IE 8580 Module 2: Transportation in the Supply Chain Lecture 2.2: Transportation Design, Modes, & Issues

Transportation Decisions - Carriers Carrier – party that moves or transports the product Factors affecting carrier decisions: Vehicle-related cost cost of owning vehicles Fixed operating cost fixed costs independent of vehicle usage (terminal/port costs, labor costs) Trip-related cost function of trip duration and distance (fuel and driver costs) Quantity-related cost loading/unloading, portion of fuel cost Overhead cost costs associated with planning, design, and scheduling, as well as information technology overhead

Transportation Decisions - Shippers Shipper – party that requires the movement of the product between two points in the supply chain Factors affecting shippers decisions Transportation cost for outsourced transportation Inventory cost in particular, cost of inventory in the pipeline Facility cost cost of all locations in the system; only variable in network design phase Processing cost loading/unloading and processing costs Service level cost cost of not meeting customer requirements

Transportation Modes Trucks Rail Air Package Carriers Water Pipeline TL LTL Rail Air Package Carriers Water Pipeline Notes:

Truckload (TL) / Less Than Truckload (LTL) Over 75% of US freight bill Point-to-point deliveries, medium speed, average to good reliability Truckload (TL) vs. less-than-truck load (LTL) Truckload prices are charged per mile since you effectively reserve the entire truck’s capacity LTL prices are a function of distance and load size Truckload is cheaper per unit weight since LTL carriers incur more downtime due to loading and unloading at multiple dropoff points Notes:

Less Than Truckload (LTL) Low fixed and variable costs Major Issues Utilization Consistent service, backhauls LTL Higher fixed costs (terminals) and low variable costs Major issues: Location of consolidation facilities Utilization, vehicle routing, customer service Notes:

Small, high-value items and emergency shipments (limited load size) Air Fast and expensive Small, high-value items and emergency shipments (limited load size) Requires transport to and from airport High reliability Key issues: Location/number of hubs Location of fleet bases/crew bases Schedule optimization Fleet assignment, crew scheduling, yield management Notes:

Companies like FedEx, UPS, USPS Package Carriers Companies like FedEx, UPS, USPS Small packages ranging from letters to shipments of ~150 pounds Expensive Rapid and reliable delivery (value added services) Small and time-sensitive shipments Preferred mode for e-businesses Consolidation of shipments (especially important for package carriers that use air as a primary method of transport)

Rail Key issues: Scheduling to minimize delays / improve service Off-track delays (at pickup and delivery end) Yard operations Variability of delivery times Notes:

Water and Pipeline Water Pipeline Limited to certain areas, high port costs Extremely high load capability, very low unit costs Slow and least reliable performance Dominant mode in global trade Pipeline Limited products, crude petroleum, refined petroleum products, natural gas Best for large and predictable demand Highest percentage of fixed costs

Intermodal Use of more than one mode of transportation to move a shipment to its destination Most common example: rail/truck Also water/rail/truck or water/truck Grown considerably with increased use of containers Increased global trade has also increased use of intermodal transportation More convenient for shippers (one entity provides the complete service) Key issue involves the exchange of information to facilitate transfer between different transport modes

Design Options for a Transportation Network What are the transportation options? Which one to select? On what basis? Direct shipping network Direct shipping with milk runs All shipments via central DC Shipping via DC using milk runs Tailored network Notes:

Ways to execute direct shipment Direct shipment network IE 8580, mason@clemson.edu

Ways to execute direct shipment Direct shipment network Milk runs IE 8580, mason@clemson.edu

Ways to execute direct shipment Direct shipment network Milk runs Milk runs w/ a DC IE 8580, mason@clemson.edu

Ways to execute direct shipment Direct shipment network Milk runs Milk runs w/ a DC Line haul w/ cross docking IE 8580, mason@clemson.edu

Transportation Network Design Network Structure Pros Cons Direct Shipping No intermediate warehouse Simple to coordinate High Inventory (large lots) High receiving expense Direct Shipping with Milk Runs Lower transportation cost with small lots Lower inventory Increased coordination complexity Central DC with inventory Lower inbound transp. cost due to consolidation Increased inventory cost Increased DC handling Central DC with crossdocking Low inventory Low transp. cost through consolidation Shipping via DC with milk runs Lower outbound transp. cost with small lots Further increase in coordination complexity Tailored network Transportation meets individual product/store needs Highest complexity

Trade-offs in Transportation Design Transportation and inventory cost trade-off Choice of transportation mode Inventory aggregation Transportation cost and responsiveness trade-off Transportation mode choice A manager must account for inventory costs when selecting a mode of transportation A mode with higher transportation costs can be justified if it results in significantly lower inventories