A Firm-Based Freight Demand Modeling Framework:

1. A Firm-Based Freight Demand Modeling Framework: Capturing Intra-firm Interaction and Joint Logistic Decision Making Qi Gong and Jessica Guo, PhD. Transportation and Urban Systems Analysis Lab Civil and Environmental Engineering University of Wisconsin – Madison

2. Outline • Introduction • Study objectives • Logistics management framework • Intra-firm interaction • Modeling framework • Conclusion

3. Introduction • Freight transportation as derived demand • Need to incorporate supply chain concepts in freight demand models • Limitation shared by existing supply-chain based models: • Business establishments are treated as separate and independent decision-making agents • Inter-establishment interactions considered only between agents of different roles in the supply chain • Interactions among establishments within a firm not accounted for

4. Introduction • Prevalence and implication of multi-establishment firms on freight movement Source: Statistics of Small Business, 2007

5. Current Study Objectives • Objectives: • To capture the philosophies in logistics management • To better represent the decision-making paradigms of establishments and firms • This study proposes a firm-based freight demand modeling framework: • Incorporates supply chain concepts • Accounts for the interdependency of establishments within a firm

6. Logistics Management Framework • Freight transportation demand is derived from business logistics management needs • Freight patterns are determined from various business operation and logistics decisions falling within different planning areas

7. Logistics Management Framework Transportation • Vehicle routing and scheduling (O) • Carrier selection (S) • Mode choice (T) Logistics Planning Area Facility Structure and Location • Business Economic Activity Boundary (S) • Facility number (S) • Facility size (S) • Facility location (S) Key Decisions (Planning Level) Decision Making Principles • Optimization of capital and transportation cost • Spatial interaction Customer Demand and Service Purchasing Inventory • Customer service level (S) • Inventory level (S) • Make-or-Buy (S) • Supplier selection (S) • Sourcing points (T) • Purchasing quantities (T) • Just-in-time/forward buying (S) • Inventory deployment (S) • Replenishment quantity (T) • Replenishment frequency (T) • Profit maximization • Kanban system/MRP • Push/pull approach • Economic order quantity • Reorder point model • Periodic review model • Transaction cost theory • Auction sourcing • Optimization for sourcing points • Carrier requirements minimization • Traveling salesman • Inventory routing (S): Strategic decision (T): Tactical decision (O): Operational decision

8. Logistics Management Framework Transportation • Vehicle routing and scheduling (O) • Carrier selection (S) • Mode choice (T) Logistics Planning Area Facility Structure and Location • Business Economic Activity Boundary (S) • Facility number (S) • Facility size (S) • Facility location (S) Key Decisions (Planning Level) Decision Making Principles • Optimization of capital and transportation cost • Spatial interaction Customer Demand and Service Purchasing Inventory • Customer service level (S) • Inventory level (S) • Make-or-Buy (S) • Supplier selection (S) • Sourcing points (T) • Purchasing quantities (T) • Just-in-time/forward buying (S) • Inventory deployment (S) • Replenishment quantity (T) • Replenishment frequency (T) • Profit maximization • Kanban system/MRP • Push/pull approach • Economic order quantity • Reorder point model • Periodic review model • Transaction cost theory • Auction sourcing • Optimization for sourcing points • Carrier requirements minimization • Traveling salesman • Inventory routing (S): Strategic decision (T): Tactical decision (O): Operational decision

9. Logistics Management Framework Transportation • Vehicle routing and scheduling (O) • Carrier selection (S) • Mode choice (T) Logistics Planning Area Facility Structure and Location • Business Economic Activity Boundary (S) • Facility number (S) • Facility size (S) • Facility location (S) Key Decisions (Planning Level) Decision Making Principles • Optimization of capital and transportation cost • Spatial interaction Customer Demand and Service Purchasing Inventory • Customer service level (S) • Inventory level (S) • Make-or-Buy (S) • Supplier selection (S) • Sourcing points (T) • Purchasing quantities (T) • Just-in-time/forward buying (S) • Inventory deployment (S) • Replenishment quantity (T) • Replenishment frequency (T) • Profit maximization • Kanban system/MRP • Push/pull approach • Economic order quantity • Reorder point model • Periodic review model • Transaction cost theory • Auction sourcing • Optimization for sourcing points • Carrier requirements minimization • Traveling salesman • Inventory routing (S): Strategic decision (T): Tactical decision (O): Operational decision

10. Logistics Management Framework Transportation • Vehicle routing and scheduling (O) • Carrier selection (S) • Mode choice (T) Logistics Planning Area Facility Structure and Location • Business Economic Activity Boundary (S) • Facility number (S) • Facility size (S) • Facility location (S) Key Decisions (Planning Level) Decision Making Principles • Optimization of capital and transportation cost • Spatial interaction Customer Demand and Service Purchasing Inventory • Customer service level (S) • Inventory level (S) • Make-or-Buy (S) • Supplier selection (S) • Sourcing points (T) • Purchasing quantities (T) • Just-in-time/forward buying (S) • Inventory deployment (S) • Replenishment quantity (T) • Replenishment frequency (T) • Profit maximization • Kanban system/MRP • Push/pull approach • Economic order quantity • Reorder point model • Periodic review model • Transaction cost theory • Auction sourcing • Optimization for sourcing points • Carrier requirements minimization • Traveling salesman • Inventory routing (S): Strategic decision (T): Tactical decision (O): Operational decision

11. Logistics Management Framework Transportation • Vehicle routing and scheduling (O) • Carrier selection (S) • Mode choice (T) Logistics Planning Area Facility Structure and Location • Business Economic Activity Boundary (S) • Facility number (S) • Facility size (S) • Facility location (S) Key Decisions (Planning Level) Decision Making Principles • Optimization of capital and transportation cost • Spatial interaction Customer Demand and Service Purchasing Inventory • Customer service level (S) • Inventory level (S) • Make-or-Buy (S) • Supplier selection (S) • Sourcing points (T) • Purchasing quantities (T) • Just-in-time/forward buying (S) • Inventory deployment (S) • Replenishment quantity (T) • Replenishment frequency (T) • Profit maximization • Kanban system/MRP • Push/pull approach • Economic order quantity • Reorder point model • Periodic review model • Transaction cost theory • Auction sourcing • Optimization for sourcing points • Carrier requirements minimization • Traveling salesman • Inventory routing (S): Strategic decision (T): Tactical decision (O): Operational decision

12. Logistics Management Framework Transportation • Vehicle routing and scheduling (O) • Carrier selection (S) • Mode choice (T) Logistics Planning Area Facility Structure and Location • Business Economic Activity Boundary (S) • Facility number (S) • Facility size (S) • Facility location (S) Key Decisions (Planning Level) Decision Making Principles • Optimization of capital and transportation cost • Spatial interaction Customer Demand and Service Purchasing Inventory • Customer service level (S) • Inventory level (S) • Make-or-Buy (S) • Supplier selection (S) • Sourcing points (T) • Purchasing quantities (T) • Just-in-time/forward buying (S) • Inventory deployment (S) • Replenishment quantity (T) • Replenishment frequency (T) • Profit maximization • Kanban system/MRP • Push/pull approach • Economic order quantity • Reorder point model • Periodic review model • Transaction cost theory • Auction sourcing • Optimization for sourcing points • Carrier requirements minimization • Traveling salesman • Inventory routing (S): Strategic decision (T): Tactical decision (O): Operational decision

13. Intra-Firm Interaction • Facility Structure and Location • In the wholesale/retail industry, consumer demand is the key determinant driving the location of retail outlets. The location decision is also affected by • cannibalization and; • market expansion • In the manufacturing industry, facility structure and location decisions depend largely on the production scheme adopted by a firm • product plant strategy • market area plant strategy • process plant strategy • general purpose plant strategy

14. Intra-Firm Interaction Firm i Plant i1 Firm i Plant Supplier Firm a Supplier Firm a Firm i Plant i2 Supplier Firm b Supplier Firm b Firm j Plant Scenario A: Supplier selection of single-plant firm Scenario B: Centralized purchasing of multi-establishment firm • Purchasing • Centralized purchasing strategy (e.g., adopted by Whirlpool, General Motors, Dells, Wal-Mart and IBM) • Decentralized purchasing • Centralized pricing with decentralized purchasing • Supplier selection for centralized purchasing scenario

15. Intra-Firm Interaction Firm i Plant 1 Firm a Supplier i Firm i Warehouse Firm i Plant 3 Firm c Firm i Plant 2 Firm b Scenario B: Push approach by multi-establishment firm Scenario A: Pull approach by single-establishment firms • Inventory • Push/Pull approach • Vendor-managed inventory (VMI) • Inventory replenishment behavior

16. Intra-Firm Interaction • Transportation • A firm owning multiple establishments has more opportunities of vehicle consolidation during goods movements • The combined shipment size may also make a mode such as rail more attractive

17. Modeling Framework • A hybrid of longitudinal and latitudinal simulation

18. Modeling Framework • Four major modules: Firm Creation Purchasing Inventory & Ordering Transportation

19. Firm Creation • Creates a collection of firms and member establishments located within the study region • Accounts for the effects of production scheme • Analysis unit: • A firm and all its member establishments

20. Purchasing • Determines annual amounts of commodities to be moved between all pairs of establishments • Assumes centralized purchasing strategy • Considers the possibility of using in-house sources

21. Inventory and Ordering • Determines the order quantity happened on an average day throughout a year • Based on the economic order quantity theory widely adopted in logistics management

22. Transportation • Assigns shipments with modes, consolidation location, vehicles, and routes • Follows the transport chain concept developed by de Jong and Ben-Akiva (2007)

23. Conclusion • The intra-firm interdependency in logistics decision-making is captured in the proposed framework • Explicitly represent firm-establishment structures • Consider possibility of internal sourcing within a firm • Apply the popular strategy of centralized purchasing • Consider joint ordering across establishments of the same firm • Part of this modeling system has been calibrated using readily available public data

24. Conclusion • Remaining models to be estimated using data from ongoing firm-based surveys in Wisconsin • Limitations resulted from certain simplifications and assumptions that are incorporated in framework to assure its operational ability: • The ignorance of horizontal alliance across single-establishment firms • Implicit consideration of price policy • A constant demand pattern assumed for the modeling of ordering behavior

25. Thank You