Transportation Strategy in a Supply Chain

1. Transportation Strategy in a Supply Chain

2. 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

3. 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

4. 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

5. Transportation Modes (USA) a U.S. Bureau, Statistical Abstract of the United States: 2002 b Ballou, Business Logistics Management, 5th edition, 2004

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. Busiest Container Ports in the World

16. Hong Kong

17. 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

18. World’s BusiestCargo Airports

19. 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

20. 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?

21. 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

22. 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

23. Freight Rate Structures

24. 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”

25. 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

26. 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

27. 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.

28. 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.

29. 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

30. 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

31. Eastern Electric – Mode Choices Marginal discount applies (i.e. first 150 cwt cost $8, next 100 cwt cost $6, etc.)

32. 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

33. Eastern Electric Corporation

34. 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

35. 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:

36. 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.

37. 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.

38. Tradeoffs in Transportation Design • Transportation, facility, and inventory cost tradeoff • Choice of transportation mode • Inventory aggregation • Transportation cost and responsiveness tradeoff

39. 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?

40. Alloy Steel - Shipment size and Transportation Costs vs. Response Time

41. Transportation Network Design • 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?

42. Transportation Network Designs Suppliers Retailer Stores Suppliers Retailer Stores Direct Supplier Network Direct Shipping with Milk Runs

43. Transportation Network Designs Suppliers Retailer Stores Suppliers Retailer Stores DC DC All Shipment via DC Milk Runs From DC

44. 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

45. Inventory Aggregation at HighMed • 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}

46. HighMed: Current Scenario • 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

47. Inventory Aggregation at HighMed If shipment size to customer is 0.5H + 5L, total cost of option 2 increases to $36,729.

48. Transportation System Design • 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?

49. All Shipments Direct All Shipments via Kokomo Milwaukee Milwaukee Kokomo Kokomo Matamoros Matamoros

50. Some shipments direct, Some from Kokomo Milk Runs from Kokomo Milwaukee Milwaukee Kokomo Kokomo Matamoros Matamoros