Transportation strategy in a supply chain
Download
1 / 58

Transportation Strategy - PowerPoint PPT Presentation


  • 597 Views
  • Updated On :

Transportation Strategy in a Supply Chain Outline Key modes of transport and major issues Transportation Costs Transportation System Design Tradeoffs in transportation design Transportation and inventory: Choice of mode Transportation and inventory: Consolidation

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Transportation Strategy' - jacob


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript

Outline l.jpg
Outline

  • Key modes of transport and major issues

  • Transportation Costs

  • Transportation System Design

  • Tradeoffs in transportation design

    • Transportation and inventory: Choice of mode

    • Transportation and inventory: Consolidation

    • Transportation and service: Transit points and lead-times


Importance of transportation l.jpg
Importance of Transportation

  • USA Freight in 2006: US $1.4 trillion, ~ 10 % of GDP

    • Employs 22 million people, 16% of all workers

  • Accessibility to markets

  • Greater competition

    • more distant markets can be served

  • Economies of scale

    • wider markets => greater production volume

    • production points need not be close to markets

  • Lower prices

    • increased competition among suppliers

    • lower production and transportation costs

  • E-Commerce: managing (global) transportation costs is crucial

    • Amazon.com? Dell Computers?

* US Bureau of Transportation Statistics


Factors affecting transportation decisions l.jpg

Carrier

(party that performs the move)

investment decisions

operating policies

Costs considerations:

Vehicle-related: Type? Number?

Fixed operating: e.g. Terminal facilities

Trip-related: labour and fuel

Quantity-related: loading/unloading

Overhead: planning/scheduling, information technologies

Capacity utilisation

Responsiveness/Service level offered

Shipper

(party requiring movement of goods)

supply chain design

transportation mode choice

assignment of shipment to transportation mode

Cost considerations:

Transportation: paid to carriers

Inventory: at intermediate warehouses, retailers, etc.

Facility: e.g. warehouse operating costs

Processing: loading/unloading, invoicing, etc.

Service level: expediting, safety stock, etc.

Responsiveness; Delivery guarantees

Factors Affecting Transportation Decisions


Transportation modes usa l.jpg
Transportation Modes (USA)

a U.S. Bureau, Statistical Abstract of the United States: 2002

b Ballou, Business Logistics Management, 5th edition, 2004


Slide6 l.jpg
Air

  • Expensive

    • (2 x truck, 20 x rail)

  • High security

  • Size of shipment constrained

    • hold space and lifting capabilities

  • Key Issues

    • Location/Number of hubs

    • Location of fleet bases / crew bases

    • Schedule optimization

    • Fleet assignment

    • Crew scheduling

    • Yield management


Truckload tl l.jpg
Truckload (TL)

  • Average Capacity = 42,000 - 50,000 lb.

    • Smaller dispatch lots (compared with rail)

  • Low fixed cost

    • carriers do not own or maintain roads

  • Door-to-door convenience

  • Good speed and frequency (small dispatch lots)

  • Cannot carry large loads

  • Major Issues

    • Utilization

    • Consistent service

    • Backhauls


Less than truckload ltl l.jpg
Less Than Truckload (LTL)

  • Higher fixed costs (terminals) and low variable costs

  • Major Issues

    • Location of consolidation facilities

    • Utilization

    • Order assignment/loading

    • Vehicle routing

    • Customer service

    • Utilization vs. delivery-time and reliability


Slide9 l.jpg
Rail

  • Long haul (avg. 720 miles)

  • Slow mover (22 mph, 64 miles per day)

  • Large load: Average load = 80 tons

  • carload, less-than-carload, multiple carload

  • consolidation, stop-off, re-route

  • High fixed costs, low variable costs

  • Key Issues

    • Scheduling to minimize delays / improve service

    • Off track delays (at pick up and delivery end)

    • Yard operations (switching of multiple shipments)

    • Variability of delivery times


Pipeline l.jpg
Pipeline

  • limited capabilities: crude oil, water

  • slow (3-4 mph)

  • high capacity

    • 3 mph, 12-in pipe = 90,000 gal/hr

  • reliable, low risk of disruption and damage

  • 24-hour service

  • high fixed costs

    • pipes, pumping equipment

    • own or lease right-of-way

  • Variable costs

    • pump operation

    • depends on throughput and pipe diameter

    • loss through seepage


Water inland and coastal l.jpg
Water - Inland and Coastal

  • heavy , bulk commodities

  • slow (5 mph on Mississippi)

  • affected by weather (freezing, floods)

  • Fixed costs

    • mainly transport equipment

    • waterways and harbours publicly owned

    • terminal costs: harbour fees, loading/unloading(high costs if not containerised)

  • Variable costs (low)

    • no charge for use of waterways

  • favours bulk commodity goods


Containerised freight cofc l.jpg
Containerised Freight (COFC)

  • first trip:

    • trailers on a WWII tanker from New Jersey to Texas in 1956

  • soon after:

    • specially converted ships to stack van-sized boxes on deck

  • now:

    • world container fleet capacity 19.3 million TEUs (2004)

    • 75% of US ocean merchandising trade

    • 70 % by weight of cargo movement of Hong Kong

    • mega-ships: Gudrun Maersk (world’s largest): 8000 TEUs, 1204 ft. long, 140 ft. wide (30 ft. wider than Panama Canal)

  • standard size avoids re-handling

    • 8 x 8 x 20 (TEU)

    • 8 x 8 x 40 or 8 x 8 x 45

  • containerised air freight gaining popularity


Intermodal transport l.jpg
Intermodal Transport

  • Truck-Rail TOFC “piggyback”

  • Truck-water RORO “fishyback”

    Trailer on Flat Car (TOFC)

  • long haul cost economy of rail

  • convenience and accessibility of trucks at origin/destination

  • shipper: door-to-door service at lower than truck rates

  • rail: more business

    • 17-fold increase 1960-1996

    • now 55% of rail loading in USA

    • 2 million carloads (13 million units) moved in 2004


International transportation l.jpg
International Transportation

  • Mainly by Water (Container)

    • over 50% by value

    • 99% by weight

  • By Air: 21% by value

  • 6.76 billion tons shipped seaborne in 2004

  • Complexities:

    • customs documentation

    • limited entry/exit points to a country

    • limited carrier liability

    • increased protective packaging




Hong kong mid stream operations l.jpg
Hong Kong - Mid-Stream Operations

  • Unique to Hong Kong

  • Barges with crane

  • Transfer containers from ship (in harbour) to shore

  • Transfer rate weather dependent

    • approx. 1/3 of container terminal

  • Lower Cost

    • approx. 1/4 of container terminal

  • Handles about 17% of container traffic through Hong Kong

    • mostly to South-East Asia

    • non-time critical


World s busiest cargo airports l.jpg
World’s BusiestCargo Airports


Other key players in the transportation supply chain l.jpg
Other key players in the Transportation Supply Chain

  • Freight forwarders

    • provide service to small shippers by consolidating shipments to get lower rates

    • purchase transportation service from carriers

  • Shippers’ agents

    • consolidate shipments for “piggyback” transport

    • purchase service “in bulk” and re-sell to individual shippers

  • Freight brokers

    • arrange door-to-door service, dealing with all modes of transport in between

  • Shippers’ Associations

    • common industry or geographical area

    • common negotiation line to get better rates


Transportation costs l.jpg
Transportation Costs

  • ~ 63% of total logistics expenditures

  • Fixed Costs

    • road/railway acquisition and maintenance, terminal facilities, transport equipment, carrier administration

  • Variable Costs

    • fuel, labour, equipment maintenance, handling, pickup and delivery

  • Cost Allocation Difficult

    • By shipment? Weight? Volume?

    • Insurance value? Delivery guarantees?

      Back Haul Costs?


Transportation rates l.jpg
Transportation Rates

  • Freight classification

    • determined by density, stowability, ease of handling, value, liability, substitutability, risk of damage, fairness

  • Class Rates

    • standardized tariffs by weight and distance

    • “break weight”

  • Contract Rates

    • discount rate from class rate tariffs

    • depends on volume, direction of movement, valued customer?

  • Freight-All-Kinds

    • used by freight forwarders

    • mixed shipments


Transportation rates22 l.jpg
Transportation Rates

  • Volume-related

    • minimum charge (AQ) rate

    • less-than-vehicle-load rate

    • vehicle load rate

    • special rate for high volume shipments

  • Distance related

    • uniform rate

    • proportional rate

    • tapering rate

    • blanket rate (simplicity, competition)

  • Demand related rates



Other transportation rates l.jpg
Other Transportation Rates

  • Incentive rates

    • for large shipment

  • Cube rates

    • for light and bulky goods

  • Import/Export rates

  • Deferred rates

    • used to fill out available space (esp. in air or water mode)

  • Released value rates

    • limited liability for carrier

  • Ocean freight rates

    • by weight or space basis

    • set by “carrier conference”


Special service charges l.jpg
Special Service Charges

  • Diversion and Re-consignment

    • change destination or change consignee

    • ship perishables before markets crystallize

    • use carriers as warehouse

  • Transit or Stop-off privileges

    • cost lower than two separate rates

    • partial loading/unloading

  • Protection

    • refrigeration/heating/ventilation

    • additional bracing

  • Interlining

    • carrier transfer shipment and pays 2nd carrier

  • Terminal services

    • pickup/deliver, rail switching

    • detention and demurrage penalty

      • allowed free time: 48 hours for rail cars

      • straight plan vs. average plan


Documentation l.jpg
Documentation

  • Bill of lading

    • legal contract between shipper and carrier for freight movement with reasonable dispatch and free of damage

    • certification of classification and tariffs of goods received

    • contract of carriage

    • documentary evidence of title

      • straight bill of lading (cannot be sold)

      • order bill of lading (can be endorsed)

  • Freight bill

    • invoice of carrier charges

    • prepaid by shipper or collected from consignee

  • Freight claims

    • loss, damage and delay claims

    • carrier liable for full value

    • overcharge/misclassification amendments


International transport documents exporting l.jpg
International Transport Documents- Exporting

  • Bill of lading. Receipt for the cargo and a contract for transportation between the shipper and the carrier.

  • Dock receipt. Used to transfer accountability for cargo between domestic and international carriers.

  • Delivery instructions. Provides specific instructions to the inland carrier regarding delivery of the goods.

  • Export declaration. Required by the U.S. Department of Commerce as a source document for export statistics.

  • Letter of credit. Financial document guaranteeing payment to the shipper for the cargo being transported.

  • Consular invoice. Used to control and identify goods shipped to particular countries.

  • Commercial invoice. Bill for the goods from seller to the buyer.

  • Certificate of origin. Used to assure the buying country precisely in which country the goods were produced.

  • Insurance certificate. Assures the consignee that insurance is provided on goods while in transit.

  • Transmittal letter. A list of the particulars of the shipment and a record of the documents being transmitted together with instructions for disposition of the documents.


International transport documents importing l.jpg
International Transport Documents -Importing

  • Arrival notice. Informs the estimated arrival time of the shipment along with some details of the shipment.

  • Customs entries. A number of documents describing the merchandise, its origin, and duties that aid in expediting clearance of the goods through customs, with or without the immediate payments of duties.

  • Carrier’s certificate and release order. Certifies to customs the owner or consignee of the cargo.

  • Delivery order. Issued by the consignee to the ocean carrier as authority to release the cargo to the inland carrier.

  • Freight release. Evidence that the freight charges for the cargo have been paid.

  • Special customs invoice. An official form usually required by U.S. Customs if the rate of duty is based upon the value and the value of the shipment exceeds a fixed dollar amount.

    • Preparation of this paperwork is facilitated by the many foreign trade specialists that

    • can aid the shipper and receiver of goods moving internationally.


Transport service selection considerations l.jpg
Transport Service Selection Considerations

  • Price

    • line haul, terminal handling,, delivery

    • door-to-door

  • Average Transit time

  • Transit Time Variability

    • increases for multi-modal or consolidated shipments

  • Loss and Damage

    Cost, speed and dependability considered most important


Choice of transportation mode eastern electric corporation l.jpg
Choice of Transportation Mode: Eastern Electric Corporation

  • Average Annual demand = 120,000 motors

  • Cost per motor = $120

  • Current order size = 3,000 motors

  • Safety stock carried = 50% of demand during delivery lead time

  • Holding cost = 25%

  • Each motor weighs 10 pounds


Eastern electric mode choices l.jpg
Eastern Electric – Mode Choices

Marginal discount applies (i.e. first 150 cwt cost $8, next 100 cwt cost $6, etc.)


Eastern electric rail option l.jpg
Eastern Electric – Rail option

Minimum shipment = 20000 lbs = 2000 motors

Cycle inventory = Q/2 = 2000/2 = 1000

Safety stock = L/2 days’ demand = (6/2)(120000/365) = 986

In-transit inventory = (120000/365)5=1644

Annual holding costs = (1000+986+1644)(120)(0.25) = $108900

Annual transportation costs = (120000)(0.65) = $78000



Transport service selection l.jpg
Transport Service Selection

  • Tradeoff between transport costs and associated inventory costs

    • Example: Ballou, p. 221-223

  • Competitive considerations

    • increased patronage due to better transport services

    • better transport reflected in goods price

    • transport volume effect on supplier inventory levels


Example l.jpg
Example:

The Carry-All Luggage Company produces a line of luggage goods. The typical distribution plan is to produce a finished goods inventory located at the plant site. Goods are then shipped to company-owned field warehouses by way of common carriers. Rail is currently used to ship between the East Coast plant to a West Coast warehouse. The average transit time for rail shipment is T=21 days. At each stocking point, there is an average of 100,000 units of luggage having an average value of C=$30 per unit. Inventory carrying costs are I=30 percent per year.

The company wishes to select the mode of transportation that will minimize total costs. It is estimated that for every day that transit time can be reduced from the current 21 days, average inventory levels can be reduced by 1 percent, which represents a reduction in a safety stock. There are D=700,000 units sold per year out of the West Coast warehouse. The company can use the following transportation services:


Slide36 l.jpg

East Coast Plant

21days

West Coast Warehouse

Inventory = 100,000 units

Inventory = 100,000 units

Example (continued)

Procurement costs and transit-time variability are assumed to be negligible.

A diagram of the company’s current distribution is shown below. By selecting alternate modes of transportation, the length of time that inventory is in transit will be affected. Annual demand (D) will be in transit by the fraction of the year represented by T/365 days, where T is average transit time. The annual cost of carrying this in-transit inventory is ICDT/365.

The average inventory at both ends of the distribution channel can be approximated as Q/2, where Q is the shipment size. The holding cost per unit is IC, but the item value C must reflect where the inventory is in the channel. For example. The value of C at he plant is the price, but at the warehouse it is the price plus the transportation rate.


Slide37 l.jpg

aR = transport rate; D = annual demand; I = carry cost (%/yr); C = product value at plant; C’=product value at warehouse (C+R); T = time in transit; and Q = shipment size.

b100,000 is more than the shipping quantity/2 to account for safety stock..

cAccounts for improved transport service and number of shipments per year.


Tradeoffs in transportation design l.jpg
Tradeoffs in Transportation Design

  • Transportation, facility, and inventory cost tradeoff

    • Choice of transportation mode

    • Inventory aggregation

  • Transportation cost and responsiveness tradeoff


Alloy steel transportation cost and responsiveness tradeoff l.jpg
Alloy Steel - Transportation cost and responsiveness tradeoff

  • Order shipped via LTL

    • shipping cost =$100 + 0.01 (shipment weight in pounds)

    • plus $10 per delivery

    • two day in transit

  • Current: ship orders on arrival

    • two-day response time

  • Three-day response?

    • Can aggregate and ship every other day

  • Four-day response?



Transportation network design l.jpg
Transportation Network Design Response Time

  • Direct Shipment Network

    • Delivery direct from a supplier to a retailer

  • Direct Shipment with Milk Runs

    • Delivery from single supplier to several retailers

  • Central Distribution Centre (DC)

    • Suppliers ship only to DC

    • DC ship direct to retailers

  • Central Distribution Centre with Milk Runs

    Tradeoffs? Number and location of DC’s?


Transportation network designs l.jpg
Transportation Network Designs Response Time

Suppliers

Retailer Stores

Suppliers

Retailer Stores

Direct Supplier Network

Direct Shipping with Milk Runs


Transportation network designs43 l.jpg
Transportation Network Designs Response Time

Suppliers

Retailer Stores

Suppliers

Retailer Stores

DC

DC

All Shipment via DC

Milk Runs From DC


Physical inventory aggregation inventory vs transportation cost l.jpg
Physical Inventory Aggregation: Inventory vs. Transportation cost

  • As a result of physical aggregation

    • Inventory costs decrease

    • Inbound transportation cost decreases

    • Outbound transportation cost increases

  • Good when:

    • inventory and facilities costs high

    • product has high value-to-weight ratio

    • products with high variability

  • On-line store vs. ‘real’ retail locations

    • store bears out-bound costs as well as in-bound costs


Inventory aggregation at highmed l.jpg
Inventory Aggregation at HighMed cost

  • Medical equipment sold direct to doctors

  • Madison -> 24 sales territories (each keeping own inventories)

  • Highval ($200, 0.1 lbs/unit)

    • weekly demand in each of 24 territories H = 2, H = 5

  • Lowval ($30/unit, 0.04 lbs/unit)

    • weekly demand in each territory L = 20, L = 5

  • Cycle Service Level =0.997

  • Inventory holding percentage =25%

  • Current: Territories re-order every 4 weeks

    • UPS rate: $0.66 + 0.26x {for replenishments, lead time = 1 week}

  • Option A: Territories re-order every week

  • Option B: Aggregate all inventory at central warehouse, replenish warehouse weekly, ship direct to customers

    • Average customer order:1 HighVal and 10 LowVal

    • FedEx rate: $5.53 + 0.53x {for customer shipping}


Highmed current scenario l.jpg
HighMed: Current Scenario cost

  • Reorder interval = T = 4 weeks

  • Replenishment lead-time = 1 week (by UPS)

  • Inventory costs (HighVal):

    • Lot size = QH= T H= (4)(2) = 8

    • Safety stock = ssH= F-1(CSL) (T+L)0.5H= 30.7

    • Average inventory for 24 regions = 24(QH/2 + ssH) =832.8

    • Annual inventory holding cost = (832.8)($200)(0.25) = $41,640

  • Inventory costs (LowVal) = (1696.8)($30)(0.25) = $12,726

  • Transportation costs:

    • Avg. weight of each replenishment order = 0.1 QH+ 0.04 QL= (0.1)(8)+(0.04)(80)= 4 lbs.

    • Shipping costs per order = $0.66+(0.26)(4) = $1.70

    • Annual transportation costs = (52/4)(24)($1.70) = $530

  • Total Cost = $54, 896


  • Inventory aggregation at highmed47 l.jpg
    Inventory Aggregation at HighMed cost

    If shipment size to customer is 0.5H + 5L, total cost of option 2

    increases to $36,729.


    Transportation system design l.jpg
    Transportation System Design cost

    • AC Delco: Very high value low volume parts

      • Three plants: Milwaukee, Kokomo, Matamoros

      • 21 assembly plants (customers for above plants)

    • What are the distribution options? Which one to select? On what basis?


    Slide49 l.jpg

    All Shipments Direct cost

    All Shipments via Kokomo

    Milwaukee

    Milwaukee

    Kokomo

    Kokomo

    Matamoros

    Matamoros


    Slide50 l.jpg

    Some shipments direct, cost

    Some from Kokomo

    Milk Runs from Kokomo

    Milwaukee

    Milwaukee

    Kokomo

    Kokomo

    Matamoros

    Matamoros


    Milk runs from plants l.jpg
    Milk Runs From Plants cost

    Milwaukee

    Number of DCs?

    Location of DC’s?

    Kokomo

    Matamoros



    Network design tradeoffs l.jpg
    Network Design Tradeoffs cost

    • Direct Shipment Network

      • Simple operation

      • Delivery Lot-size ~ truckload

      • High inventories

      • High loading/unloading costs

    • Direct Shipment with Milk Runs

      • Small lot-size per retailer

      • Increased co-ordination complexity

    • Central Distribution Centre (DC)

      • Inventory consolidation/disaggregation

      • Transfer point (allow transportation mode change)

      • Lower in-bound transportation costs

    • Central Distribution Centre with Milk Runs

      • Increased co-ordination complexity


    Cross docking l.jpg
    Cross-docking cost

    • Inbound goods transferred directly into outbound vehicles without being stored in DC

      • Disaggregate goods from one supplier to several retailers

      • Aggregate different goods from respective suppliers to one retailer

      • Economies of scale (both in- and out-bound)


    Line haul and cross dock l.jpg

    This approach is useful if deliveries are time sensitive and there are several dropoffs in proximity, not all of which can be delivered on a single truck.

    Line Haul and Cross Dock

    Milwaukee

    Kokomo

    Matamoros


    Tailored network l.jpg
    Tailored Network there are several dropoffs in proximity, not all of which can be delivered on a single truck.

    • Use combination of options to reduce costs and improve responsiveness

    • High volume: ship direct

    • Low volume: consolidate in DC


    Tailored transportation l.jpg
    Tailored Transportation there are several dropoffs in proximity, not all of which can be delivered on a single truck.

    • Factors affecting tailoring

      • Customer distance and density

        • high customer density near DC -> own fleet, milk runs

        • customers far away -> use third-party carrier reduce backhaul costs

      • Customer size

        • TL, LTL, courier

        • Replenishment frequency

        • Mixed milk runs with large and small customers

      • Product demand and value

        • high demand, high value : cheap mode for cycle stock replenishment; aggregate safety stock, fast transport mode

        • high demand, low value: disaggregate inventory location, cheap mode

        • low demand, high value: aggregate inventories, fast mode

        • low demand, low value: aggregate only safety stock


    Summary of learning objectives l.jpg
    Summary of Learning Objectives there are several dropoffs in proximity, not all of which can be delivered on a single truck.

    • Strengths and weaknesses of transport modes

    • Choices of transportation networks

    • Tradeoffs in transportation network design

    • Tailored transportation networks

      Reference: Chopra & Meindl, Supply Chain Management, 2004, Prentice-Hall.


    ad