A SEMINAR ON

TRANSPORTATION IN SUPPLY CHAIN MANAGEMENT

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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

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Factors AffectingTransportation 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

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Transportation Modes Trucks

– TL– LTL

Rail Air Package Carriers Water Pipeline

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Truckload (TL) Average revenue per ton mile (1996) = 9.13 cents Average haul = 274 miles Average Capacity = 42,000 - 50,000 lb. Low fixed and variable costs Major Issues

– Utilization– Consistent service– Backhauls

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Less Than Truckload (LTL) Average revenue per ton-mile (1996) = 25.08 cents Average haul = 646 miles Higher fixed costs (terminals) and low variable costs Major issues:

– Location of consolidation facilities– Utilization– Vehicle routing– Customer service

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Rail Average revenue / ton-mile (1996) = 2.5 cents Average haul = 720 miles Average load = 80 tons Key issues:

– Scheduling to minimize delays / improve service– Off-track delays (at pickup and delivery end) – Yard operations– Variability of delivery times

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Air Key issues:

– Location/number of hubs– Location of fleet bases/crew bases– Schedule optimization– Fleet assignment– Crew scheduling– Yield management

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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)

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Water Limited to certain geographic areas Ocean, inland waterway system, coastal waters Very large loads at very low cost Slowest Dominant in global trade (autos, grain, apparel, etc.)

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Pipeline High fixed cost Primarily for crude petroleum, refined petroleum

products, natural gas Best for large and predictable demand Would be used for getting crude oil to a port or

refinery, but not for getting refined gasoline to a gasoline station (why?)

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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

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Design Options for aTransportation 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

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Trade-offs in Transportation Design Transportation and inventory cost trade-off

– Choice of transportation mode– Inventory aggregation

Transportation cost and responsiveness trade-off

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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

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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

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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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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

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Role of IT in Transportation The complexity of transportation decisions demands to use

of IT systems IT software can assist in:

– Identification of optimal routes by minimizing costs subject to delivery constraints

– Optimal fleet utilization– GPS applications

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Risk Management in Transportation

Three main risks to be considered in transportation are:– Risk that the shipment is delayed– Risk of disruptions– Risk of hazardous material

Risk 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

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Making TransportationDecisions 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

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Summary of Learning Objectives What is the role of transportation in a supply chain? What are the strengths and weaknesses of different

transport modes? What are the different network design options and what

are their strengths and weaknesses? What are the trade-offs in transportation network design?

CASE STUDY

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The impact of supply chain reconfiguration on transports.The impact of supply chain reconfiguration on transports.

- - The Danish mechanical, electronic and medical industriesThe Danish mechanical, electronic and medical industries

Theoretical Approach

It was found

Many examples of companies reconfiguring their supply chains

Quite limited empirical evidence on the consequences of reconfiguration process on transport

due toTheoretical/empirical difficulties in determining cause-effect relationships between variables

Explanatory variables sensitive to individual logistical systems

Research objectives and methodology- Objectives

To illustrate the implications of reconfiguration supply chains on transport by using quantitative and qualitative data from Denmark

Focus on the future transport demands. Amount of transports and the total transport work

Supply chains under analysis

Three Danish supply chains:

Grain and feedstuff

Fresh-foods

Highly manufactured industrial goods

- Highly manufactured goods

No clear signs towards a reduction in the supplier base. Only carrier base has been dimished

Number of production facilities and warehouses do not show signs of modifications

Among those companies reporting and expecting changes: a trend towards a growth in the number of suppliers, production and warehouse facilities outside Europe

Direct distribution New customers requirements

- Qualitative data

An in-depth study

Goal: To achieve a better understanding of supply chain reconfiguration and firm’s transport patterns

The firm was just at the beginning of SC redesign, facilitating the analysis of the impact “old” and “new” logistics trends can have on the demand of transports

- Supplier base

Supplier baseSupplier base

The number of suppliers has been quite stable

The firm has launched a project to reduce the amount of suppliers

Production: Production:

Expansion of production capacity outside of Europe during the last five years.

No further changes are expected in the near future

Warehouses:Warehouses:

Bypass central warehouse of the corporationWarehouses in Denmark and other EU countries have been closing down. Only few national warehouses are maintained due to the physical distance

Outside Europe no plans for closing down warehouses

-Logistics structures

Customers

Denmark Other countries

Europe

Production facilities

Suppliers/ clients

Production facilitiesin Denmark

Own warehouses

Distributors, wholesalers, agents

Transport firmshubs

Denmark Other countriesEurope

Changes in Distribution patterns

Customers

Denmark Other countries

Europe

Production facilities

Future development: Direct distribution to customers in Europe

Suppliers/ clients

Production facilitiesin Denmark

Own warehouses

Distributors, wholesalers, agents

Transport firmshubs

Denmark Other countriesEurope

Amount of goods produced

Market andlogistic strategies of the firm

Quantity of tons transported

Destination of the products

Traveled distance

Amount of lorries/trips traveling between the nodes

Total nodes in the chain

Frequency of transport/trips

- Freight transport activity

Status-quo scenarioIn the status quo scenario the amount of trucks/trips is anticipated to grow linear

0

5000

10000

15000

20000

25000

1 2 3 4 5 6

Year

Amou

nt o

f tru

cks/

trip

s

Amount of tonnes

3,640

9,057

6,700 trucks

Firms’s logisticsstrategies scenario

In the scenario with firm’s logistics strategiesthe number of transports is anticipated to grow exponentiallyMain reason:

New distribution strategies

Two scenarios were developed:

No. 1. Status quo. No reconfiguration

No. 2. Firm’s new logistics strategies

-100%

0%

100%

200%

300%

2001 2006 2006

DenmarkOther European countriesRest of the world

Status-quo scenario

Firm’s logistics strategies

Ton-

km –

Dev

elop

men

t in

perc

ent

Elimination of warehouses in Denmark and Europe implies erradication of a node in the chain.

Reduction in the national transport work.

Conclusions

Production, location, distribution and marketing decisions have a tremendous impact on the transport content of the supply chains.

There is no clear-cut cause-effect relationship between supply chain reconfiguration, and demand for transport. The demand for transport is influenced not only by company specific logistic and marketing strategies, but also by characteristics of the products and supply chains involved – e.g. fresh food vs. highly manufactured goods.

Transport demands also depend on how transport is organized, and how capable the global carriers are of consolidating and utilizing the capacities of their transport equipment

Conclusions

Logistics and supply chain managers decisions can help to

Slow down or boost the rate of tonne-km, the amount of vehicles/trips used

And

The impact of transport on the environment

THANK You!!