IMPROVING EFFECTIVENESS OF
FREIGHT TRANSPORT IN LOGISTICS
SYSTEMS
Amal S. Kumarage
Professor, Department of Transport & Logistics Management,
University of Moratuwa
kumarage@sltnet.lk
16th February 2010
Short Course on Freight Transport
Freight Transport
FT is the process of conveying different types of goods from
one point to another using a variety of transport modes.
Hence FT is NOT site specific as other logistic activities.
Transportation create the place and time value (utility)
High Transport Costs can off set manufacturing gains and
reduce market size.
Transport Costs as % of Logistics Costs is Increasing
3
1980
GDP $2.88 trillion
Logistics Cost $451 billion
15.7% of GDP
Trans. Cost $214 billion
47.5 % of Logistics Cost
100
0900
$ billion
800
700
600
500
400
300
200
100
0
1980
Logistics
Year
1999
Transportation
1999
GDP $9.26 trillion
Logistics Cost $921 billion
9.9% of GDP
Trans. Cost $554 billion
60.2 % of Logistics Cost
Introduction
4
Transport & Logistics Structure
Why attention on FT is important?
Transportation costs directly affect the location of the firm’s plants,
warehouses, vendors and customers.
Inventory requirements are influenced by the mode of transport used.
The transport modes selected determine the packaging loading and
unloading facilities required.
Maximum consolidation of shipments between common points enables a
company to give larger shipments to its carriers and take advantage of
volume discounts
Customer service goals influence the type and quality of carrier and carrier
service selected by the seller.
FT cost impacts on Economies of Scale
Wider markets can result in lower per unit
production costs
Lower FT costs lead to decoupling of markets and
production sites.
Top Ten Transport Service Decision Variables
Time-in-transit
Reliability
Door to Door Time
Rates
Equipment Availability
Frequency of Service
Pick up and Delivery
Damage-in-transit
Shipment Tracking
LTL consolidation services
Freight Traffic
Freight traffic is influenced by 4 levels of logistical decision making
1.
Logistics Structure : Numbers, locations and capacity factors, warehouse,
terminals and shops
2.
Supply Chain Configuration : Patterns of trading links within the logistical
structures
3.
Scheduling of Flows : Manifestation of the trading links as discrete freight
movements, routing delivery
Management of transport resources : relating to the choice of vehicle,
utilization of vehicle capacity , etc.
Level 1 & 2 determines the quantity of freight movement measured in tonne-kms,
which needs to be reduced
Level 3 translate this into vehicle traffic measured in vehicle km which also needs to
be reduced
Level 4 translates to the requirements for resources in terms of vehicles and equipment
4.
Traditional Practise
The traditional delivery pattern of freight is fewer trips and more
loads.
The delivery companies usually maintained their business
independently.
It means two or more carriers might serve in the same area.
State of the Art Practise
Trends FT to deliver “Just-in-time” & “door-to-door”.
Demands more FT trips but lower loads.
Cooperative freight systems can reduce the burden of cost of such
demands.
Optimum location of warehouses.
Reducing Veh Km/Resources
Freight Consolidation
Data Fed Delivery Systems.
Routing paths, vehicle size and fleet mix
Use of software to improve these
Improving Delivery Reliability
Freight Consolidation
Freight consolidation can be achieved in 4 ways
1.
Temporal Consolidation : orders from customers are held so that a few larger
shipments may be made at one time, rather than making many smaller shipments
at various times. Economies of transportation are achieved through improved
routing of the larger shipments as well as through lower per-unit rates.
2.
Inventory Consolidation : an inventory of items is created from which demand is
served. This allows large and even full truck-load (FTL) shipments to be made.
3.
Vehicle Consolidation : pickups and deliveries involve less than vehicle-load
quantities, more than one pickup or delivery is placed on the same vehicle for
more efficient transport. Vehicle routing and scheduling procedures need to be
developed.
4.
Warehouse Consolidation : allow the transportation of large shipment sizes over
long distances and the transportation of smaller sizes over short distances. A
warehouse used in a break bulk operation is an example
Freight Consolidation Systems
In transportation, since rates reduce for larger
shipments, it encourages shipments of larger quantities.
The main objectives of the FCS techniques are
increase trip loads;
reduce unnecessary trips;
reduce trip length from service area overlaps ;
increasing service quality (specially frequency).
This will then give a lower transport cost per unit.
Structure of Transport Chain
Structure of Transport Chain
Central Warehouse & Direct delivery
One Central Warehouse
serving customers directly.
Number of smaller vehicles
going to many customer
destinations. Large fleet.
High vehicle kms.
Transfer to different trucks before unloading at
final destination
J
J
L
L
K
J
Break-bulk at a
Transload point in
between customers
and origin and
distribute with a
smaller truck to
each destination
K
L
K
Transloading Point/
Cross Docking/
Break-bulk
warehouse/
Centralised DC
Origin
(Production Plant/
Centralised
Warehouse)
No Central warehouse. Large trucks collect
and distributes to and from many plants.
Smaller vehicles distribute to customers
from each DC.
No warehouses or DCs. Each
location is a cross docking where
trucks bring and distribute after
sorting out. (Lunch carrier operation
or vegetable distribution).
Total Cost Trade off
Factors Affecting the Total Logistics
Cost
Inventory costs
Warehousing costs
Transportation costs
Cost of lost sales
Maintenance of customer service
levels
Service small quantity buyers
21
Approach to Dynamic Routing & Scheduling
1.
Build on historical data feeds for different inventory items.
2.
Build routes so that load factors are reasonably high but do not exceed
that of the truck capacity say 95% of time.
3.
If desired frequency is achieved or if transport cost per unit need to be
reduced then get larger truck.
4.
If GPS is fitted to trucks then routing can be dynamically changed to
add/drop scheduled stops or routing order depedning on
developments after truck is dispactched.
5.
The sequence of stops to be designed so that veh kms are minimised.
6.
Pickups mixed into delivery routes rather than assigned to the end of
routes after checking for capacity of truck at all points of delivery
route.
7.
Improving turn around time, higher vehicle utilisation, crew assignment
will decrease per unit cost further.
Conclusions
Transport costs make up a significant part of total logistics cost.
Higher quality of service requirements such as JIT and D2D
results in higher transport costs.
Distribution Centres will reduce transport costs but increase
other costs.
Consolidation, Routing and Scheduling can further reduce
transport costs without increasing total logistics costs.
Principles for Good Routing and
Scheduling
1.
Load Trucks with stop volumes that are in the close proximity to each other
2.
Stops on different days should be arranged to produce tight clusters
3.
Build routes beginning with the farthest stop from the depot
4.
The sequence of stops on a truck should form a teardrop pattern
5.
The most efficient routes are built using the largest vehicle available
6.
7.
8.
Pickups should be mixed into delivery routes rather than assigned to the
end of routes
A stop that is greatly removed from a route cluster is a good candidate
for an alternate means of delivery
Narrow stop time window restrictions should be avoided
Consolidation Centres
Freight villages (terminals) applied in several cities, such as
Monaco.
The goods are reorganised in the freight village before
being delivered to the urban areas.
This system can reduce the required number of trucks used
for delivery and handling.
Typical problems in trucking and
deliveries
Industry has built in inefficiencies that determine price levels.
Inefficient utilization of vehicle, poor productivity of crews. Typical
trucks in long haul require to operate 250-400 kms per day,
city/short haul 150-250 kms.
Only innovative management techniques and technology can break
these.
A capital-intensive business hence keeping investments low is key
Need to provide 24/7/365 non-stop service at equal service levels.
Deciding between reliability vs cost. (calculating the opportunity
costs in reliability)
Setting service levels in freight transport
Pricing (volume discounts, back haul discounts)
Determining frequency of deliveries, load and equipment used for
optimum cost
Some developments
Urban Consolidation Centres (modernizing the bicycle lunch delivery
system in Colombo).
Improving Routing Options (real time information to select best route,
historical data analysis)
Correct Fleet mix (matching load to vehicle)
Pooling of resources (vehicles, equipment and crew, scheduling crew
to vehicles, advantage of using single vehicle operators and fleet
operators)
Automated and data fed dispatching (more customers, more
deliveries, more equipment means manual systems have limitations)
Maintaining Delivery reliability (setting delivery windows)
Improving loading and unloading times.
Use of ICT and www
The relationship between IT-productivity growth in the
economy at-large is
mirrored in the freight transportation sector.
IT & Logistics
But linkages can be weakened, even severed, by congestion and delay on
the nation’s highways.
It is one thing for new robotics and intelligent logistics products to come on
the market; it is quite another for manufacturing and transportation firms to
invest in them. Such investment is costly.
Threats to the effectiveness of such products are threats to the business case
for investing in them.
Wide-spread testimonials are not at hand, but analytic and anecdotal
evidence indicates that congestion and delay is viewed in some sectors as a
barrier to obtaining satisfactory pay-back from investment in just-in-time
logistical products.
Take-up of advanced logistics may be waning already, in part due to the
economic slowdown, but also to mounting congestion in some strategic
corridors around the country.
Future Growth in Freight
Transportation
It is clear that transportation agencies at all levels of government can
bring about improvement in highway freight-carriage. For instance,
Targeted capacity expansion projects that alleviate high-frequency bottlenecks in the
freight system can improve transit time variability.
Freight planning can help to make sure that freight movement needs are appropriately
considered by decision-makers by providing state and local transportation planners with
the necessary tools to better account for the impacts of alternative investments on the
efficiency of the freight system.
Programs that strive to improve operations planning (or the interaction of planning and
operations functions within a transportation agency) can improve system performance.
ITS deployment can enhance the efficiency of the highway system through operational
improvements, better user information, and incident management (which is particularly
problematic from the perspective of system reliability).
Federal grant programs that provide financing mechanisms for freight transportation
improvements can help to generate the types of investments needed to improve the
productivity of the freight system.
Future Growth in Freight
Transportation
In a nutshell, future (and to some extent current)
challenges will center on
squeezing as much efficiency as possible out of available
transportation resources (in particular infrastructure) and
finding scarce resources to implement efficiency-enhancing
programs and projects.
Transportation and the Economy
How do firms react to improvements in freight
Transportation
Improvements in
Network
Connectivity and
Density
Industry Investment
in Advanced
Logistics
Industrial
Reorganization
and Enhanced
Productivity
Firms reduce stocking points, increase JIT processes and increasing
shipping distance.
Firms react to reduced late-shipping-delays, values highly by
shippers by investing more in logistics.
Inter-industry trading partners are affected
Transport & Logistics Structure
Traditionally these steps involved separate companies for production, storage,
transportation, wholesaling, and retail sale, however basically, production/manufacturing
plants, warehousing services, merchandising establishments are all about doing
transportation.
Production or manufacturing plants required the assembly of materials, components, and
supplies, with or without storage, processing and material handling within the plant and
plant inventory Warehousing services between plants and marketing outlets involved
separate transport. Merchandising establishments completed the chain with delivery to
the consumers.
The manufacturers limited themselves to the production of goods, leaving marketing and
distribution to other firms.
Warehousing and storage can be considered in terms of services for the production
process and for product distribution.
There have been major changes in the number and location of facilities with the closure
of many single-user warehouses and an expansion of consolidation facilities and
distribution centres.
These developments reflect factors such as better transport services and pressures to
improve logistics performance.
There are good examples of cases where logistics
reorganization, supported by a good transportation system,
leads to lower total logistics costs and also to improved
customer service.
In the late 1980s, Polaroid, for example, decided to centralize its
European inventories by buying more transportation and using fewer
warehouses; a large number of warehouses were, in fact, closed.
Polaroid’s action resulted with:
1.
estimated annual gross savings of $6.9 million and
2.
net annual savings of $6.3 million after subtracting $0.6 million per year for
increased costs resulting from computer system maintenance and increased
warehouse personnel at headquarters
Polaroid’s Cost Savings from
Reorganization—The Break-Down
warehousing personnel—$2.5 million;
inventory carrying costs—$2.2 million;
warehouse rental costs—$1.0 million;
facilities and offices—$0.6 million;
internal transportation between dealers and
subsidiaries—$0.5 million; and
insurance premiums—$0.1 million.
Polaroid’s Cost Savings
Besides the savings that Polaroid could quantify, there were
other gains that were not measured.
Prior to centralizing inventory, 69 percent of orders could
not be filled at the location that received them, so that items
were backordered until they could be filled from other
locations.
This required significant internal transportation among
dealers and subsidiaries to reposition inventory.
Polaroid also achieved freight-cost savings based on volume
discounts for consolidated (truckload) shipments to
centralized warehouses.
Ford’s Mixing Centers
Similarly, Ford Motor Company found a way to
reduce transportation costs and inventory costs and
improve service to its dealers by exploiting the lower
cost of rail shipment of finished vehicles and
introducing a new distribution system that sped the
movement of vehicles from factories to dealers.
Ford instituted a system of “mixing centers,” essentially
distribution centers, with predominantly rail shipment
from factories to mixing centers and the final leg to
the dealer by rail and highway or all highway
according to the circumstances
Ford’s Mixing Centers-Ford created four national mixing centers
at Chicago; Shelbyville, Kentucky; Kansas City, Missouri;
and Fostoria, Ohio.
At the mixing centers, vehicles are sorted and recombined
to meet actual orders from dealers and moved on by rail
or highway. Vehicles are held at the mixing center only as
long as is needed for sorting and transloading, usually
eight to 24 hours.
Modal Distribution of Ton-Miles
43
Distribution of ton-miles
a ton-mile is one ton of cargo carried one mile, and is a
standard statistical measurement used in the transportation
industry).
This shows the usage of rail and water has decreased
Slide 1 : One Central Warehouse serving customers directly.
Show number of smaller vehciles going to many destinations.
High fleet. High vehicle kms
Slide 2: One large truck moves from Central Warehouse to
severl DCs. Small trucks distribute to customers. Lower fleet.
Lower veh kms (slide 19 is ok)
Slide 3: No Central warehouse. One large truck collects and
distributes to and from many DCs. Smaller vehicles distribute
to customers from each DC and picks up from suppliers as well.
Slide 4: No warehouses or DCs. Each location is a cross
docking where small trucks bring and distribute after sorting
out. (Lunch carrier operation or vegetable distribution).
Mixing Warehouse
(outbound logistics)
Plant A, Product 1
Plant B, Product 2
Plant C, Product 3
Plant D, Product 4
1
Because companies often produce
items at different plants & if a
company that did not have a
warehouse has to fill orders from
different plants causing more delays
22
3
44
Customer W
1
2
3
4
Customer X
Mixing Warehouse
With having mixing warehouses
such firms can improve their
order filing rates
By having mixing warehouses
close to the dense areas firms
can make deliveries and pickups
in smaller vehicles
1
2
3
4
Customer Y
1
2
3
4
ConsolidationWarehouse
(outbound logistics)
Plant A
Plant B
Consolidation Warehouse
40,000 lb
Customer
Plant C
Plant D
•Reduce the transport cost as well as
storage cost at the production plant
Breaking bulk
.
.
Break-bulk Warehouse
(outbound logistics)
Customer 1
Customer 2
1000
Plant
Breakbulk Warehouse
Customer 3
Cross-docking:
Inbound
Movement from an
inbound dock directly to
an outbound dock
Movement directly from
an inbound dock to a
sorting process to an
outbound dock.
Outbound
Outbound
Outbound
Inbound
Outbound
Inbound
Sorting area
Structure of Transport Chain
Consolidated Distribution
It is cheaper to for shipper to consolidate several
shipments moving to different destinations in order to
take advantage of substantial volume rate breaks
while incurring modest stop-off charges.
There can be two types;
1.
2.
Using a single truck or transport equipment
Using different trucks or transport equipments