VTU MBA SCM Module 3

1. DESIGNING AND PLANNING
TRANSPORTATION
NETWORKS
MODULE 3

2. INTRODUCTION
• Transportation involves the physical movement of goods
between origin and destination points.
• The transportation system links geographically separated
partners and facilities in a company’s supply.
• Transportation facilitates the creation of time and place
utility in the supply chain.
• Transportation also has a major economic impact on the
financial performance of businesses.
2/16/2015 2

3. ROLE OF TRANSPORTATION IN SUPPLY
CHAIN
• Transportation provides the critical links between these
organizations, permitting goods to flow between their
facilities.
• Transportation service availability is critical to demand
fulfillment in the supply chain.
• Transportation efficiency promotes the competitiveness
of a supply chain
• Supply chain also uses responsive transportation to
centralize inventories and operate with fewer facilities.
2/16/2015 3

4. FACTORS AFFECTING TRANSPORTATION
DECISIONS
• Carrier (party that moves or transports the product)
• Vehicle-related cost
• Fixed operating cost
• Trip-related cost
• Shipper (party that requires the movement of the product
between two points in the supply chain)
• Transportation cost
• Inventory cost
• Facility cost
2/16/2015 4

5. TRANSPORTATION MODES
• Trucks
• TL(Truck Load)
• LTL(Less than Truck Load)
• Rail
• Air
• Package Carriers
• Water
• Pipeline
• intermodal
2/16/2015 5

6. TRUCKLOAD (TL)
• Average revenue per ton mile (1996) = 9.13 cents
• Average haul= 274 miles
• Average Capacity = 42,000 - 50,000 lb.
• Low fixed and variable costs
• Major Issues
• Utilization
• Consistent service
• Backhauls
2/16/2015 6

7. LESS THAN TRUCKLOAD (LTL)
• Average revenue per ton-mile (1996) = 25.08 cents
• Average haul = 646 miles
• Higher fixed costs (terminals) and low variable costs
• Major issues:
• Location of consolidation facilities
• Utilization
• Vehicle routing
• Customer service
2/16/2015 7

8. RAIL
• Average revenue / ton-mile (1996) = 2.5 cents
• Average haul = 720 miles
• Average load = 80 tons
• Key issues:
• Scheduling to minimize delays / improve service
• Off-track delays (at pickup and delivery end)
• Yard operations
• Variability of delivery times
2/16/2015 8

9. AIR
• Key issues:
• Location/number of hubs
• Location of fleet bases/crew bases
• Schedule optimization
• Fleet assignment
• Crew scheduling
• Yield management
2/16/2015 9

10. PACKAGE CARRIERS
• Companies like FedEx, UPS, USPS, that carry small
packages ranging from letters to shipments of about 150
pounds
• Expensive
• Rapid and reliable delivery
• Small and time-sensitive shipments
• Preferred mode for e-businesses (e.g., Amazon, Dell,
McMaster-Carr)
• Consolidation of shipments (especially important for
package carriers that use air as a primary method of
transport)
2/16/2015 10

11. WATER
• Limited to certain geographic areas
• Ocean, inland waterway system, coastal waters
• Very large loads at very low cost
• Slowest
• Dominant in global trade (autos, grain, apparel, etc.)
2/16/2015 11

12. PIPELINE
• High fixed cost
• Primarily for crude petroleum, refined petroleum
products, natural gas
• Best for large and predictable demand
• Would be used for getting crude oil to a port or refinery,
but not for getting refined gasoline to a gasoline station
(why?)
2/16/2015 12

13. INTERMODAL
• Use of more than one mode of transportation to move a
shipment to its destination
• Most common example: rail/truck
• Also water/rail/truck or water/truck
• Grown considerably with increased use of containers
• Increased global trade has also increased use of intermodal
transportation
• More convenient for shippers (one entity provides the
complete service)
• Key issue involves the exchange of information to facilitate
transfer between different transport modes
2/16/2015 13

14. DESIGN OPTIONS FOR A TRANSPORTATION
NETWORK
• What are the transportation options? Which one to select?
On what basis?
• Direct shipping network
• Direct shipping with milk runs
• All shipments via central DC
• Shipping via DC using milk runs
• Tailored network
2/16/2015 14

15. DIRECT SHIPMENT NETWORK
SUPPLIERS BUYER LOCATIONS
2/16/2015 15

16. DIRECT SHIPMENT NETWORK
• In direct shipping network, the truck delivers products
from a single supplier to multiple buyers
or
• Goes from multiple suppliers to a single buyer location.
• The manager has to decide on the routing of each truck,
eliminating intermediate warehouses.
2/16/2015 16

17. MILK RUNS FROM MULTIPLE SUPPLIERS OR TO MULTIPLE BUYER LOCATIONS
SUPPLIERS BUYER LOCATIONS
2/16/2015 17

18. MILK RUNS FROM MULTIPLE SUPPLIERS OR TO MULTIPLE BUYER LOCATIONS
SUPPLIERS BUYER LOCATIONS
2/16/2015 18

19. 2/16/2015 19
Example:
1. Frito-Lay that make direct store deliveries use milk runs
to lower their transportation cost. If frequent deliveries
are needed on a regular basis and either a set of
suppliers is in geographic proximity, the use of milk
runs can significantly reduce transportation cost.
2. Toyota uses milk runs from suppliers to transport its JIT
manufacturing system in Japan and U.S. Toyota has
many assembly plants located close together and thus
uses milk runs from a single supplier to many plants.
MILK RUNS FROM MULTIPLE SUPPLIERS
OR TO MULTIPLE BUYER LOCATIONS

20. ALL SHIPMENTS VIA DC
SUPPLIERS BUYER LOCATIONS
DC
2/16/2015 20

21. ALL SHIPMENTS VIA DC
• In this section, product is shipped from suppliers to a
central distribution centre (DC) where it is stored until
needed by the buyers when it is shipped to each buyer
location.
• Storing products at an intermediary location is justified if
transportation economies require large shipments on the
inbound side or shipments on the outbound side cannot
be coordinated . In such cases, product comes to DC in
large quantities where it is held in inventory and sent to
buyer locations in smaller replenishments lots when
needed.
• Ex: WW Grainger has its suppliers ship products to one of
nine DC (large quantities) with each DC in turn
replenishing store in its vicinity with smaller quantities
they need.
2/16/2015 21

22. MILK RUNS FROM DC
SUPPLIERS BUYER LOCATIONS
DC
2/16/2015 22

23. 2/16/2015 23
• Milk runs reduces outbound transportation cost by
consolidating small shipments.
• The use of cross docking and milk runs allows to lower
transportation cost while sending small replenishment
lots to each store.
• Coordination and scheduling requirement is maximum
MILK RUNS FROM DC

24. TRADE-OFFS IN TRANSPORTATION DESIGN
• Transportation and inventory cost trade-off
• Choice of transportation mode
• Inventory aggregation
• Transportation cost and responsiveness trade-off
2/16/2015 24

25. CHOICE OF TRANSPORTATION MODE
• Selecting a transportation mode is both a planning and an
operational decision.
• Decisions made by managers (shippers) must balance
transportation and inventory cost.
• A mode with higher transportation costs can be justified if
it results in significantly lower inventories
2/16/2015 25

26. INVENTORY AGGREGATION: INVENTORY
VS. TRANSPORTATION COST
• As a result of physical aggregation
• Inventory costs decrease
• Inbound transportation cost decreases
• Outbound transportation cost increases
• Inventory aggregation decreases supply chain costs if the
product has a high value to weight ratio, high demand
uncertainty, or customer orders are large
• Inventory aggregation may increase supply chain costs if the
product has a low value to weight ratio, low demand
uncertainty, or customer orders are small
2/16/2015 26

27. TRADE-OFFS BETWEEN TRANSPORTATION
COST AND CUSTOMER RESPONSIVENESS
• Temporal aggregation is the process of combining orders
across time
• Temporal aggregation reduces transportation cost because
it results in larger shipments and reduces variation in
shipment sizes
• However, temporal aggregation reduces customer
responsiveness
2/16/2015 27

28. TAILORED TRANSPORTATION
• The use of different transportation networks and modes
based on customer and product characteristics
• Factors affecting tailoring:
• Customer distance and density
• Customer size
• Transportation cost based on total route distance
• Delivery cost based on number of deliveries
• Product demand and value
The above factors allows supply chain to achieve
appropriate responsiveness and low cost.
2/16/2015 28

29. PROS AND CONS OF DIFFERENT TRANSPORTATION
NETWORKS
2/16/2015 29
Network Structure Pros Cons
Direct shipping No intermediate warehouse.
Simple to coordinate
High inventories due to large
lot sizes.
Significant receiving expense.
Direct shipping with milk runs Lower transportation cost for
small lots,
Lower inventories
Increased coordination
complexity
All shipments via central DC
with inventory storage
Lower inbound transportation
cost through consolidation
Increased inventory cost.
Increased handling cot at DC.
All shipments via central DC
with cross-dock
Lower inventory requirement.
Lower transportation cost
through consolidation
Increased coordination
complexity
Shipping via DC using milk
runs
Lower outbound
transportation cost for small
lots
Further increase in
coordination complexity
Tailored network Transportation choice best
matches needs of individual
product and store
Highest coordination
complexity

30. 2/16/2015 30

31. ROLE OF IT IN TRANSPORTATION
• The complexity of transportation decisions demands to 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
2/16/2015 31

32. RISK MANAGEMENT IN TRANSPORTATION
• Three main risks to be considered in transportation are:
• Risk that the shipment is delayed
• Risk of disruptions
• Risk of hazardous material
• Risk mitigation strategies:
• Decrease the probability of disruptions
• Alternative routings
• In case of hazardous materials the use of modified
containers, low-risk transportation models, modification
of physical and chemical properties can prove to be
effective
2/16/2015 32

33. MAKING TRANSPORTATION DECISIONS IN
PRACTICE
• Align transportation strategy with competitive strategy
• Consider both in-house and outsourced transportation
• Design a transportation network that can handle
e-commerce
• Use technology to improve transportation performance
• Design flexibility into the transportation network
2/16/2015 33

34. ASSIGNMENT…
• What is the role of transportation in a supply chain?
• What are the strengths and weaknesses of different
transport modes?
• What are the different network design options and what are
their strengths and weaknesses?
• What are the trade-offs in transportation network design?
2/16/2015 34

35. END OF MODULE 3