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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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  • 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
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
    • Dell Computers?

* US Bureau of Transportation Statistics

factors affecting transportation decisions

(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


(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
Transportation Modes (USA)

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

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

  • 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
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
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
  • 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
  • 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
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
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
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
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
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
other key players in the transportation supply chain
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
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
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
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
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
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
  • 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
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
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
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
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
Eastern Electric – Mode Choices

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

eastern electric rail option
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
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

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:


East Coast Plant


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.


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
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
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
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?

transportation network designs
Transportation Network Designs


Retailer Stores


Retailer Stores

Direct Supplier Network

Direct Shipping with Milk Runs

transportation network designs43
Transportation Network Designs


Retailer Stores


Retailer Stores



All Shipment via DC

Milk Runs From DC

physical inventory aggregation inventory vs transportation cost
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
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}
highmed current scenario
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
inventory aggregation at highmed47
Inventory Aggregation at HighMed

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

increases to $36,729.

transportation system design
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?
All Shipments Direct

All Shipments via Kokomo







Some shipments direct,

Some from Kokomo

Milk Runs from Kokomo







milk runs from plants
Milk Runs From Plants


Number of DCs?

Location of DC’s?



network design tradeoffs
Network Design Tradeoffs
  • 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
  • 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
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




tailored network
Tailored Network
  • Use combination of options to reduce costs and improve responsiveness
  • High volume: ship direct
  • Low volume: consolidate in DC
tailored transportation
Tailored Transportation
  • 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
Summary of Learning Objectives
  • 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.