transportation management

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Supply Chain Management

Transportation Management

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Why has logistics become increasingly important?

Cost reduction pressures are severe Logistics has a high impact on customer service A strong need exists for demand and supply

planning consistency A focus on core competencies has placed

logistics in the outsourcing “spotlight” Development of IT technology supports

integrated logistics management

Logistics Overview

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Value-added Transportation Concept

Supplier Manufacturer Customer

Inbound Outbound

Product/Info Flows

Info/Return Goods Flows

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Role of TransportationTime and Place Utility:Movement across space or distance.

Place utility - Where it is needed Time utility - created or added by the

warehousing & storage of product until it isneeded.

Also a factor in time utility; it determines how fast and how consistently a product move from one point to another.

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Transportation Role in Value Attainment Process

• Critical element of structure, capacity, and movement decisions

• Both between supply chain members and intra-organizational

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Transportation-Related Service Elements Speed: time-in-transit Availability: accessible to customers when they

want it Dependability: pick-up and delivery time variability Flexibility: adjustment to shipper’s needs

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Role of Transportation in Logistics & Supply Chain Management Transportation Functions, Principles,

ParticipantsTransportation RegulationTransportation Industry StructureTransportation Services

Industry Deregulation

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Economies of Scale

Transportation Cost per Book

Number of Books in Shipment

$.10/book

$100/book

1 1000

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

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Economies of DistanceTapering Principle

Transportation Cost per Mile

Shipment Distance1 mile 1000 miles

$50/mile

$.05/mile$.10/mile

500 miles

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

Transportation rates are distance related, not distance proportional

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Transportation Participants

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Economic

Types of Transportation Regulation

• Investments in transportation infrastructure (e.g., highways, airports, ports)

• Control of routes, pricing, schedules

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Economic

Types of Transportation Regulation

• Investments in transportation infrastructure (e.g., highways, airports, ports)

• Control of routes, pricing, schedules

Social/Safety• Protect the public, the environment

• Make sure equipment operates safely, cleanly • Safe transportation of hazardous materials (HAZMAT)• Regulating hours worked

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Pipeline Water

Rail

Air

Highway

Five Basic Transportation Modes

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Basic Modes of TransportationFixed Variable Traffic costs costs composition

Rail high low bulk food, mining, oilheavy mfg

Motor low medium consumer goods,medium/light mfg

Water medium low bulk food, mining, chemicals

Air low high high-value goods,rush shipments

Pipe high low petroleum, chemicals,mineral slurry

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Containerization

Significant growth during Vietnam War Improves efficiency, protects material,

reduces handling & pilferage Sizes: 20 ft (TEU) or 40 ft (FEU) Shorter to permit multiple units on railcars

TEU: 20’ equivalent unit FEU: 40’ Equivalent Unit

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Transportation Functions, Principles, Participants

Transportation Regulation Transportation Industry Structure

Transportation ServicesNon Operating IntermediariesTraditional Transportation CarriersPackage Services Intermodal Transportation

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Third Party Providers The offering of nearly any form of

transportation to a shipper or receiver as part of a total package of logistics services

Shipper or user avoids capital outlays and investment

Focus on core competency--let experts do logistics

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Freight Forwarders Formerly common carriers

– non-asset owning Earn difference between what they charge

(LTL, LCL) and what they pay (CL, TL) Issue bill of lading

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Freight Brokers Intermediaries who bring shippers and carriers

together for a fee Find customers for carriers or carriers for shippers Reduce burden for carriers & shippers Find best means/rate for shippers Help maximize capacity for carrier Information Systems expanding opportunities

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Owner-Operator Own or lease a truck and trailer and make

services available to for-hire carriers Contract out their services to other carriers Provide overflow capacity and flexibility Reduce financial risk to carriers

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Express & Courier TCS, UPS, FEDEX, DHL Fast, door-to-door service Operate large network of terminals, pick up

and delivery vehicles, and line haul Typically under 200 lbs Compete with Postal Service Future good due to expansion and

innovative practices

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What is Intermodal Transportation? The use of two or modes of transportation in moving a

shipment from origin to destination Mostly associated with “piggyback” or container

shipments Combines advantages (and disadvantages) of each

mode used Reduces risk of theft and loss Shortens customer order cycle time and effectively

reduces costs Promotes “seamless” product movement: Eliminates

unnecessary handling

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Intermodal

Enables shippers to benefit from advantages of multiple modes of transportation

minimizes disadvantages of individual modes

Rail

Air Water

Truck

Transshipment Transshipment is the shipment of goods or

containers to an intermediate destination, then to yet another destination.

One possible reason for transshipment is to change the means of transport during the journey (e.g., Machinery from India is often imported through transshipment via Dubai)

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Changing Transportation Environment

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Changing Transportation Environment

Deregulation Time-based competition Expanding geographic coverage Information technology Social and environmental concerns

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Selected Results of the Changing Environment - Economic Impact

Increased competition in individual markets - both within modes and between modes

More efficient carrier operations - less interlining, more direct routing, efficient pricing

Transportation costs declined in real terms and as percent of GDP

Transportation service quality improved

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Selected Results of the Changing Environment - Industry Impact

Consolidation in rail, air and LTL trucking Proliferation of TL carriers Strong growth in regional trucking - networks TL growing faster than LTL Air freight growth Intermodal growth: rail-truck, air-truck, rail-ship Growth of “one-stop shopping” - 3PL Private fleet conversion

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Selected Results of the Changing Environment - Market Impact

Demand for fast, dependable, responsive service at lower cost

Demand for a broader range of services to integrate supply chain functions

Core carrier concept - interdependence between shipper-carrier

Customized price/service packages/contracts Relational view of transportation as a “value-

added” service

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Transportation Management

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Transportation Management

Network Freight Flows: Macro-Decisions

Micro-Decisions Information Systems Support

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Transportation Decision Making in an Integrated Supply Chain

Supplier Manufacturer Customer

Inbound Outbound

Dec

isio

n Fl

ow

Understand total network flows

Understand individual lane flows

Understand current carrier usage patterns

Make mode/carrier decisions

Routing/Scheduling, Load Planning, etc.

Strategic

Operational

Macro

Micro

Dec

isio

n Sc

ope

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Network Freight Flows: A Fully Integrated Approach Managing Inbound-Outbound flows in an

optimal manner requires firm to have a good handle on the entire logistics process

Traditionally view transportation in a vacuum-- need to look at it in the context of the total logistics system

Greatest improvement opportunities lie in integrating transportation with other logistics functional areas such as purchasing, inventory control, forecasting and production scheduling

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Approach to Analysis

1. Analyze lane densities/frequencies: what opportunities emerge for:

inbound/outbound consolidation vehicle consolidation temporal consolidation network consolidation - cross dock

potential (hub and spoke systems)

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Approach to Analysis (cont.)2. Once opportunities for consolidation are visible, make

mode/carrier selection based on service/cost mix Given similar service, are rates better on 1

mode/carrier than another? Does any mode/carrier have relative strengths in a

particular lane? Any backhaul opportunities?

3. If so, look to consolidate loads on mode/carrier with best cost structure - assign private fleet to most costly routes

In the freight industry, freight carried by a trucker to return to his home with a loaded truck, rather than an empty one (as opposed to headhaul, the outgoing freight).

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Consolidation Opportunities

• Inbound-Outbound flow consolidation: look for opportunities to combine inbound/ outbound freight

• Vehicle consolidation: use one vehicle/multi stops for LTL volumes vs. one shipment to each

• Temporal consolidation: hold orders until large volume shipment possible

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Suggested Analyses

Network flows Lane densities, frequencies, consistency Freight distribution by mode, carrier Consolidation opportunities

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Summary

Identify:

Opportunities to achieve balanced flows - obtain

lower rates for providing loads both ways

Significant volumes for rate negotiation

Vehicle/temporal consolidation opportunities

Advantages of reducing number of carriers

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Key Principles of TransportationManagement

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I. Improving Efficiency Rule of efficiency: Straight line, minimize stopping--

avoid damage and cost (delay) Minimize handling: Avoid “handshakes” and attempt to

make process “seamless” Full capacity: Reduce cost per unit Break bulk & consolidation on long haul Avoid empty backhauls Effective Scheduling: “Optimize” labor and equipment

(5%-10%) Transportation rates are distance related, not distance

proportional

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II. Efficient Use of Technology & Equipment

High utilization of expensive assets

Larger the vehicle, the lower the cost per unit

Speed does not equal economical operations

Minimize vehicle gross weight Standardized vehicles and

equipment Balance specialization with

adaptability Examine trade-offs between IT

and traditional logistics functions

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III. Coordinate Operations Coordinate operations with requirements to

ensure trade-offs and appropriate level of service

Cost accountability as part of performance measurement

Reliability is sometimes better than speed Look for opportunities to innovate, but

recognize proven principles

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Customer Service Measures

Order cycle lead time Stock availability/fill rates/stock-outs/back

orders/partial shipments Record integrity Frequency of delivery Delivery reliability Order tracing capability Volume flexibility

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Customer Service Measures

Invoice accuracy Order status information Technical support responsiveness Unscheduled service responsiveness Speed of product feature changes Product and service quality

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Total Cost Concept The total cost concept recognizes that an optimum cost in one

area or function may not lead to an optimum total system cost Total cost analysis requires the management of supply chain

trade-offs Logistical activity areas that drive total logistics costs:

Customer service level costs Inventory carrying costs Lot quantity costs Order processing and information costs Warehousing costs Transportation costs

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Summary-1

The transportation mode available to the logistics manager consists of the basic mode, intermodal and indirect and special carrier

The carrier selection is two fold, selection of the mode and selection of the specific carrier

Factors determining carrier selection include transportation rate, transit time, reliability, capability, accessibility and security

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Summary-2 Railroads offer low cost for long hauls of large volumes,

but they have accessibility limitation and long transit time.

Motor carriers are very accessible and move product in small quantities with low consistent transit times. However their costs are higher than the other modes except air

Water transportation is relatively low cost and is desirable for moving large volume over long distances. The prime disadvantage is long transit time and service disruption caused by weather

Air carriers have very low transit times but very high rates.

Pipelines offer very low rates for the movement of liquids but are not a viable option for manufactured goods.

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Summary-3 Intermodal transportation is the combination of two or

more basic modes to provide through movement. The dominant form is rail-truck or piggyback

Containerization is the shipping of freight in a box or container that is subsequently transferred from one carrier to another. It reduces freight handling and damage while improving transit time.

The transportation system includes a number of indirect and special carriers such as small package carriers, consolidators, freight forwarder, shipper associations, brokers and intermodal marketing companies.

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Reference: The Management of Business Logistics by

J. J. Coyle, E. J. Bardi and C. J. Langley Jr.

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