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

2. 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

3. 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

4. Transportation Modes Trucks Rail Air Package Carriers Water PipelineTL
LTL
Rail
Air
Package Carriers
Water
Pipeline
Notes:

5. 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:

6. 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:

7. 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:

8. 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)

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

10. 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

11. 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

12. 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:

13. Ways to execute direct shipment
Direct shipment network
IE 8580,

14. Ways to execute direct shipment
Direct shipment network
Milk runs
IE 8580,

15. Ways to execute direct shipment
Direct shipment network
Milk runs
Milk runs w/ a DC
IE 8580,

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

17. 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

18. 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