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  1. Michigan State University Transportation

  2. 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

  3. 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

  4. 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

  5. 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

  6. 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

  7. Customer Service Measures • Invoice accuracy • Order status information • Technical support responsiveness • Unscheduled service responsiveness • Speed of product feature changes • Product and service quality

  8. Value-added Transportation Concept Product/Info Flows Inbound Outbound Supplier Manufacturer Customer Info/Return Goods Flows

  9. 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

  10. Basic Modes of Transportation Fixed Variable Traffic costs costs composition Rail high low bulk food, mining, heavy mfg Motor low medium consumer goods, medium/light mfg Water medium low bulk food, mining, chemicals Air low high high-value goods, rush shipments Pipe high low petroleum, chemicals, mineral slurry

  11. 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 18 16 17 1 = best, 5=worst

  12. Intermodal • Enables shippers to benefit from advantages of multiple modes of transportation • minimizes disadvantages of individual modes Rail Truck Air Water

  13. 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

  14. 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

  15. Transportation Economies • Economy of Scale Cost per unit LTL TL Volume/weight

  16. Transportation Economies • Economy of Distance Tapering Principle Cost per load Distance

  17. Shelf Standards • Brand Consolidation • Space • Position • Proper Groupings • Price • Schematic • Housekeeping • Point of Sale

  18. 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.

  19. Topics • Introduction • Transportation Infrastructure • Transportation Management

  20. Introduction • Importance of Transportation • Value-added Role of Transportation

  21. Transportation Role in Value Attainment Process • Critical element of structure, capacity, and movement decisions • Both between supply chain members and intra-organizational

  22. Transportation Infrastructure • Modal Characteristics • Changing Environment

  23. Distribution of U.S. Intercity Freight (% of ton-miles) Rail Motor WaterAir Pipe 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

  24. Changing Transportation Environment • Deregulation • Time-based competition • Expanding geographic coverage • Information technology • Social and environmental concerns

  25. 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

  26. 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

  27. 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

  28. Transportation Management • Network Freight Flows: Macro-Decisions • Micro-Decisions • Information Systems Support

  29. 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

  30. 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)

  31. 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

  32. 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

  33. Suggested Analyses • Network flows • Lane densities, frequencies, consistency • Freight distribution by mode, carrier • Consolidation opportunities

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

  35. Total freight flows

  36. Lane Densities • Volume on a weekly basis • Consistency of volume • Volume + Consistency = Rate bargaining power • Identify LTL freight consolidation opportunities

  37. Inbound-Outbound Lane Densities Site State In # Avg Wt Out # Avg Wt DC 1 CA 135 2024 592 989 DC 2 CA 110 625 465 654 DC3 CA 125 1690 572 1005 DC1 AZ 2 228 28 444 DC2 AZ 7 502 9 484 DC3 AZ 1 1135 36 622 DC1 NM 0 0 44 462 DC2 NM 0 0 42 418 DC3 NM 0 0 89 517 DC1 TX 598 971 1975 957 DC2 TX 911 3147 2125 693 DC3 TX 1631 1619 1368 1716

  38. Mode/Carrier Profile Analysis • Understand freight distribution among carriers by state • Identify potential for core carrier concept

  39. CARRIER WT (k#) %OF MARKET COTTON 4261.4 18.7 WARD’S 3050.7 13.39 PIQUA 2491.2 10.93 SO.BROKE 1914.4 8.40 N & P 1764.0 7.74 TRANSDYN 1546.2 6.78 KBT 1368.6 6.01 ITCO 1363.0 5.98 WRIGHT 811.9 3.56 TELEDYNE 727.2 3.19 OSBORN 723.1 3.17 SHAFFER 421.3 1.85 THREE I 259.0 1.14 ROCHEST 253.4 1.11 INTERSTATE 250.3 1.10 SUNFLOWER 232.0 1.02 SOS 190.2 0.83 MAWSON 169.9 0.75 LEE EXPR 165.4 0.73 POOLE 127.0 0.56 OLDSOUTH 124.1 0.54 NOBLETRK 123.6 0.54 CONCEPT 121.5 0.53 VICTORY 86.2 0.38 RBX 69.7 0.31 S & M 44.0 0.19 NORANDAL 43.6 0.19 PERFORM 43.1 0.19 MCGRIFF 42.3 0.19 North Carolina TL Van Freight Distribution

  40. 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

  41. Mode/Carrier Selection step 1 step 2 Modal Choice basic mode Specific Carrier step 3 intermodal legal type Transport individual carrier provider

  42. Transportation Pricing Function of: • cost-of-service • value-of-service

  43. Prices and Volume • Per pound costs will decrease over volume/weight Price per pound Weight of load

  44. Price and Density • Assuming no “weighing out,” denser products use space better Price per pound cotton steel Product Density

  45. 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

  46. 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)

  47. Limits on Rates maximum value of service demand rate level minimum cost of service supply fully allocated average variable out-of-pocket

  48. 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

  49. 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

  50. 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