Transportation
Management
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Learning Objectives
1) Understand the role of transportation in a supply chain
2) Strengths and weaknesses of different modes of
transportation
3) Transportation network design options
4) Identify trade-offs when designing a transportation
network
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Transportation Modes
• Trucks
- TL
- LTL
• Rail
• Air
• Package Carriers
• Water
• Pipeline
• Intermodal
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Trucks
• Main mode of freight transport in India
• Small loads, point-to-point service, flexible
• More reliable, less damage than rails
• More expensive than rails for long distance
Truck load (TL)
Less than truck load (LTL)
• Low fixed and variable costs
• Major Issues
• Higher fixed costs (terminals)
- Utilization
- Consistent service
- Backhauls/imbalance between
flows
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and low variable costs
• Major issues:
- Location of consolidation
-
facilities
Vehicle routing
Customer service
May take longer than TL
Rail
• Historically suitable for long distance haul of large, regular
flows of low-value, high-density, bulk products, raw materials
• High fixed costs in equipment and facilities
• Not economical for small loads
• Slower, less flexible than trucking
• Key issues:
- Scheduled to maximize utilization not minimize delays / improve service
- Off-track delays (at pickup and delivery end). Trains ‘built’ not scheduled
- Long and variable delivery times
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Air
• Most expensive and fastest mode of freight transport
• Lightweight, small packages <500 lbs.
• High-value, perishable and critical goods
• Less theft
• Key issues:
- Location/number of hubs
- Location of fleet bases/crew bases
- Schedule optimization
- Fleet assignment
- Crew scheduling
- Yield management
- High cost and pollution intensity
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Water
• Low-cost shipping mode
• Slowest shipping mode
• Limited to certain geographic areas
• Very large loads at very low cost
• Primary means of international trade (autos, grain, apparel,
etc.)
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Package Delivery
• Small packages may be less than 150 pound
• Fast and reliable delivery
• Expensive
• Used for small and time-sensitive shipments where response time is
primary concern
• Value-added services like package tracking
• Preferred mode for e-businesses (e.g., Amazon, Dell etc.)
• Consolidation of shipments is important (especially for package
carriers that use air as a primary method of transport)
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Pipeline
• Transport oil and products in liquid form
• High capital cost
• Long life and low operating cost
• Best for large and stable demand
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Intermodal Transportation
• Makes use of more than one mode of transportation
• Key component are containers
• Increased global trade has also increased use of intermodal
transportation
• More convenient for shippers (one entity provides the
complete service)
• Key issue involved is the exchange of information to facilitate
transfer between different transport modes
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Transportation Network Decisions
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1)
Should transportation be direct or through an intermediate
site?
2)
Should the intermediate site stock product or only serve as
a cross-docking location?
3)
Should each delivery route supply a single destination or
multiple destinations (milk run)?
Transhipment
• Transhipment is the shipment of goods or containers to a
destination through an intermediate destination
• Use of transhipment
- To change the means of transport during the journey (e.g., from ship
-
transport to road transport), known as transloading
To combine small shipments into a large shipment (consolidation)
Dividing a large shipment into smaller shipments
(deconsolidation/breakbulk)
• International transhipment also takes place in designated
customs areas, thus avoiding the need for customs checks
and/or duties
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Transportation Networks
• Direct Shipment to Single Destination
• Direct Shipping with Milk Runs
• Shipments via Intermediate Distribution Center with Storage
• Shipments via Intermediate Transit Point with Cross-Docking
• Shipping via DC using Milk Runs
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Direct Shipment Network to Single Destination
Direct Shipment Network to Single Destination
• The routing of each shipment is specified, key decisions are the
quantity to ship and the mode of transportation to use to be decided.
• It involves a trade-off between transportation and inventory costs
• Simplicity of operation and coordination.
• Low facility and handling costs
• Justified only if demand at buyer locations is large enough so that
replenishment lot sizes are close to a truckload from each supplier to
each location
Direct Shipping with Milk Runs
Milk runs make sense when the quantity destined for each location
is too small to fill a truck but multiple locations are close enough to
each other (Why?)
Direct Shipping with Milk Runs
• A milk run is a route on which a truck either delivers product from a
single supplier to multiple retailers or goes from multiple suppliers to
a single buyer location
• Key decision in milk run is the routing of each milk run.
• Milk runs lower transportation cost by consolidating shipments to
multiple locations on a single truck.
• Toyota uses milk runs from suppliers to support its just-in-time (JIT)
manufacturing system
Shipments via Intermediate Distribution Center
with Storage
Shipments via Intermediate Distribution Center
with Storage
• Shipping with intermediate DC can help reduce supply chain
costs when the transportation economies require large
shipments on the inbound side and the suppliers are
located far from the buyers’ locations
• Suppliers of W.W. Grainger ship products to it DCs (typically in
large quantities), with each DC in turn replenishing stores in its
vicinity with the smaller quantities they need.
• When Home Depot sources from an overseas supplier, the
product is held in inventory at the DC because the lot size on
the inbound side is much larger than the sum of the lot sizes
for the stores served by the DC.
Shipments via Intermediate Transit Point with
Cross-Docking
• Each inbound truck to an intermediate transit point (DC)
contains product from suppliers for several buyer locations
which are cross-docked and and sent to buyer locations
• Cross-docking is appropriate when economies of scale in
transportation can be achieved on both the inbound and
outbound sides and both inbound and outbound shipments
can be coordinated.
• Major benefits of cross-docking:
- Little inventory needs to be held
- Product flows faster in the supply chain.
- Saves on handling cost
Shipping via DC Using Milk Runs
Shipping via DC Using Milk Runs
• Milk runs reduce outbound transportation costs by consolidating
small shipments.
• It requires a significant degree of coordination and suitable routing
and scheduling.
• Seven-Eleven Japan cross-docks deliveries from its fresh-food
suppliers at its DCs and sends out milk runs to the retail outlets
• Use of cross-docking and milk runs allows Seven-Eleven Japan to
lower its transportation cost while sending small replenishment lots to
each store.
Tailored Networks
• Tailored network is a combination of more than one options so
as to reduces cost and improves responsiveness of the supply
chain.
• High-demand products to retail outlets may be shipped directly
• Low-demand products or shipments to low-demand retail
outlets are consolidated to and from the DC.
• There is high coordination complexity in this network which
requires significant investment in IT infrastructure
Transportation Networks
Network
Structure
Pros
Direct shipping
• No intermediate warehouse
• Simple to coordinate
Direct shipping
with Milk Runs
• Lower transportation costs for
small lots
• Lower inventories
All shipments via
• Lower inbound transportation
central DC with
cost through consolidation
inventory storage
Cons
• High inventories (due to large lot
size)
• Significant receiving expense
• Increased coordination
complexity
• Increased inventory cost
• Increased handling at DC
All shipments via
central DC with
cross-dock
• Low inventory requirement
• Lower transportation cost
Shipping via DC
using milk runs
• Lower outbound transportation • Further increase in coordination
through consolidation
cost for small lots
• Transportation choice best
Tailored network
matches needs of individual
product and store
• Increased coordination
complexity
complexity
• Highest coordination complexity
Trade-offs in Transportation Design
Transportation
Cost
• Transportation
Mode (Speed,
Quantity)
• Aggregation/
disaggregation
Inventory Cost
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Responsiveness
Trade-offs in Transportation Design
Transportation and Inventory Trade-off
• Cheaper modes of transport typically have longer lead times
and larger minimum shipment quantities both of which result
into higher levels of inventory in the supply chain. (Why?)
• Modes that allow for shipping in small quantities lower inventory
levels but tend to be more expensive.
Which mode of transportation (faster/slower) should be used for product
with high value-to-weight ratio?
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Trade-offs in Transportation Design
Decision in Transportation-Inventory Trade-off
1) Choice of Transportation Mode
- While selecting a mode of transportation both quantity transported
and inventory (cycle, safety, in-transit inventory) costs, are
accounted for
2) Inventory Aggregation
- Lower facility and inventory costs
- Transportation cost generally increases when inventory is
aggregated.
- If inventories are highly disaggregated, some aggregation can
lower transportation costs.
When should aggregation be used?
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Aggregation or Disaggregation of Inventory
Aggregate
Disaggregate
Transportation cost
Low
High
Demand Uncertainty
High
Low
Holding Cost
High
Low
Customer Order Size
Large
Small
Value-to-weight Ratio
High
Low
• Inventory aggregation is a good idea when inventory and facility
costs form a large fraction of a supply chain’s total costs.
What aggregation strategy would you suggest for PCs and different
types of books?
Trade-offs in Transportation Design
Transportation Cost and Responsiveness Trade-off
• High responsiveness means shipping in small lot resulting into
high transportation costs
• Temporal aggregation decreases a firm’s responsiveness due
to shipping delay but also decreases transportation costs
• Temporal aggregation might contribute to loss of revenue
because of poor responsiveness.
• A limited amount of temporal aggregation can be very effective
in reducing transportation costs
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Transportation Modes and Supply Chain
Performance
Mode
Cycle
Inventory
Safety
Inventory
In-Transit
Cost
Rail
5
5
5
5
2
TL
4
4
4
4
3
LTL
3
3
3
3
4
Package
1
1
1
1
6
Air
2
2
2
2
5
Water
6
6
6
6
1
1- Best
6- Worst
Transportation Transportation
Time
Cost
Tailored Transportation
• Tailored transportation uses different transportation networks
and modes based on customer (quantity ordered,
responsiveness required) and product characteristics (size,
value, demand etc.)
• For e.g. W.W Grainger
• Factors affecting tailoring
1) Customer density and distance
2) Customer size
3) Product demand and value
Tailoring transportation based on customer density and distance,
customer size, or product demand and value allows a supply chain to
achieve appropriate responsiveness and low cost.
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Problem: Selecting a Transportation Network
A retail chain has eight stores in a region which are supplied four
different products from four supply sources. Trucks have a capacity of
40,000 units and cost $1,000 per load plus $100 per delivery. Thus, a
truck making two deliveries charges $1,200. The cost of holding one
unit in inventory at retail for a year is $0.20.
The company is considering whether to use direct shipping from
suppliers to retail stores or setting up milk runs from suppliers to retail
stores in which a truck supplies to 2 stores in a trip.
1)
What network would you recommend if annual sales for each
product at each retail store are 960,000 units?
2)
What network would you recommend if sales for each product at
each retail store are 120,000 units?
Problem
Indian Logistic Sector
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India
Developed
Economies
Logistics costs (% of product price)
18
9-10
Logistic cost (% of GDP)
14
8-10
• Transportation
7
5-6
• Inventory
6.3
2-3
• Overheads/administrative
0.7
0.5-1
What could be the factors behind high inventory costs in India?
Vehicle Scheduling
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Vehicle Scheduling
•
•
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Basic Vehicle scheduling formulation
Heuristics
- Saving Matrix Method
Typical Vehicle Scheduling Problem
Depot at location 0 serving 10 retailers
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Two Independent Routes Versus Merged Routes
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Saving Algorithm
Depot(1)
Ci1
Cj1
C1i
Node i
C1j
Node j
Savings if routes are merged = Ci1+Cj1-Cij
Saving Algorithm
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•
•
Construct distance matrix
•
•
Order savings in descending order
Calculate savings for all the pairs of customer i and j
Sij = C1i - Cij + Cj1
Start at the top link, do following:
- If making a given link results in feasible route (feasibility
constraints, can be used to extend one of the existing route
or starting a new route), append this link to solution, if not
reject the link
- Repeat above step until no more links are left
Vehicle Scheduling Exercise
Consider an instance of the VRP
with the deport at vertex 1 and
six customers at vehicles 2, ….,
7. The symmetric distance matrix
is shown in table. There are two
vehicles with capacities
Q1=Q2=6. The customer
demands are (q2,….q7) =
(2,3,1,1,2,1).
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DISTANCE MATRIX
1
2
3
4
5
6
7
1
28
21
14
17
18
22
2
3
4
5
6
7
47
36
25
20
35
26 37 15 30 31 29 20 34 39 16 -
Vehicle Route Planning: Extensions
Vehicle can operate multiple routes
Time window for a customer
Business may involve both deliveries and collections
Vehicles ( drivers) may have a time window
Time consuming activities other
than travel:
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Loading & unloading
Queuing at loading and unloading