14.

TRANSPORTATION
IN SUPPLY CHAIN

Group Number 14:

PRERNA SINGH (1602138)
SHAMIK (1602142)
PRATEEK CHOPRA (1602136)
SHOUBHIK MONDAL (1602110)
RAGHAV VERMA (1602147)
 Outline
The role of transportation in the supply chain
Factors affecting transportation decisions
Modes of transportation and their performance characteristics
Design options for a transportation network
Trade-offs in transportation design
Tailored transportation
Routing and scheduling in transportation
Making transportation decisions in practice
 Role of Transportation in
TRANSPORTATION It refers to the SCM
movement of product from one
location to another as it makes its
way from beginning of a supply chain
to a customer.

For example companies like Ikea,

amazon, etc. use different mode of
transportation to achieve their on
time delivery.
 Decision Factors
1. Carrier -party that moves or transports the product
2.Shipper -party that requires the movement of the product between two points in the supply chain
3.Consignee- party that receives the shipment
4. The owners of the infrastructure (Ports, highways, railroads)
5.Government and/or bodies that set worldwide transportation policy
 Modes of Transportation
Air
Package Carriers
Truck
Rail
Water
Pipeline
Intermodal
Air
Three Cost Components
Fixed cost of infrastructure and equipment
Cost of labour and fuel that is independent of passengers & cargo carried
Variable cost that depends on the cargo or passenger
Fast and fairly expensive mode of transportation
High valued items or time sensitive expensive items
Key issues that air carrier face-identifying the location & number of hubs
,assigning plane to routes, setting up maintenance schedules for planes,
scheduling crew members, and managing availability at different price rate.

Package Carriers
Transportation companies like FedEx, UPS etc
Use air, truck and rail to transport
Also provide value added services like package tracking
Preferred mode for online businesses
Rail
Ideal mode for carrying large, heavy or high-density
products over
long distances
Low value shipments which are not time sensitive

Truck
Two major segments :Truckload (TL) >10000 pounds
Less than Truckload (LTL)
>150 pounds
Expensive than rail but offers advantage of door-to-
door shipment
Shorter delivery time compared to rail and water
Water
Slowest of all the modes
Ideally suited for carrying large loads at low cost

Pipeline
Used mainly to transport crude oil, petroleum and natural gas.

Intermodal
Use of more than one mode of transportation
Grown because of increase in global trade
INTERMODAL VS ROAD
FREIGHT
 Transportation Infrastructure and Policies

Transportation infrastructure consists of the fixed installations including

roads, railways, airways, waterways, canals and pipelines and terminals
such as airports, railway stations, bus stations, warehouses, trucking
terminals and seaports necessary for the circulation and safety of traffic.
Transportation infrastructure often require government ownership or
regulation because of their monopolistic nature.
In the absence of monopoly, deregulation and market forces help create an
effective industry structure.
 Benefits

The supply chain benefits from good transport infrastructure includes:

Lower sourcing costs:

Lower transport costs and an efficient

transportation network will help to source from
fewer locations because it becomes more
affordable to ship longer distances from each
facility.
 Benefits
2. Reduced fleet, warehousing, and inventory
costs:
Increase transportation system's capacity and
reduce or eliminate congestion
Replace traditional warehouses with efficient
cross-dock operations that keep inventory in
transit instead of putting it in storage
Reduces variability in transit times, making it
possible to predict on-time performance with
greater accuracy.
 Benefits
3. Increased revenue from adopting new business models:

Reinvest the savings in more competitive pricing.

Help companies reach a broader market, facilitating increased sales
May decide to offer higher service levels (shorter order-to-delivery lead
times) instead of, or in addition to, pocketing the savings.
 Policy Framework for
Transportation
To invest efficiently in transport infrastructure, policy and decision makers need to
have key information on:
Infrastructure inventory - the type, amount, location, and condition of transport
infrastructure, categorized by mode
Use and performance - the effectiveness and efficiency of the transport
infrastructure in moving people and goods, as well as the undesirable
consequences (e.g., accidents)
Factors affecting the performance of the transport infrastructure - such as the
aging of, and the increasing demand on, the infrastructure
Economic drivers - trends and developments that affect economic growth
Design Options for a Transportation Network

Direct Shipment Network to Single Destination

Direct Shipping with Milk Runs
All Shipments via Intermediate Distribution Center with Storage
All Shipments via Intermediate Transit Point with Cross-Docking
Shipping via DC Using Milk Runs
Tailored Network
Direct Shipment Milk Runs from Multiple Suppliers or
Network to Multiple Buyer Locations

All Shipments Milk Runs

via DC from DC
Pros and Cons of Different Transportation Networks
Network Structure Pros Cons
Direct Shipping No intermediate High inventories(due
warehouse to large lot size)
Simple to coordinate Significant expense
Direct Shipping with Lower transportation Increased coordination
Milk Runs costs for small lots complexity
Lower inventories
All Shipments via Lower inbound Increased inventory
Central DC with transportation cost cost
Inventory Storage through consolidation Increased handling
at DC
All Shipments via Low inventory Increased coordination
Central DC with Cross- requirement complexity
Dock Lower transportation
cost through
consolidation
Shipping via DC using Lower outbound Further increase in
Milk Runs transportation cost for coordination
 Trade-offs in Transportation Design
All transportation decisions in a supply chain network must take into account their
impact on inventory costs, processing costs, cost of coordinating operations, level of
responsiveness provided to customers. Eg. Amazons use of package carriers to deliver
products increases transportation costs but reduces inventory cost.
What should
amazon do ?

The following trade-offs must be considered for making transportation

decisions :- Transportation and inventory cost trade-off
Choice of transportation mode
Inventory aggregation
Transportation cost and responsiveness trade-off
 CHOICE OF TRANSPORTATION MODE
The key factor in choosing the transportation method is keeping in mind that th
is balance maintained between- Transportation Cost and Supply Chain cost

Cheaper mode- Expensive modes-

Higher lead times, Allows lower minimum
Supply Transportati high minimum shipment, and reduces
Chain cost on cost shipment qty. lead times.

Apple incurs higher transportation costs, as it sends

very less amount of products via air, but that in turn
increases its customer satisfaction and
responsiveness

IKEA seeks for lower transportation costs, as its

furniture is not a luxury product, and more
concentration is on reducing the
transportation costs to get more profits
 Ranking of Transportation modes :

Cycle Safety In-transit Transportation Transportation Average

Mode Inventory Inventory cost cost time rank
Rail 5 5 5 2 5 4.4
TL 4 4 4 3 3 3.6
LTL 3 3 3 4 4 3.4
Packa
ge 1 1 1 6 1 2
Air 2 2 2 5 2 2.6

Water 6 6 6 1 6 5
 Trade-offs When Selecting Transportation Mode

Eastern Electric , a major appliance manufacturer has a

Demand = 120,000 motors, Cost = $120/motor,
Weight = 10 lbs/motor, Lot size = 3,000,
Safety stock = 50% demand during lead time.
 Trade-offs When Selecting Transportation Mode

Cycle inventory= Q/2 = 2,000/2 = 1,000 motors

Safety inventory = L/2 days of demand
= (6/2)(120,000/365) = 986 motors
In-transit inventory = 120,000(5/365) = 1,644 motors
Total average inventory = 1,000 + 986 + 1,644
= 3,630 motors
Annual holding cost
using AM Rail = 3,630 x $30 = $108,900
Annual transportation
cost using AM Rail = 120,000 x 0.65 = $78,000
The total annual cost for
inventory and transportation
using AM Rail = $186,900
Trade-offs When Selecting Transportation Mode
DHLS INNOVATION IN TRANSPORTATION
 Tradeoffs When
Aggregating Inventory
Firms can reduce safety inventory by aggregating inventories in one
location. It is a good idea when inventory and facility costs form a
major portion of supply chain. Example:- Amazon has focused on
decreasing its inventory costs by holding inventory in a few
warehouses.
 Tradeoffs When
Aggregating Inventory
HighMed, a manufacturer of medical equipments is considering two options :-

Highval weekly demand H = 2, H = 5, weight = 0.1 lbs, cost = $200

, $0.66 + 0.26x
FedEx lead time = overnight, $5.53 + 0.53x
Lowval weekly demand L = 20, L = 5, weight = 0.04 lbs, cost = $30
CSL = 0.997, holding cost = 25%, L = 1 week, T = 4 weeks
UPS lead time = 1 week
Option A. Keep the current structure but replenish inventory once a week rather than once
every four weeks
Option B. Eliminate inventories in the territories, aggregate all inventories in a finished-goods
warehouse at Madison, and replenish the warehouse once a week
 Tradeoffs When
Aggregating Inventory

1. HighMed inventory costs (current

scenario, HighVal)
 Tradeoffs When
Aggregating Inventory

2.HighMed inventory costs (current scenario,

LowVal)
 Tradeoffs When
Aggregating Inventory

Annual inventory
holding cost
for High Med = (average HighVal
inventory x $200
+ average LowVal inventory x $30) x
0.25
= (832.8 x $200 + 169.8 x $30) x 0.25
= $54,366 ($54,395 without rounding)
 Tradeoffs When
Aggregating Inventory
 Tradeoffs When
Aggregating Inventory
 Trade-off Between Transportation
Cost and Responsiveness

If a firm has high responsiveness and ships orders within a day it

would result in high transportation cost and vice versa.
Example:
Steel shipments LTL = $100 + 0.01x where x is no. of pounds of
steel shipped. What are cost advantages of increasing response
time?
Trade-off Between Transportation
Cost and Responsiveness
 Tailored Transportation

The use of different transportation networks and modes based on customer and product characteristics. Example:

W.W. Grainger sells more than 200,000 MRO supply products to both small contractors and large firms

Variation in product sizes, values, quantity, delivery distance etc.

The firm should not design a common transportation network to meet all needs

Factors affecting tailoring

o Customer density and distance

o Customer size

o Product demand and value

 Tailored Transportation
by Customer Density & Distance
Short Distance Medium Distance Long Distance

High density Private fleet with milk Cross-dock with milk runs Cross-dock with milk runs
runs

Medium density Third-party milk runs LTL carrier LTL or package carrier

Low density Third-party milk runs or LTL or package carrier Package carrier
LTL carrier
 Tailored Transportation
by Size of Customer
Large customers can be supplied using a TL carrier, whereas smaller customers will require an LTL carrier or milk runs

Two types of costs involved in milk run:

Transportation cost based on total route distance

Delivery cost based on number od deliveries

For small customers, the delivery cost per unit is higher than for large customers

Thus it is not optimal to deliver to small and large customers with the same frequency at the same price

Firms can charge higher delivery charge for small customers or tailor milk runs so that they visit large customers more
frequently

Firms can divide their customers into Large, Medium and Small based on demand and can determine optimum delivery
cost
 Tailored Transportation by
Product Demand and Value
Product Type High Value Low Value

High demand Disaggregate cycle inventory. Disaggregate all inventories and use
Aggregate safety inventory. Inexpensive inexpensive mode of transportation for
mode of transportation for replenishing replenishment.
cycle inventory and fast mode when
using safety inventory.

Low demand Aggregate all inventories. If needed, use Aggregate only safety inventory. Use
fast mode of transportation for filling inexpensive mode of transportation for
customer orders. replenishing cycle inventory.
 Role of IT
in Transportation
IT software can assist in:

Identification of optimal routes by minimizing costs subject to delivery constraints

Vehicle load optimization software helps improve fleet utilization
GPS for tracking real time location of vehicles and electric notification of impending arrival
The internet has also been used to help match shipper loads with available capacity with carriers in the
trucking industry
Problems with IT:

include cross-enterprise collaboration and the narrow view taken by some transportation software
Software often ignores customer service and promised delivery dates
Risk Management In
Transportation
 RISK MANAGEMENT IN

TRANSPORTATION
Three main risks to be considered in transportation are
Risk that the shipment is delayed
Risk of disruptions
Risk of hazardous material
Risk mitigation strategies
Delay can be avoided by moving inventories closer to the destination, using alternate lanes, building a
buffer into the lead time, avoiding congestion by changing routes in real time based on congestion,
owning transportation facilities and signing long term contracts with the logistics partner
Disruptions can be avoided by designing alternative routings, decreasing the probability of disruptions
etc.
In case of hazardous materials the use of modified containers, low-risk transportation models,
modification of physical and chemical properties can prove to be effective
 Making Transportation Decisions in Practice

Align transportation strategy with competitive strategy

Transportation strategy should support competitive strategy

Total cost and level of responsiveness should be considered

Consider both in-house and outsourced transportation

Right combination of owned and outsourced transportation

Outsource when shipment sizes are small, own logistics when the sizes are large and responsiveness is important

Use technology to improve transportation performance

Helps in planning, route selection, scheduling, tracking etc

Design flexibility into the transportation network

Account for uncertainty for high level of responsiveness
 SUMMARY

Understanding the role of transportation in a supply chain

Evaluate the strengths and weaknesses of different modes of transportation

Discuss the role of infrastructure and policies in transportation

Identify the relative strengths and weaknesses of various transportation network design options

Identify trade offs that shippers need to consider when designing a transportation network