Supply Chain Management: Strategy,

Planning, and Operation

Chapter 14, Kalra

Transportation in a Supply
Chain
Learning Objectives (1 of 2)
14.1 Understand the role of different transportation
modes in a supply chain.
14.2 Discuss the role of infrastructure and policies
in transportation.
14.3 Identify the relative strengths and weaknesses
of various transportation network design options.
14.4 Understand some success factors in a
responsive network for same day delivery.
Learning Objectives (2 of 2)
14.5 Evaluate trade-offs that shippers need to
consider when designing a transportation network.
14.6 Design tailored transportation networks in a
supply chain.
Transportation Modes and Their Role 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
Modes of Transportation and Their
Performance Characteristics (1 of 2)
• Air
• Package carriers
• Truck
• Rail
• Water
• Pipeline
• Intermodal
Modes of Transportation and Their
Performance Characteristics (2 of 2)
Table 14-1 Transportation Facts

Freight Value Added

Freight Value Freight Tons Ton-Miles to GNP
($ billions) (millions) (billions) ($ billions)
Mode in 2011 in 2011 in 2011 in 2009
Air (includes
truck and air) 394 6 11 61.9
Truck 12,181 11,924 2,337 113.1
Rail 588 2,053 1,518 30.8
Water 201 645 434 14.3
Pipeline 889 1,912 1,018 12.0
Multimodal 1,985 583 489 Blank
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
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
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
• Fatigue-related accidents
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
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
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
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
Summary of Learning Objective 1 (1 of 2)
Transportation decisions affect supply chain
profitability and influence both inventory and facility
decisions within a supply chain. The various modes
of transportation include water, rail, truck, air,
pipeline, intermodal, and package carriers. Water is
typically the least expensive mode but is also the
slowest, whereas air and package carriers are the
most expensive and the fastest. Rail and water are
best suited for low-value, large shipments that do
not need to be moved in a hurry.
Summary of Learning Objective 1 (2 of 2)
Air and package carriers are best suited for small,
high-value, emergency shipments. Intermodal and T
L carriers are faster than rail and water but are
somewhat more expensive. LTL carriers are best
suited for small shipments that are too large for
package carriers but much smaller than needed for
a TL.
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?
Direct Shipment Network to Single
Destination

Figure 14-2 Direct Shipment Network

Direct Shipping with Milk Runs

Figure 14-3 Milk Runs from Multiple Suppliers or to Multiple Buyer

Locations
All Shipments Via Intermediate Distribution
Center with Storage

Figure 14-4 All Shipments via DC

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
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
Shipping Via DC Using Milk Runs

Figure 14-5 Milk Runs from DC

Tailored Network
Table 14-2 Pros and Cons of Different Transportation Networks
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 Increased coordination
milk runs lots Lower inventories complexity
All shipments via Lower inbound transportation cost Increased inventory
central DC with through consolidation cost Increased handling
inventory storage at DC
All shipments via Low inventory requirement Increased coordination
central DC with cross- Lower transportation cost through complexity
dock consolidation
Shipping via D C using Lower outbound transportation cost Further increase in
milk runs for small lots coordination complexity
Tailored network Transportation choice best matches Highest coordination
needs of individual product and store complexity
Summary of Learning Objective 3
Networks are designed to either ship directly from
origin to destination or move the product through a
consolidation point. Direct shipments are most
effective when demand at each destination is
large. When demand at each destination is small,
use of an intermediate warehouse or D C lowers
inbound transportation cost by consolidating
inbound transportation to the DC. Shipments may
also be consolidated with milk runs either picking
up from multiple locations or dropping off in
multiple locations.
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
Summary of Learning Objective 4
The main challenge for same day delivery networks
is to get a high enough utilization of delivery assets
to make the cost reasonable. The Mumbai
dabbawalas use the predictability of their demand,
the temporal aggregation of demand because all
lunches are picked up and delivered around the
same time, and the use of underutilized
transportation assets, to be very responsive at a
reasonable cost.
Trade-Offs in Transportation Design (1 of 2)
• Trade-offs
– Transportation and inventory cost
– Transportation cost and customer
responsiveness
• Transportation and inventory cost trade-off
– Choice of transportation mode
– Inventory aggregation
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
• Decreased Response Time
• Decreased Transportation Cost
• Larger Shipments
Example of Temporal Aggregation: Amazon would charge less if the customer can wait
for few days, because then it will club shipments of several customers in that locality
Summary of Learning Objective 5 (1 of 2)
Given a supply chain goal to minimize the total cost
while providing the desired level of responsiveness
to customers, tradeoffs between transportation
costs, inventory cost, facility costs, operating cost,
and response time must be considered when
selecting the mode of transport, the extent of
inventory aggregation, and the targeted customer
responsiveness. Modes with high transportation
costs can be justified if they result in significantly
lower inventory 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.
Summary of Learning Objective 5 (2 of 2)
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. Temporal aggregation
of demand reduces responsiveness but decreases
transportation costs because it entails larger
shipments and reduces the variation in shipment
sizes from one shipment to the next. The marginal
benefit of temporal aggregation declines as the
time window over which aggregation takes place
increases.
Tailored Transportation (1 of 3)
• 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
Tailored Transportation (2 of 3)
Table 14-10 Transportation Options Based on Customer Density
and Distance

Blank Short Distance Medium Distance Long Distance

High density Private fleet with Cross-dock with milk Cross-dock with
milk runs runs milk runs

Medium Third-party milk LTL carrier LTL or package

density runs carrier

Low density Third-party milk LTL or package Package carrier

runs or LTL carrier carrier
Tailored Transportation (3 of 3)
Table 14-11 Aggregation Strategies Based on Value/Demand

Product Type High Value Low Value

High demand Disaggregate cycle inventory. Disaggregate all inventories

Aggregate safety inventory. and use inexpensive mode of
Inexpensive mode of transportation for
transportation for replenishment.
replenishing cycle inventory
and fast mode when using
safety inventory.
Low demand Aggregate all inventories. If Aggregate only safety
needed, use fast mode of inventory. Use inexpensive
transportation for filling mode of transportation for
customer orders. replenishing cycle inventory.
Summary of Learning Objective 6
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. Whereas a high density of
customers close to a DC can be served by a private
fleet, a low density of customers far from a DC may be
better served using package carriers. Whereas large
customers can easily be provided more frequent
deliveries, doing the same for small customers is much
more expensive. Whereas high demand, low value
products should be decentralized to lower
transportation costs, low demand, high value products
should be centralized to lower inventory costs.