15-03-2020

Transportation

Rakesh V | IIM Lucknow 1

• 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

Rakesh V | IIM Lucknow 2

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

Rakesh V | IIM Lucknow 3

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

Rakesh V | IIM Lucknow 4

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Truck
• Significant fraction of the goods moved
• Truckload (T L)
– Low fixed cost
– Imbalance between flows
• Less than truckload (L T L)
– Small lots
– Hub and spoke system
– May take longer than T L
• Fatigue-related accidents

Rakesh V | IIM Lucknow 5

Rail
• Move commodities over large distances
• High fixed costs in equipment and facilities
• Scheduled to maximize utilization
• Transportation time can be long

Rakesh V | IIM Lucknow 6

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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

Rakesh V | IIM Lucknow 7

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

Rakesh V | IIM Lucknow 8

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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

Rakesh V | IIM Lucknow 9

Transportation and policy making

• 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

Rakesh V | IIM Lucknow 10

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Design of 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?

Rakesh V | IIM Lucknow 11

Direct Shipment

Rakesh V | IIM Lucknow 12

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Direct Shipment with milk runs

Rakesh V | IIM Lucknow 13

Shipments via distribution centre

Rakesh V | IIM Lucknow 14

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Shipments via DC with milkruns

Rakesh V | IIM Lucknow 15

Comparison

Network Structure Pros Cons

Direct shipping No intermediate warehouse High inventories (due
Simple to coordinate to 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 D C with through consolidation cost Increased handling
inventory storage at D C
All shipments via Low inventory requirement Increased coordination
central D C 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

Rakesh V | IIM Lucknow 16

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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

Rakesh V | IIM Lucknow 17

Trade-Offs in transportation

• Trade-offs
– Transportation and inventory cost
– Transportation cost and customer responsiveness
• Transportation and inventory cost trade-off
– Choice of transportation mode
– Inventory aggregation

Rakesh V | IIM Lucknow 18

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Sourcing

Rakesh V | IIM Lucknow 19

Traditional view
• Less strategic in nature
• More concerned with getting materials and supplies
and do some negotiations
• More admin like preparing Purchase orders, invoices

Rakesh V | IIM Lucknow 20

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Emerging View
• Sourcing has a strategic value
• Need to re-think concepts like core capability
• Global sourcing
• Uncertainties, risk
• Long term relationships, continuous improvements,
benchmarking, innovation, early involvement of
suppliers in design.
• Market structure, competition, litigations
• Ethics, sustainability

Rakesh V | IIM Lucknow 21

Reactive v/s Proactive Buying

Reactive Buying Proactive Buying

Purchasing is a cost centre Purchasing can add value
Purchasing receive specifications Purchasing (and suppliers) can
add to specifications
Price is the key variable Total value (or supply chain
surplus) is key
Systems isolated from suppliers Systems integrated with
suppliers
Stock to avoid risks Eliminate waste
Information is power Information (at times) may be
more valuable when shared

Rakesh V | IIM Lucknow 22

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How does a third party increase supply chain

surplus? Discuss

Rakesh V | IIM Lucknow 23

Increasing surplus by third party

1. Reduction in agency costs
2. Capacity aggregation
3. Inventory aggregation
4. Transportation aggregation
5. Warehousing/Storage aggregation
6. Procurement aggregation
7. Information aggregation
8. Relationship aggregation
9. Higher quality, brand
10. Learning curve effect
Rakesh V | IIM Lucknow 24

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Factors influencing growth of surplus

• Scale
– Large scale it is unlikely that a third party can achieve further
scale economies and increase the surplus
• Uncertainty
– If requirements are highly variable over time, third party can
increase the surplus through aggregation
• Specificity of assets
– If assets required are specific to a firm, a third party is
unlikely to increase the surplus
• Cost and quantity of available capital
– Third party may have available or lower cost capital

Rakesh V | IIM Lucknow 25

Risks of using a third party

1. The process is broken

2. Underestimation of the cost of coordination
3. Reduced customer/supplier contact
4. Loss of internal capability and growth in third-party
power
5. Leakage of sensitive data and information
6. Ineffective contracts
7. Negative reputational impact

Rakesh V | IIM Lucknow 26

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Total Cost of ownership

• Mistake to focus only on quoted price

• Total cost of ownership (TCO)
– Includes all supply chain costs of sourcing from a particular
supplier
• Three “buckets”
– Acquisition costs
– Ownership costs
– Post-ownership costs

Rakesh V | IIM Lucknow 27

Total Cost of ownership

Performance Category Category Components Quantifiable?

Acquisition Costs Blank Blank
Supplier price Labor, material, and overhead Yes
Supplier terms Net payment terms, delivery frequency, minimum Yes
lot size, quantity discounts
Taxes and duties All tariffs and compliance costs Yes
Delivery costs All transportation costs from source to Yes
destination, packaging costs
Incoming quality costs Cost of inspection, defectives, and rework Yes
Management costs Cost of managing and planning the purchase Difficult

Rakesh V | IIM Lucknow 28

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Total Cost of ownership

Performance Category Category Components Quantifiable?

Ownership Costs Blank Blank
Inventory costs Supplier inventory, including raw material, in Yes
process and finished goods, in-transit inventory,
finished goods inventory in supply chain
Warehousing cost Warehousing and material handling costs to Yes
support additional inventory
Manufacturing costs Cost of manufacturing associated with the Yes
sourced part
Production quality costs Impact of sourced part on finished product Difficult
quality
Cycle time costs Impact of sourced part on production cycle time Yes

Rakesh V | IIM Lucknow 29

Total Cost of ownership

Performance Category Category Components Quantifiable?

Post-Ownership Costs Blank Blank
Reputation Reputation impact of quality problems No
Warranty and product Warranty and product liability costs associated Difficult
liability costs with sourced part
Environmental costs Environmental costs affected by sourced part Difficult
Supplier capabilities Replenishment lead time, on-time performance, To some extent
flexibility, information coordination capability,
design coordination capability, supplier viability

Rakesh V | IIM Lucknow 30

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Make – Buy continuum

Apart from extreme positions of complete outsourcing

and vertical integration, there are other alternatives
• Tapered integration
• Collaborative Relationship – Kieretsu, Strategic
alliances, JVs

Rakesh V | IIM Lucknow 31

Purchasing Portflio – The Kraljic Matrix

Rakesh V | IIM Lucknow 32

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