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A Firm-Based Freight Demand Modeling Framework:
Qi Gong and Jessica Guo, PhD.Transportation and Urban Systems Analysis
Lab
Civil and Environmental Engineering
University of Wisconsin – Madison
Capturing Intra-firm Interaction and Joint Logistic Decision Making
Outline
IntroductionStudy objectivesLogistics management frameworkIntra-firm interactionModeling frameworkConclusion
Introduction
Freight transportation as derived demand Need to incorporate supply chain
concepts in freight demand models Limitation shared by existing supply-chain
based models: Business establishments are treated as
separate and independent decision-making agents
Inter-establishment interactions considered only between agents of different roles in the supply chain
Interactions among establishments within a firm not accounted for
Introduction
Prevalence and implication of multi-establishment firms on freight movement
Source: Statistics of Small Business, 2007
Employment Size of Firm
1-19 20-99 100-499 500+
All Industries
Number of Firms 5,410,367 532,391 88,586 18,311
Number of Establishments 5,466,985 723,385 355,853 1,158,795
Average Establishment-to-Firm Ratio 1.01 1.36 4.02 63.28
Total Sales Receipts ($1,000) 3,975,109 3,792,921 3,612,050 18,366,661
Manufacturing Industry
Number of Firms 213,074 55,603 13,945 4,079
Number of Establishments 213,509 59,596 23,030 35,220
Average Establishment-to-Firm Ratio 1.00 1.07 1.65 8.63
Total Sales Receipts ($1,000) 197,171 440,740 634,738 4,019,587
Wholesale Trade Industry
Number of Firms 286,873 36,783 7,907 3,113
Number of Establishments 292,554 53,305 28,337 60,268
Average Establishment-to-Firm Ratio 1.02 1.45 3.58 19.36
Total Sales Receipts ($1,000) 872,353 899,444 771,807 3,442,613
Current Study Objectives
Objectives: To capture the philosophies in logistics
management To better represent the decision-making
paradigms of establishments and firms This study proposes a firm-based freight
demand modeling framework: Incorporates supply chain concepts Accounts for the interdependency of
establishments within a firm
Logistics Management Framework
Freight transportation demand is derived from business logistics management needs
Freight patterns are determined from various business operation and logistics decisions falling within different planning areas
Planning Area Effect of Decisions on Freight TransportationCustomer Demand and Service
Origin/Destination (OD) of shipments, temporal characteristics
Facility Structure and Location
OD, shipment temporal characteristics
Inventories OD, shipment frequency, shipment size
Purchasing Mode, route and shipment size
Transportation OD, shipment frequency, shipment size
Logistics Management Framework
Customer Demand and Service
Facility Structure and Location Business Economic Activity Boundary (S)Facility number (S)Facility size (S)Facility location (S)
Transportation
Inventory
Just-in-time/forward buying (S)Inventory deployment (S)Replenishment quantity (T)Replenishment frequency (T)
Purchasing
Make-or-Buy (S)Supplier selection (S)Sourcing points (T)Purchasing quantities (T)
•Kanban system/MRP•Push/pull approach•Economic order quantity•Reorder point model•Periodic review model
•Transaction cost theory•Auction sourcing•Optimization for sourcing points
•Profit maximization
•Optimization of capital and transportation cost •Spatial interaction
Customer service level (S)Inventory level (S)
Carrier selection (S)Mode choice (T)
Vehicle routing and scheduling (O)
•Carrier requirements minimization•Traveling salesman•Inventory routing
Logistics Planning Area
Key Decisions (Planning Level)
Decision Making Principles
(S): Strategic decision (T): Tactical decision (O): Operational decision
Customer Demand and Service
Facility Structure and Location Business Economic Activity Boundary (S)Facility number (S)Facility size (S)Facility location (S)
Transportation
Inventory
Just-in-time/forward buying (S)Inventory deployment (S)Replenishment quantity (T)Replenishment frequency (T)
Purchasing
Make-or-Buy (S)Supplier selection (S)Sourcing points (T)Purchasing quantities (T)
•Kanban system/MRP•Push/pull approach•Economic order quantity•Reorder point model•Periodic review model
•Transaction cost theory•Auction sourcing•Optimization for sourcing points
•Profit maximization
•Optimization of capital and transportation cost •Spatial interaction
Customer service level (S)Inventory level (S)
Carrier selection (S)Mode choice (T)
Vehicle routing and scheduling (O)
•Carrier requirements minimization•Traveling salesman•Inventory routing
Logistics Planning Area
Key Decisions (Planning Level)
Decision Making Principles
(S): Strategic decision (T): Tactical decision (O): Operational decision
Logistics Management Framework
Logistics Management Framework
Customer Demand and Service
Facility Structure and Location Business Economic Activity Boundary (S)Facility number (S)Facility size (S)Facility location (S)
Transportation
Inventory
Just-in-time/forward buying (S)Inventory deployment (S)Replenishment quantity (T)Replenishment frequency (T)
Purchasing
Make-or-Buy (S)Supplier selection (S)Sourcing points (T)Purchasing quantities (T)
•Kanban system/MRP•Push/pull approach•Economic order quantity•Reorder point model•Periodic review model
•Transaction cost theory•Auction sourcing•Optimization for sourcing points
•Profit maximization
•Optimization of capital and transportation cost •Spatial interaction
Customer service level (S)Inventory level (S)
Carrier selection (S)Mode choice (T)
Vehicle routing and scheduling (O)
•Carrier requirements minimization•Traveling salesman•Inventory routing
Logistics Planning Area
Key Decisions (Planning Level)
Decision Making Principles
(S): Strategic decision (T): Tactical decision (O): Operational decision
Logistics Management Framework
Customer Demand and Service
Facility Structure and Location Business Economic Activity Boundary (S)Facility number (S)Facility size (S)Facility location (S)
Transportation
Inventory
Just-in-time/forward buying (S)Inventory deployment (S)Replenishment quantity (T)Replenishment frequency (T)
Purchasing
Make-or-Buy (S)Supplier selection (S)Sourcing points (T)Purchasing quantities (T)
•Kanban system/MRP•Push/pull approach•Economic order quantity•Reorder point model•Periodic review model
•Transaction cost theory•Auction sourcing•Optimization for sourcing points
•Profit maximization
•Optimization of capital and transportation cost •Spatial interaction
Customer service level (S)Inventory level (S)
Carrier selection (S)Mode choice (T)
Vehicle routing and scheduling (O)
•Carrier requirements minimization•Traveling salesman•Inventory routing
Logistics Planning Area
Key Decisions (Planning Level)
Decision Making Principles
(S): Strategic decision (T): Tactical decision (O): Operational decision
Logistics Management Framework
Customer Demand and Service
Facility Structure and Location Business Economic Activity Boundary (S)Facility number (S)Facility size (S)Facility location (S)
Transportation
Inventory
Just-in-time/forward buying (S)Inventory deployment (S)Replenishment quantity (T)Replenishment frequency (T)
Purchasing
Make-or-Buy (S)Supplier selection (S)Sourcing points (T)Purchasing quantities (T)
•Kanban system/MRP•Push/pull approach•Economic order quantity•Reorder point model•Periodic review model
•Transaction cost theory•Auction sourcing•Optimization for sourcing points
•Profit maximization
•Optimization of capital and transportation cost •Spatial interaction
Customer service level (S)Inventory level (S)
Carrier selection (S)Mode choice (T)
Vehicle routing and scheduling (O)
•Carrier requirements minimization•Traveling salesman•Inventory routing
Logistics Planning Area
Key Decisions (Planning Level)
Decision Making Principles
(S): Strategic decision (T): Tactical decision (O): Operational decision
Logistics Management Framework
Customer Demand and Service
Facility Structure and Location Business Economic Activity Boundary (S)Facility number (S)Facility size (S)Facility location (S)
Transportation
Inventory
Just-in-time/forward buying (S)Inventory deployment (S)Replenishment quantity (T)Replenishment frequency (T)
Purchasing
Make-or-Buy (S)Supplier selection (S)Sourcing points (T)Purchasing quantities (T)
•Kanban system/MRP•Push/pull approach•Economic order quantity•Reorder point model•Periodic review model
•Transaction cost theory•Auction sourcing•Optimization for sourcing points
•Profit maximization
•Optimization of capital and transportation cost •Spatial interaction
Customer service level (S)Inventory level (S)
Carrier selection (S)Mode choice (T)
Vehicle routing and scheduling (O)
•Carrier requirements minimization•Traveling salesman•Inventory routing
Logistics Planning Area
Key Decisions (Planning Level)
Decision Making Principles
(S): Strategic decision (T): Tactical decision (O): Operational decision
Intra-Firm Interaction
Facility Structure and Location In the wholesale/retail industry, consumer
demand is the key determinant driving the location of retail outlets. The location decision is also affected by cannibalization and; market expansion
In the manufacturing industry, facility structure and location decisions depend largely on the production scheme adopted by a firm product plant strategy market area plant strategy process plant strategy general purpose plant strategy
Intra-Firm Interaction
Purchasing Centralized purchasing strategy (e.g.,
adopted by Whirlpool, General Motors, Dells, Wal-Mart and IBM)
Decentralized purchasing Centralized pricing with decentralized
purchasing Supplier selection for centralized
purchasing scenario Firm iPlant
Scenario A: Supplier selection of single-plant firm
SupplierFirm b
Firm jPlant
SupplierFirm a
Supplier Firm b
Firm iPlant i1
Firm iPlant i2
Scenario B: Centralized purchasing of multi-establishment firm
SupplierFirm a
Intra-Firm Interaction
Inventory Push/Pull approach Vendor-managed inventory (VMI)
Inventory replenishment behavior
Firm a
Firm b Firm c
Scenario B: Push approach by multi-establishment firm
Supplier i
Firm iPlant 1
Firm iPlant 2
Firm iPlant 3
Firm iWarehouse
Scenario A: Pull approach by single-establishment firms
Intra-Firm Interaction
Transportation A firm owning multiple establishments has
more opportunities of vehicle consolidation during goods movements
The combined shipment size may also make a mode such as rail more attractive
Firm Creation
Creates a collection of firms and member establishments located within the study region
Accounts for the effects of production scheme Analysis unit: A firm and all its
member establishments
Purchasing
Determines annual amounts of commodities to be moved between all pairs of establishments
Assumes centralized purchasing strategy Considers the possibility of using in-
house sources
Inventory and Ordering
Determines the order quantity happened on an average day throughout a year
Based on the economic order quantity theory widely adopted in logistics management
Transportation Assigns shipments with modes, consolidation
location, vehicles, and routes Follows the transport chain concept developed
by de Jong and Ben-Akiva (2007)
Conclusion
The intra-firm interdependency in logistics decision-making is captured in the proposed framework Explicitly represent firm-establishment
structures Consider possibility of internal sourcing within
a firm Apply the popular strategy of centralized
purchasing Consider joint ordering across establishments
of the same firm Part of this modeling system has been
calibrated using readily available public data
Conclusion
Remaining models to be estimated using data from ongoing firm-based surveys in Wisconsin
Limitations resulted from certain simplifications and assumptions that are incorporated in framework to assure its operational ability: The ignorance of horizontal alliance across
single-establishment firms Implicit consideration of price policy A constant demand pattern assumed for the
modeling of ordering behavior