14 Transportation in a

Supply Chain

PowerPoint presentation
to accompany
Chopra and Meindl
Supply Chain Management, 6e
Copyright © 2016 Pearson Education, Inc. 14 – 1
 Learning Objectives
1. Understand the role of transportation in a supply
chain
2. Evaluate the strengths and weaknesses of different
modes of transportation
3. Discuss the role of infrastructure and policies in
transportation
4. Identify the relative strengths and weaknesses of
various transportation network design options
5. Identify trade-offs that shippers need to consider
when designing a transportation network

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 The Role of Transportation
in a Supply Chain

• Movement of product from one location to

another
• Products rarely produced and consumed in the
same location
• Significant cost component
• Shipper requires the movement of the product
• Carrier moves or transports the product

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 Modes of Transportation and Their
Performance Characteristics

• Air
• Package carriers
• Truck
• Rail
• Water
• Pipeline
• Intermodal

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 Modes of Transportation and Their
Performance Characteristics
Freight Value Added
Freight Value Freight Tons Ton-Miles to GNP
($ billions) (billions) (millions) ($ billions)
Mode in 2002 in 2002 in 2002 in 2009
Air (includes
truck and air) 563 6 13 61.9
Truck 9,075 11,712 1,515 113.1
Rail 392 1,979 1,372 30.8
Water 673 1,668 485 14.3
Pipeline 896 3,529 688 12.0
Multimodal 1,121 229 233

TABLE 14-1

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 Air
• Cost components
1. Fixed infrastructure and equipment
2. Labor and fuel
3. Variable depending on passenger/cargo
• Key issues
– Location/number of hubs
– Fleet assignment
– Maintenance schedules
– Crew scheduling
– Prices and availability

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 Package Carriers

• Small packages up to about 150 pounds

• Expensive
• Rapid and reliable delivery
• Small and time-sensitive shipments
• Provide other value-added services
• Consolidation of shipments a key factor

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 Truck
• Significant fraction of the goods moved
• Truckload (TL)
– Low fixed cost
– Imbalance between flows
• Less than truckload (LTL)
– Small lots
– Hub and spoke system
– May take longer than TL

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 Rail

• Move commodities over large distances

• High fixed costs in equipment and facilities
• Scheduled to maximize utilization
• Transportation time can be long
– Trains ‘built’ not scheduled

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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
• Containers

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 Pipeline

• High fixed cost

• Primarily for crude petroleum, refined
petroleum products, natural gas
• Best for large and stable flows
• Pricing structure encourages use for
predicable component of demand

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 Intermodal
• Use of more than one mode of transportation
to move a shipment
• Grown considerably with increased use of
containers
• May be the only option for global trade
• More convenient for shippers – one entity
• Key issue – exchange of information to
facilitate transfer between different modes

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 Transportation Infrastructure
and Policies
• Governments generally take full
responsibility or played a significant role in
building and managing infrastructure
elements
• Without a monopoly, deregulation and
market forces help create an effective
industry structure
• Pricing should reflect the marginal impact
on the cost to society

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 Transportation Infrastructure
and Policies

FIGURE 14-1

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 Key Point

Transportation infrastructures often require government

ownership or regulation because of their inherently
monopolistic nature. In the absence of a monopoly,
deregulation and market forces help create an effective
industry structure. When the infrastructure is publicly
owned, it is important to price usage to reflect the
marginal impact on the cost to society. If this is not done,
overuse and congestion result because the cost borne by
a user is less than the user’s marginal impact on total
cost.

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 Design Options for a
Transportation Network

• When designing a transportation network

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)?

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 Direct Shipment Network
to Single Destination

FIGURE 14-2

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 Direct Shipping with Milk Runs

FIGURE 14-3

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 All Shipments via Intermediate
Distribution Center with Storage

FIGURE 14-4

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 All Shipments via Intermediate Transit
Point with Storage

• Suppliers send their shipments to a

central distribution center
• Stored until needed by buyers
• Shipped to each buyer location

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 All Shipments via Intermediate Transit
Point with Cross-Docking

• Suppliers send their shipments to an

intermediate transit point
• They are cross-docked and sent to buyer
locations without storing them

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 Shipping via DC Using Milk Runs

FIGURE 14-5

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 Tailored Network
Network Structure Pros Cons
Direct shipping No intermediate warehouse High inventories (due to
Simple to coordinate large lot size)
Direct shipping with Lower transportation costs for small lots Increased coordination
milk runs Lower inventories complexity
All shipments via central Lower inbound transportation cost through Increased inventory cost
DC with inventory storage consolidation Increased handling at DC
All shipments via central Low inventory requirement Increased coordination
DC with cross-dock Lower transportation cost through complexity
consolidation
Shipping via DC using Lower outbound transportation cost for Further increase in
milk runs small lots coordination complexity
Tailored network Transportation choice best matches needs Highest coordination
of individual product and store complexity

TABLE 14-2

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Selecting a Transportation Network

• Eight stores, four supply sources

• Truck capacity = 40,000 units
• Cost $1,000 per load, $100 per delivery
• Holding cost = $0.20/year

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Selecting a Transportation Network
Annual sales = 960,000/store Direct shipping

Batch size shipped from each

supplier to each store = 40,000 units
Number of shipments/yr from
each supplier to each store = 960,000/40,000 = 24
Annual trucking cost
for direct network = 24 x 1,100 x 4 x 8 = $844,800
Average inventory at each
store for each product = 40,000/2 = 20,000 units
Annual inventory cost
for direct network = 20,000 x 0.2 x 4 x 8 = $128,000
Total annual cost of
direct network = $844,800 + $128,000 = $972,800

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Selecting a Transportation Network
Annual sales = 960,000/store Milk runs

Batch size shipped from each

supplier to each store = 40,000/2 = 20,000 units
Number of shipments/yr from
each supplier to each store = 960,000/20,000 = 48
Transportation cost per shipment
per store (two stores/truck) = 1,000/2 + 100 = $600
Annual trucking cost
for direct network = 48 x 600 x 4 x 8 = $921,600
Average inventory at each
store for each product = 20,000/2 = 10,000 units
Annual inventory cost
for direct network = 10,000 x 0.2 x 4 x 8 = $64,000
Total annual cost of
direct network = $921,600 + $64,000 = $985,600
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Selecting a Transportation Network
Annual sales = 120,000/store Direct shipping

Batch size shipped from each

supplier to each store = 40,000 units
Number of shipments/yr from
each supplier to each store = 120,000/40,000 = 3
Annual trucking cost
for direct network = 3 x 1,100 x 4 x 8 = $105,600
Average inventory at each
store for each product = 40,000/2 = 20,000 units
Annual inventory cost
for direct network = 20,000 x 0.2 x 4 x 8 = $128,000
Total annual cost of
direct network = $105,600 + $128,000 = $233,600

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Selecting a Transportation Network
Annual sales = 120,000/store Milk runs

Batch size shipped from each

supplier to each store = 40,000/4 = 10,000 units
Number of shipments/yr from
each supplier to each store = 120,000/10,000 = 12
Transportation cost per shipment
per store (two stores/truck) = 1,000/4 + 100 = $350
Annual trucking cost
for direct network = 12 x 350 x 4 x 8 = $134,400
Average inventory at each
store for each product = 10,000/2 = 5,000 units
Annual inventory cost
for direct network = 5,000 x 0.2 x 4 x 8 = $32,000
Total annual cost of
direct network = $134,400 + $32,000 = $166,400
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 Mumbai Dabbawalas

• Lunchbox delivery system

• Factors facilitating success
1. Low uncertainty of demand
2. Temporal aggregation of demand
3. Use of transportation resources when
they are underutilized

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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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 Trade-offs in Transportation Design

Cycle Safety Transportation Transportation

Mode Inventory Inventory In-Transit Cost Time Cost
Rail 5 5 5 2 5
TL 4 4 4 3 3
LTL 3 3 3 4 4
Package 1 1 1 6 1
Air 2 2 2 5 2
Water 6 6 6 1 6

TABLE 14-3

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 Trade-offs When Selecting
Transportation Mode
Demand = 120,000 motors, Cost = $120/motor,
Weight = 10 lbs/motor, Lot size = 3,000,
Safety stock = 50% ddlt

Range of Quantity
Carrier Shipped (cwt) Shipping Cost ($/cwt)
AM Railroad 200+ 6.50
Northeast Trucking 100+ 7.50
Golden Freightways 50–150 8.00
Golden Freightways 150–250 6.00
Golden Freightways 250+ 4.00

TABLE 14-4

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 Trade-offs When Selecting
Transportation Mode
Cycle inventory = Q/2 = 2,000/2 = 1,000 motors
Safety inventory = L/2 days of demand
= (6/2)(120,000/365) = 986 motors
In-transit inventory = 120,000(5/365) = 1,644 motors
Total average inventory = 1,000 + 986 + 1,644
= 3,630 motors
Annual holding cost
using AM Rail = 3,630 x $30 = $108,900
Annual transportation
cost using AM Rail = 120,000 x 0.65 = $78,000
The total annual cost for
inventory and transportation
using AM Rail = $186,900

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 Trade-offs When Selecting
Transportation Mode
Transpor-
Lot Size tation Cycle Safety In-Transit Inventory
Alternative (Motors) Cost Inventory Inventory Inventory Cost Total Cost
AM Rail $78,000 986 $108,900 $186,900
2,000 1,000 1,644
Northeast $90,000 500 658 986 $64,320 $154,320
1,000
Golden 500 $96,000 250 658 986 $56,820 $152,820
Golden $96,000 750 658 986 $71,820 $167,820
1,500
Golden 2,500 $86,400 1,250 658 986 $86,820 $173,220
Golden 3,000 $80,000 1,500 658 986 $94,320 $174,320
Golden (old 4,000 $72,000 2,000 658 986 $109,320 $181,320
proposal)
Golden (new 4,000 $67,000 2,000 658 986 $109,320 $176,820
proposal)

TABLE 14-5

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 Key Point

When selecting a mode of transportation, managers

must account for unit costs and cycle, safety, and in-
transit inventory costs that result from using each mode.
Modes with high transportation costs can be justified if
they result in significantly lower inventory costs.

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 Inventory Aggregation
• Can significantly reduce safety inventories
• Transportation costs generally increase
• Use
– When inventory and facility costs form a large fraction
of a supply chain’s total costs
– For products with a large value-to-weight ratio
– For products with high demand uncertainty

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 Tradeoffs When
Aggregating Inventory
HighVal – weekly demand μH = 2, σH = 5, weight = 0.1 lbs, cost = $200
LowVal – weekly demand μL = 20, σL = 5, weight = 0.04 lbs, cost = $30
CSL = 0.997, holding cost = 25%, L = 1 week, T = 4 weeks
UPS lead time = 1 week, $0.66 + 0.26x
FedEx lead time = overnight, $5.53 + 0.53x

• Option A. Keep the current structure but replenish inventory

once a week rather than once every four weeks
• Option B. Eliminate inventories in the territories, aggregate all
inventories in a finished-goods warehouse at Madison, and
replenish the warehouse once a week

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 Tradeoffs When
Aggregating Inventory
1. HighMed inventory costs (current scenario, HighVal)

Average lot size, QH = expected demand during T weeks

=T m H =4 ´ 2 =8 units
Safety inventory, ssH =F –1(CSL) ´ s T +L =F –1(CSL) ´ T + L ´ sH
=F –1(0.997) ´ 4 +1´ 5 =30.7 units
Total HighVal inventory =QH / 2 + ssH =(8 / 2) + 30.7 =34.7 units

All 24 territories, HighVal inventory = 24 x 34.7 = 832.8 units

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 Tradeoffs When
Aggregating Inventory
1. HighMed inventory costs (current scenario, LowVal)

Average lot size, QL = expected demand during T weeks

=T m H =4 ´ 20 =80 units
Safety inventory, ssL =F –1(CSL) ´ s T +L =F –1(CSL) ´ T +L ´ sL
=F –1(0.997) ´ 4 +1´ 5 =30.7 units
Total LowVal inventory =QL / 2 + ssL =(80 / 2) + 30.7 =70.7 units

All 24 territories, LowVal inventory = 24 x 70.7 = 1696.8 units

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 Tradeoffs When
Aggregating Inventory

Annual inventory
holding cost
for HighMed = (average HighVal inventory
x $200
+ average LowVal inventory x $30) x 0.25
= (832.8 x $200 + 169.8 x $30) x 0.25
= $54,366 ($54,395 without rounding)

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 Tradeoffs When
Aggregating Inventory
2. HighMed transportation cost (current scenario)

Average weight of each replenishment order

= 0.1QH + 0.04QL = 0.1 x 8 + 0.04 x 80 = 4 pounds
Shipping cost per replenishment order
= $0.66 + 0.26 x 4 = $1.70
Annual transportation cost = $1.70 x 13 x 24 = $530
3. HighMed total cost (current scenario)

Annual inventory and transportation cost at HighMed

= inventory cost + transportation cost
= $54,366 + $530 = $54,896
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 Tradeoffs When
Aggregating Inventory
Current Scenario Option A Option B
Number of stocking locations 24 24 1
Reorder interval 4 weeks 1 week 1 week
HighVal cycle inventory 96 units 24 units 24 units
HighVal safety inventory 737.3 units 466.3 units 95.2 units
HighVal inventory 833.3 units 490.3 units 119.2 units
LowVal cycle inventory 960 units 240 units 240 units
LowVal safety inventory 737.3 units 466.3 units 95.2 units
LowVal inventory 1,697.3 units 706.3 units 335.2 units
Annual inventory cost $54,395 $29,813 $8,473
Shipment type Replenishment Replenishment Customer order
Shipment size 8 HighVal + 80 LowVal 2 HighVal + 20 LowVal 1 HighVal + 10 LowVal
Shipment weight 4 lbs. 1 lb. 0.5 lb.
Annual transport cost $530 $1,148 $14,464
Total annual cost $54,926 $30,961 $22,938

TABLE 14-6

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 Tradeoffs When
Aggregating Inventory
Average weight of
each customer order = 0.1 x 0.5 + 0.04 x 5 = 0.25 pounds
Shipping cost per
customer order = $5.53 + 0.53 x 0.25 = $5.66
Number of customer orders
per territory per week =4
Total customer orders
per year = 4 x 24 x 52 = 4,992
Annual transportation cost = 4,992 x $5.66 = $28,255
Total annual cost = inventory cost
+ transportation cost
= $8,474 + $28,255 = $36,729

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 Tradeoffs When
Aggregating Inventory

Aggregate Disaggregate
Transport cost Low High
Demand uncertainty High Low
Holding cost High Low
Customer order size Large Small

TABLE 14-7

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 Key Point

Inventory aggregation decisions must account for

inventory and transportation costs. Inventory
aggregation decreases supply chain costs if the product
has a high value-to-weight ratio, high demand
uncertainty, low transportation cost, and customer
orders are large. If a product has a low value-to-weight
ratio, low demand uncertainty, large transportation cost,
or small customer orders, inventory aggregation may
increase supply chain costs.

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 Trade-off Between Transportation Cost
and Customer Responsiveness

• Closely linked to degree of responsiveness

– High responsiveness, high transportation costs
– Decreased responsiveness, lower
transportation costs
• Temporal aggregation – combining orders
across time

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 Trade-off Between Transportation Cost
and Responsiveness

Steel shipments LTL = $100 + 0.01x

Monday Tuesday Wednesday Thursday Friday Saturday Sunday

Week 1 19,970 17,470 11,316 26,192 20,263 8,381 25,377

Week 2 39,171 2,158 20,633 23,370 24,100 19,603 18,442

TABLE 14-8

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 Trade-off Between Transportation Cost
and Responsiveness TABLE 14-9
Two-Day Response Three-Day Response Four-Day Response
Quantity Quantity Quantity
Day Demand Shipped Cost ($) Shipped Cost ($) Shipped Cost ($)
1 19,970 19,970 299.70 0 0
2 17,470 17,470 274.70 37,440 474.40 0
3 11,316 11,316 213.16 0 48,756 586.56
4 26,192 26,192 361.92 37,508 475.08 0
5 20,263 20,263 302.63 0 0
6 8,381 8,381 183.81 28,644 386.44 54,836 648.36
7 25,377 25,377 353.77 0 0
8 39,171 39,171 491.71 64,548 745.48 0
9 2,158 2,158 121.58 0 66,706 767.06
10 20,633 20,633 306.33 22,791 327.91 0
11 23,370 23,370 333.70 0 0
12 24,100 24,100 341.00 47,70 574.70 68,103 781.03
13 19,603 19,603 296.03 0 0
14 18,442 18,442 284.42 38,045 480.45 38,045 480.45
$4,164.46 $3,464.46 $3,264.46

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 Key Point

Temporal aggregation of demand results in a reduction of

transportation costs because it entails larger shipments
and reduces the variation in shipment sizes from one
shipment to the next. It does, however, hurt customer
response time. The marginal benefit of temporal
aggregation declines as the time window over which
aggregation takes place increases.

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 Tailored Transportation
• The use of different transportation networks
and modes based on customer and product
characteristics
• Factors affecting tailoring
– Customer density and distance
– Customer size
• Transportation cost based on total route distance
• Delivery cost based on number of deliveries
– Product demand and value

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 Tailored Transportation

Short Distance Medium Distance Long Distance

High density Private fleet with Cross-dock with Cross-dock with
milk runs milk runs milk runs
Medium density Third-party milk runs LTL carrier LTL or package carrier
Low density Third-party milk runs LTL or package carrier Package carrier
or LTL carrier

TABLE 14-10

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 Tailored Transportation

Product Type High Value Low Value

High demand Disaggregate cycle inventory. Disaggregate all inventories and
Aggregate safety inventory. use inexpensive mode of
Inexpensive mode of transportation for replenishment.
transportation for replenishing
cycle inventory and fast mode
when using safety inventory.

Low demand Aggregate all inventories. If Aggregate only safety inventory.

needed, use fast mode of Use inexpensive mode of
transportation for filling transportation for replenishing
customer orders. cycle inventory.

TABLE 14-11

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 Key Point

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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 Role of IT in Transportation
• The complexity of transportation decisions
demands 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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 Making Transportation
Decisions in Practice

1. Align transportation strategy with competitive

strategy
2. Consider both in-house and outsourced
transportation
3. Use technology to improve transportation
performance
4. Design flexibility into the transportation
network

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 Summary of Learning Objectives
1. Understand the role of transportation in a supply chain
2. Evaluate the strengths and weaknesses of different
modes of transportation
3. Discuss the role of infrastructure and policies in
transportation
4. Identify the relative strengths and weaknesses of
various transportation network design options
5. Identify trade-offs that shippers need to consider when
designing a transportation network

Copyright © 2016 Pearson Education, Inc. 14 – 56