Transportation in a Supply Chain By Dr. Debadyuti Das

Importance of transportation in Supply Chain Transportation provides significant link among various stages in the supply chain Significant component of the costs incurred by most supply chains (5-6% of the recommended retail price of the product) Transportation activity represents around 10% of the GDP of USA Transportation-related activity accounts for 16% of total US occupational employment Examples - Indian Army - Dell Computers - Wal-Mart - IKEA - Seven-Eleven Japan

Importance of transportation in Supply Chain Transportation strategy in tune with overall supply chain strategy Transportation-related decisions significantly affect cost as well as responsiveness of the supply chain. Facility, location, transportation and inventory management are inter-related decisions.

Drivers of transportation decisions Transportation cost structures Impact of product characteristics Impact of demand characteristics

Drivers of transportation decisions Transportation cost structures - Function of distance and quantity of goods shipped - Economies of distance (with longer distances) - Economies of scale (with increase in shipment weight) - Driver and crew-related costs are a function of the distance and do not depend on load.

Truck Freight Rates (Rs/ tonne) for a Nine-tonne Shipment Source: The Hindu Business Line, 06 November, 2006

Drivers of transportation decisions Impact of product characteristics - Value-density (the ratio of rupee value of the product to its weight) reveals the importance of transportation cost in the overall product cost. - Value-density captures transportation-inventory trade-off Inventory carrying cost is a function of the value of the product Transportation cost is a function of the weight of the product.

Drivers of transportation decisions - For high value-density product (High-technology products), firms can use faster and expensive mode of transportation - For low value-density product (cement, coal etc.), firms have to use slower mode of transportation - For bulky products like water storage tanks, cycles etc. T.C. is captured by the physical volume rather than the weight - In air-freight industry, volumetric weight is measured and freight rate is charged based on physical wt or volumetric wt, whichever is higher

Drivers of transportation decisions Impact of demand characteristics - Volume of demand (cycle stock) - Uncertainty associated with the product demand (safety stock) - Long lead time (high safety stock) - Faster mode of transport for high uncertainty products - Slower mode of transport for products that have a stable demand

Drivers of transportation decisions Carrier (party that moves or transports the product) Vehicle-related cost Fixed operating cost Trip-related cost Shipper (party that requires the movement of the product between two points in the supply chain) Transportation cost Inventory cost Sourcing cost Facility cost Information processing cost

Mode of transportation Rail Road Air Package Carriers Water Pipeline

Mode of transportation (Rail) Suitable for low value-density products Long and unreliable lead time Off-track delays (at pickup and delivery end) Accounts 30% of freight movement in India Very high in-transit damages and losses 95% of the freight carried is in bulk goods and within that coal accounts for 50% of the traffic.

Mode of transportation (Road) Trucks account for about 65% of freight movement in India More expensive than rail, but offers the advantages of door-to-door delivery and shorter delivery time Low freight rate and poor quality of service Unreliable transit time High in-transit damages

Mode of transportation (Water) One of the cheapest modes of transport Very large loads at very low cost Slowest amongst all Limited to certain geographic areas Ocean, inland waterway system, coastal waters Considerable delays at ports in loading and unloading Extensively used for international cargo

Mode of transportation (Air) Expensive Rapid and reliable delivery Small, time-sensitive and high value-density goods Preferred mode for e-businesses (e.g., Amazon, Dell, McMaster-Carr) Consolidation of shipments (especially important for package carriers that use air as a primary method of transport)

Mode of transportation (Pipelines) High fixed cost Primarily for crude petroleum, refined petroleum products, natural gas Best for large and predictable demand Used for getting crude oil to a port or refinery, but not for getting refined gasoline to a gasoline station

Multi-modal 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 multi-modal 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

Comparison of modes of transportation on SC performance measures Freight cost Lot size Delivery time Delivery time variability Losses and damages

Relative ranking of modes of transportation by performance measures Mode of transportation Cost (1 = least) Lot size (1= smallest) Delivery time (1= fastest) Delivery time variability (1= least) Loss and damage (1=least) Rail 2 3 4 Road Water 1 Air

Total cost approach to performance measures Transportation cost + Cycle stock inventory carrying cost + Pipeline inventory carrying cost + Safety stock inventory carrying cost + Cost of losses and damages

Cost comparisons for different modes of transport for different varieties of product Problem: A global company has decided to use India as its manufacturing base for the supply of printers to the European markets. The company offers three types of printers: high-end, standard and low-end. The three models of the printers cost Rs. 20,000, 15,000 and 10,000 per unit respectively. If the firm decides to use air as the mode of transport, it can fly the goods in smaller lots of 100 units, while shipping via sea requires a minimum shipment size of 400 units. Transportation and customs clearance take 1 week if air is used as the mode of transport. The same will take 4 weeks, if sea is used as the medium of transport. The freight by air will be Rs 360 per unit while freight by sea will be Rs 90 per unit. The annual inventory carrying cost for the firm is 20% of the cost of the item.

Cost comparisons for different modes of transport for different varieties of product Case 1: The demand in Europe is stable at 100 units per week for each of the three types of printers (Demand is stable) Case 2: Average demand in Europe is 100 units per week for each of the three types of printers and standard deviation of demand is 30 units per week (Demand is variable) The firm has to decide on the optimum mode of transport for different varieties of product under different situations.

Cost comparisons for different modes of transport under stable demand Product Mode of transport Cycle-stock Pipeline inventory Average inventory Inventory carrying cost (‘000) Transportation cost (‘000) Total cost per annum (‘000) High end Sea Air 200 50 400 100 600 150 2400 468 1872 2868 2472 Standard 1800 450 2268 2322 Low end 1200 300 1668 2172

Cost comparisons for different modes of transport under demand uncertainty Product Mode of transport Total cost per annum for stable demand (‘000) Safety stock inventory carrying cost (‘000) Total cost High end Sea Air 2868 2472 480 240 3348 2712 Standard 2268 2322 360 180 2628 2502 Low end 1668 2172 120 1908 2292

Distribution network design options A garment manufacturing plant has three plants (A, B and C), each manufacturing a different product line and serving a stable market through three depots (X, Y and Z). Plant A is manufacturing men's wear, plant B ladies’ wear and plant C children’s wear. Each of the plant will be supplying to all the three depots.

Distribution network design options Ship directly from each plant to each market -Stable demand with high volume - High cycle inventory Aggregate demand across depots and using Milk Run from each plant - Increase in frequency of visit - Increase in transportation cost - Lower cycle stock Ship Via Distribution centre - Cycle stock almost similar to Milk Run option - Transportation cost higher than Direct shipping, but lower than Milk Run option - Setting up of an additional facility at DC - Additional loading and unloading costs at DC

Distribution network design options Hub and Spoke Model - Large number of time-sensitive small-size shipments - All the destinations in a region are inter-connected through a central hub - Originate from geographically dispersed areas - To be distributed over large geographical areas

Comparison of Distribution network design options Consider the same problem. Weekly demand at each of the three depots is 100 units for each of the three types of garments. A truck can carry 300 units of garments and the transportation cost is Rs. 2 per km for FTL shipments. To obtain economies of scale, the firm has decided to work with FTL shipments and all the trips will carry 300 units of garments. The firm can bundle men’s wear, ladies’ wear and children’s wear in one trip, but all together it can carry only 300 units in one trip. The inventory carrying cost is 20% of item cost per annum. All the products cost Rs 200 per unit. The facility cost of maintaining a DC is Rs 12,000 per year. In the Direct shipping option, 3 week’s worth of demand will be supplied in every trip and the cycle will be repeated in every 3 weeks. In the other two options, each trip will have 1 week’s worth of supply and the cycle will be repeated every week.

Transportation strategy: linking plants to depots Spatial data representation A 100 X DC Plants Depots B 50 O Y C 0 Z 200 100

Computation of distances Location (X. Y) Coordinates Trip Distance A (O, 100) AX, BY, CZ 200 B (0, 50) AZ, CX 223.6 C (0, 0) AY, BX, BZ, CY 206.15 X (200, 100) XY, YZ 50 Y (200, 50) AO, CO, OX, OZ 111.18 Z (200, 0) BO, OY 100 O (100, 50)

Relevant costs Transportation costs Inventory carrying costs

Comparison of three shipping strategies Option Distance traveled in one cycle Frequency of transport cycle Annual transport cost Annual facility cost Premium garment (Avg garment cost: Rs 200) Annual Annual Inv cost TC Low-end garment (Avg garment cost: Rs 75) Direct shipping 3,744 Once in three weeks 1,29,781 54,000 183781 20250 150,031 Milk Run 1,560 Once a week 1,62,191 18,000 180191 6750 168,941 Shipping via DC 1,294 1,34,620 12,000 18,000 164620 6750 153,370

Transportation costs in E-Retailing Benefits of keeping inventory at a central location Increase in transportation costs Shipping charges by E-Retailers - Consist of a fixed and a variable component - Depends on the type of the items shipped e.g. books, DVDs, Computer, groceries, sport items, automotive items Firstandsecond.com, Indian E-Retailer of books charges 7% of the order value or Rs 30, whichever is higher for standard shipping of order value of less than Rs. 5000.

Impact of transport cost on Business performance of E-Retailers Dell Computer Amazon.com Webvan Items Avg price Avg weight Value-density Shipment Transport cost* Shipping cost as a % of price Laptop $1500 3 kg $500/kg 1 laptop 12.4 0.8 Book $15 0.5 kg $30/kg 3 books 6.0 13.3 Grocery $5 1 kg $5/kg 10 kg 18.2 36.4

Impact of transport cost on Business performance of E-Retailers E-Retailing is suitable for high-variety, high value-density and high demand uncertainty products