Physical Distribution in Supply Chain

Approaches to Distribution:
1. Functional model:spread out the functions
between actors in the distribution channel on
the basis of minimum cost.
2. Consumer Utility model:equilibrium between
market and resource allocation on the basis of
4 Ps.
3. Postponement and Speculative model:optimize
the organization of the channel by minimizing
costs and risks for producers and
distributors.
 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 Modes
 Trucks
– TL
– LTL
 Rail
 Air
 Package Carriers
 Water
 Pipeline
 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
 Inventory Aggregation: Inventory
vs. Transportation Cost
 As a result of physical aggregation
– Inventory costs decrease
– Inbound transportation cost decreases
– Outbound transportation cost increases
 Inventory aggregation decreases supply chain
costs if the product has a high value to weight
ratio, high demand uncertainty, or customer
orders are large
 Inventory aggregation may increase supply chain
costs if the product has a low value to weight
ratio, low demand uncertainty, or customer orders
are small
 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
 Tailored Transportation
 The use of different transportation
networks and modes based on
customer and product characteristics
 Factors affecting tailoring:
Customer distance and density
Customer size
Product demand and value
 Routing and Scheduling
in Logistics
 Decision of which customers to be
visited by a particular vehicle and
the sequence in which they will be
visited
 Two basic approaches:

– Savings matrix method

– Generalized assignment method
 Savings Matrix Method

 Identify the distance matrix

 Identify the savings matrix
 Assign customers to vehicles or
routes
 Sequence customers within routes
 Generalized Assignment
Method
 Assign seed points for each route
 Evaluate insertion cost for each
customer
 Assign customers to routes
 Sequence customers within routes
Transportation Pricing
 Cost-of-service pricing
 Value-of-service pricing
 Terms of sale
 Pricing negotiation
 Rate categories
International Transportation Issues
 International freight security
 International intermediaries
1. Customs brokers
2. International or foreign freight forwarders
3. Trading companies
4. Non-vessel-operating common carriers
5. Global logistics service providers
Transportation Management
 Transportation supply base reduction
 Mode and carrier selection
 Contracting transportation services
 Outsourcing the transportation
function
 Measuring transportation performance
 Creating strategic carrier alliances
 Performing transportation audits
 Making Transportation
Decisions in Practice
 Align transportation strategy with competitive
strategy
 Consider both in-house and outsourced
transportation
 Design a transportation network that can handle e-
commerce
 Use technology to improve transportation
performance
 Design flexibility into the transportation network
 Logistics Service Firms & Third
Party Logistics (3PL)
Reasons for Using 3PL:
1. Improved Specialization.
2. Improved Service-level.
3. Reduction in Inventories.
4. Reduction in cost.
 Third-Party Logistics Services

 Freight forwarders
 Transportation Brokers
 Shippers’ Association
 Intermodal marketing companies
 Integrated logistics service providers
Advantages of Using Third-Party
Logistics Providers
 Help companies penetrate new markets.
 Reduce the financial risk associated with owning
logistics assets.
 Coordinate producers and distributors within a
global approach.
 Access new technologies and innovative
solutions.
 Focus on core competencies.
 Disadvantages of Using 3PL
Providers:
 Strategic Risk

 Commercial Risk

 Management Risk
TYPES OF 3PL PROVIDERS:
 Basic Services: common carriage; public
warehousing.
 Physical Contract Logistics Services: dedicated
contract carrier; dedicated warehousing.
 Management Contract Logistics Services:
traffic management;warehouse management;
import/export management.
 Integrated Contract Logistics: integrated
warehousing and transportation; integrated
carrier management and transportation.
Characteristics of New Supplier
Partnerships:
1. Multiple criteria.
2. Longer term contracts.
3. Intensive & extensive evaluation.
4. Fewer Selected suppliers.
5. Improved benefits.
6. Continuous improvement.
7. Quasi-vertical integration.
8. Problems are mutually solved.
9. Information sharing.