Supply Chain Management

Chapter 14
Transportation in the Supply Chain

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Outline
The role of transportation in the supply chain
Factors affecting transportation decisions
Modes of transportation and their performance
characteristics
Design options for a transportation network
Trade-offs in transportation design

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Role of Transportation in a supply

chain
Transportation refers to movement of product from
one location to another in a supply chain.
Bureau of statistics: Over 19 billion tons freight,
valued at $13 trillion in US in 2012
Ikea: 270 stores in 26 countries need cost effective
transportation
Seven Eleven stores in japan need responsive
transportation system

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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
e.g. Amazon is a shipper & DHL a carrier
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Transportation Modes
Trucks
TL
LTL

Rail
Air
Package Carriers
Water
Pipeline

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 Important trend :
Between 1970 to 2002, US GDP grew by 176% whereas
freight transportation grew by 73%. In 1970 it took 2.1 tonmiles to produce $1 of GDP, in 2002 it took only 1.1 tonmiles to produce $1 GPD.
Trend shows downsizing of products with new technology
and improved efficiency of freight transportation system.

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Air
Three cost components: 1. fixed cost of infrastructure 2. Cost of
labor & fuel fixed for a flight 3. A variable cost that depends on
the cargo on a flight
Usually Less then 500 pounds high value shipments carried

Key issues:

Location/number of hubs
Location of bases/crew bases
Schedule optimization
Fleet assignment
Crew scheduling

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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)
Consolidation of shipments (especially important for package
carriers that use air as a primary method of transport)

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Truckload (TL)
Carry significant fraction of goods moved, in 2002 trucks moved
69.5% of US commercial freight.
TL has lower fixed costs, 50,000 carriers offer TL services in US.
Challenge is that most markets have an imbalance of inbound and
outbound flow.
Low fixed and variable costs

Major Issues
Utilization
Consistent service
Backhauls

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Less Than Truckload (LTL)

LTL ships in small lots usually less then half of TL
LTL operators run regional or national hub and spoke
networks that allow consolidation of partial loads.
Major issues:

Location of consolidation facilities

Utilization
Vehicle routing
Customer service

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Rail
Heavy load capacity make rail ideal mode for
carrying large, heavy or high density products.
E.g. Coal
Key issues:
Scheduling to minimize delays / improve service
delays (at pickup and delivery end)
Variability of delivery times

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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 (autos, grain, apparel, etc.)
Major global ocean carriers include Maersk,
American president lines, Hanjin shipping co.

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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 petrol to a
gasoline station (why?)

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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

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Design Options for a

Transportation Network
What are the transportation options? Which one to select? On what
basis?
1. Direct shipment network to a single location e.g. home depot
stores
2. Direct shipping with milk runs e.g. Toyota
3. All shipments via intermediate distribution center with storage
4. All shipments via intermediate transit point with cross docking
5. Shipping via DC using milk runs
6. Tailored network

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1. Direct Shipment Network to Single

Destination
All shipments come directly from each supplier to each buyer
location
Shipment decision is completely local
Routing is specified so supply managers need to decide on
quantity to ship and mode of transportation.
Major advantage is elimination of intermediate warehouse and
its simplicity of operations
Justified only if demand at buyer locations is large enough.
E.g. Home depot stores etc.

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Direct Shipment Network to Single

Destination
Buyer
Supplier
Buyer
Buyer
Buyer
Buyer

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2. Direct shipping with milk runs

A milk run is a route on which a truck either delivers product
from a single supplier to multiple retailers or goes from
multiple suppliers to a single buyer location
In direct shipping with milk runs, a supplier delivers directly to
multiple buyer locations on a truck
Or
A truck picks up deliveries destined for the same buyer
location from many suppliers.
Routing needs to be decided, milk runs lower transportation
costs by consolidating shipments on a single truck.
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Direct shipping with milk runs e.g. Toyota

In Japan, Toyota has many assembly plants located
close together and thus uses milk runs from a single
supplier to many plants & vice versa in states.
Supplier

Buyer

Supplier
Supplier
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3. All shipments via intermediate distribution

centre with storage
Product is shipped from supplier to a central distribution centre
where it is stored until needed by buyers when it shipped to
each buyer location
Justified if transportation economies require large shipments on
the inbound side
Product comes into DC in large quantities, held as inventory
and sent to buyer locations in smaller replenishment lots when
needed.
Because DC serve close by stores, outbound transportation cost
if not very large.

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All shipments via intermediate distribution

centre with storage
E.g. when home depot sources from overseas supplier, product
is held in inventory at the DC because lot size of inbound side
is large.
Buyer
Supplier
DC
Supplier

Buyer

Supplier

Buyer

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4. All shipments via intermediate transit point with

cross docking

Suppliers sends all shipments to an intermediate

transit point ( could be DC) where they are cross
docked & sent to buyer location without storing.
Inbound truck contains product from suppliers for
several buyer locations
Outbound truck contains product for a buyer location
from several suppliers
E.g. Wal-Mart
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5. Shipping via DC using milk runs

Milk runs can be used from a DC if lot sizes to be delivered to
each buyer location are small.
Milk runs reduce outbound transportation costs by
consolidating small shipments.
E.g. Seven-Eleven Japan cross docks deliveries from its fresh
food suppliers at its DC and sends out milk runs to the retail
outlets because total shipments to a store from all suppliers
does not fill a truck.
Requires significant coordination, suitable routing and
scheduling.
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Shipping via DC using milk runs

Buyer
Supplier
Supplier
Supplier

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DC
Buyer
Buyer
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6. Tailored Network
Suitable combination of previous options that reduce
the cost and improves responsiveness in the supply
chain.
Transportation uses a combination of cross docking,
milk runs, TL & LTL carriers along with package
carriers in some cases.

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Pros & Cons of Different Transportation Networks

Network Structure

Pros

Cons

Direct Shipping

No intermediate warehouse
Simple to coordinate

High inventories due to

large lot size
Receiving expense

Direct shipping with milk

runs

Lower transportation costs

for small lots
Lower inventories

Increased coordination
complexity

All shipments via central

DC with inventory storage

Lower inbound
transportation cost

Increased inventory cost

Increased handling at DC

All shipments via central

DC with Cross-Dock

Lower inventory required

Lower transport cost

Coordination complexity

Shipping via DC using milk Lower outbound

runs
transportation costs for
small lots

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Further increase in
coordination complexity

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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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Choice of Transportation Mode

A manager must account for inventory costs when
selecting a mode of transportation
A mode with higher transportation costs can be
justified if it results in significantly lower inventories

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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
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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

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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
Product demand and value

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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

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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

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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

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Summary of Learning Objectives

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?

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