Transportation Management

(Source: Supply Chain Management By Janat

Shah, Pearson; Supply Chain Management,
Strategy, Planning and Operation, By Sunil
Chopra, Peter Meindl, D. V. KalraPearson)
For academic purpose and private circulation
only

Transportation Management

Transportation refers to movement of product from one

location to another.

Shipper is the party that requires the movement of the

product between two points in the supply chain.

Carrier is the party that moves or transports the product.

Transportation related decisions significantly affect cost as

well as responsiveness of the supply chain.

Transportation decisions cannot be taken in isolation as

transportation, facility, inventory management decisions are
interrelated.
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Transportation Management
Transportation Cost Structures:

Transportation

cost

for

given

mode

of

transports is a function of distance and the

quantity of goods shipped.

Transportation cost show both economies

of distance and economies of scale.

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Transportation Management
Economies of scale:

Transportation costs (per unit) decrease with increase in

shipment weight.

This is because bulk of fuel related costs, driver and crew

costs do not depend on load and are a function of distance

Also, higher load allows a operator to use bigger vehicle

which results in reduction of costs per ton of shipment.

It is because of economies of scale, full truck load (FTL)

rates are lower than less than full truck load (LTL) rates.

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Transportation Management
Economies of distance:
A minimum amount charged irrespective of the distance to be
travelled.
However, transportation rates (cost per unit distance) taper with
increasing distance. With increasing distance the rate of increase
of transportation costs will go down.
This is because of longer distance travelled , the related fixed
costs at the point of origin and destination (loading and
unloading) are distributed over more kilometers.
Also longer the distance travelled, better will be the overall
vehicle utilisation.
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Transportation Management:
from Mumbai

Air Freight data

Transportation Management

In addition to distance and shipment size, transportation

rates also depend on the point of origin and point of
destination of freight.

This is because freight rates depend on demand and supply at

the point of origin

Transportation

rates

are

generally

quoted

for

origin-

destination pairs.

Note that package carriers work with much simpler and uniform
rate structures than other transport companies.

This is because bulk of their costs are fixed costs (of setting up
network and handling shipment) and shipment sizes are
comparatively small.
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Transportation Management
Product characteristics And Transportation :
Product characteristics influences the choice of mode
of transport.
Nature of product characteristic is captured by a
concept called value density.
Value density is the ratio of rupee value of the
product to its weight.
Value density concept allows a firm to examine
tradeoff between transportation and inventory costs.
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Transportation Management

Transportation costs are function of weight and

inventory costs are function of value.

For products with higher value density, firms can

use

faster

mode

of

transportation

as

transportation cost is a small fraction of product cost.

In high technology products, transportation costs are

relatively less important as compared to low value
density products like cement, steel, furniture etc.

E.g. Apple vs IKEA

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Transportation Management
Volumetric weight:
In case of bulky products, transportation costs are
captured by volume and not by weight (e.g. water
storage tank ).
For

such

products,

air

freight

industry

uses

volumetric weight. 1m = 200 kg). Freight rate is

charges based on volumetric or physical weight,
which ever is higher.

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Transportation Management
Demand Volume And Transportation Costs:

Cycle and safety stock are associated with volume of

demand and uncertainty of demand respectively.

Higher volume of demand allows firm to have larger

lot sizes and thereby lower transportation costs but
higher cycle inventory.

Lower volume of demand do not allow firm to have larger

lot sizes and obtain benefit of economies of scale in
transportation, transportation costs are higher. Thus firm
typically work with LTL shipments or milk runs.

FTL is cheaper for large shipments

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Transportation Management
Demand uncertainty and Transportation Costs
For a products with higher demand uncertainty, if a firm
is using slower mode of transport (with long lead time),
firm ends up with high safety inventory .
Firms

typically

transportation

employs

with

high

faster
demand

mode

of

uncertainty

products and slower mode of transportation with

low demand uncertainty products.
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Transportation Management
Tradeoff in Transportation Design:

Following

Tradeoffs

must

be

considered

in

making transportation decisions:

1. Transportation and Inventory cost Tradeoff
2. Transportation and customer responsiveness
tradeoff

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Transportation Management
1. Transportation and Inventory cost Tradeoff

Two decisions involved in this tradeoff are:

i) Choice of transportation mode

Cheaper mode of transportation typically have longer

lead times and larger minimum shipment quantities
resulting in higher inventory levels.

Modes of transport that allow small shipments results

in low inventory levels but are expensive.
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Transportation Management

Faster mode of transportation are preferred for

products with high value density as in this case
reducing inventory costs are important.

Cheaper mode of transportation are preferred for

products with low value density as in this case
reducing transportation costs are important.

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Transportation Management
ii) Inventory Aggregation:
Required inventory level (safety inventory) reduces with
aggregation in one location.
Transportation costs in general increases with
aggregation

Inventory aggregation is useful for products with large

value to weight ratio (i.e. high value density) and
products with high demand uncertainty.

Inventory aggregation is suitable when inventory and

facilities costs form large fraction of total supply chain
costs.
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Transportation Management
2. Transportation and customer responsiveness
tradeoff

If a firm is responsive then it shall use faster mode of

transportation and shipping time is less, shipment size
will be small, both resulting in high transportation costs.

Temporal

aggregation

(combining

orders

across

time) increases the shipments size and decreases the

transportation costs as well as responsiveness.
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Transportation Management
Mode of Transports:
Air
Rail
Road / Truck
Water
Pipeline
Mix mode services:
Package carriers
Intermodal

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Transportation Management
Air:

Fast but expensive

Suitable of high value density and time sensitive goods

Rail:

Suitable of Large /heavy/ low value density goods over

large distances

Goods that are not time sensitive , long lead times.

Freight cost is lower

Unreliable

and

Indian

Railways

share

of

freight

movement in India is about 30%. 95% of freight is bulk

goods with coal alone accounts for about 50%.
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Transportation Management
Road / Truck
Expensive than Rail but offers advantage of door to

door shipment and short delivery time.

Trucking Industry consists of two major segments

Truckload (TL or FTL) and less than truckload

(LTL)

Shipment lots are smaller in LTL than TL.

TL cheaper for larger shipments.
LTL suited for shipments that are too large to be mailed as
packages but are less than half of TL.
LTL takes longer time than TL because of other loads that
need to be picked up or dropped off.

Transportation Management

Dominant mode of transport in India.

Accounts for about 65% of freight movement in India.

More

than

90%

vehicles

are

owned

by

small

transporters who own less than 5 trucks.

Although freight rates are among lowest in the world

but quality of service is poor with long unreliable lead
times & damages.

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Transportation Management
Water:

Cheapest mode but also the slowest

Limited to certain geographic areas
Ocean, inland waterway system, coastal waters
Very large bulky loads at very low cost

Extensively used for international cargo in view of

quantities shipped and distances involved

Marked by delays . Avg. turn around time for a container

ship in India is about 1-3 days.

Indias Largest container port , Jawahar lal Nehru Port at

Navi Mumbai handles about 56 million tonnes of cargo as
against 776 million tonnes handled at Shangai port.
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Transportation Management
Package Carriers:
Expensive
Rapid and reliable delivery
Suitable for small and time-sensitive shipments
Uses air, rail and truck for time-sensitive small
deliveries
Packages ranging from letters to shipments
More expensive than LTL for similar shipments
Provide other value-added services
Consolidation of shipments a key factor (because of
small package size and several delivery points)

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Transportation Management
Pipelines:

Bulk

transportation

of

predictable

volumes

of

specialized products like petroleum products and

natural gas.

High fixed cost

Best for large and stable flows

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Transportation Management
Intermodal:

Use of more than one mode of transportation to

move a shipment to its destination.

Variety of intermodal combinations possible with most

common being truck / rail.

Grown considerably with increased use of containers.

Containerized
freight
often
uses
truck/rail/water
combinations particularly for global freight.

On land intermodal system offers lower costs than TL and

faster delivery than rail
Exchange of information to facilitate transfer between
different modes is a critical issue.

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Transportation Management
Comparison of Modes of Transport on
Supply Chain Performance Measures

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Transportation Management
Design Options for a Transportation Network

(in

context of a buyer and its several suppliers)

A well designed transportation network allows a supply chain

to achieve the desired degree of responsiveness at a low
cost.

A variety of transportation networks are possible based on the

answers to these basic questions :
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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Transportation Management
1. Direct Shipment Network to Single Destination
Shipments comes directly from each supplier to each buyer
location.
Advantage is elimination of intermediate stage and simplicity of
operation.
Transportation time is short as shipment moves directly.
Justified only when the demand at the buyer locations is
large enough that so that lot sizes are optimal and close
to truckload.
However, large lot sizes leads to high inventory levels
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Direct Shipment Network to Single

Destination

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Transportation Management
2. Direct Shipping with Milk Runs
A milk run is a route which a truck either delivers product from a
single supplier to multiple retailers or goes from multiple suppliers to
single buyer location.
Milk runs are suited when quantity destined for each location is too
small to fill a truck but the multiple locations are close enough to
each other that their combined quantity fills the truck.
Used when deliveries are needed on regular basis
Lowers transportation cost by consolidating shipments to a single
truck.
(not using milk runs results in higher costs as FTL cannot be employed)

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Direct Shipping with Milk Runs

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Direct Shipping with Milk Runs

.

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Transportation Management
3. All Shipments via Intermediate Distribution Center
with Storage
Products are shipped from suppliers to a central distribution centre
where it is stored and shipped to buyer location when needed.
Suitable when lot sizes on inbound side is larger than sum of lot sizes
on the outbound side or shipment on outbound side cannot be
coordinated.
Helps in achieving economies of scale on inbound transportation from
supplier to DC. Expensive for suppliers to serve customers directly.
DC are typically close to buyers so outbound transportation costs are
not large.
High inventory cost
e.g. Amazon

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All Shipments via Intermediate

Distribution Center with Storage

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Transportation Management
4. All Shipments via Intermediate Transit
Point with Cross-Docking

Suppliers send their shipments to an intermediate

transit point with no storage at intermediate facility.

Each inbound truck contains products from suppliers

for several buyer locations whereas each outbound
truck contains product for a buyer location.

They are cross-docked and sent to buyer locations.

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Transportation Management

Major benefit is low inventory and product flow is faster.

Also saves on handling costs as no inventory storage at

DC

Suitable

when

economies

of

scale

in

transportation can be achieved on both inbound

and

outbound

sides

and

both

inbound

and

outbound shipments can be coordinated.

E.g. Walmart
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Transportation Management
5. Shipping via DC Using Milk Runs

Suitable when outbound lot sizes to be delivered

from DC to each buyer locations are small.

Milk runs reduce outbound transportation costs by

consolidating small shipments.

e.g. Seven eleven Japan cross docks deliveries from

fresh food suppliers and milk runs to retail outlets
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Shipping via DC Using Milk Runs

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Transportation Management
6. Tailored Network:

Suitable combination of previous options that reduces

costs and improve responsiveness of the supply chain.

Transportation networks uses combination of options

like cross docking, milk runs, Tl , LTL carriers etc.

E.g. High demand retail outlets may be served directly

whereas low demand retail outlets can be served via
DC
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Transportation Management
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
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Transportation Management
Total

Cost

Approach

in

Comparing

Different

Transport Modes:
Firm can choose the mode of transport resulting in least total
cost.
Total Cost = Transportation Cost + Cycle Stock Inventory
carrying cost + Safety Stock Inventory carrying cost + Facilities
and processing costs + Cost of losses and damages
(if different mode of transport result in different nos. of
handlings, handlings cost should also be taken into account)
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Transportation Management
Note in reference to total cost equation:
Lot size:

Differences in required shipment sizes

translate to differences in cycle stock related inventory.

Delivery time:

pipeline inventory and safety stock

carried in supply chain is a function of lead-time in
transport

Delivery time variability: safety stock carried in a

supply chain is
in transport.

function of the variability in lead time

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Pipeline Inventory:

Also called in-transit inventory.

It consists of materials actually being worked on (workin-process inventory) or being moved from one location
to another in the chain (on transit inventory).

Pipeline

inventory

of

an

item

between

two

adjacent locations is the product of the process

time or transport time and usage rate of an item

Pipeline inventory may be reduced by using faster rater

of transporting or by reducing manufacturing lead time .

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example :
LT -Shipment by air = 7 days
LT- Shipment by sea = 45 days
Average demand = 100/day
Pipeline Inventory ( Shipment by air) = 700 units
Pipeline Inventory ( Shipment by Sea = 4500
units

Transportation Management
Illustration:
A retail chain has eight stores in a region supplied

from four supply sources. Trucks have a capacity of

40,000 units and costs $1000 per load plus $100
per delivery. Thus a truck making two deliveries
charges $1200. The cost of holding one unit in
inventory at retail for a year is $0.20.
The vice president of supply chain is considering

whether to use direct shipping from suppliers to

retailers or setting up milk runs from suppliers to
retail stores (to two stores).
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Transportation Management
What network do you recommend if annual

sales for each product at each retail store are

960,000 units? In this case compare between
direct shipping, milk run to two stores / truck.
What network do you recommend if annual

sales for each product at each retail store is

120,000 units. In this case compare between
direct shipping, milk run to two stores / truck,
milk run to four stores / truck
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Transportation Management
Choice of Mode of Transport: Illustration
A

global company has decided to use India as its

manufacturing base for supply of printers to Europe. Firm
wants to decide the optimum mode of transport.
High End

Printers
Value/unit ( Rs.)
Inv. Carrying cost/unit/year (20%)
Mean Demand/week (units)
SD of demand /week(Units)
Option
Lot size (units)
Fright/unit (Rs.)
Lead time(weeks)

Sea
400
90
4

20,000
4,000
100
30

Standard

15,000
3000
100
30

Low end

10,000
2000
100
30

Air
100
360
1
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Transportation Management
Part I) under assumption of stable demand, d = 0 and
no supply uncertainty L = 0.
For sea as mode of transport, high end printers:

Cycle stock = Q/2 = 400/2 = 200 units

Pipeline inventory = Lead Time x Demand Rate = 4 x 100 =

400 units

Total inventory = 600

Annual Inventory carrying cost = 600 x 4000 = Rs

2,400,000

Annual

Transportation

Cost

Annual

demand

Transport rate per unit = 100 x 52 x 90 = Rs 468,000

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Transportation Management

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Transportation Management

Thus it is seen that for high end printers, air is

preferred mode of transport. For standard and low end
printers, sea is the preferred mode of transport.

Part II) Let the demand uncertainty exists and d

=3 0
With 98 % service level, K= 2
Safety Stock = K x Lead Time Demand

For Sea , Lead

Time Demand =

L d2 = 30 x 2= 60 and

Safety stock = 2 x 60 = 120 units

For, Air , Lead

Time Demand =

L d2

Safety stock = 2 x 30 = 60 units

= 30 x 1= 30 and
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Transportation Management

Thus with demand uncertainty, optimal transport

mode is air for highend and standard printers.
For low-end printers, optimal transport is Sea.
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Comparison of Distribution Network

Design Options: Illustration
A Garment manufacturing firm has three plants (A, B &C),

each manufacturing a different product line and serving a

stable market through three depots ( X, Y & Z). Plant A is
manufacturing menswear, plant B is manufacturing ladies
wear and plant C is manufacturing childrens wear.
Weekly demand = 100 units for each of the three types of

garments at each of the three depots. Demand is stable.

Truck can carry 300 units of garments and the transport

cost is Rs 2 per km. for TL shipments. To obtain economies

of scale firm has decided to work with TL shipments..
Inventory carrying cost is at 20% per annum.

Illustration
All the products cost Rs 200 per unit, so inventory

carrying cost is Rs 40 per unit per year. Facility cost

of maintaining a DC is Rs 12,000 per year.
Spatial Arrangement of the plants and depot is given.
Compare between:
1.Direct shipping
2.Direct shipping with milk runs
3.All shipments via central DC with inventory storage
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Illustration

Illustration

If the cost of a garment is Rs 75 instead of Rs 200, what will be

the change?
How would network design change if demand at each depot is
300 units per week for each of the product instead of 100 per
week?