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
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* US Bureau of Transportation Statistics
(party that performs the move)
Vehicle-related: Type? Number?
Fixed operating: e.g. Terminal facilities
Trip-related: labour and fuel
Overhead: planning/scheduling, information technologies
Responsiveness/Service level offered
(party requiring movement of goods)
supply chain design
transportation mode choice
assignment of shipment to transportation mode
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 guaranteesFactors Affecting Transportation Decisions
a U.S. Bureau, Statistical Abstract of the United States: 2002
b Ballou, Business Logistics Management, 5th edition, 2004
Trailer on Flat Car (TOFC)
Back Haul Costs?
Cost, speed and dependability considered most important
Marginal discount applies (i.e. first 150 cwt cost $8, next 100 cwt cost $6, etc.)
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
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:
West Coast Warehouse
Inventory = 100,000 units
Inventory = 100,000 units
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 IC, 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.
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? Number and location of DC’s?
Direct Supplier Network
Direct Shipping with Milk Runs
All Shipment via DC
Milk Runs From DC
If shipment size to customer is 0.5H + 5L, total cost of option 2
increases to $36,729.
All Shipments via Kokomo
Some from Kokomo
Milk Runs from Kokomo
Number of DCs?
Location of DC’s?
Reference: Chopra & Meindl, Supply Chain Management, 2004, Prentice-Hall.