Cha[Ter 6 - Transportation Management

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Supply Chain

Management

Chapter 6

Transportation Management

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Why has logistics become increasingly important?

� Cost reduction pressures are severe

� Logistics has a high impact on customer service

� A strong need exists for demand and supply

planning consistency

� A focus on core competencies has placed

logistics in the outsourcing “spotlight”

� Development of IT technology supports

integrated logistics management

Logistics Overview

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Value-added Transportation

Concept

Supplier Manufacturer Customer

Inbound Outbound

Product/Info Flows

Info/Return Goods Flows

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Role of Transportation

Time and Place Utility:

Movement across space or distance.

� Place utility - Where it is needed

� Time utility - created or added by the

warehousing & storage of product until it is

needed. Also a factor in time utility; it

determines how fast and how consistently

a product move from one point to another.

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Transportation Role in Value

Attainment Process

• Critical element of structure,

capacity, and movement decisions

• Both between supply chain

members and intra-organizational

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Transportation-Related Service

Elements

� Speed: time-in-transit

� Availability: accessible to customers when they

want it

� Dependability: pick-up and delivery time variability

� Flexibility: adjustment to shipper’s needs

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� Role of Transportation in Logistics & Supply Chain Management

� Industry Deregulation

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� Transportation Functions, Principles, Participants

� Transportation Regulation

� Transportation Industry Structure

� Transportation Services

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�Transportation Functions

�Transportation Principles

�Transportation Participants

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� Transportation Functions, Principles, Participants�Transportation Functions

� Product Movement� Product Storage

�Transportation Principles�Transportation Participants

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Product Movement

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Product Storage

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Diversion

Original DestinationLahore

New DestinationMultan

Karachi

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�Transportation Principles� Economy of Scale

� Economy of Distance (Tapering Principle)


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Economies of Scale

Transportation Cost per Book

Number of Books in Shipment

$.10/book

$100/book

1 1000

The more items (weight)

is transported,

the less the

transportation costs per

item (unit of weight)

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Economies of DistanceTapering Principle

Transportation Cost per Mile

Shipment Distance

1 mile 1000 miles

$50/mile

$.05/mile

$.10/mile

500 miles

The larger the distance,

the less the

transportation costs per

unit of distance (e.g.,

per mile)

Transportation rates are distance related, not distance proportional

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�Transportation Principles


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Transportation Participants

I need something shipped at the lowest

possible cost!

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I need something delivered at the lowest

possible cost!

I need something shipped at the lowest

possible cost!


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Carriers: We have the equipment!


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Carriers – we can find a shipper! Shippers – we can find a carrier!


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the transportation system is vital for the country’s

economic health


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purchase fuel, transportation

equipment, supplies


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track shipments


equipment, supplies


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match products needing to be shipped with available

capacity


equipment, supplies

track shipments


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Creates demand for transportation by

purchasing products


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�Types of Transportation Regulation



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�Types of Transportation Regulation



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Economic

Types of Transportation Regulation

• Investments in transportation infrastructure (e.g., highways, airports, ports)

• Control of routes, pricing, schedules

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Economic

Types of Transportation Regulation

• Investments in transportation infrastructure (e.g., highways, airports, ports)

• Control of routes, pricing, schedules

Social/Safety

• Protect the public, the environment• Make sure equipment operates safely, cleanly • Safe transportation of hazardous materials (HAZMAT)• Regulating hours worked

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Five Basic Transportation ModesPipeline

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Pipeline Water

Five Basic Transportation Modes

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Pipeline Water

Air


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Pipeline Water

Rail

Air


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Pipeline Water

Rail

Air

Highway


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Cost Structure For Each Transportation Mode

Rail

• high fixed costs (land, tracks)

• low variable costs (operating costs, e.g., labor, fuel)

• slow, but inexpensive way to transport heavy freight that doesn’t require special handling, long distances

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Cost Structure For Each Transportation Mode

Highway

• low fixed costs (government builds, maintains highways)

• medium-high variable costs (operating costs, e.g., labor, fuel)

• most accessible mode (more highways than railroads, waterways, pipelines); best for transporting medium to high value products short to moderate distances

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Containerization

Significant growth during Vietnam War

� Improves efficiency, protects material, reduces handling & pilferage

� Sizes: 20 ft (TEU) or 40 ft (FEU)

� Shorter to permit multiple units on railcars

TEU: 20’ equivalent unit FEU: 40’ Equivalent Unit

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Highway

• LTL – less than truckload

• TL – truckload

• Specialty

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Cost Structure For Each Transportation

Mode Water

• moderate fixed costs (ships and freight handling equipment)

• low variable costs (operating costs, e.g., labor, fuel)

• very slow, but inexpensive way to transport large, heavy freight over long distances (e.g., oceans, rivers, inland waterways, lakes)

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Mode Air

• low fixed costs (aircraft and freight handling equipment)

• highest variable costs (e.g., labor, fuel, maintenance)

• very fast; used for transporting high value and/or high perishability product over short to medium distances.

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ModePipeline

• highest fixed costs (right of way & construction costs of equipment)

• lowest variable costs (no significant labor or fuel costs)

• slow, but dependable (e.g., no weather, traffic disruptions); no flexibility with regard to types of products that can be transported – must be liquid (e.g., petroleum)

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Basic Modes of TransportationFixed Variable Traffic

costs costs compositionRail high low bulk food, mining, oil

heavy mfg

Motor low medium consumer goods,

medium/light mfg

Water medium low bulk food, mining,

chemicals

Air low high high-value goods,

rush shipments

Pipe high low petroleum, chemicals,

mineral slurry

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� Transportation Regulation Transportation Industry Structure


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� Transportation Services�Non Operating Intermediaries

�Traditional Transportation Carriers

�Package Services

�Intermodal Transportation

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� Freight Forwarders� Transportation Brokers � Shipper Associations/Cooperatives/Agents

�Traditional Transportation Carriers�Package Services�Intermodal Transportation

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� Freight Forwarders� Transportation Brokers � Shipper Associations/Cooperatives/Agents


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Third Party Providers

� The offering of nearly any form of transportation to a shipper or receiver as part of a total package of logistics services

� Shipper or user avoids capital outlays and investment

� Focus on core competency--let experts do logistics

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Freight Forwarders

� Formerly common carriers

– non-asset owning

� Earn difference between what they charge (LTL, LCL) and what they pay (CL, TL)

� Issue bill of lading

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� Freight Forwarders� Transportation Brokers� Shipper Associations/Cooperatives/Agents


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Freight Brokers

� Intermediaries who bring shippers and carriers

together for a fee

� Find customers for carriers or carriers for

shippers

� Reduce burden for carriers & shippers

� Find best means/rate for shippers

� Help maximize capacity for carrier

� Information Systems expanding opportunities

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� Freight Forwarders� Transportation Brokers� Shipper Associations/Cooperatives/Agents


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�Non Operating Intermediaries


�Package Services


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Owner-Operator

� Own or lease a truck and trailer and make services available to for-hire carriers

� Contract out their services to other carriers

� Provide overflow capacity and flexibility

� Reduce financial risk to carriers

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�Package Services


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Express & Courier

� TCS, UPS, FEDEX, DHL

� Fast, door-to-door service

� Operate large network of terminals, pick up and delivery vehicles, and line haul

� Typically under 200 lbs

� Compete with Postal Service

� Future good due to expansion and innovative practices

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�Package Services


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What is Intermodal

Transportation?

� The use of two or modes of transportation in moving a shipment from origin to destination

� Mostly associated with “piggyback” or container shipments

� Combines advantages (and disadvantages) of each mode used

� Reduces risk of theft and loss

� Shortens customer order cycle time and effectively reduces costs

� Promotes “seamless” product movement: Eliminates unnecessary handling

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Intermodal

� Enables shippers to benefit from advantages

of multiple modes of transportation

� minimizes disadvantages of individual modes

Rail

Air Water

Truck

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Changing Transportation

Environment

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Changing Transportation Environment

� Deregulation

� Time-based competition

� Expanding geographic coverage

� Information technology

� Social and environmental concerns

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Selected Results of the Changing

Environment - Economic Impact

� Increased competition in individual markets - both

within modes and between modes

� More efficient carrier operations - less interlining,

more direct routing, efficient pricing

� Transportation costs declined in real terms and as

percent of GDP

� Transportation service quality improved

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Selected Results of the Changing

Environment - Industry Impact

� Consolidation in rail, air and LTL trucking

� Proliferation of TL carriers

� Strong growth in regional trucking - networks

� TL growing faster than LTL

� Air freight growth

� Intermodal growth: rail-truck, air-truck, rail-ship

� Growth of “one-stop shopping” - 3PL

� Private fleet conversion

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Selected Results of the Changing Environment - Market Impact

� Demand for fast, dependable, responsive service

at lower cost

� Demand for a broader range of services to

integrate supply chain functions

� Core carrier concept - interdependence between

shipper-carrier

� Customized price/service packages/contracts

� Relational view of transportation as a “value-

added” service

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� Network Freight Flows: Macro-

Decisions

� Micro-Decisions

� Information Systems Support

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Transportation Decision Making in an Integrated Supply Chain

Supplier Manufacturer Customer

Inbound Outbound

Dec

isio

n F

low

Understand total network flows

Understand individual lane flows

Understand current

carrier usage patterns

Make mode/carrier

decisions

Routing/Scheduling,

Load Planning, etc.

Strategic

Operational

Macro

Micro

Dec

isio

n S

cope

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Network Freight Flows: A Fully

Integrated Approach

� Managing Inbound-Outbound flows in an optimal manner requires firm to have a good handle on the entire logistics process

� Traditionally view transportation in a vacuum--need to look at it in the context of the total logistics system

� Greatest improvement opportunities lie in integrating transportation with other logistics functional areas such as purchasing, inventory control, forecasting and production scheduling

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Approach to Analysis

1. Analyze lane densities/frequencies: what opportunities emerge for:

� inbound/outbound consolidation

� vehicle consolidation

� temporal consolidation

� network consolidation - cross dock

potential (hub and spoke systems)

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Approach to Analysis (cont.)

2. Once opportunities for consolidation are visible, make

mode/carrier selection based on service/cost mix

� Given similar service, are rates better on 1

mode/carrier than another?

� Does any mode/carrier have relative strengths in a

particular lane?

� Any backhaul opportunities?

3. If so, look to consolidate loads on mode/carrier with best

cost structure - assign private fleet to most costly routes

In the freight industry, freight carried by a trucker to return to his home with a loaded truck, rather than an empty one (as opposed to headhaul, the outgoing freight).

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Consolidation Opportunities

• Inbound-Outbound flow consolidation: look

for opportunities to combine inbound/

outbound freight

• Vehicle consolidation: use one vehicle/multi

stops for LTL volumes vs. one shipment to

each

• Temporal consolidation: hold orders until

large volume shipment possible

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Suggested Analyses

� Network flows

� Lane densities, frequencies, consistency

� Freight distribution by mode, carrier

� Consolidation opportunities

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Summary

Identify:

� Opportunities to achieve balanced flows - obtain

lower rates for providing loads both ways

� Significant volumes for rate negotiation

� Vehicle/temporal consolidation opportunities

� Advantages of reducing number of carriers

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Key Principles of Transportation

Management

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I. Improving Efficiency

� Rule of efficiency: Straight line, minimize stopping--avoid damage and cost (delay)

� Minimize handling: Avoid “handshakes” and attempt to make process “seamless”

� Full capacity: Reduce cost per unit

� Break bulk & consolidation on long haul

� Avoid empty backhauls� Effective Scheduling: “Optimize” labor and equipment

(5%-10%)

� Transportation rates are distance related, not distance proportional

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II. Efficient Use of Technology &

Equipment� High utilization of expensive

assets

� Larger the vehicle, the lower the cost per unit

� Speed does not equal economical operations

� Minimize vehicle gross weight

� Standardized vehicles and equipment

� Balance specialization with adaptability

� Examine trade-offs between IT and traditional logistics functions

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III. Coordinate Operations

� Coordinate operations with requirements to ensure trade-offs and appropriate level of service

� Cost accountability as part of performance measurement

� Reliability is sometimes better than speed

� Look for opportunities to innovate, but recognize proven principles

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Customer Service Measures

� Order cycle lead time

� Stock availability/fill rates/stock-outs/back orders/partial shipments

� Record integrity

� Frequency of delivery

� Delivery reliability

� Order tracing capability

� Volume flexibility

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Customer Service Measures

� Invoice accuracy

� Order status information

� Technical support responsiveness

� Unscheduled service responsiveness

� Speed of product feature changes

� Product and service quality

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Total Cost Concept

� The total cost concept recognizes that an optimum cost in one area or function may not lead to an optimum total system cost

� Total cost analysis requires the management of supply chain trade-offs

� Logistical activity areas that drive total logistics costs:

� Customer service level costs

� Inventory carrying costs

� Lot quantity costs

� Order processing and information costs� Warehousing costs

� Transportation costs

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Summary-1

� The transportation mode available to the

logistics manager consists of the basic mode,

intermodal and indirect and special carrier

� The carrier selection is two fold, selection of the

mode and selection of the specific carrier

� Factors determining carrier selection include

transportation rate, transit time, reliability,

capability, accessibility and security

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Summary-2

� Railroads offer low cost for long hauls of large volumes, but they have accessibility limitation and long transit time.

� Motor carriers are very accessible and move product in small quantities with low consistent transit times. However their costs are higher than the other modes except air

� Water transportation is relatively low cost and is desirable for moving large volume over long distances. The prime disadvantage is long transit time and service disruption caused by weather

� Air carriers have very low transit times but very high rates.

� Pipelines offer very low rates for the movement of liquids but are not a viable option for manufactured goods.

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Summary-3

� Intermodal transportation is the combination of two or more basic modes to provide through movement. The dominant form is rail-truck or piggyback

� Containerization is the shipping of freight in a box or container that is subsequently transferred from one carrier to another. It reduces freight handling and damage while improving transit time.

� The transportation system includes a number of indirect and special carriers such as small package carriers, consolidators, freight forwarder, shipper associations, brokers and intermodal marketing companies.

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Reference:

� The Management of Business Logistics by J. J. Coyle, E. J. Bardi and C. J. Langley Jr.

Documents

Cha[Ter 6 - Transportation Management