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Michigan State University. Transportation. Relative Transportation Costs. Transportation costs represented 6.3% of total U.S. GDP in 1990 Transportation costs represented over 50% of total U.S. logistics expenditures in 1990

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Transportation

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Michigan State University

Transportation


Relative Transportation Costs

  • Transportation costs represented 6.3% of total U.S. GDP in 1990

  • Transportation costs represented over 50% of total U.S. logistics expenditures in 1990

  • Transportation accounted for 27% of total U.S. energy use and 63% of total U.S. petroleum use in 1990


Economic Impact

  • Logistics contributes approximately 10.5% of GDP

  • U.S. industry spent $451 billion on freight transportation in 1996

  • U.S. industry spent $311 billion on warehousing, storage, and carrying inventory in 1996

  • Total logistics costs equals almost $800 billion


Logistics Overview

Why has logistics become increasingly important?

  • Cost reduction pressures are severe

  • Logistics has a high impact on customer service

  • A strong need exists for demand and supply planning consistency

  • A focus on core competencies has placed logistics in the outsourcing “spotlight”

  • Development of IT technology supports integrated logistics management

  • Government deregulation of transportation has created new opportunities


Total Cost Concept

  • The total cost concept recognizes that an optimum cost in one area or function may not lead to an optimum total system cost

  • Total cost analysis requires the management of supply chain trade-offs

  • Logistical activity areas that drive total logistics costs:

    • Customer service level costs

    • Inventory carrying costs

    • Lot quantity costs

    • Order processing and information costs

    • Warehousing costs

    • Transportation costs


Customer Service Measures

  • Order cycle lead time

  • Stock availability/fill rates/stockouts/back orders/partial shipments

  • Record integrity

  • Frequency of delivery

  • Delivery reliability

  • Order tracing capability

  • Volume flexibility


Customer Service Measures

  • Invoice accuracy

  • Order status information

  • Technical support responsiveness

  • Unscheduled service responsiveness

  • Speed of product feature changes

  • Product and service quality


Value-added Transportation Concept

Product/Info Flows

Inbound

Outbound

Supplier

Manufacturer

Customer

Info/Return Goods Flows


Transportation-Related Service Elements

  • Speed: time-in-transit

  • Availability: accessible to customers when they want it

  • Dependability: pick-up and delivery time variability

  • Flexibility: adjustment to shipper’s needs


Basic Modes of Transportation

Fixed Variable Traffic

costscostscomposition

Railhighlowbulk food, mining,

heavy mfg

Motorlowmediumconsumer goods,

medium/light mfg

Watermediumlowbulk food, mining,

chemicals

Airlowhighhigh-value goods,

rush shipments

Pipehighlowpetroleum, chemicals,

mineral slurry


Relative Operating Characteristics

Operating

characteristicsRailMotorWaterAirPipe

Speed 3 2 4 1 5

Availability 2 1 4 3 5

Dependability 3 2 4 5 1

Capability 2 3 1 4 5

Frequency 4 2 5 3 1

Composite 14 10 1816 17

1 = best, 5=worst


Intermodal

  • Enables shippers to benefit from advantages of multiple modes of transportation

  • minimizes disadvantages of individual modes

Rail

Truck

Air

Water


Decision Flow

Outbound

Inbound

Manufacturer

Customer

Supplier

Transportation Decision Making in an Integrated Supply Chain

Macro

Understand total network flows

Strategic

Understand individual lane flows

Understand current carrier usage patterns

Decision Scope

Make mode/carrier decisions

Routing/Scheduling, Load Planning, etc.

Micro

Operational


Product related

density

stowability

ease or difficulty of handling

liability

Market related

intramode/intermode competition

location of markets

nature and extent of regulation

balance/imbalance of freight traffic

seasonality of product movements

domestic vs. international

Transportation Costs


Transportation Economies

  • Economy of Scale

Cost per unit

LTL

TL

Volume/weight


Transportation Economies

  • Economy of Distance

Tapering Principle

Cost per load

Distance


Shelf Standards

  • Brand Consolidation

  • Space

  • Position

  • Proper Groupings

  • Price

  • Schematic

  • Housekeeping

  • Point of Sale


Shelf Management Principles

  • Place your wines at eye level or the best position possible.

    • 80% increase if moved from bottom to eye level

    • 43% increase if moved from bottom to waist level

  • Place your wines next to the best selling competitive wines.

  • Place your wines next to wines that are priced higher than your wines.


  • Topics

    • Introduction

    • Transportation Infrastructure

    • Transportation Management


    Introduction

    • Importance of Transportation

    • Value-added Role of Transportation


    Transportation Role in Value Attainment Process

    • Critical element of structure, capacity, and movement decisions

    • Both between supply chain members and intra-organizational


    Transportation Infrastructure

    • Modal Characteristics

    • Changing Environment


    Distribution of U.S. Intercity Freight (% of ton-miles)

    RailMotorWaterAirPipe

    1980 38% 22% 17% .2% 24%

    1990 37% 26% 16% .2% 20%

    Average Revenue per Ton-Mile

    1980 $2.8$18.0 $.77 $46 $1.0

    1990 $2.7$24.4 $.75$140 $1.4


    Changing Transportation Environment

    • Deregulation

    • Time-based competition

    • Expanding geographic coverage

    • Information technology

    • Social and environmental concerns


    Selected Results of the Changing Environment - Economic Impact

    • Increased competition in individual markets - both within modes and between modes

    • More efficient carrier operations - less interlining, more direct routing, efficient pricing

    • Transportation costs declined in real terms and as percent of GDP

    • Transportation service quality improved


    Selected Results of the Changing Environment - Industry Impact

    • Consolidation in rail, air and LTL trucking

    • Proliferation of TL carriers

    • Strong growth in regional trucking - networks

    • TL growing faster than LTL

    • Air freight growth

    • Intermodal growth: rail-truck, air-truck, rail-ship

    • Growth of “one-stop shopping” - 3PL

    • Private fleet conversion


    Selected Results of the Changing Environment - Market Impact

    • Demand for fast, dependable, responsive service at lower cost

    • Demand for a broader range of services to integrate supply chain functions

    • Core carrier concept - interdependence between shipper-carrier

    • Customized price/service packages/contracts

    • Relational view of transportation as a “value-added” service


    Transportation Management

    • Network Freight Flows: Macro-Decisions

    • Micro-Decisions

    • Information Systems Support


    Network Freight Flows: A Fully Integrated Approach

    • Managing Inbound-Outbound flows in an optimal manner requires firm to have a good handle on the entire logistics process

    • Traditionally view transportation in a vacuum-- need to look at it in the context of the total logistics system

    • Greatest improvement opportunities lie in integrating transportation with other logistics functional areas such as purchasing, inventory control, forecasting and production scheduling


    Approach to Analysis

    • Analyze lane densities/frequencies: what opportunities emerge for:

      • inbound/outbound consolidation

      • vehicle consolidation

      • temporal consolidation

      • network consolidation - cross dock potential (hub and spoke systems)


    Approach to Analysis (cont.)

    • ) Once opportunities for consolidation are visible, make mode/carrier selection based on service/cost mix

      • Given similar service, are rates better on 1 mode/carrier than another?

      • Does any mode/carrier have relative strengths in a particular lane?

      • Any backhaul opportunities?

    • ) If so, look to consolidate loads on mode/carrier with best cost structure - assign private fleet to most costly routes


    Consolidation Opportunities

    • Inbound-Outbound flow consolidation: look for opportunities to combine inbound/outbound freight

    • Vehicle consolidation: use one vehicle/multi stops for LTL volumes vs. one shipment to each

    • Temporal consolidation: hold orders until large volume shipment possible


    Suggested Analyses

    • Network flows

    • Lane densities, frequencies, consistency

    • Freight distribution by mode, carrier

    • Consolidation opportunities


    Nodes and links in a Logistics System(W=warehouse, P=plant, M=market)

    MM

    MW

    PWP

    MWW

    WPW

    MWPM


    Total freight flows


    Lane Densities

    • Volume on a weekly basis

    • Consistency of volume

    • Volume + Consistency = Rate bargaining power

    • Identify LTL freight consolidation opportunities


    Inbound-Outbound Lane Densities

    SiteStateIn #Avg WtOut #Avg Wt

    DC 1CA1352024592989

    DC 2CA110625465654

    DC3CA12516905721005

    DC1AZ222828444

    DC2AZ75029484

    DC3AZ1113536622

    DC1NM0044462

    DC2NM0042418

    DC3NM0089517

    DC1TX5989711975957

    DC2TX91131472125693

    DC3TX1631161913681716


    Mode/Carrier Profile Analysis

    • Understand freight distribution among carriers by state

    • Identify potential for core carrier concept


    CARRIERWT (k#)%OF MARKET

    COTTON4261.418.7

    WARD’S3050.713.39

    PIQUA2491.210.93

    SO.BROKE1914.48.40

    N & P1764.07.74

    TRANSDYN1546.26.78

    KBT1368.66.01

    ITCO1363.05.98

    WRIGHT811.93.56

    TELEDYNE727.23.19

    OSBORN723.13.17

    SHAFFER421.31.85

    THREE I259.01.14

    ROCHEST253.41.11

    INTERSTATE250.31.10

    SUNFLOWER232.01.02

    SOS190.20.83

    MAWSON169.90.75

    LEE EXPR165.40.73

    POOLE127.00.56

    OLDSOUTH124.10.54

    NOBLETRK123.60.54

    CONCEPT121.50.53

    VICTORY86.20.38

    RBX69.70.31

    S & M44.00.19

    NORANDAL43.60.19

    PERFORM43.10.19

    MCGRIFF42.30.19

    North Carolina TL Van Freight Distribution


    Summary

    Identify:

    • Opportunities to achieve balanced flows - obtain lower rates for providing loads both ways

    • Significant volumes for rate negotiation

    • Vehicle/temporal consolidation opportunities

    • Advantages of reducing number of carriers


    Mode/Carrier Selection

    step 1

    step 2

    Modal Choice

    basic modeSpecific Carrierstep 3

    intermodal legal typeTransport

    individual carrierprovider


    Transportation Pricing

    Function of:

    • cost-of-service

    • value-of-service


    Prices and Volume

    • Per pound costs will decrease over volume/weight

    Price per pound

    Weight of load


    Price and Density

    • Assuming no “weighing out,” denser products use space better

    Price per pound

    cotton

    steel

    Product Density


    Transportation Cost Structures

    • Variable: costs vary with services or volume:

      • line-haul costs of fuel, labor and maintenance

      • handling

      • pickup and delivery

    • Fixed: constant regardless of activity

      • Facilities, equipment and administration

    • Joint: “hand-in-hand” costs -- unavoidable

      • Example: the backhaul move

    • Common: shared costs (“overhead”)

      • need for Activity-based costing


    Pricing Structures

    • Cost-of-service: “cost plus” method

    • Value-of-service: “market based” method

    • Combination: a middle of the road approach using cost (minimum) and value (maximum)

    • Net Rate Pricing: All-inclusive prices specific to customers’ needs (not discount-based)


    Limits on Rates

    maximumvalue of service demand

    rate level

    minimumcost of service supply

    fully allocated

    average variable

    out-of-pocket


    Routing and Scheduling

    Goals:

    • find best path a vehicle should follow through networks of roads, rail lines, shipping lanes, and air routes

    • determine best pattern for stops, multi-vehicle use, driver layovers, time of day restrictions

      Benefits:

    • greater vehicle utilization

    • improved and more responsive customer service

    • reduced transportation expenses

    • reduced capital investment in equipment


    Principles for Good Routing/Scheduling

    • load trucks with deliveries for customers closest to each other

    • stops on individual days arranged together

    • start routes with farthest stops first

    • circular routes - don’t cross paths

    • use largest vehicles first if can be filled

    • mix pickups in with deliveries, not at end

    • if one stop far from other, use other truck

    • avoid narrow stop time windows, or handle separately


    What Is Contract Logistics?

    • It is a very confusing term because there are so many different descriptions of what it really is.

      • “Contracting out the entire distribution function and the related information function”

      • “Subcontracting specific logistics activities to a third-party specialist service provider.”

    • A wide range of practices fall under these definitions


    Services Provided by Third-party Logistics Providers

    • Transportation

    • Warehousing

    • Information management

    • Human resources

    • Management


    Two Types of Providers

    • Asset-based

      • Own their own warehousing, transportation, computer systems, etc.

    • Data-based

      • essentially asset free companies who sell logistics management capability through their computer systems and managerial skill

    • There is frequently a bias against asset-based providers


    Categories of Services Available

    • Exclusive Service Provider-devotes all resources to a single client

    • Consortium Service Provider-provides services to a small group of clients

    • Specialist Provider-provides services for products or clients who have specialized needs

    • National/Multinational Provider-provides services to many clients throughout the world


    Business Drivers

    • “Stick to the knitting”

    • “Vertical disintegration”

    • “How to do more, with less”


    Changing Business Environment

    • Debt reduction <> unleveraging

    • Strategic focus of ...

      • Financial resources

      • Human resources

      • Information technology

    • Competition

      • Faster (agility)

      • Better (quality)

      • Cheaper (low cost provider)

    Investment Rationing


    Advantages/Disadvantages

    • Less asset investment, redeploy capital

    • Lower operating cost (service provider

    • has economies of scope and scale)

    • Time lag between increased costs

    • and changing rates

    • More attention for core business

    • Gather missing management knowledge

    • Provide higher service level

    • Increased flexibility

    • Entry mode to new markets

    • Flexibility as environment changes

    • “Switching costs”

    • Possible higher operating costs

    • Less direct customer contact

    • Dependency

    • Loss of control


    Information Systems Support

    • Network analysis

    • Electronic Data Interchange

    • Freight rate maintenance and auditing

    • Routing and scheduling

    • Administration

      • Produce/track bill of lading for each shipment

      • Automated bills of lading

      • Automate shipment data files

      • Carrier evaluation


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