Lecture 4 Transportation—Managing the Flow of the Supply Chain

Introduction Transportation involves the physical movement of goods between origin and destination points. The transportation system links geographically separated partners and facilities in a company’s supply. Transportation facilitates the creation of time and place utility in the supply chain. Transportation also has a major economic impact on the financial performance of businesses.

Role of Transportation in Supply Chain Management Transportation provides the critical links between these organizations, permitting goods to flow between their facilities. Transportation service availability is critical to demand fulfillment in the supply chain. Transportation efficiency promotes the competitiveness of a supply chain

Challenges to Carrying out This Role supply chain complexity competing goals among supply chain partners changing customer requirements limited information availability synchronizing transportation with other supply chain activities

Challenges to Carrying out This Role Transportation capacity constraints pose a challenge. Rising transportation rates present another major concern for organizations. The transportation industry is impacted by governmental requirements that affect cost structures and service capabilities. Regulation is growing in areas where the transportation industry has the potential to impact the quality of life, the safety of citizens, and the growth of commerce.

Modes of Transportation primary modes of transportation truck rail air water pipeline intermodal transportation

Modes of Transportation moves approximately 19.5 billion tons valued at nearly $13 trillion Modal breakdown: Trucking 80.0 % $635 billion Rail 06.7% Air 04.7% Water 04.6% Pipeline 01.2%

Modes of Transportation Motor Carriers widely used mode of transportation in the domestic supply chain 573,469 private, for hire, and other U.S. interstate motor carriers economic structure of the motor carrier industry contributes to the vast number of carriers in the industry comprised of for-hire and private fleet operations Truckload carriers. Less-than-truckload (LTL) Small package carriers Low fixed cost, high variable

Modes of Transportation Railroads 7 Class I railroads revenues in excess of $290 million Activity levels have been achieved despite a lack of direct accessibility to all parts of the supply chain Railroads are “natural monopolies” Two carrier types: Linehaul Shortline carriers High fixed, low variable

Modes of Transportation Water Major facilitator of international trade 81% international freight movement 19% coastal, inland, and Great Lakes traffic High variable and low fixed cost Two primary carrier types Liner Charter Options include Container ships Bulk carriers Tankers General cargo ships Roll-on, roll-off (RO–RO) vessels

Modes of Transportation Air Carriers 491 air cargo carriers Combination carriers Air cargo carriers Integrated carriers Nonintegrated carriers Domestic market is dominated by 14 major carriers High variable and low fixed cost

Modes of Transportation Pipeline Unique mode of transportation as the equipment is fixed in place and the product moves through it in high volume 174 operators of hazardous liquid pipelines that primarily carry crude oil and petroleum products Three primary types Gathering lines Trunk lines Refined product pipelines High fixed versus low variable

Intermodal Transportation Modes of Transportation Intermodal Transportation Use of two or more different modes in movement Greater accessibility Overall cost efficiency Facilitates global trade Development of standardized containers that are compatible with multiple modes. Product-handling characteristics Containerized freight Transload freight

Functional Control of Transportation Which department will be responsible for transportation? Logistics Procurement Marketing

Decision to Outsource Transportation Firms choose between “make” or “buy” Commercial carriers “buy” Private fleets “make” External experts move the freight and/or manage the transportation process “buy” Third-party logistics (3PL) “buy”

Modal Selection Accessibility Transit Time Reliability Accessibility advantage: Motor carriage Accessibility disadvantage: Air, rail, and water Transit Time Transit time advantage: Air and motor carriage Transit time disadvantage: Rail, water, and pipeline Reliability Reliability advantage: Motor carriers and air carriers Reliability disadvantage: Water carriers and rail carriers

Modal Selection Product Safety Cost Safety advantage: Air transportation and motor carriage Safety disadvantage: Rail and water Cost Cost advantage: The cost of transportation service varies greatly between and within the modes Cost disadvantage: Motor carriage and air transportation

Modal Selection The nature of a product—size, durability, and value Product value Shipment characteristics—size, route, and required speed

Carrier Selection selecting the individual transportation service providers within the mode major difference between modal and carrier selection is the number of options difference is the frequency of the decision type of service provided within a mode impacts carrier selection most carriers have the capabilities to provide a similar level of service Core carrier limited number of carriers leverage its purchasing dollars

Rate Negotiations centralized freight rate negotiations developing contracts with carriers for a tailored set of transportation services at a specific price leveraging volume with a small set of carriers

Shipment Preparation corporate transportation routing guide last-minute, cost-saving decisions consolidate freight coordinate shipment deliveries take full advantage of container capacity an accurate freight count should be taken

Maintain In-Transit Visibility manage key events as product moves across the supply chain technology facilitates the ability to monitor product visibility tools must be linked to other capabilities and processes to have an impact on supply chain event management

Monitor Service Quality analyze the outcome of all their transportation strategy, planning, and decision-making key requirement for service quality monitoring is information

Transportation Metrics key performance indicators (KPIs) can be used to evaluate current performance versus historical results internal goals carrier commitments challenge lies in narrowing down metrics available to monitor performance to a manageable number of KPIs primary categories of transportation KPIs include service quality and efficiency

Transportation Management Systems (TMS) Critical applications include the following: Routing and scheduling proper planning of delivery routes has a major impact on customer satisfaction, supply chain performance, and organizational success Load planning effective preparation of safe, efficient deliveries Load tendering Status tracking Appointment scheduling

The Role of Distribution in SCM: 1. Balancing supply and demand. Whether seasonal production must service year-round demand (e.g., corn) or year-round production is needed to meet seasonal demand (e.g., holiday wrapping paper), distribution facilities can stockpile inventory to buffer supply and demand. 2. Protecting against uncertainty. Distribution facilities can hold inventory for protection against forecast errors, supply disruptions, and demand spikes. 3. Allowing quantity purchase discounts. Suppliers often provide incentives to purchase product in larger quantities. Distribution facilities can handle the quantities, reducing the purchase cost per unit. 4. Supporting production requirements. If a manufacturing operation can reduce costs via long production runs or if outputs need to age or ripen (e.g., wine, cheese, fruit), the output can be warehoused prior to distribution. 5. Promoting transportation economies. Fully utilizing container capacity and moving product in larger quantities is less expensive per unit than shipping “air” and moving small quantities at a time. Distribution facilities can be used to receive and hold the larger deliveries of inventory for future requirements.

Distribution Facility Functionality Four primary functions are: accumulation sortation allocation assortment

Tradeoffs Cost of distribution centers and inventory vs. cost of transportation Cost of additional facilities vs. level of customer service Space vs. equipment Equipment vs. people People vs. space

Capability Requirements Product characteristics must drive the design of the distribution process such as product value, durability, temperature sensitivity, obsolescence, volume, and other factors Two options for product flow: direct shipment of goods from the manufacturer to retailer from the retailer to consumer movement of goods through distribution facilities to customers Must analyze the inventory, transportation, and service trade offs before choosing between direct shipping and the use of distribution facilities Advantages of each Disadvantages of each

Network Design Issues Inventory positioning focuses on the issue of where inventory is located within the supply chain single location Advantages Disadvantages hold product in multiple customer-facing positions Second and third network design issues focus on the number and locations of distribution facilities within the supply chain.

Number of facilities needed for a supply chain involves the evaluation of cost tradeoffs with other functional areas: Transportation costs Cost of lost sales Warehousing costs Inventory costs

Facility ownership question Own or contract? Private DCs are internal facilities owned by the organization Public warehousing is the traditional external distribution option Contract warehousing is a customized version of public warehousing in which an external company provides a combination of distribution Choosing between private and 3PL distribution options requires significant planning and analysis

Facility Considerations: first facility consideration is to determine the size of each operation within the network an area may be needed for processing rework and returns office space is needed for administrative and clerical activities space must be planned for miscellaneous requirements

Support Functions: Inventory control Safety, maintenance, and sanitation Security Performance analysis Information technology

Distribution Metrics Distribution KPIs are objective measures of fulfillment performance that are critical to the success of the organization Important issues: cost efficiency inventory accuracy order fill rates capacity utilization

Customer Facing Measures Order accuracy and order completeness Customers want to receive the exact products and quantities that they ordered, not substitute items, incorrectly shipped items, or wrong quantities Timeliness is a critical component of customer service Perfect order index (POI) delivered to the right place at the right time in defect-free condition with the correct documentation, pricing, and invoicing

Internal Measures Distribution cost efficiency Aggregate cost efficiency total distribution spending versus goal or budget Asset utilization Resource productivity distribution costs averaging nearly 10 percent of a sales dollar Resource efficiency

Distribution Technology Warehouse Management Systems software control system that improves product movement and storage operations value-added capabilities generate performance reports support paperless processes enable integration of materials handling equipment picking systems sorting systems leverage wireless communication

Distribution Technology Warehouse Management Systems Other value-added capabilities: Labor management Task interleaving Systems integration Activity-based costing/billing Multifunction distribution

Automatic Identification Tools WMS utilizes Auto-ID data capture technologies: barcode scanners mobile computers wireless local area networks (LAN) RFID