Freight Logistics Fundamentals

1. Freight Logistics and Strategies: Fundamentals of Freight Decisions Alan Erera Associate Professor, Industrial and Systems Engineering Faculty Director, MS in Supply Chain Engineering Program Planning for the Future of Freight Movement Southeast Diesel Collaborative September 16, 2013

2. Supply Chain Engineering at Georgia Tech ISyE • 25 faculty in logistics/manufacturing • Graduate programs – MS in Supply Chain Engineering • 50 grads/yr • Exec MS in International Logistics (EMIL) – 20 grads/yr • Ph.D. in IE: Supply Chain Engineering – 5-10 grads/yr

3. My role • MS in Supply Chain Engineering – Faculty Director • Research program – Co-director, Center for Global Transportation – Optimizing design and control of logistics systems – Research program funded by • NSF, DHS, USDOT • Industry partners (trucking, freight railroads, manufacturers)

4. What to remember • Shippers focus on total logistics costs when making freight transport decisions • Providers (carriers) configure freight systems to deliver excellent customer service at lowest possible cost • Supply chains continuously evolve, but fundamentals change little

5. Supply chain 101 • People demand products – Food, clothing, staples (must have), everything else (nice to have) • Supply chain networks – Procure/produce products – Get them to people • “Logistics” systems – Connect suppliers to customers cost- effectively, using freight transportation networks and logistics facilities

6. • Inbound logistics (procurement) Supply chain 101 auto assembly Tier 1 supplier

10. • Outbound logistics (distribution) Supply chain 101 medical supplies primary DC

11. • Outbound logistics (distribution) Supply chain 101 medical supplies primary DC regional DCs

12. • Outbound logistics (distribution) Supply chain 101 medical supplies primary DC regional DCs customer facilities

13. Fundamental 1: Transportation Cost EOS and Batching • Cost economies of scale (EOS) – Average transportation cost per unit decreases as units increase items Truckload Shipment Price on Lane (o, d) full trailer 1 trailer 2

14. Fundamental 1: Transportation Cost EOS and Batching • Cost economies of scale (EOS) – Average transportation cost per unit decreases as units increase items LTL Shipment Price on Lane (o, d)

15. Fundamental 2: Balancing Freight and Inventory Costs • Selecting shipment quantity – Small shipments sent frequently lead to high freight bill spending – Larger batched shipments take advantage of cost scale economies and reduce freight spend, but – Larger shipment quantities create larger cycle inventories • Working capital increase (cost) • Storage capacity increase (cost) • Other inventory carrying costs: obsolescence/perishability, insurance, …

16. Fundamental 2: Balancing Freight and Inventory Costs t I(t) safety stock cycle stock

17. Fundamental 2: Balancing Freight and Inventory Costs t safety stock Reduce inventory costs 50% by shipping twice as frequently cycle stock

18. Fundamental 2: Balancing Freight and Inventory Costs • Another implication – Although freight cost scale economies often create incentives for sending full trailer (container, …) shipments, cycle inventory costs sometimes make it worthwhile to send partially-loaded equipment

19. Fundamental 3: Pipeline Inventory and Mode Selection • Pipeline inventory – Items on order, that have not yet arrived, often in transit – Although not stored in a facility, still creates working capital and inventory cost!! • For shippers of very high value goods or with high storage costs, inventory costs dominate freight costs – Hard to shift to slower modes

20. Fundamental 3: Pipeline Inventory and Mode Selection t Time items spend in inventories in plant cycle stock in-transit in DC cycle stock Items

21. Fundamental 3: Pipeline Inventory and Mode Selection t Items Reducing pipeline inventory may substantially reduce cost in plant cycle stock in-transit in DC cycle stock

22. Fundamental 3: Pipeline Inventory and Mode Selection t in plant cycle stock in-transit in DC cycle stock Items Low cost goods with high storage costs may better off in pipeline!

23. Fundamental 4: Safety Stock and Mode Selection • Safety stock inventory – Buffer inventory held in a supply chain to hedge against uncertainty •Customer demand uncertainty •Procurement quality and reliability uncertainty •Freight transit time uncertainty • Shippers with high costs of inventory will strongly prefer freight modes with little transit time variability

24. Fundamental 5: More Ton-Miles is Often Cheaper • Batching over geography (usually called consolidation) can be as important as batching over time – for shippers – and, for consolidation carriers like LTL, package express, … • Freight ton-miles may increase, but total equipment miles and total costs may decrease – More time, and extra handling

25. Fundamental 5: More Ton-Miles is Often Cheaper • Inbound cross-docking for retail crossdock suppliers destination DC

26. Fundamental 5: More Ton-Miles is Often Cheaper • Inbound cross-docking for retail crossdock suppliers destination DC

27. Fundamental 5: More Ton-Miles is Often Cheaper • LTL cross-docking terminal network

28. Fundamental 5: More Ton-Miles is Often Cheaper • LTL cross-docking terminal network

29. Fundamental 5: More Ton-Miles is Often Cheaper • 40’ to 53’ domestic container transload destination DC POLA/LB ATL ramp

30. Fundamental 5: More Ton-Miles is Often Cheaper • Pack three 40’ into two 53’ domestic containers crossdock destination DC POLA/LB ATL ramp

31. Fundamental 5: More Ton-Miles is Often Cheaper • “Consolidation” onto freight intermodal trains of truckload shipments originMOD ramp IND ramp destination

32. Fundamental 5: More Ton-Miles is Often Cheaper • Non-stop sleeper team truckload originMOD ramp IND ramp destination

33. Fundamental 6: Trailers and Containers Must Move Empty • Geographic imbalance between freight origins and destinations – Certain areas net producers of freight traffic (by mode, carrier, …) – Other areas net consumers – Imbalance! • Freight transport mobile resources are reusable – Always travel in cycles: (A, B, C, … , A)

34. California Midwest Southwest 15 10 6 Weekly flow (10s) 5 6 8 Fundamental 6: Trailers and Containers Must Move Empty

35. California Midwest Southwest Weekly flow (10s) 6 net arrivals 8 net arrivals 14 net departures Fundamental 6: Trailers and Containers Must Move Empty

36. Fundamental 6: Trailers and Containers Must Move Empty Empty Plan Weekly flow (10s of 53’ tractor-trailers) California Midwest Southwest 6 empty supply 8 empty supply 8 6 14 net departures

37. Fundamental 7: Freight Demand, Supply, and Pricing • Backhaul lanes – Light volume origin-destination pair lanes that help move equipment back toward high volume lanes – Freight pricing can be significantly lower •Carrier gets paid for otherwise empty move

38. Fundamental 7: Freight Demand, Supply, and Pricing California Midwest Southwest 6 empty supply 8 empty supply 8 6 14 net departures 6 8 No backhaul from Southwest to California, due to network effect Not all imbalanced lanes are backhaul lanes!

39. Fundamental 8: Last-mile Freight Efficiency is Hardest • Last-mile – Consolidation modes – Pickup from shipper into first terminal – Delivery to consignee from last terminal • Examples – Container drayage into seaport/IM terminal – Package express pickup/delivery routes – LTL pickup/delivery routes – Distribution delivery routes into stores

40. Fundamental 8: Last-mile Freight Efficiency is Hardest • Challenges to efficiency – Small shipment sizes – Multiple stop vehicle tours – Tour duration constraints, deadlines – Customer delivery constraints, time windows – Urban logistics: congestion, parking, regulation

41. Parting Thoughts: Trends for Supply Chains 1. Global manufacturing here to stay 2. Consumers continue to demand better cheaper products, faster 3. Retailing is more and more a supply chain business 4. Ubiquitous sensors, connected devices, data, automation will continue to drive efficiency gains 5. Alternate fuel technologies will expand steadily into fleets as total costs to own/operate decrease

42. What to remember • Shippers focus on total logistics costs when making freight transport decisions • Providers (carriers) configure freight systems to deliver excellent customer service at lowest possible cost • Supply chains continuously evolve, but fundamentals change little