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Transportation in the Supply Chain

Outline
The role of transportation in the supply chain Factors affecting transportation decisions Modes of transportation and their performance characteristics Design options for a transportation network Trade-offs in transportation design Tailored transportation Routing and scheduling in transportation Making transportation decisions in practice

A Framework for Structuring Drivers


Competitive Strategy Supply Chain Strategy Efficiency Supply chain structure Logistical Drivers Facilities Inventory Transportation Responsiveness

Information

Sourcing Cross Functional Drivers

Pricing

Factors Affecting 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 Facility cost

Transportation Functions, Principles, Participants


Transportation Functions Transportation Principles
Economy of Scale Economy of Distance (Tapering Principle)

Transportation Participants

Transportation Regulation Transportation Industry Structure Transportation Services

Economies of Scale The more items (weight) is transported, the less the transportation costs per item (unit of weight)

$100/book

Transportation Cost per Book

$.10/book

1 Number of Books in Shipment

1000

Economies of Distance The larger the distance, the less the transportation costs per unit of distance (e.g., per mile)

$.10/mile
Transportation Cost per Mile Tapering Principle

$.05/mile

$50/mile
1 mile 500 miles Shipment Distance 1000 miles

Transportation Participants
I need something shipped at the lowest possible cost!

Transportation Participants
I need something shipped at the lowest possible cost! I need something delivered at the lowest possible cost!

Transportation Participants
Carriers: We have the equipment!

Transportation Participants
Carriers we can find a shipper! Shippers we can find a carrier!

Transportation Participants
the transportation system is vital for the countrys economic health

Transportation Participants

purchase fuel, transportation equipment, supplies

Transportation Participants
track shipments

purchase fuel, transportation equipment, supplies

Transportation Participants
track shipments

purchase fuel, transportation equipment, supplies

match products needing to be shipped with available capacity

Transportation Participants
Creates demand for transportation by purchasing products

Five Basic Transportation Modes


Pipeline Water

Air

Rail Highway Package Carriers

Cost Structure For Each Transportation Mode

Rail

high fixed costs (land, tracks) low variable costs (operating costs, e.g., labor, fuel) slow, but inexpensive way to transport heavy freight that doesnt require special handling, long distances Major Issues
Scheduling to minimize delays / improve service Off-track delays (at pickup and delivery end) Yard operations Variability of delivery times

Cost Structure For Each Transportation Mode

Highway

low fixed costs (government builds, maintains highways)


medium-high variable costs (operating costs, e.g., labor, fuel) most accessible mode (more highways than railroads, waterways, pipelines); best for transporting medium to high value products short to moderate distances

Highway

LTL less than truckload TL truckload Specialty Major Issues Utilization Consistent service Backhauls

Cost Structure For Each Transportation Mode


Water

moderate fixed costs (ships and freight handling equipment)


low variable costs (operating costs, e.g., labor, fuel) very slow, but inexpensive way to transport large, heavy freight over long distances (e.g., oceans, rivers, inland waterways, lakes)

Cost Structure For Each Transportation Mode


Air

relatively low fixed costs (aircraft and freight handling equipment)


highest variable costs (e.g., labor, fuel, maintenance) very fast; used for transporting high value and/or high perishability product over short to medium distances.

Cost Structure For Each Transportation Mode


Pipeline

highest fixed costs (right of way & construction costs of equipment)


lowest variable costs (no significant labor or fuel costs) slow, but dependable (e.g., no weather, traffic disruptions); no flexibility with regard to types of products that can be transported must be liquid (e.g., petroleum)

Package Carriers
Companies like FedEx, UPS, USPS, that carry small packages ranging from letters to shipments of about 150 pounds Expensive Rapid and reliable delivery Small and time-sensitive shipments 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)

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

Direct Shipment Network

Simplicity Local shipment decision TL/LTL transportation Vs inventory costs

Direct Shipment with Milk Runs

TL/LTL transportation Vs inventory costs

Shipment via CDC

Inbound EoS Outbound costs? DC carrying inventory? Cross-docking? Milk run?

Trade-offs in Transportation Design


Transportation and inventory cost trade-off
Choice of transportation mode Inventory aggregation

Transportation cost and responsiveness trade-off

Choice of Transportation Mode


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

Inventory Aggregation: Inventory vs. Transportation Cost


As a result of physical aggregation
Inventory costs decrease (Why?) Inbound transportation cost decreases Outbound transportation cost increases (Example?)

Trade-offs Between Transportation Cost and Customer Responsiveness


Temporal aggregation is the process of combining orders across time Temporal aggregation reduces transportation cost because it results in larger shipments and reduces variation in shipment sizes However, temporal aggregation reduces customer responsiveness

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