainger branches and DCs

Transportation Options Based on Customer Density and Distance

Short distance
High density

Medium Distance

Long Distance
Cross-dock with milk runs

Private fleet with milk Cross-dock with milk runs runs Transportation Options Based on Customer Density and Distance Third party milk runs LTL carrier

Medium density

LTL or package carrier

Low density

Third party milk runs or LTL carrier

LTL or package carrier Package carrier

Tailored transportation By Size of Customer Firms must consider customer size and location when designing transportation networks
Very large customer can be supplied using a TL carrier, where as smaller customer require an LTL carrier or milk runs When using milk runs , a shipper incurs two types of costs
Transportation cost based on total route distance

Delivery cost based on number of delivers

Tailored transportation By Size of Customer

The transportation cost is the same whether going to a large or small customer If a delivery is to be made to a large customer on the same truck can save on transportation cost For each small customer ,however the delivery cost per unit is higher than for large customer Thus it is not optimal to deliver to small & large customers with the same frequency at the same price

One option firms have is to charge a higher delivery cost for smaller customers
Another option is to tailor milk runs so that they visit larger customer with a higher frequency than smaller customer

Tailored transportation By Size of Customer

The transportation cost is the same whether going to a large or small customer If a delivery is to be made to a large customer on the same truck can save on transportation cost For each small customer ,however the delivery cost per unit is higher than for large customer Thus it is not optimal to deliver to small & large customers with the same frequency at the same price

One option firms have is to charge a higher delivery cost for smaller customers
Another option is to tailor milk runs so that they visit larger customer with a higher frequency than smaller customer

Tailored Transportation By Product Demand And Value

The degree of inventory aggregation and the modes of transportation used in a supply chain network should vary with the demand and value of a product, as shown in following table
Product Type High demand High value Disaggregate cycle inventory. Aggregate safety inventory. Inexpensive mode of T.P for replenishing cycle inventory and fast mode when using safety inventory. Low value Disaggregate all inventories and use inexpensive mode of T.P for replenishment.

Low Demand

Aggregate all inventories. If needed, use fast mode of T.P for filling customer orders.

Aggregate only safety inventory. Use inexpensive mode of T.P for replenishing cycle inventory.

Trade Offs in Transport design

Transportation Cost & Inventory cost trade off
Choice of transportation mode
Inventory aggregation

Transportation cost & Customer responsiveness trade off

Role of IT in Transportation
The complexity of transportation decisions demands to use of IT systems The use of software to determine transportation routes has been most common IT application in transportation This software takes the location of the customers, shipment size, desired delivery times, information on the transportation infrastructure , and vehicle capacity as input These inputs are formulated into an organization problem whose solution is a set of routings and a packing lists for each vehicle that minimize the costs while meeting delivery constraints Routing and vehicle packing software helps to improve fleet utilization

Role of IT in Transportation
By accounting for the size of container and the size and sequence of each delivery, this software develops a plan to pack the vehicle efficiently while allowing for the greatest ease of uploading or loading along the route Synchronization between packing and routing software is an important because how much is packed on a truck affect the routing , while routing affects what is packed on a truck IT also comes into play in the use of global Positioning Systems(GPS) and electronic notification of impending arrivals. GPS systems monitor the real time location of vehicles This real time information improves a firms response to customer questions regarding deliveries

Problems in the use of IT in transportation

It relates to cross enterprise collaboration and the narrow view taken by some transportation software Collaboration across enterprises is crucial in transportation because this is a function that is often outsourced does not directly involve either the shipper or customer thus successful collaboration in transportation requires 3 or more firms work together , making it much more difficult. Much of transportation software is very focused on efficient routings. The software often overlooks other factors such as customer service and promised delivery times , which should constrain the route selected.

RISK MANAGEMENT IN TRANSPORTATION

There are three main types of Risk: 1. The Risk that the shipment is delayed 2. The risk that ship does not reach its destination because intermediate nodes or links are disrupted by external forces. 3. The risk of hazardous material

RISK MANAGEMENT IN TRANSPORTATION

Delay arises either because of congestion along links such as roads or nodes such as ports and airports When congestion is the cause of delay, mitigation strategies for the shipper include moving inventories closer to the destination, using alternative lanes, and building a buffer into the lead time

Delay may also arises because of the limited availability of transportation and or infrastructure capacity
Such delays are more likely when the assets are owned by the third party that is serving multiple customer Disruption at transportation links or nodes may occur because of natural events . The best mitigation strategy in this case is to design alternative routing in the transportation network