© 2007 Pearson Education 14-1 Chapter 13 Transportation in the Supply Chain Supply Chain Management (3rd Edition)

© 2007 Pearson Education 14-2 Outline uThe role of transportation in the supply chain uFactors affecting transportation decisions uModes of transportation and their performance characteristics uDesign options for a transportation network uTrade-offs in transportation design uTailored transportation uRouting and scheduling in transportation uMaking transportation decisions in practice

© 2007 Pearson Education 14-3 Factors Affecting Transportation Decisions uCarrier (party that moves or transports the product) –Vehicle-related cost –Fixed operating cost –Trip-related cost uShipper (party that requires the movement of the product between two points in the supply chain) –Transportation cost –Inventory cost –Facility cost

© 2007 Pearson Education 14-4 Transportation Modes uTrucks –TL –LTL uRail uAir uPackage Carriers uWater uPipeline uIntermodal

© 2007 Pearson Education 14-5 Truck u the trucking industry consists of two major segments- –TL (truckload) –LTL (less than truckload) uTrucking is more expensive than rail but offers the advantage of door-to-door shipment and a shorter delivery time. uMajor Issues –Utilization –Consistent service –Backhauls

© 2007 Pearson Education Truckload (TL) u TL operations have relatively low fixed costs, and owning a few trucks is often sufficient to enter the business. 14-6

© 2007 Pearson Education 14-7 Less Than Truckload (LTL) uLTL operations are priced to encourage shipments in small lots, usually less than half a TL, as TL tends to be cheaper for larger shipments. uPrices display some economies of scale with the quantity shipped as well as the distance traveled. uLTL shipments take longer than TL shipments because of other loads that need to be picked up and dropped off.

© 2007 Pearson Education uMajor issues: –Location of consolidation facilities –Utilization –Vehicle routing –Customer service 14-8

© 2007 Pearson Education 14-9 Rail uRail is an ideal mode for carrying large, heavy, or high-density product over long distances. uTransportation time by rail can be long. uRail is thus ideal for very heavy, low value shipments that are not very time sensitive. uKey issues: –Scheduling to minimize delays / improve service –Off-track delays (at pickup and delivery end) –Yard operations –Variability of delivery times

© 2007 Pearson Education Air uIt carries both passenger and cargo. uAir carrier offer a very fast and fairly expensive mode of transportation. uSmall, high-value items or time-sensitive emergency shipments that have to travel a long distance are best suited for air transport. uKey issues: –Location/number of hubs –Location of fleet bases/crew bases –Schedule optimization –Fleet assignment –Crew scheduling –Yield management

© 2007 Pearson Education Package Carriers uCompanies like FedEx, UPS, USPS, that carry small packages ranging from letters to shipments of about 150 pounds uExpensive uRapid and reliable delivery uSmall and time-sensitive shipments uPreferred mode for e-businesses (e.g., Amazon, Dell, McMaster-Carr) uConsolidation of shipments (especially important for package carriers that use air as a primary method of transport)

© 2007 Pearson Education Water uLimited to certain geographic areas uOcean, inland waterway system, coastal waters uVery large loads at very low cost uSlowest uDominant in global trade (autos, grain, apparel, etc.)

© 2007 Pearson Education Pipeline uHigh fixed cost uPrimarily for crude petroleum, refined petroleum products, natural gas uBest for large and predictable demand uWould be used for getting crude oil to a port or refinery, but not for getting refined gasoline to a gasoline station.

© 2007 Pearson Education Intermodal uUse of more than one mode of transportation to move a shipment to its destination uMost common example: rail/truck uAlso water/rail/truck or water/truck uGrown considerably with increased use of containers uIncreased global trade has also increased use of intermodal transportation uMore convenient for shippers (one entity provides the complete service) uKey issue involves the exchange of information to facilitate transfer between different transport modes

© 2007 Pearson Education Design Options for a Transportation Network uWhat are the transportation options? Which one to select? On what basis? uDirect shipping network uDirect shipping with milk runs uAll shipments via central DC uShipping via DC using milk runs uTailored network

© 2007 Pearson Education Direct shipping network uThe buyer structures his transportation network so that all shipments come directly from each supplier to each buyer location. uRouting of each shipment is specified and the supply chain manager only needs to decide on the quantity to ship and the mode of transportation to use. uAdvantage is the elimination of intermediate warehouse and its simplicity of operation and coordination. uTransportation time is short

© 2007 Pearson Education Direct shipment network uSupplierBuyer Location 14-17

© 2007 Pearson Education Direct shipping with milk runs uA milk run is a route on which a truck either delivers product from a single supplier to multiple retailer or goes from multiple supplier to a single buyer location. uIn direct shipment with milk runs, a supplier delivers directly to multiple buyer locations on a truck or a truck picks up deliveries destined for the same buyer location from many suppliers

© 2007 Pearson Education Milk runs from multiple suppliers or to multiple buyer locations uSuppliersBuyer locations Suppliers Buyer locations 14-19

© 2007 Pearson Education All shipments via central DC uSupplier do not send shipments directly to buyer locations. uThe buyer divides locations by geographic region and a DC is built for each region. uSupplier send their shipments to DC and the DC then forwards appropriate shipments to each buyer location. uDC is an extra layer between supplier and buyer locations and can play two different roles. uOne is to store inventory and uThe other is to serve as a transfer location

© 2007 Pearson Education All shipments via DC uSuppliersDCBuyer locations 14-21

© 2007 Pearson Education Shipping via DC using milk runs uMilk runs can be used from a DC if lot sizes to be delivered to each buyer location are small. uMilk runs reduce outbound transportation costs by consolidating small shipments

© 2007 Pearson Education Milk runs from DC uSuppliersDCBuyer locations

© 2007 Pearson Education Tailored network uThe tailored network option is a suitable combination of previous options that reduces the cost and improves responsiveness of the supply chain

© 2007 Pearson Education Trade-offs in Transportation Design uAll transportation decisions made by shippers in a supply chain network must take into account their impact on inventory costs, facility and processing costs, the cost of coordinating operations, as well as the level of responsiveness provided to customer. u Transportation and inventory cost trade-off –Two fundamental supply chain decisions involving this trade-off are: »Choice of transportation mode »Inventory aggregation uTransportation cost and responsiveness trade-off

© 2007 Pearson Education Choice of Transportation Mode uA manager must account for inventory costs when selecting a mode of transportation uA mode with higher transportation costs can be justified if it results in significantly lower inventories

© 2007 Pearson Education Inventory Aggregation: Inventory vs. Transportation Cost uAs a result of physical aggregation –Inventory costs decrease –Inbound transportation cost decreases –Outbound transportation cost increases uInventory aggregation decreases supply chain costs if the product has a high value to weight ratio, high demand uncertainty, or customer orders are large uInventory aggregation may increase supply chain costs if the product has a low value to weight ratio, low demand uncertainty, or customer orders are small

© 2007 Pearson Education Trade-offs Between Transportation Cost and Customer Responsiveness uThe transportation cost a supply chain incurs is closely linked to the degree of responsiveness the supply chain aim provide. uTemporal aggregation is the process of combining orders across time uTemporal aggregation reduces transportation cost because it results in larger shipments and reduces variation in shipment sizes uHowever, temporal aggregation reduces customer responsiveness

© 2007 Pearson Education Tailored Transportation uThe use of different transportation networks and modes based on customer and product characteristics uFactors affecting tailoring: –Customer distance and density –Customer size –Product demand and value

© 2007 Pearson Education Role of IT in Transportation uThe complexity of transportation decisions demands to use of IT systems uIT software can assist in: –Identification of optimal routes by minimizing costs subject to delivery constraints –Optimal fleet utilization –GPS applications

© 2007 Pearson Education Risk Management in Transportation uThree main risks to be considered in transportation are: –Risk that the shipment is delayed –Risk that the shipment does not reach its destination because intermediate nodes or links are disrupted by external force –Risk of hazardous material uRisk mitigation strategies: –Decrease the probability of disruptions –Alternative routings –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

© 2007 Pearson Education Making Transportation Decisions in Practice uAlign transportation strategy with competitive strategy uConsider both in-house and outsourced transportation uDesign a transportation network that can handle e-commerce uUse technology to improve transportation performance uDesign flexibility into the transportation network

© 2007 Pearson Education Summary of Learning Objectives uWhat is the role of transportation in a supply chain? uWhat are the strengths and weaknesses of different transport modes? uWhat are the different network design options and what are their strengths and weaknesses? uWhat are the trade-offs in transportation network design?