Managing Transportation in a Supply ChainCC3.0(2) Managing Transportation in a Supply Chain*

OutlineFactors affecting transportation decisionKey modes of transport and major issuesTransportation System DesignTradeoffs in transportation designTransportation and inventory: Choice of modeTransportation and inventory: ConsolidationTransportation and service: Transit points at MerloniTailored TransportationRouting and scheduling in transportation*

Factors Affecting Carrier DecisionsVehicle-related cost: lease or purchase the vehiclesFixed operating cost: terminals, airport gates, and laborTrip-related cost: length, durationQuantity related cost: loading, unloading, proportion of fuelOverhead cost: planning, scheduling, IT investmentsMicrosoft Office 2007Microsoft465265Microsoft Office 2007Microsoft465265Microsoft Office 2007Microsoft465265*

Factors Affecting Shippers DecisionsTransportation costInventory costFacility costProcessing costService level cost: delivery commitmentMicrosoft Office 2007Microsoft465265Microsoft Office 2007Microsoft465265Microsoft Office 2007Microsoft465265*

Transportation ModesTrucksTLLTLRailCarloadAirPackage CarriersWaterPipelineIntermodalMicrosoft Office 2007Microsoft465265Microsoft Office 2007Microsoft465265*

Average revenue per ton mile (1998) = 9.13 centsAverage haul = 289 milesAverage Capacity = 42,000 - 50,000 lb.Low fixed and variable costsMajor IssuesUtilization: economies of scaleConsistent serviceBackhaulsTruckload (TL)Microsoft Office 2007Microsoft465265*

Less Than Truckload (LTL)Average revenue per ton-mile (1998) = 26.12 centsAverage haul = 629 milesHigher fixed costs (terminals) and low variable costsMajor IssuesLocation of consolidation facilitiesUtilization (load assignment)scheduling and routing of pickup and deliveryCustomer serviceMicrosoft Office 2007Microsoft465265Microsoft Office 2007Microsoft465265Microsoft Office 2007Microsoft465265*

Average revenue / ton-mile (1998) = 2.40 centsAverage haul = 722 milesAverage load = 80 tonsKey IssuesScheduling to minimize delays / improve serviceOff track delays (at pick up and delivery end) Yard operationsVariability of delivery times

Rail*

Average revenue / ton-mile (1998) = 56.25 centsAverage haul = 1260 milesKey IssuesLocation/Number of hubsLocation of fleet bases / crew basesSchedule optimizationFleet assignmentMaintenance scheduleCrew schedulingYield management (price management)Air*

Expensive but offer rapid, reliable serviceValue-added services:Order trackingOne-stop shippingKey factors:Consolidation of shipmentsLocation and capacity of transfer pointsInformation capabilityPackage Carriers*

Revenue/Ton-Mile (1998) = 0.73 centsAverage length of haul:Rivers/Canals 481Great lakes 509Coastwise 1653Issue:Delays at ports, customsManagement of containers usedWater*

Transport petroleum and related products, natural gasRevenue/Ton-Mile (1998): 1.37Average length of haulCrude 761Products 394Stable and large flow appliedPipeline *

Use more than one mode of transportation to move a shipment to destinationExamples: piggyback, fishyback, birdybackKey issues:Exchange of information to facilitate shipment transfer between different modesIntermodal *

Replenishment size close to TLDesign Options for Transportation Network--- Direct Shipment Network*

Eliminate warehouse and consolidate the shipments from suppliers or to customersDesign Options for Transportation Network--- Direct Shipping with Mike Runs*

Reduce inbound costsCross-duckingDesign Options for Transportation Network--- Via Central Distribution Center*

Consolidate local small shipmentsDesign Options for Transportation Network--- Via Distribution Center Using Mike Runs*

Pros and Cons of Different Transportation Networks*

Transportation and inventory tradeoffChoice of transportation modesInventory aggregationTransportation cost and customer responsiveness trade-offTrade-Offs in Transportation Design*

Impact of Transportation Modes*

Annual demand = 120,000 motorsCost per motor = $120Each motor weighs 10 poundsCurrent order size = 3,000 motorsSafety stock carried = 50% of demand during delivery lead timeHolding cost = 25%, annual cost of H = $120 0.25 = $30Choice of Mode: Eastern Electric Corporation*

Eastern Electric Corporation*

Minimum shipment 20,000 lb. or 2,000 motors. Replenishment lead time L = 5 + 1 = 6 days. Q = 2,000 motorsCycle inventory = Q/2 = 2,000/2 = 1,000 Safety inventory = L/2 = (6/2)(120,000/365) = 986In-transit inventory = 120,000 (5/365) = 1,644Total average inventory = 1,000 + 986 + 1,644 = 3,630Annual holding cost using AM Rail = 3,630 30 = $108,900Annual transportation cost = 120,000 0.65 = $78,000Total annual cost for inventory and transportation using AM Rail is $186,900Example: AM Rail Proposal*

Eastern Electric Corporation*

Alternative

Transport Cost

Cycle Inventory

Safety Inventory

Transit Inventory

Inventory Cost

Total Cost

AM Rail (2,000)

$78,000

1,000

986

1,644

$108,900

$186,900

Northeast Trucking (1,000)

$90,000

500

658

986

$64,320

$154,320

Golden (500)

$96,000

250

658

986

$56,820

$152,820

Golden

(1500)

$96,000

750

658

986

$71,820

$167,820

Golden (2,500)

$86,400

1,250

658

986

$86,820

$173,220

Golden (3,000)

$78,000

1,500

658

986

$94,320

$172,320

Golden (4,000)-old

$67,500

2,000

658

986

$109,320

$176,820

Golden (4,000)-new

$63,500

2,000

658

986

$109,320

$173,820

As a result of physical aggregationInventory costs decreaseInbound transportation cost decreasesOutbound transportation cost increasesApplications:Inventory and facility costs are higherProducts with large value-to-weight ratio or high demand uncertainty or customer orders are largerPhysical Inventory Aggregation: Inventory vs. Transportation cost*

Highval (worth $200, .1 lbs/unit) demand in each of 24 territories, H = 2, H = 5Lowval (worth $30/unit, 0.04 lbs/unit) demand in each territory, L = 20, L = 5CSL in each territory is 0.997 for each product. Holding cost is 25%.UPS rate: $0.66 + 0.26x (every 4 weeks for replenishments)Inventory Aggregation at HighMed*

Option A: keep the current but start replenishing inventory once a weekOption B: Eliminate inventories in the territories, aggregate all inventories in a finished goods warehouse at Madison, and replenish the warehouse once a weekFedEx rate: $5.53 + 0.53x (one-week lead time to replenish goods at Madison. An average customer order is for 1 unit of HighVal and 10 units of LowVal)Inventory Aggregation at HighMed*

Current situation:Replenishment lead time L = 1 weekReorder interval T = 4 weeks CSL = 0.997HighVal inventory costs at each territory: Average lot size QH = 4 2 = 8Safety stock = F-1(CSL) T+L = F-1(0.997) = 30.7 Total inventory = 8 / 2 + 30. 7 = 34.7For 24 territories, HighVal invetory = 34.7 24 = 832.8LowVal inventory costs at each territory: Average lot size QL = 4 20 = 80Safety stock = F-1(CSL) T+L = F-1(0.997) = 30.7 Total inventory = 80 / 2 + 30. 7 = 70.7For 24 territories, HighVal invetory = 70.7 24 = 1696.8Inventory Aggregation at HighMed*

Current situation:Annual inventory holding cost = (832.8 $200 + 1696.8 $30 ) 0.25 = $54,366Transportation cost:Average weight of each replenishment order = 0.1 QH + 0.04QL = 0.1 8 + 0.04 80 = 4 lbsShipping cost per replenishment order $0.66 + $0.26 4 = $1.7Annual transportation cost for 24 territories = $1.7 13 24 = $530.4Total cost = $54,366 + $530.4 = $54,896.4Inventory Aggregation at HighMed*

Inventory Aggregation at HighMed*

If shipment size to customer is 0.5H + 5L, total cost of option 2 increases to $36,729. Average weight of each customer order = 0.10.5 + 0.045 = 0.25 lbsShipping cost per customer order = $5.53 + 0.530.25 = $5.66 Number of customer orders per territory per week = 4Total customer order per year = 42452 = 4,992Annual transportation cost = 4,992 5.66 = $28,255Total annual cost = $8,474 + $28,255 = $36,729Inventory Aggregation at HighMed*

Inventory aggregation decision must account for inventory and transportation costs. Inventory aggregation decreases supply chain costs if the product has a high value to weight ratio, high demand uncertainty, customer orders are large. If a product has a low value to weight, low demand uncertainty, or customer orders are small, inventory aggregation may increase SC costs.Key Points*

High responsivenesshigh trans costExample: Alloy steelShip using an LTL with charge 100 + 0.01x, charge $10 per customer deliveryCurrently ship on the day that order received, allow two days in transit, the response time is 2 days

Trade-off between Transportation Cost and Customer Responsiveness*

Daily demand at Alloy Steel*

Quantity Shipped and Transportation Cost*

Factors affecting tailoringCustomer distance and densityCustomer sizeProduct demand and valueTailored Transportation*

Tailored Transportation---by Customer Density and Distance*

Large customer: TL carrierSmaller customer: LTL carrier or milk runDepends on distance and number of deliveriesVisit larger customers with higher frequency than small customersTailored Transportation---by Size of Customer*

Tailored Transportation---by Product Demand and Value*

Two approaches:Saving Matrix MethodGeneralized Assignment MethodRouting and Scheduling in Transportation*

Vehicle Routing*

X-Coordinate

Y-Coordinate

Order Size ai

Warehouse

0

0

Customer 1

0

12

48

Customer 2

6

5

36

Customer 3

7

15

43

Customer 4

9

12

92

Customer 5

15

3

57

Customer 6

20

0

16

Customer 7

17

-2

56

Customer 8

7

-4

30

Customer 9

1

-6

57

Customer 10

15

-6

47

Customer 11

20

-7

91

Customer 12

7

-9

55

Customer 13

2

-15

38

Step 1: identify the distance matrix

Step 2: identify the saving matrixS (x, y) = Dist (DC, x) + Dist (DC, y) Dist (x, y)Step 3: assign customers to vehicles or routesInitially, each customer assigned to a separate routeTwo routes combined into a feasible route if the total deliveries across both routes dont exceed the vehicles capacityCombine routes with the highest savings into a new feasible route.The procedure continues until no more combinations are feasibleStep 4: sequence customers within routesSequence customer visits to minimize the distance each vehicle travelsProcedures of Saving Matrix Method*

Vehicle Routing*

Distance Matrix

DC

Cust 1

Cust 2

Cust 3

Cust 4

Cust 5

Cust 6

Cust 7

Cust 8

Cust 9

Cust 10

Cust 11

Cust 12

Cust 13

DC

0

Cust 1

12

0

Cust 2

8

9

0

Cust 3

17

8

10

0

Cust 4

15

9

8

4

0

Cust 5

15

17

9

14

11

0

Cust 6

20

23

15

20

16

6

0

Cust 7

17

22

13

20

16

5

4

0

Cust 8

8

17

9

19

16

11

14

10

0

Cust 9

6

18

12

22

20

17

20

16

6

0

Cust 10

16

23

14

22

19

9

8

4

8

14

0

Cust 11

21

28

18

26

22

11

7

6

13

19

5

0

Cust 12

11

22

14

24

21

14

16

12

5

7

9

13

0

Cust 13

15

27

20

30

28

22

23

20

12

9

16

20

8

0

Vehicle Routing*

Savings Matrix

Truck

Cust 1

Cust 2

Cust 3

Cust 4

Cust 5

Cust 6

Cust 7

Cust 8

Cust 9

Cust 10

Cust 11

Cust 12

Cust 13

Cust 1

1

0

Cust 2

2

11

0

Cust 3

3

21

15

0

Cust 4

4

18

15

28

0

Cust 5

5

10

14

18

19

0

Cust 6

6

9

13

17

19

29

0

Cust 7

7

7

12

14

16

27

33

0

Cust 8

8

3

7

6

7

12

14

15

0

Cust 9

9

0

2

1

1

4

6

7

8

0

Cust 10

10

5

10

11

12

22

28

29

16

8

0

Cust 11

11

5

11

12

14

25

34

32

16

8

32

0

Cust 12

12

1

5

4

5

12

15

16

14

10

18

19

0

Cust 13

13

0

3

2

2

8

12

12

11

12

15

16

18

0

Route Sequencing ProcedureFarthest insert: given a trip for each remaining customer, find the min increase in length for this customer to be inserted from all the potential points in the trips. Choose to insert the customer with the largest min increase to form a new trip. Continue until all remaining customers are included. Nearest insert: given a trip for each remaining customer, find the min increase in length for this customer to be inserted from all the potential points in the trips. Choose to insert the customer with the smallest min increase to form a new trip. Continue until all remaining customers are included. Nearest neighbor: start at DC, add the closest customer to extend the trip.Sweep: any point selected and a line swept either clockwise or counterclockwise from the point. Sequence the customers in the order they are encountered during the sweep.Sequence Customers within Routes*

2-OPT:Start with a trip and break it at two places which results in two separated paths. Reconnect in two possible ways.The length of each reconnection is evaluated and smaller of the two is used to define a new trip. Continue until no further improvement results.3-OPT:Break a trip at three points which results in three paths and reconnect to form up to 8 possible ways. The length of each reconnection is evaluated and shortest trip is retained. Continue until no further improvement results.Routes Improvement Procedures*

Step 1: assign seed points for each routeStep 2: evaluate insertion cost for each routeStep 3: assign customers to routesStep 4: sequence customers within routesGeneralized Assignment Method*

cij = insertion cost of customer i and seed point kai = order size from customer ibk = capacity of vehicle kyik = 1 if customer i is assigned to vehicle k

Assignment Problem Formulation*

Align transportation strategy with competitive strategyAppropriate combination of in-house and outsourced transportationDesign a transportation network that can handle e-commerceUse technology to improve performanceDesign flexibility into transportation networkMaking Transportation Decisions in Supply Chain*

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/3Microsoft Office 2007Microsoft4652653Microsoft Office 2007Microsoft4652653Microsoft Office 2007Microsoft4652654Microsoft Office 2007Microsoft4652654Microsoft Office 2007Microsoft4652654Microsoft Office 2007Microsoft4652655Microsoft Office 2007Microsoft465265

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/5Microsoft Office 2007Microsoft4652656-7Microsoft Office 2007Microsoft4652657Microsoft Office 2007Microsoft4652657Microsoft Office 2007Microsoft465265

**Notes:******Notes:*Notes:*Notes:*Notes:Safety stock = 3 days demand for rail and 2 days demand for truck.Daily demand = 120,000/365 = 329 motors.Transit inventory = 120,000*5/365 = 986 for rail120,000*3/365 = 658 for truck

Case discussion:Mention role of incentives in choice of mode. Stress importance of considering beyond mere transportation cost.*Notes:*Notes:*Notes: