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INDEX
DISTRIBUTION.......................................................................4
1. Role of Distribution in the Supply Chain....................................................................4
2. Designing Distribution Channels.................................................................................8
3. Distribution Network Planning..................................................................................35
4. Network Design & Optimization Approach and Techniques....................................45
TRANSPORTATION...............................................................57
5. Role of Transportation in the Supply Chain..............................................................58
6. Transportation Principles and Participants................................................................62
7. Transportation Modes, Performance Characteristics and Selection..........................65
8 . Transportation Performance, Costs And Value Measures........................................73
9. Transportation Routing Decisions.............................................................................80
10. Transit Operations Software....................................................................................90
11. Advanced Fleet Management System.....................................................................92
12. Intermodal Freight Technology...............................................................................94
13. Transportation Security Initiatives And Role Of Technology.................................97
PRACTICE AREA......................................................................................................101
DISTRIBUTION
In this module you would learn the concepts behind physical distribution of products, the
channels of distribution, the decision criteria for designing and selecting distribution
channels.
1. Role of Distribution in the Supply Chain
2. Designing Distribution Channels
3. Distribution Network Planning
4. Network Design & Optimization Approach and Techniques
1. Role of Distribution in the Supply Chain
The Supply Chain comprises of various activities in the fulfillment of demand of the
customer and involves various intermediate stages for value addition and the
accompanying flow of material, information and financial transactions. Within the range
of activities in the Supply Chain, Distribution is concerned with the physical fulfillment of
the customer demand. The Customer could be the end consumer with the manufacturing
plant as the supplier or further backward Distribution could also involve moving raw
materials and components to the intermediary (manufacturer or retailer).
With the rapid growth of the trade channels for meeting the customer demand and the
various intermediaries involved within the Supply Chain, Distribution has evolved as a
key business function for various organizations. Considering the case of an Automobile
manufacturer, the distribution channel spans the entire chain from the vendors who
supply raw material (steel, rubber, plastic); components ( pumps, engines, valves, tyres)
sub-assemblies and finally the end product distribution in a complete or SKD (semi-
knocked down) form to the dealer network within or outside the country.
CHAPTER - 1
In the case of exports the distribution channel might span multiple levels upstream in
terms of consolidation, product mixing, and culminating in the final sale. This might not
be the end of the Distribution function as channels for supply of spare parts and other
replacement items would have to be established as also in some cases reverse
distribution channels for return of non-biodegradable parts like batteries would have to
be ensured to meet the various environmental regulations. The above example
illustrates the range of activities and the scope of one of the important Supply Chain
activities.
The National Council of Physical Distribution Management (NCPDM) now known as The
Council for Logistics defines Physical Distribution as:
Physical distribution is a broad range of activities concerned with efficient movement of
finished goods, products from the end of the production line to the customer. In some
cases includes movement of raw material from the source of supply to the beginning of
the production line. These activities include freight, transportation, material handling,
protective packaging, order processing and customer service.
Distribution is a key activity for companies as it significantly influences the supply chain
costs and the service levels offered to customers. Hence most companies within the
same industry sometime follow different distribution strategies to accommodate for the
differences on the two fronts –costs and service levels. For instance Dell and HP
belonging to the IT industry (hardware manufacturing) follow different strategies, with
Dell setting up direct delivery channel at a reasonable delivery lead time and HP setting
up extensive reseller network that offers more responsive service to the customer in
terms of the delivery lead time. These significantly affect the cost structure of the two
companies with Dell reporting a lower level of Inventory holding compared to the industry
norm. It has been observed that for a manufacturing company distribution costs account
for close to 20% of the total costs. Taking the case of the cement industry the cost of
outbound distribution of cement (to the point of sale) is approximately 30% of the total
cost of production and selling.
Most companies involved in manufacturing or retailing have established internal
department(s) to look into this important function. The responsibilities generally include
many inter-related and highly coordinated set of activities: transportation, order
processing, warehousing, inventory control and location analysis. Out of these set of
activities, the key functions are transportation, warehousing and inventory control. These
have been discussed below
Transportation Management
An in-depth look at Transportation would follow in the subsequent section, but it is
essential to realize that this is one of the most important focus activities which has
significant impact on cost and responsiveness. On a broad level it can be considered to
be a function involved in moving raw material to the manufacturing unit or warehouse
and moving finished or semi-finished products to the next level of the supply chain or to
the final consumption point.
There is a great amount of detailed planning required for this function, especially in
India, since the sector is still within the sphere of unorganized sector. A strike by the
road transporters recently crippled the manufacturing units because of non-availability of
raw material and also led to a pile up of finished product inventory. The five basic modes
that are looked at for transportation are –road, rail, air, waterways and pipelines. While
making a choice of a transportation mode, the criteria used are –cost, transit time,
service level, safety of the products.
Inventory Control
The role of distribution in inventory control is critical as it involves material in warehouse
stages of the supply chain –in transit, in storage and ready to be shipped out. In fact one
of the important responsibilities of distribution managers in companies is to optimize the
level of inventory in the distribution network based on the customer service norms. In
the example of Dell discussed above which has a high focus on costs and uses a direct
distribution network, the level of inventory held in the total supply chain was around 7
days (2003). It is moving to bringing this down further through innovative planning and
distribution.
Warehousing
Warehousing provides “space” utility to the material in the supply chain. But in the recent
years this has become a significant aspect of the total distribution because of the value
added service that it is engaged in like postponement, repackaging etc; The strategic
level decision in setting up a distribution network is often the location, size and the role
of a warehouse. The warehousing structure often depends on the overall distribution
strategy. For instance FMCG companies in India have traditionally followed an intensive
distribution due to the need for ‘reach’. This required high level of availability of products
in shop shelves in metros, cities, towns and villages. To support this spread and the
depth of penetration they follow a Decentralized distribution which emphasizes on
availability and reach –warehouses in all major states of the country(regional
warehouses) and some warehouses close to the major demand points (local
warehouses) and some close to the premises of the major customers. Managing this
kind of an extensive distribution network requires resources both for planning and
execution.
2. Designing Distribution Channels
In the previous sections we saw the role of Distribution in the Supply Chain and the
various types of Distribution Channels and their characteristics. This section details the
different options available to companies (suppliers or manufacturers) to reach their
customers (end consumer or manufacturer).
The choice of a distribution network at the strategic level should be based on two
important criteria:
1. The customer service level expected and offered
2. The cost involved in offering the level of service
These two criteria need to be balanced out by choosing the appropriate elements in the
supply chain. This process of balancing out is called “optimization” and is discussed
subsequently. Ultimately the decision is based on the customer requirements that are
met, the revenue generated from that and the cost of serving the same profitably.
The customer service level has many dimensions and the important ones that constitute
are given below:
1. The Delivery Lead time
2. The product mix in the order
3. Availability of products
4. The overall customer satisfaction
5. The visibility of orders in the pipeline –downstream and upstream
6. Handling of returns
CHAPTER - 2
The delivery lead time is the time from the customer placing an order to the time of
receipt of material from the supplier? In certain cases the delivery lead time are short as
in the case of FMCG type of products, where the availability should be instantaneous
when the customer shops in a retail outlet. In other cases the delivery lead time
encompasses product design, manufacturing, testing and installation as in the case of
large engineering products like boilers and windmills, where the delivery lead times are
longer.
The product variety refers to the number of products and configuration options available
to the customer from the manufacturer. The higher the number of product variety and
options the greater the complexity that the distribution network would have to handle,
because of the need to multiple delivery modes, packaging and handling requirements,
documentation and coordination amongst the different channel partners. In some cases
where there is a bundled offering, for instance on purchase of a product A, product B is
offered free of cost. This is also a case of a high product variety.
Availability within the supply chain is defined as the number of times a product is
available whenever the order for the product is received. This factor is a critical
differentiator in the case of many supply chains. For instance in the case of FMCG type
of product the primary focus of the distribution channel and the channel members is to
ensure high availability through an optimal mix of inventory holding.
Customer experience is related to the earlier factors of delivery lead times and
availability and also has the experiential elements involved like the overall experience of
placing the order, the interactions with the staff and the service level offered.
Order visibility refers to the ability of the customer to track the various orders and also to
know the current status of the orders. Some of the service organizations like cargo and
courier operators offer this feature to their customers. Also with integrated IT tools like
ERP and EDI, the process of order tracking is becoming enabled at various levels.
Handling of product returns is one of the key factors emerging of late because of the
various environmental and social issues which are being enforced by the government.
Manufacturers need to work out separate distribution channels in the case of handling
product returns in the case of some products like batteries and tyres.
Though customers would like superior performance on all the above factors from their
suppliers, in reality the balancing needs to be done with respect to some of the factors.
For instance a customer ordering from Dell is willing to wait longer than a customer
walking to the nearby hardware outlet and buying a home PC (delivery lead time factor).
But the customer also gets a higher product variety and mix and customize his needs
better when he buys through Dell (product variety factor). In general companies targeting
customers who can accommodate a longer lead time can offer the same at lower cost as
the investment in other supply chain elements like inventory, facilities etc; is much lower.
The distribution network design affects the following costs –inventory, transportation,
warehousing and information. The impact of the various elements discussed above on
the cost structure of the distribution network is detailed below. The interrelationships
which are discussed below are:
1. Number of Warehouses and the Delivery lead time
2. Number of Warehouses and the Total Inventory cost
3. Number of Warehouses and the Transportation cost
4. Number of Warehouses and the total Warehousing Cost
1. Number of Warehouses and the Delivery lead time
As the number of warehouses in the supply chain increases the delivery lead time to the
customer shrinks. This relationship exits because of greater responsiveness to the
customer and shorter transit time to the customer site. This is being adopted by the auto
component manufacturers who have to respond to the major automotive manufacturer’s
requirement of lead times of sometimes less that an hour by establishing a chain a
warehouses in major manufacturing hubs like Chennai, Gurgaon, Faridabad etc; where
the automotive manufacturers like Ford, Hyundai, Maruti are present. Some times these
warehouse facilities are located very close to the customer site to cut down on the transit
time.
The increase in the number of warehouses to offer shorter delivery lead times also has
implications in terms of the cost which needs to be balanced against the potential for lost
sales or additional revenue or bargaining power.
Delivery Lead time
Number of Warehouses
2. Number of Warehouses and the Inventory costs
As the number of warehouse facilities in the supply chain increases the level of inventory
increases as also the associated inventory carrying cost. This problem is attacked by
strategies like consolidation of certain classes of inventory and decentralizing the
inventory holding for other classes of inventory. Sometimes the level of inventory held
has a significant impact on the service level that needs to be offered and this need to be
optimized.
Number of Warehouses
Inventory Costs
3. Number of Warehouses and the Transportation costs
The transportation activity can be classified as Inbound and Outbound. The Inbound
transportation for a manufacturer refers to the transportation of raw materials and other
manufacturing supplies to the production unit and the Outbound transportation refers to
the costs incurred in sending finished products from the manufacturing unit to the
customer. In general it has been observed that the per unit transportation costs tend to
be much higher than the inbound transportation cost.
This is because the inbound raw materials normally come as a full truck load (FTL)
which optimizes the weight and volume capacity of the carrier. By increasing the number
of warehouse facilities the average transportation distance to a customer site is reduced
because the overall transportation distance is a smaller fraction of the total distance
traveled by the product. It can thus be seen that as the number of facilities increases,
initially the total transportation cost decreases. But if the number of warehouse facilities
is increased to a point where the inbound lot size decreases beyond the normal lot size
economies, the total transportation costs start to rise.
Number of Warehouses
Transportation Costs
4. Number of Warehouses and the Warehouse facility cost
As the number of warehouses increases the total warehouse facility cost increases
because of the increase in the fixed and variable cost components like rent, manpower,
equipment etc;
The above discussion illustrates the range of variables that are impact the overall
distribution network. The following discussion illustrates certain common distribution
channels and the key characteristics of these distribution network models.
Distribution Network ModelsWhile designing a distribution network many factors are considered including the cost
and service trade-off and also three other important questions:
1. Will the product be delivered directly to the customer?
2. Will the customer pick up the product from the pre-decided site
3. Will there be intermediaries (warehouse, retailers, stockiest etc;) involved in the
distribution network?
Number of Warehouses
Total Warehouse Facility cost
Depending on the options available and the resources the commonly adopted
distribution networks are detailed below:
1. Direct delivery from the manufacturer to the customer
2. Delivery through in-transit mixing from the manufacturer storage facility
3. Delivery through packaged carrier delivery from the distributor storage facility
4. Last mile delivery from the distributor storage facility
5. Customer pickup from the manufacturer/distributor storage facility
6. Multi-channel distribution network
Each individual distribution network model is discussed in detail and the performance
and the applicability of each is evaluated on cost and service level dimensions.
1. Direct delivery from the manufacturer to the customer
The key Features of this distribution model are:
The products are delivered directly from the manufacturer to the customer. The
retailer is bypassed in this model of distribution and in some cases he serves the
function of only order communication to the manufacturer. The process of direct
distribution from the manufacturer to the customer is also referred to as drop
shipping.
The manufacturer carries the inventories in various forms –components, sub
assemblies, finished products and starts the manufacturing or assembly of the
finished product only on receipt of a confirmed order. In this case the retailer
does not carry any inventory. Well known and successful examples of this
distribution model are Dell Computers, amazon.com.
Manufacturer
Retailer
Customers
Product Flow
Information Flow
The Advantages of this distribution model are:
Consolidating inventory: The manufacturer is able to consolidate the orders
from various retailers. Due to this the product availability is enhanced with
lower inventory holdings. The benefits from consolidation of inventory are
higher for products which have a low and unpredictable demand pattern and
which are of high value. Due to this the need to carry high value inventory
over long periods of time is eliminated.
Postponement: Manufacturers can also postpone the manufacturing till the
last mile. This involves customization based on the actual customer demand
and offering a higher product variety but with lowered inventory holding cost.
An example of this is Dell which assembles the final PC based on the specific
customer configurations by holding sub assemblies of common parts in large
numbers and few components specific to the customer order in small
numbers.
Low warehousing and fixed costs: Due to the direct delivery from the
manufacturer to the customer, the most obvious benefit is the saving from
maintaining and operating warehousing facilities.
High product variety: High level of product variety can be offered to the
customer in this model. Even slow moving items can be offered to the
customer because of the centralized inventory holding for this category of
items.
The Disadvantages of this distribution model are:
High Delivery lead time: The delivery lead time is high because of the higher
in-transit time from the manufacturer location to the customer. If the order
from the customer is mixed then the delivery might happen in partial lots as
the manufacturer might ship from different locations.
Higher transportation costs: The transportation costs are higher because of
the distance involved and also the use of expensive package courier service,
since the manufacturer is handling multiple smaller lot quantities, due to
which he is unable to get the benefit of a larger transportation weight/volume.
Difficulty in handling product returns: Due to the absence of an intermediary
in the proximity of the customer the cost for handling returns is more than the
cost for distribution. The cost of coordination and documentation for the
returns is also higher.
The Pre-requisites for this distribution model are:
Good information infrastructure: This is extremely important for providing
product information and also other functions like the customer directly
processing the order using the manufacturers Information systems. Thus this
distribution model requires significant investment in Information system
infrastructure.
Order visibility and tracking: This is a crucial feature of this distribution model
as it can impact the customer satisfaction. This requires a complete
integration of the order processing and the manufacturing and supply chain
systems, to enable the customer to track his individual order.
In summation it can be said that this distribution model is ideally suited for a
manufacturer dealing with a large variety of low demand and high value items where
customers are accommodative of the longer delivery lead times because of the benefit
of lowered costs and ability to customize their orders.
2. Delivery through in-transit mixing from the manufacturer storage facility
Manufacturing Plants
Retailer
Customers
Product Flow
Information Flow
In-transit merge
The key Features of this distribution model are:
The previous distribution model involved supplying from the manufacturer each
individual order/product. Due to this the per unit transportation cost is high. Under
a in-transit merge option the individual products/orders are clubbed and the
customer gets a single consolidated order. For instance if a customer orders a
home PC from company A and a printer from company B as a single order, the
PC and printer are merged at a single location and the customer gets the
complete order.
The Advantages of this distribution model are:
As in the case of direct delivery from the manufacturer to the customer, in-transit
merge option enables aggregation of inventory and postponement of
customization
The greatest benefit would be in reduction of the transportation costs due to the
merging which takes place. This merge normally happens at a transporters dock.
Assuming the usage of package couriers in the case of the direct delivery and in-
transit merge, the delivery lead time would still be the same, or marginally higher
due to the extra time required for merge.
The overall customer satisfaction would be much higher as he receives a single
receipt instead of multiple deliveries.
The Disadvantages of this distribution model are:
The processing and coordination costs are much higher due to the increased
deployment of information systems due to the complexity involved in merging
multiple customer orders.
The investment in information infrastructure will also be higher.
The Pre-requisites for this distribution model are:
Initial set up and planning for the operation and location of the merge point is
important
Investment in IT infrastructure which gives visibility in the entire chain –
manufacturer, distributor, and customer is essential.
This distribution model has similar performance characteristics as the dropship
model but reduces the overall transportation cost and also enhances the customer
experience. This model requires good IT infrastructure and planning systems for
planning and coordination of the merge.
3. Delivery through packaged carrier delivery from the distributor storage facility
Manufacturing Plants
Customers
Product Flow
Information Flow
Storage at Distributor or Retailer
The key Features of this distribution model are:
The manufacturer does not hold stock at his facility but moves it to an
intermediate warehouse owned/operated by a retailer or distributor. The
customer orders registered at the manufacturer or distributor are serviced from
the distributor or retailer facility.
The inbound transportation to the distributor is handled by the manufacturer and
the outbound transportation from the distributor to the customer is handled by the
distributor.
The information flows directly from the customer to the retailer or from the
customer to the manufacturer.
This distribution model is pre-dominant is FMCG industry and others where there
is a need to be closer to the customer and ensure a good reach for the products.
For example, a detergent manufacturing company manufacturing the same
product (or brand) at multiple factories would transport the material to distributors
who in turn would service the demand from retailers or end consumers.
The Advantages of this distribution model are:
The delivery lead time to customers (or the response time) is very short in this
model due to the proximity of the seller to the customer. This is very crucial in
cases where there are multiple parity products competing and availability would
ensure sale, like in the case of personal and hygiene products.
The overall customer experience in this model is also enhanced more than in the
case of direct delivery from the manufacturer. For instance in buying a book from
a retailer the customer has no waiting time but when he order from the publisher
the delivery lead time might range from couple of days to a week.
Handling of product returns is also easier in this case as the customer can easily
reach out to the retailer or distributor due to proximity, thus reducing the
transportation cost for the manufacturer.
Postponement is a strategy which is feasible for this model, though it requires
capital investment at the distributor warehouse. This is being attempted by
bicycle manufacturers who are evaluating the option of setting up a paint shop at
the warehouse, to offer more product (color) variety to the customer. But this can
increase the overall cost to the customer.
The transportation cost is also lower in this model as the manufacturer can ship
out limited FTL (full truck loads) to the retailer instead of multiple LTL (less than
truck load).
The Disadvantages of this distribution model are:
This model requires a higher level of inventory as the inventory holding can not
be aggregated as in the case of direct distribution model at the manufacturer.
Also inventory is held at multiple levels in the supply chain due to the demand
uncertainty and benefits of aggregating overall customer demand are not
realizable.
The overall warehouse facility cost are much higher in this case due to the
operating and fixed costs of the warehouse.
The Pre-requisites for this distribution model are:
Good warehouse facilities at the distributor end to enable faster turnaround time
of customer orders
Right product mix and quantity availability to ensure customer service
This distribution model is suitable for products which do not have a high demand
unpredictability and the product variety is limited. This model enables lower delivery lead
times and in cases where the customer can not wait for his order to be fulfilled.
4. Last mile delivery from the distributor storage facility
Customers
Product Flow
Information Flow
Storage at Distributor or Retailer
Manufacturing Plants
The key Features of this distribution model are:
In this distribution model, the distributor delivers to the customer premises
instead of the customer picking up.
In this model, more number of distributor warehouses are needed to be in the
proximity of the demand points to efficiently service the customer orders.
The Advantages of this distribution model are:
This distribution model offers a good customer response time and overall
customer experience.
This model is especially efficient where there is a “dense” demand concentration
so that multiple customers can be served in the same route.
The Disadvantages of this distribution model are:
This model requires a high level of inventory because it can not aggregate
inventories based on specific customer orders.
Also the overall transportation cost is on the higher side. The transportation route
and network planning process is crucial for this distribution model to economize
on the transportation costs.
The warehousing and facilities costs are also higher because of the need to set
up multiple warehouses closer to the customer for efficient service.
The Pre-requisites for this distribution model are:
Good planning capabilities for route and transportation planning
Good information infrastructure to support order tracking and processing
This distribution model is feasible in cases where the customer values the experience
of delivery to his premises and is willing to pay for the extra service provided. It is
particularly useful in cases where the order sizes are large to justify economies of
scale in storage and transportation. This model works extremely well, when it is
clubbed with an existing distribution network and selectively utilize this model where
the order sizes and the transportation distances justify this.
5. Customer pickup from the manufacturer/distributor storage facility
Customers
Product FlowInformation Flow
Cross Dock
Manufacturing Plants
Retailer
Pick up sites
Customer Flow
The key Features of this distribution model are:
This distribution model uses some features of a direct distribution model but
economizes on the customer service cost. The products are held at the
manufacturer or distributor warehouse, the customer places orders online or over
phone and then picks up the orders from the pick up sites upon intimation of the
availability.
This distribution model is used both for B2C (selling to the customer) or B2B
(selling to intermediary).
The Advantages of this distribution model are:
The inventory levels can be kept low due to the visibility of customer order and
the ability to aggregate inventory based on the customer order.
The transportation costs are also much lower due to the ability to aggregate
orders over longer distances. This means that more FTL vehicles can be used
saving significantly on the costs.
This model can offer better product variety at lower costs due to the ability to plan
for different orders and segregate.
If the cross-docking is used then the routing to the various pickup points can be
done more efficiently thus economizing further on the transportation costs.
The Disadvantages of this distribution model are:
The delivery lead times are longer due to the time required to move products
from the manufacturer plant to the pick up site. This can be lowered with
investment in IT systems to enable viewing of customer orders and the
committed delivery schedules.
The overall facilities and handling costs can be higher if multiple such pick up
sites are operated.
The Pre-requisites for this distribution model are:
Good information infrastructure to support order tracking and processing
Planning and coordination for routing and cross-docking
The major benefit of this distribution model is that it can lower the transportation and
delivery costs. The inventory can be aggregated at the manufacturer level if good
Information systems support tracking and visibility of customer orders, thus lowering
the level of inventory held at the same time offering better product variety.
6. Multi-channel distribution model
Customers
Product Flow
Information Flow
Storage at Distributor or Retailer
Manufacturing Plants
The key Features of this distribution model are:
The manufacturer has the flexibility to cater to different category of customers
based on the costs and service level expectations. For instance LG (the
consumer durables company) has set up a multi channel distribution model,
wherein the customer could select products and choose the required product at
lgezbuy.com and ask for direct delivery to his home or choose to pick up the
product from the nearest retail outlet. The conventional channel of the customer
going to the retail shop, placing an order and picking up the product or the
retailer delivering to the customer’s home are also available. Alternately the
customer can place an order for some categories of products at the retailer and
be served directly by the manufacturer.
The various options given above have different implications on cost and delivery
lead time. A customer placing an order directly with the manufacturer has a
longer wait time for the product to be delivered but his overall cost of transaction
might be lower. If the manufacturer services the order through the retailer nearest
to the customer, the transportation cost is lower compared to delivery from the
manufacturing location.
The advantages of this distribution model are:
The manufacturer can choose an appropriate service level strategy depending on
the customer expectation and the product. For some products which have a low
demand and which are of high value, it is preferable to centralize the stock at the
manufacturing location and deliver based on direct customer order or order
through the retailer.
More product variety can be offered to the customer in this case
The disadvantages of this distribution model are:
This model requires a higher investment in IT resources and connectivity at all
levels –manufacturer, retailer and customer.
The planning and coordination efforts are also higher
There might be instances of conflict of interest with the other channel partners
The pre-requisites of this distribution model are:
Good IT systems to enable order processing and order tracking
Tight central coordination and planning
With the increasing product variety and the customer buying behavior undergoing a
change due to the multiple modes available for servicing demand, most manufacturers
are looking at establishing a multi-channel distribution model to be in closer touch with
the customer. This model requires trained and experienced planners who can exert a
strong control and monitoring of the entire channel and a good IT backbone network to
enable real time information flow.
Comparing Distribution Network Models
The above discussion explored the options available to manufacturers in setting up
distribution networks. The comparison of these can be done on an objective basis based
on observation on many variables. This is presented as a compiled set for consideration
as thumb rules. Within each the performance characteristic can vary depending on the
product and customer expectations. The ranking of each of these has been done on the
cost and service level variables. A ranking of 1 indicates a higher level of performance
than a ranking of 5
Direct
delivery
from the
manufact
urer to the
customer
Delivery
through in-
transit
mixing from
the
manufactur
er storage
facility
Delivery
through
packaged
carrier
delivery from
the
distributor
storage
facility
Last mile
delivery
from the
distributor
storage
facility
Customer
pickup
from the
manufactu
rer/distribu
tor
storage
facility
Response time 5 3 2 1 1
Product variety
1 1 3 3 3
Product availability
1 1 2 2 3
Customer experience
5 4 3 1 2
Order visibility 5 5 3 2 2
Inventory levels
1 1 3 3 3
Transportation cost
5 3 3 3 1
Warehousing cost
1 1 3 3 4
Information cost
5 5 2 3 3
The multi-channel distribution network has not been included in the above tables as the
all the above options are potentially available to the planner and he could select the best
option, based on the product, cost and service level requirements.
3. Distribution Network Planning
The discussion above gave a framework to plan for distribution based on the
performance on various characteristics like inventory, transportation, service levels,
facilities cost etc; . But when the actual design of the distribution channel is approached
one tool which is employed frequently is Channel Mapping.
A Channel map, which is essentially a map of the product and information flow amongst
the various participants in the channel. A channel map is developed at the strategic level
after detailed discussion and analysis since the decisions can not be easily reversed.
Hence lot of research and usage of analytical techniques goes into the design of
distribution channels.
The purpose of the channel mapping is to provide a blueprint for the possible design
options based on the current markets served, the buying characteristics, the cost
structure, the viability in terms of transportation and warehousing, the capital investment
required and the future demands to be addressed. As can be seen all these decisions
flow from the overall Business plan of the firm. For firms which have a distribution
network in place, the Channel mapping exercise proves useful as it helps to review and
for firms which are in the process of establishing a channel structure, the channel
mapping process the market knowledge gets distilled through the channel mapping
process.
An example of a Clothing company which manufactures fashion garments as well as
uniforms and the like for institutional customers and deals with multiple market segments
in outlined below.
CHAPTER - 3
MANUFACTURER
Agents National Account Sales
Military Distributors
Military installations
Garments Distributors
Company Sales Force
Wholesalers
Large multi brand retail stores
Exclusive retail storesHospitals Hotels Factories
Consumers
In the above distribution channel map, three distinct market segments have been
identified 1) consumers 2) institutional user and 3) military installations.
The mapping process details the fulfillment to these segments through the other channel
partners and intermediaries. Some of these intermediaries could be on an exclusive
basis with the manufacturer or they could be the channel partners for competing
products also.
The channel mapping should not construct the flow of material and information
schematically but also analyze the volume of material which passes through each
individual network. For example the volume of goods that passes to the channel catering
to the military installations and to exclusive retail outlets should be done and the range of
distinctive activities performed by each channel member should be detailed. The costs
associated with serving each customer segment should be captured.
One advantage of channel mapping is the identification of duplication and justification or
solution for the same. In the above example the institutional segment identified above,
there is duplication in terms of the brokers, wholesalers and the manufacturers’ sales
team interaction. It should be looked into if there are specific characteristics of the
market which necessitate this kind of interaction. The channel mapping also helps
determine the financial implication at each stage of the channel. In the above example,
is it financially viable to merge the broker and the wholesaler channel to achieve greater
economies in transportation? Or is there some other reconfiguration required to achieve
the efficiencies? Channel mapping helps to understand and is the starting point for
developing options and tradeoffs.
Though the Channel mapping is a useful tool to understand the entire channel structure,
the material and information flow, the specific decisions which need to be taken for
network planning are:
Role of facilities –warehouse, plant, transportation related facilities
Location of facilities – geographical spread of the facilities
Allocation of capacity to facilities – the installed capacity of the facilities
Matching the market and sources of supply – identifying the appropriate supply
source and the markets that can be served from there.
One of the key facts in considering the above factors for network planning is that each
one is inter-related and has a significant impact on the supply chain performance.
The role of facilities is an important decision as it determines the amount of flexibility that
is available in the supply chain. Some of the facilities could be wholly owned or partly
owned or outsourced to a third party. The role varies depending on the overall supply
chain strategy. For example in automotive manufacturing the role of the facility in China
and India is to serve as a supply base to the assembly locations located in Europe or
North America. Some of the facilities are wholly owned through backward integration by
the primary automobile manufacturer and some are captive outsourced relationships.
Any imbalance of demand and supply can affect the entire supply chain because of the
huge installed capacity. In the case of an outsourced relationship the manufacturer has a
greater flexibility to scout for alternative channels where as the owned facility might
required a fixed capacity to be advantageous in terms of cost saving.
The next level of decision is in terms of locating the facility. The common approach is to
be close to the demand concentration points. But this approach might not be correct in
terms of overall supply chain costs. Location identification is crucial because it helps to
achieve low costs while being responsive to the demand.
Capacity allocation is a also an important decision which determines the costs and the
responsiveness of the supply chain. Though capacity allocation decisions are easier to
change than facility location, they tend to be fixed for the medium term. Allocating too
much capacity to a facility might risk in terms of high costs if the demand falls due to
non-utilization of capacity and at the same time, allocating too less capacity affects the
responsiveness of the supply chain to cater to the demand.
The next level of decision regarding the matching of supply sources and demand points
is a important since it determines the level of inventory, the transportation modes and
cost and the service level offered. This decision could be dynamic to accommodate
changes in the market. An example of this is the emergence of e-commerce as an
integral part of the supply chain ordering. Manufacturers are trying to innovate around
this by setting up mixed supply sources for orders which are originating though the
internet channels like direct delivery from the manufacturing locations or from the
nearest storage facility.
Factors Influencing Distribution Network Decisions
The factors influencing network design can be classified under the following broad heads
-- strategic, technological, macroeconomic, political, infrastructure, competitive and
operational.
Strategic Factors
Companies tend to follow one of the two major strategic variables in their overall strategy
–cost or responsiveness. Firms following the cost strategy would focus on cost
leadership trough various means –low cost plant operations, procurement efficiencies,
smaller vendor base etc; they would not invest in multiple facilities because of cost
reasons and would distribute mostly through the direct distribution route even if the
facilities are far from the demand points. On the other hand firms focusing on
responsiveness would try to compete on the basis of innovative products, product variety
and shorter lead times to the customers. They would establish a distribution network
which reaches out to the customer through various levels of intermediaries. Some firms
can choose to use both the strategies based on the customer/product segment that is
targeted by them.
For example shoe manufacturer Nike has production facilities located globally and in
many parts of Asia. The facilities in China and Indonesia focus on the cost aspects
through high economies of scale and produce the mass market lower priced shoes. The
facilities in Taiwan and Korea on the other hand focus on responsiveness and produce
the higher priced and design intensive, high variety of shoes. Hence it is important for a
firm to think in terms of its overall business strategy even while thinking of supply chain
design. The following classification looks at the strategic role for various facilities of a
firm in the Supply Chain:
Offshore facility: This is primarily a low cost facility, which focuses on exports and
is a competitive tool for manufacturers who are looking at benefiting from the
lower cost structure in these geographical regions away from their home market.
To support this strategy the labour cost should be low and the raw material
should be available at a relatively low cost locally. On of the reasons the
manufacturing outsourcing to the off shore facilities is prevalent in the Asian
region successfully.
Source facility: This is further up in the value chain than the off shore facility. The
major difference being that these facilities produce for the global market. Though
the focus is still on the cost the complete production is exported due to reasons
of low cost, well developed infrastructure, skilled manpower and high quality. An
example of these facilities is the Nike plant network in Korea and Taiwan. In
Nike’s case both these facilities started of as off shore facilities and over a period
of time have become involved in new product development and manufacture
products for sale globally.
Server facility: These facilities are focused on serving local or regional demand of
the places where they are located. The primary reason for setting up a server
facility is to overcome the tariff barriers like high taxes, local content requirement
and other regulations by the government. An example of this was the decision by
Suzuki to partner with the Indian government to set up Maruti Udyog. This facility
was set up as a server facility in the country as the import tariffs were very high
and the logistics costs of importing from other countries into India made is
unviable.
Contributor facility: A server facility can migrate to become a server facility over a
period of time by assuming greater responsibility of product development,
process improvements, product modification/customization. A server facility that
is well managed can potentially become a contributor facility. The Maruti plant in
India started of as the server facility, but over a period of time it has assumed a
role of contributor facility in the Suzuki network.
Outpost facility: These are facilities established to obtain access to local
knowledge and skill that may be available within the existing network. This might
also play the role of a server facility but the primary purpose is to be a source of
knowledge for the entire network.
Lead facilities: Facilities that create new products, process improvements and
technologies for the entire network. These are facilities with access to trained
and skilled manpower and technical resources.
Technological Factors
The production technology available and deployed has a significant impact on the supply
chain network. If the technology supports large production scenario, then the economies
of scale dictate the setting up of few large production facilities. This is the case of the
chip manufacturing where the installed capacity and the technology support large scale
manufacturing. Firms in this industry have set up few facilities which cater to the global
requirement from one or two facilities. On the other hand if the facilities have a low fixed
cost then many regional facilities can be set up to cater to the regional/local demand.
This is the case with the bottling plant of Pepsi which has many facilities in each country
of operation. If the production technology is inflexible then the firm has t set up many
local facilities to cater to the demand of each region and on the other hand a flexible
production technology would help in consolidating the manufacturing thus helping in
aggregating inventories and lower costs in production.
Macro economic factors
These are factors which are not internal to the firm but significantly influence the network
structure. These include taxes, tariffs, import and export regulations, exchange rates and
such. For instance with the introduction of a unified VAT (value added tax) structure in
India, the existing decentralized distribution structure is slated to undergo a change and
might be replaced by a more centralized structure because of the uniformities in tax
structure across states.
Political Factors
While deciding on the network structure companies have to take decisions on the
location of facilities in various regions in the world. One of the influencers of this decision
is the political system prevailing in the country. If the company feels that there is a
adequate legal system for protecting its rights then it is a positive influencer. This
decision is difficult to quantify and companies have to make a subjective evaluation
based on the information and research available to them.
Infrastructure factors
The available infrastructure in terms of roads, ports, rail movement, air cargo, broad
band etc; significantly impacts the supply chain in terms of the transaction cost and the
responsiveness that it can deliver. Most firms would consider this as one of the important
criteria for locating facilities. An example of this is China, which has got significant
foreign investment in the manufacturing sector in places like Shanghai, Guangzhou
though these are high cost locations, because of the excellent infrastructure developed
by the local government. This factor is also important because it can over ride the
disadvantages of the other factors mentioned above.
Competitive Factors
The competitor action also influences the decision on distribution network planning.
Firms might choose to locate at different places farther from each other or closer to each
other depending on factors like availability of raw material, manpower resources and
infrastructure facilities. An example of this is companies locating retail outlets in a single
place (mall) to take advantage of the customer buying behavior and expectation of
locating all products in a single place, thus saving on the total transportation cost.
Another example of this is the emergence of hubs because of the local advantages. For
instance Chennai has emerged as a manufacturing hub for automotive and auto
component manufacturers because of the presence of large number of vendors and
suppliers catering to this industry – MRF, TVS group companies, Sundaram Clayton,
Ashok Leyland, Ford Motors etc; Future competitors might choose to locate a facility in
this region because of the advantages of a well established supply base.
Delivery Lead time and Local Facilities
Companies that are competing based on the customer responsiveness need to locate
their facility closer to the customer. For instance companies that are in retailing locate
their facility based on the geographic reach that can be achieved from the facility.
Alternately companies that are delivering directly to customers might use a faster mode
of transportation to reduce the facility cost but this might increase the overall
transportation cost. The decision to locate a facility or substitute by faster mode of
transportation depends on the customer buying behaviour. For instance the customer
might be willing to travel for a longer distance to reach a facility which is selling home
PCs at a lower cost but might be unwilling to do so while buying medical products. The
overall network strategy should consider this to deploy the optimal mix of facilities and
transportation modes.
Logistics and Facility Cost
Total logistics cost is computed as the sum of the inventory, transportation and facilities
cost. Firms wishing to reduce the total logistics cost must focus on reducing the
individual components by choosing an appropriate mix of the number of facilities and the
location of the facilities. It has been observed that inventory and facilities costs increase
as the number of facilities increase and the transportation cost decreases up to a point
as the number of facilities increase after which the facilities are stretched too thin and
the overall transportation costs increase. There might also be cases where the weight to
volume ratio might be significantly impacted due to the characteristics of the raw material
and finished product. For example iron ore is processed to make steel the output is a
small fraction of the input material used. Locating the facility close to the source of the
raw material is a good strategy to economize on the overall transportation cost.
4. Network Design & Optimization Approach and Techniques
In the rapidly changing business environment companies need to assess the viability of
their existing distribution networks and new firms entering the market need to consider
many factors while establishing a network structure. The important issues that need to
be decided upon as detailed above are: facility role, facility location, capacity allocation,
allocating demand and supply.
Answers to such issues are complex and data-intensive. The complexity is due to factors
detailed earlier –political, macro economic, competitive etc; The data-intensiveness is
due to the large amount of data required to take decisions on the network structure. The
typical information requirements include possible service alternatives, costs, technology
applications. The process requires a structured approach and methodology for effective
analysis. This process has been segmented into three phases – Problem definition and
Planning, Data Collection and analysis and recommendations and implementation. The
generalized structure for this is given below and shows a phased approach to network
design.
CHAPTER - 4
Feasibility Assessment
Project Planning
Assumptions and Data Collection
Analysis
Development of recommendations
Implementation
PHASE 1
PHASE 2
PHASE 3
Phase 1: Problem definition and Planning
This phase provides the foundation for the network planning and design process. The
feasibility assessment process essentially evaluates the prevailing conditions and
identifies the need for the changed situation and the justification for the same through
situational analysis, supporting logic development and cost/benefit estimation.
The situational analysis involves in-depth understanding and appraisal of the internal
processes, market assessment, and competitive evaluation to arrive at potential
improvement areas.
The internal review is required for developing a clear understanding of the logistics
processes. The internal review focuses on historical performance, data, strategies,
operations and tactical processes and practices. Each element of the logistics process
should be carefully examined with respect to the stated objectives and the capabilities to
meet those objectives. An example of the internal review processes that are studied in
Materials Management as below.
Material Management Processes
What is the current material flow through plants and distribution centers?
What processes are performed at each manufacturing location and distribution
centre?
Material Management Decisions
How manufacturing and distribution are centre capacity allocation decisions
made?
How are production planning and scheduling decisions mad?
Material Management Measurable
What are the manufacturing and distribution centre capacity limitations?
What are the key measures of materials management performance?
The external assessment focuses on external relationships with customers, suppliers
and consumers. The assessment should consider processes and competitors
capabilities. An example of the external assessment for suppliers would focus on issues
like:
What value added services are suppliers providing?
What are the major bottlenecks with current suppliers
What are the opportunities to outsource activities?
How can processes be changed to reduce bottlenecks?
Supporting Logic Development
The purpose of the supporting logic development is to integrate the findings from internal
and external review and assessment. This process critically reviews the potential
opportunities and investigation of whether additional investigation is required. This
process also evaluates practices with a factual analysis to remove biases. This process
should enable the generation of some alternatives for further evaluation and
consideration.
Cost/Benefit Estimation
The final feasibility assessment task is the estimation of the potential benefits of
performing a logistics analysis and implementation. The benefits can be looked at as
service improvements, cost reduction and cost prevention. Service improvements
include results that enhance availability, quality or capability. Cost reduction benefits
accrue from one time reduction in certain areas or elimination of non value adding tasks.
Cost prevention involves improvements in operations and processes.
Project Planning
This is the second Phase 1 activity and involves setting up the statement of objectives
and the statement of constraints for network design.
The statement of objectives involves measurable and targets under various heads based
on the areas identified during situational analysis. This states the objectives in
quantifiable terms, for example
Inventory availability of 95%
Delivery of 98% of orders within 48 hours of order receipt
Specific definition of the objectives helps to direct distribution network design efforts to
achieve customer service performance levels.
The statement of constraints lists the available constraints. These constraints could be
due to the cost needed to reverse existing channel structure in terms of location of
facilities, product mix at facilities or other capacity related changes.
Phase 2: Data Collection and Analysis
Once the feasibility assessment and project plan are completed, Phase 2 focuses on
data collection and analysis. The focus of this phase is to define the analytical
approaches and techniques and collect data.
The first step is determination of appropriate analysis approaches and techniques. The
most common approaches available are analytical, simulation and optimization. The
analytical approach uses standard numerical methods such as those available through
spreadsheets to evaluate alternatives. A simulation approach is use when there is lot of
uncertainty involved. This makes extensive use of software tools that can model flows,
activity levels and performance characteristics.
For example supply chain dynamic simulation can be used to illustrate the trade-off
between inventory allocation strategy and supply chain performance. Optimization uses
linear programming to evaluate alternatives and select the best one. This is smaller in
scope than the simulation based solutions.
The focus of the analysis is to define the analysis question, completing the analyses of
alternatives and doing a sensitivity analysis.
The first task defines the specific analysis questions concerning alternatives and the
range of acceptability of alternatives. An example of this is given below, where the key
question is distribution site location. Suppose that the network planning effort is on
identifying the network of distribution facilities to serve the Indian market. Assume that
the current network uses four distribution centers – Chennai, Delhi, Mumbai and Kolkata.
The table below summarizes the volumes, costs and service characteristics of the
existing system.
Distribution
Centre
Location
Shipment
volume(‘000
tones)
Inbound
Transportation
cost(lakh Rs)
Outbound
Transportation
cost (lakh Rs)
Inventory
carrying
cost(lakh
Rs)
Total
cost(lakh
Rs)
Chennai 693 317 264 476 1057
Delhi 135 62 62 92 216
Mumbai 455 208 284 303 795
Kolkata 10 5 5 6 16
TOTAL 1293 592 615 877 2777
Likely questions for the analysis include 1) what is the performance impact of removing
Kolkata distribution centre 2) What is the performance impact of merging Chennai and
Kolkata distribution centre. These questions represent a small fraction of the likely
alternatives that can be considered.
The next step is to evaluate the available alternatives. The analysis must be completed
to take into account all the performance characteristics of the alternative network design
strategies. After this the alternatives can be subject to further sensitivity analysis. Here
uncontrollable factors such as demand, interest cost, and competitive actions are varied
to assess each alternatives ability to meet the set objectives. In the case of the above
example if one of the alternative is to start another distribution centre to meet the
customer service level requirements the sensitivity analysis investigates the
appropriateness of this solution for different volumes and costs. For example would five
distribution centers be a good option even if the volume increased or decreased by 10%.
Phase III: Recommendations and Implementation
Alternatives and sensitivity analysis are reviewed to determine the best alternative and
evaluate costs and benefits. This done by comparing present cost and service levels
with the developed alternatives and projecting the same into the future. The ideal cost-
benefit compares the alternatives for a base period and then projects the comparative
operations across some planning horizon. For the example of the distribution centers
detailed above let us assume that the management is evaluating three alternatives 1)
Expanding existing facilities 2) expanding existing facilities and adding two more 3)
expanding existing facilities and adding three more. The cost vs service results of the
three alternatives are represented graphically below. These graphs show dramatically
different performance characteristics for the three alternatives. Alternative 1 shows a low
cost initially but the service level is low and declines further as volumes grow in the
distant markets. Alternative 2 is the lowest cost option and service level increases as the
volume increases. Alternative 3 offers substantially better service though the initial costs
are very high.
Total Cost Performance
6
8
10
12
14
16
18
20
22
0 1 2 3 4 5 6 7 8 9 10
Years into the future
Tota
l Log
istic
s C
ost
Alternative 1
Alternative 2
Alternative 3
Service level Performance
75
80
85
90
95
0 1 2 3 4 5 6 7 8 9 10
Years into the future
Volu
me
deliv
ered
with
in 5
day
s of
ord
er
Alternative 1
Alternative 2
Alternative 3
Alternative 1 is the lowest cost alternative for the first year, Alternative 2 is better from
year 5 to year 8. Evaluating the above options the company has the option of enhancing
the competitive position by offering better than competitor service by using alternative 3,
though at a higher cost. After year 8 the alternative 3 is the most attractive in terms of
cost.
If prior to the planning process management believed that additional facilities would be
required to maintain desired service levels and the total cost would increase
substantially with increased warehouse facilities. But with the above analysis, the
decision making becomes clearer and the most effective long term plan can be identified
to maintain competitive position.
Decision Analysis Methods and Techniques
One of the most widely used optimization techniques are the mathematical programming
methods. Linear Programming is one of the common techniques and it helps to select
the optimal network design from a number of available options while operating in defined
constraints.
The application of LP is in cases where two or more locations are competing for limited
resources, and the operating conditions should be capable of linear approximation. But it
should be remembered that a solution which is mathematically possible might not be
feasible logistically.
One of the most widely used forms of LP for network problems is Network Optimization.
Network optimization treats the distribution network as consisting of nodes to identify
production plants, warehouses and markets and transportation links. Costs are incurred
for handling goods at the nodes and the movement happens in arcs. The network model
objective is to minimize the total production, warehousing, inventory and transportation
costs subject to supply, demand and capacity constraints.
Mixed integer programming is another optimization technique successfully applied to
distribution network problems. This technique allows lot of flexibility in which enables it to
incorporate multiple variables. The main advantage of a mixed integer programming is
that fixed as well as variable costs can be included in the analysis. In other words mixed
integer programming allows solutions to reflect the real life situation of increasing costs
with increase in the number and size of the warehouses and the spread of the
distribution network.
Another network analysis method is Static Simulation, which has a wide applicability and
attempts to replicate a situation. It can be defined as the process of designing a model of
a real system and conducting experiments with this model for the purpose of either
understanding system behaviour or evaluating various strategies within the limits
imposed by defined criteria for the system.
The figure below illustrates a typical network and the major cost components. The
network includes plants, distribution centers, and markets. The major cost components
are raw material, sourcing, manufacturing, inbound transportation and outbound
transportation and inventory carrying cost.
Plant 1 Plant 2 Plant 3
DC DC DC DC
Markets
Static simulation evaluates product flow as if it all occurred at a single point of time
during the period under consideration. In this sense the primary difference between
static and dynamic simulation is the manner in which time related events are treated.
Dynamic simulation evaluates performance across time, static simulation does not
consider the changes happening between and across time periods.
The above discussion focuses on the factors to be considered while making supply
chain network decisions and also provides a useful framework for analysis and usage of
mathematical techniques for making network decisions. Apart from the above, some
issues that managers consider while making network planning decisions:
Expense Components
Plant handling+
Inbound Freight+
Handling at the DC+
Inventory Carrying +
Primary Outbound Transportation+
Information handling+
Secondary transportation
TOTAL COST
1) The total lifespan of the facilities is longer than the decision period: The decision to
locate a facility and the ownership structure is a long term decision which can not be
reversed easily. For instance a food distributor recently moved his regional warehouse
away from the city to a less expensive location to reduce the facility cost. But with the
introduction of VAT the location became a burden in terms of the extra tax due to
additional handling and also it was difficult to dispose it, since it was away from the city.
Hence managers must consider the fact that any facility –manufacturing, warehouse –
that they put up will stay there for a long period of time. To mitigate the risk it might be a
good option to go in for an outsourcing arrangement with a service provider so that the
ownership and fixed costs are avoided.
2) Focus on infrastructure availability: For any facility to be functioning efficiently the
available infrastructure at the location plays a great role. Well developed infrastructure
like broad band connectivity, well maintained connected highways, availability of rail
linkages and wagons, access to ports are important. The overall cost for the facility is
also determined by how low the transaction cost is and the service level is determined
by turnaround times.
3) Taxes, tariffs and incentives: With the pace of economic activity especially in the
manufacturing going up due to the MNCs looking at India as a major hub, many
incentives like lower surcharge, tax holidays, access to low cost facilities is being
provided by the local governments. These have to be well understood and taken into
account while planning to locate a facility. Essentially these reduce the risk of locating a
facility and lower the fixed cost of setting up operations.
4) Ownership structure of the distribution network: The distribution network as has been
seen earlier has a number of players and the manufacturer has to exert control over
various aspects of the network. If the manufacturer owns the various stages of the
distribution network like facilities, warehouses and transportation then he can optimize
theses for greater benefit of the entire supply chain. But if there are multiple players
owning different set of resources as is normally the case then each would try to optimize
his own resources and not necessarily the entire network. Trying to optimize the entire
network requires great effort and coordination.
TRANSPORTATION
This section deals with the various issues related to physical movement of goods, the
transportation modes, the economics of the transportation activity, the transportation
planning process and techniques and the trends in transportation like usage of IT tools.
1. Role of Transportation in the Supply Chain
2. Transportation Principles and Participants
3. Transportation Modes, Performance Characteristics and Selection
4. Transportation performance, costs and value measures
5. Transportation Routing Decisions
6. Transit Operations Software
7. Advanced Fleet Management System
8. Intermodal Freight Technology
9. Transportation Security Initiatives And Role Of Technology
5. Role of Transportation in the Supply Chain
Transportation is one of the critical elements of the supply chain, along with inventory
and warehousing. As an activity it is concerned with the movement of goods from a
source to a destination. It has significant cost implications in terms of the mode
employed and the weight/volume of goods and the distance covered. It is also a major
economic activity which provides direct and indirect employment to millions of people.
Transportation accounts for around 6% of the total GDP in the country. It is also a large
fraction of the total cost of the goods sold through the distribution channels.
Category Proportion of total logistics cost
TRANSPORTATION 45%
INVENTORY & WAREHOUSING 25%
PACKING & LOSSES 30%
Total logistics cost (Rs.billion) 2,800
Total GDP (Rs.billion) 22,000
Total logistics cost as% GDP 13%
Year 2002
It is the key to the success for many businesses especially where responsiveness and
product availability are key factors. For example Walmart, the biggest retailer in USA
uses transportation as a strategic and tactical tool to lower costs. There is frequent
replenishment to the stores from the central hub or from the suppliers to keep the
inventory costs low. To lower the costs of transportation, Wal-Mart consolidates
inventory at its central hub and thus ensures higher truck utilization for every trip.
CHAPTER - 5
To ensure faster turnaround for the trucks, Walmart has pioneered the usage of cross-
docking where in incoming material from various sources are segregated, sorted and
moved on to another truck for outbound deliveries to the same customer. This eliminates
the need for storing and multiple handling thus saving cost and time. This example
illustrates both the innovative usage of transportation and also the inter-relationship
between transportation and inventory management.
Transportation is a crucial link between the various stages of the supply chain. With the
growth of global trade the transportation infrastructure and the IT tools are contributing
towards improving the transportation efficiencies for lower supply chain costs. Consider
the case of India, which uses maritime transportation for more than 95% of the exports
and imports. The port infrastructure in terms of container handling, road and rail linkages
influence the performance of the supply chain. The PC manufacturer Dell uses an
extensive transportation network for movement of products from suppliers to the
assembly plants located all over the world and then dispatches from each plant to the
individual customers.
From the above discussion it can be concluded that:
Transportation contributes to the overall economic activity and provides
opportunity for growth under competitive conditions. The more efficient the
transportation the lower the transaction costs for the companies operating in the
economy
It supports greater reach and availability for the products in the market place
The wider the product distribution and reach greater the role for transportation
and more the number of opportunities for companies to exploit the economies of
scale
Transportation is a significant cost influencer and has more than 25% of the
share in the total logistics costs. This can influence the price of the end products.
The transportation activity should not be considered in isolation, but in
conjunction with the other supply chain activities and it is more than physical
delivery. There is a need to deploy and support the transportation planning
process with IT tools and techniques.
Next we look at factors which affect the transportation decisions in a Supply Chain. The
factors can be looked at from the view point of a transporter or a shipper (company using
/contracting the transporter). For the shipper the factors influencing decisions of
transportation are:
Transportation Cost: This is calculated as the total cost paid to the transporters
for inbound and outbound transportation. Inbound transportation refers to the
cost incurred for the movement of raw material and other inputs for
manufacturing and outbound transportation refers to the movement of finished
products to the customer. The transportation costs vary based on the transporter
offered price for movement of goods. These costs can be considered to be purely
variable costs if the shipper does not own the transportation resources.
Inventory cost: These costs are towards holding inventory in various stages of
the supply chain. For transportation decisions these are considered as fixed for
short term transportation and variable when considering the design of the total
distribution network.
Facility cost: These are the costs for maintaining the various facilities –factories,
warehouses etc; and these are considered as fixed for making transportation
decisions.
Processing cost: These are the costs associated with loading, unloading and
handling of goods. These are considered as variable costs for transportation
decisions. For some transportation modes like through container, these can be
quite significant.
A shipper should consider all the above costs while making transportation decisions,
since these impact the overall cost of the supply chain and the product and the
service level offered to the customer. Within these there is scope for making trade-
offs where necessary based on the overall supply chain strategy – focus on cost or
responsiveness.
For a transporter the factors that are considered while making decisions are:
Vehicle related costs: These are the costs towards the purchase or lease of a
vehicle. These costs are considered fixed for the short term and taking into
account whether the vehicle is operating or not and for the medium or long
term these costs are considered as variable. For strategic and long term
purpose the vehicle related costs depend on the number of vehicles owned.
Fixed operating expenses: These are the costs associated with maintaining
transportation assets like insurance, taxes, labour etc; If the vehicle operators
are paid irrespective of the trips made then they would fall within this
category.
Operations related expenses: This is the cost incurred towards labour, fuel,
which are independent of the quantity transported. These depend on the
duration of the trip and independent of the quantity carried.
Quantity related costs: Under this category are the costs in loading, unloading
and handling. A small portion of the fuel cost also depends on the quantity
carried.
Overhead costs: These costs are incurred for planning, coordination,
scheduling and any investment in IT tools and applications.
A transporter should consider all the above costs while making a choice of the markets it
wishes to serve. If he operates in a market where responsiveness is crucial then there
will be cost implications in terms of the size of the fleet and the operating expenses. But
if he focuses on serving price sensitive markets then ability to exploit economies of scale
in terms of backhaul etc; would be crucial.
6. Transportation Principles and Participants
The two fundamental economic principles for transportation decisions are – economy of scale and economy of distance.
The principle of Economy of Scale states that as the size of the shipment increases the
per unit cost of weight transported decreases. For example shipments that use the entire
carrying capacity of a truck have a lower cost per weight (kg or tonne) than those
shipments which use a smaller portion of the total truck capacity. It is also observed that
larger capacity transportation vehicle (rail, ship) has a lower per unit cost per weight than
smaller capacity vehicle. The transportation economies of scale operate in such a way
that the fixed cost of moving a shipment is spread over a larger weight. These fixed
costs as detailed earlier are: loading, unloading, documentation, coordination etc; Such
costs are considered fixed because they do not vary based on the shipment volume.
This means that the fixed costs of moving a shipment of 1000 tonnes and 100 tonnes is
the same.
The principle of Economy of Distance states that the transportation cost per unit weight
decreases as the transportation distance increases. This means that the cost to move a
shipment for 1000 kms will cost less than to move two shipments of the same weight
each moving 500 kms. This is also referred to as the tapering principle. The working is
similar to that of economy of scale, in that the fixed costs are spread over longer
distance, resulting in lower per km cost.
The above two principles need to be considered while making transportation decisions.
The goal should be to maximize the shipment size and the ship for longer distance by
offering the desired service level to the customer.
CHAPTER - 6
Transportation Participants
Transportation decisions are taken by all the members in the supply chain and the
participants in the decision making can be classified as – shipper, transporter,
destination or consignee, agents and brokers, the government, internet and the public at
large.
Some of these participants influence an overwhelming influence on the transportation
network, and all the players are significantly influenced by the decisions taken in public
domain by the government and the local authorities. For our discussion the government
should be interpreted as comprising both the central authority and also at the regional or
local level for specific laws regulating transportation movement.
The figure below illustrates the inter-relationship between each of the players. It is also
useful to look at the individual participant’s role and perspective of each party in the
supply chain.
Public
Government
Agents/Brokers/
Transporters
Shipper Consignee/Receiver
Internet
Shipper and Consignee: The transaction between the shipper and consignee covers
movement of goods from a source to the destination, the pick and delivery schedules,
guarantees of safe delivery, and related documentation.
Agents/Brokers/Transporters: The transporter actually performs the task of loading,
transporting and unloading at the premises. He is guided by the principles of economies
of scale and transportation distance. He seeks to maximize his delivery by coordinating
the pickup from multiple shippers so that his costs of transportation are covered and he
maximizes his return. The agents/brokers perform the task of matching the shipper to
the transporter.
Government: The government has an interest in the smooth and efficient performance of
the transportation industry since it has a direct impact on the economic and social well
being. In some cases like railways it is sole transporter. The government also looks at
regulating this sector through multiple laws on the carriage of different types of goods
and also through entry and exit timings into the residential zones of the cities or towns.
Internet: The internet is emerging as the backbone of the industry primarily through
exchange of information. The earliest usage has been in matching freight to the
available shipment in the market. This has changed the role of the various intermediaries
in the market. The other role is as a B2B market place for procurement of fuel,
insurance, spares, consumables etc; The other major use of the internet is to enable the
tracking and tracing of shipments from the source to the destination. All these topics
would be dealt in greater detail in the later portion.
Public: The public has a stake in the way the transportation system functions and they
indirectly create demand for transportation when they buy goods. Any increase in cost of
transportation increases the overall product price. Also the concerns are there in
environmental regulations and impact on safety.
7. Transportation Modes, Performance Characteristics and Selection
There are essentially seven modes of transportation that are used by shippers to reach
out to the customers in the supply chain.
Roadways
Railways
Waterways
Airways
Pipelines
Ropeways
Multimodal
These can be further classified and looked as below:
MODES OF TRANSPORTATION
Roadways Railways Airways Pipelines Ropeways Intermodal
Regular freight
Package carrier
Waterways
Domestic water transport
Foreign Water transport
Coastal Inland
CHAPTER - 7
Airways
Airways carry both freight and cargo. Airways have a high fixed cost compared to other
modes of transport because of the infrastructure and equipment. The fuel costs and
manpower costs are variable and depend on the number of trips made. The goal of
airlines as is the case with other modes is to maximize the flying time and of a plane and
the revenue generated per trip.
Airways offer the benefit of faster delivery times but are the most expensive mode of
transportation. They are ideally suited for emergency shipment and for movement of
high value and low volume/weight goods. For example Dell uses airways exclusively for
deliveries from plants located in Asia. Even the pharmaceutical industry in India uses
this mode of transportation for exports. The general rule for selecting this mode of
transportation is the time sensitivity of the product. For instance high fashion clothing,
fresh cut flowers air might be the only feasible mode of transportation. Some of the
major air transportation companies are UPS, DHL, and FedEx.
Crucial success factor for the air transport is the well developed airport facilities and
infrastructure like ground handling, connectivity, storage facilities.
Road Transportation
Road transportation is the pre-dominant mode of transportation of goods in the country
and accounts for more than 75% of the total freight cost. The trucking industry can be
classified based on the size of the vehicle in operation and the capacity as LTL(less than
truck load) or TL(truck load). The TL operators charge based on the full carrying capacity
of the truck irrespective of the load actually carried. The LT operators charge based on
the weight carried and the distance traveled. The major advantage of road transportation
also called as trucking, is the ability to offer door to door pick up and delivery.
Though this is a more expensive operation than railways it is due to this reason that it is
the most popular apart from the fact that it is easily contracted. The fixed costs are
relatively lower for TL operations. The idle time and the travel distance between
successive shipments add to the costs of operation. The major objective is to minimize
the idle time and get return loads from the destination point reached. Some companies
producing in large batches and shipping frequently find this option very feasible as they
get assured service by the TL operators. The LTL operations are priced to be cheaper
for smaller shipment sizes as TL tends to be cheaper for larger sizes. The LTL operators
can not assure the same level of service as a TL operator because of the need to pick
up multiple shipments, consolidate and then transport.
This mode of transportation relies exclusively on the highway network in the country.
Hence let us briefly touch upon some issues relating to road transportation specific to
India. The roads in India can be classified as national highways, state highways and
district roads and village roads. The responsibilities for maintenance and up gradation is
also split along these lines between the Central and State governments. The
government has set up a body NHAI for developing, maintaining and upgrading the road
network.
The growth in road traffic has been phenomenal because of the increased economic
activity especially manufacturing. According to a recent study the average growth of road
transportation on a yearly basis is around 8%. But the road network has not kept pace
with the increased usage of this mode. The result has been frequent congestions,
accidents, and higher turnaround times near check posts. It is a fact that the average
travel distance of a truck in India is around 250-300 km per day whereas in developed
countries it is between 650-700 kms. This is adversely impacting the supply chain costs
and indirectly increases the costs of the goods and services.
The government has recognized this fact and the Golden Quadrilateral project initiated
to connect the major economic centers of the country is a proof of the action being
taken. This sector has also been opened for foreign participation through joint
investment and many major firms have ventured into this development sector.
Given the size of the industry and the network covered it is envisaged that this mode of
transportation would continue to be the backbone of the transportation network in the
country. Some of the major operators in India who provide road transportation services
are TCI, GATI, SER, ABT, JGT etc;
Railway Transport
This is a mode of transportation operated only by the Government in India. But in other
countries there are many private players like in North America the major operators are
Canadian National, CSX Transportation. This mode is used for transportation of high
density or high weight cargo over very long distances in cases where the cargo is not
time sensitive. For instance this is the dominant mode for transportation of coal from
mines to the thermal power plants and for the transportation of food grains from and to
the FCI warehouses. The rail transport has a very high fixed cost because of the
locomotives, wagons (cars) and the yards. The trip related expenses like fuel and labour
is independent of the number of wagons but varies according to the distance traveled or
time taken. The focus of the rail transportation operators is to reduce the idle time or wait
time for the train. The costing of the rail transportation is economical only when large
shipments are transported over very large distances.
The major issues at rail roads are vehicle and staff scheduling, track maintenance and
repair, availability of empty wagons.
In India demand for rail transportation is growing exponentially but the growth has been
less than the road transport because of inadequate investment and expansion of the
network. The present capacity is mostly devoted to carrying essential commodities like
coal, food grains, and petroleum thus leaving the spare capacity for carrying industrial
produce. Due to this the load is shifting to the road transportation sector.
Water transport
Historically water transport is the earliest form of transportation. It can be classified as
1) Domestic water transport: This is the transport of goods within the geographical
boundaries of the country. These can be further classified as
a) Coastal domestic water transport: This involves transport of products through
inland waterways as well as within domestic ports.
b) Inland domestic water transport: This uses the rivers, canals and lakes of the
country for transportation of goods
2) Foreign Water transport: This is the movement of goods over water across the
domestic waterways onto international waterways and boundaries.
Water transport constitutes over 95% of the total volumes handled for exports and
imports through the ports of India.
This mode of transport is ideally suited for shipment of very large shipments at low cost.
It is however the slowest mode of transport because of the slower in transit time, wait
time and ports and loading and unloading time from ships. This is not a feasible option
for short distances though the domestic water transport is able to operate efficiently
through this mode. In global trade this is the dominant mode of shipment. The range of
products handled is also diverse –cars, food grains, fertilizers, cement, agricultural
produce etc; considering the distances and the volume involved this is the most cost
effective transportation mode.
In the Indian context the major issues faced for the growth of this mode of transportation
are:
1) Inadequate dredging facilities preventing usage of large capacity vessels
2) Port equipment and operational constraints
3) Lack of sufficient container handling facilities
4) Usage of IT tools for planning and coordination is low
Pipeline Transport
Pipeline is primarily used for transportation of crude petroleum, refined petroleum
products and natural gas. This mode of transport has a high fixed cost for setting up and
operationalizing the pipeline. These are effective way of transporting liquids and gases
when relatively large flows are required. This mode is used along with other modes to
cover for any fluctuating demand, for instance crude is also transported through ships
and also through pipelines. In the Indian context, a pipeline is being planned from Iran to
India passing through Pakistan for transporting natural gas.
Ropeways
This is not a well developed model and has not found many applications. This is
sometimes used to connect remote points for transport of essential commodities. For
instance it is being used in Pinjore to transport iron ore from the mine to the shipment
point. It has also some applications for short distances within the premises of
manufacturing plants.
Intermodal transportation
The above discussion focused on the various modes, their performance characteristics
and advantages. The shipper could choose to operate on an exclusive basis with some
mode or use an appropriate mix of various modes to lower costs and increase
responsiveness. This is called as intermodal transportation network. This essentially
combines two or more modes to take advantage of the inherent economies of each and
thus provide an integrated service at lower cost.
This mode of transportation has become common with the adoption of containerization
for shipping. These are the boxes used to intermodal storage and movement between
motor freight, railroads and water transportation. These are typically 8 feet wide, 8 feet
high, or 20 or 40 feet long. Container transport often uses truck/water/rail combination
particularly for global freight.
Key issue to the use of intermodal transportation is the exchange of information to
facilitate shipment transfers between different modes because these transfers often
involve considerable delays.
In India rail and truck combination is popular and is termed as Piggybacking or TOFC
(trailer on flatcar). It is a combination of convenience and flexibility of trucking with long
haul economy of rail.
The table below summarizes the fixed and variable costs for different modes of
transportation.
Rail High fixed cost in equipment, terminals, tracks, wagons etc and low
variable cost
Road Low fixed cost and medium variable cost (fuel, maintenance etc)
Water Medium fixed cost (ships and equipment) and low variable cost
Pipeline Highest fixed cost (construction, pumping equipment) and lowest
variable cost
Air Low fixed cost (aircraft, cargo handling) and high variable cost ( fuel
labour, maintenance)
Transportation Mode Selection
The transportation mode selection process tries to achieve two goals –minimize costs
and maximize the service level. The general principles for mode of transportation are:
1. Match the shipment characteristic with the appropriate mode of transportation.
There should be documented proof of performance for a transportation mode.
2. Evaluate on the basis of cost
3. Developing selection criteria is the final step and the modes should be evaluated
on the basis of these.
The table below ranks the different modes with respect to speed, availability,
dependability, capability and frequency. Note that each has been ranked on a scale of 1
to 5 with 1 being the best option and 5 being the least desirable option.
Speed refers to the elapsed movement time. Availability refers to the ability of a mode to
service any given pair of locations. Dependability refers to potential variance from
expected delivery schedules. Capability refers to the ability of a mode to handle any
transportation requirement. Frequency refers to the quantity of scheduled movements.
This essentially summarizes the above discussion on the various modes and also
enables comparison.
Operating characteristics
Rail Truck Water Pipeline Air
Speed 3 2 4 5 1
Availability 2 1 4 5 3
Dependability 3 2 4 1 5
Capability 2 3 1 5 4
Frequency 4 2 5 1 3
8 . Transportation Performance, Costs And Value Measures
It is necessary to understand the underlying economics of transportation in terms of
factors and characteristics that drive costs and hence the performance. This deals with
four issues, namely 1) the factors that drive costs 2) the cost structures 3) carrier pricing strategy 4) transportation rates
Factors driving costs
The six critical factors that drive transportation costs are – distance, volume, density,
storability, handling, and liability. Though all these impact the costs, some of these might
be specific to the product characteristics.
Distance
Distance is a major influencer of transportation cost since it directly contributes to
variable expenses such as fuel, labour and maintenance. The above graph
demonstrates the relationship between distance and transportation cost. Form the graph
above it can be seen that the cost curve does not start at the origin but at a higher point,
due to the fixed expenses which must be incurred for operating the transportation
irrespective of the distance. Also it can be seen that the cost curve is increasing at a
decreasing rate, which is called the tapering effect, as discussed earlier.
Distance
Cost
CHAPTER - 8
Volume
The second factor is the load volume. This inter-relationship is shown in the graph
above. As the weight of the shipment increases the cost per unit weight decreases. This
relationship exists because the fixed costs of vehicle operation like loading, unloading,
documentation, manpower get allocate over larger volumes thus bringing down the per
unit cost. The implication for shippers is that the response time would be highest when
the weight equal to the carrying capacity of the vehicle is transported. Hence small loads
should be consolidated into large loads to maximize economies of scale.
Density
Weight of the Shipment (tonnes)
Cost per Tonne
Product density
Cost per Tonne
Density is a combination of weight and volume. Weight and volume are important since
transportation cost for any movement is usually quoted in Rs. per unit weight. In terms of
weight and volume, vehicles are constrained more by cubic capacity than by weight.
Since actual vehicle, labour and fuel expenses are not influenced by weight, higher-
density products allow relatively fixed transportation expenses to be spread across more
weight. As a result higher density products are typically assessed at lower transportation
costs per unit weight. The graph above illustrates the relationship of declining cost as the
product density increases.
Stowability
Stowability refers to how the product dimensions can be positioned. Odd size packaging
of different sizes and shapes as well as having excessive weight or length may be
difficult to load or position in the vehicle. This is similar to the density of the product, but
it is possible to have odd shape and dense products. This impacts the cost in the same
way as density. For example while steel coils may have an odd shape, they are dense
and easier to stow than steel rods and piping.
Handling
Special handling equipment may be required to load and unload from trucks, trailers or
ships. In addition to special handling equipment, the manner in which products are
grouped in boxes, pallets or containers affects the transportation.
Liability
This includes product characteristics that can result in damage and claims. Transporters
must either have insurance to protect against possible claims or accept responsibility for
the damages. This can be addressed by improving the packaging and using sufficient
material handling equipment for handling.
Cost Structures
Transportation costs are classified into three categories: fixed, variable, joint and
common costs.
Variable costs: These represent the minimum costs that a transporter must charge to
pay the running expenses of the vehicle. Hence transportation costs must at least cover
the variable costs incurred. The variable costs are incurred for movement of shipments
from point to point and are measured as cost per kilometer or per unit of weight. The
typical components in this include –fuel, labour and maintenance.
Fixed costs: These are expenses that do not change in the short run and must be
serviced even when the vehicles are not operating. These include costs that are not
directly influenced by shipment volumes or distance traveled. These include information
systems, permits, licenses, parking fee etc; The transporter has to look at spreading
these fixed costs over shipment volumes to be profitable.
Joint costs: These are costs incurred to provide a particular service and are
unavoidable. For instance when a transporter goods from Point A to Point X there is a
implicit assumption that he would get shipment volumes to start from Point X to Point A
or elsewhere. These costs are either charged to the shipper who contracted the vehicle
from Point A or a broker or agent must be approached to assist in the backhaul load for
the vehicle. These costs are implied in the freight rates charged by transporters to the
shippers and can be reduced by jointly planning for backhaul shipments.
Common costs: These costs are also not apparent but are sometimes charged by the
transporter to the shipper. These might include the toll and other movement related
expenses. These are allocated to shippers depending on the level of activity like the
number of shipments.
Carrier pricing Strategies
Transporters normally use various strategies for pricing the movement of goods, hence
no single strategy is right. But based on the observation in the market the following are
the broad strategies that are relevant.
Cost-of-service
This is a cost plus approach where the transporter adds a margin on his base costs. For
example if the cost of transportation is Rs.5000/- and the profit margin desired in 10%,
the transporter would charge Rs.5500/- This is the commonly used approach in
transporting low value goods, commodities or in highly competitive markets.
Value-of-service
This strategy costs the transportation based on the value as perceived by the shipper.
For instance if the shipper thinks that transporting 500 kg of high fashion goods is more
critical than transporting 500 kg of soap, since fashion products are worth more, then he
would be willing to pay more for the transportation service. Hence transporters use value
of service strategy for transporting high value goods. This strategy is used by the
express courier and cargo industry for packages and documents.
Combination Pricing
This strategy establishes the cost at an intermediate level between the cost-of-service
and the value-of-service. This must be understood by the shippers for negotiation.
Rate contracts
This strategy is used by shippers for negotiating low transportation rates. Under this the
shipper assures of specific volumes in a period of time in return for committed rates for
that period with a clause for escalation in this period in case of increase in inputs like
fuel. This strategy is used by companies to standardize the costing for transportation.
Transportation rates
In transportation terminology the price paid to move a unit weight of a product between
locations is termed as rate. The rate per unit weight (for the discussion let us consider
this as tonne) is usually based on the shipment origin and destination points, although
the actual rate charged might differ based on the other marginal factors subject to a
minimum. The rates are published by the players in the market and now also available
over the internet as a paid service by companies like infreight.com which track and
publish the rates.
An example of a typical rate sheet is shown below. There are different rates available
also by the good transported for the same weight and the origin-destination points. For
instance different rates would be applicable for transporting packaged dry goods like –
auto parts, FMCG products and different rates for fruits and vegetables.
Rate from Chennai to rest of India for Vegetables and Fruits
Weight(tonne) Bangalore Trivandrum Hyderabad Vijaywada
1
2
5
9
12
14
An alternative to the unit weight rate is the per kilometer charge, which is common to TL
shipments. As discussed earlier TL shipments are designed to reduce multiple handling
and transfer costs. Since the entire vehicle is used in a TL movement and there is no
requirement to transfer the shipment at different points, a per kilometer charge offers a
more appropriate pricing strategy.
In addition to the variable shipment charge applied on either per unit weight or per
kilometer, the other charges that are common are: minimum charge and surcharge. The
minimum charge represents the rate the shipper must pay to make the shipment
irrespective of the weight. For example if the rate is Rs 500 per tonne and the shipper
wishes to transport 1 tonne then the rate applicable is only Rs 500 which might not cover
the fixed cost of the transporter, hence a minimum charge of Rs 1500 might be
specified. The surcharge represents an additional charge designed to cover specific
carrier costs to protect the transporter from changes not anticipated when publishing the
rates.
Some transporters also perform ancillary or value added services. The value added
services provided by a transporter are:
COD – Collect payment on delivery
Inside delivery—deliver product inside a building
Marking or tagging – mark or tag a product as it is transported
Notify before delivery – make appointments before delivery
Reconsignment of delivery—redirect shipments to a new destination while in transit
Redelivery –attempt a second delivery
Residential delivery – deliver at a residence with out a truck dock
Sorting and segregation – sort commodity prior to delivery
Storage – store commodity prior to deliver
9. Transportation Routing Decisions
Transportation analysis focuses on the routing and scheduling of vehicles and seeks to
optimize vehicle and driver utilization while meeting customer service requirements.
Transportation decisions can be classified as either strategic or tactical. Strategic
transportation decisions are concerned with decisions like which modes to use, which
routes to serve and the service level to be offered and the costs. Whereas tactical level
transportation decisions are concerned with daily or weekly routing schedules and
allocation of vehicles based on the current demand.
The overall objective of transportation analysis and planning is to minimize the
combination of vehicles, kilometers and people required to deliver products. The
analysis addresses issues like –
How should deliveries be grouped to form routes?
What is the best delivery sequence for serving customers?
Which routes should be assigned to which customers?
Normally these decisions are taken at the warehouse or the central distribution centre
which also stocks and delivers the goods.
The decisions of routing and scheduling involve the usage of mathematical techniques
and have been well researched for their applicability. These techniques can be broadly
classified under three broad headings – heuristic approached, exact approaches,
interactive approaches and combination approaches.
Heuristic approaches use rule-of thumb clustering or savings techniques to develop
routes by sequentially adding or deleting the intermediate delivery points. Exact or
optimal approaches use mathematical (linear) programming to identify the best routes.
This makes extensive usage of computers and software programming. The problem with
using this approach are the large number of constraints and variables that are needed to
represent even the basic routing or scheduling problem and the impact of this on the
computational time and resources.
CHAPTER - 9
Many companies which are into distribution intensive businesses like home delivery
outlets, retail stores and consumer product companies have implemented basic routing
software. The primary reason for implementing these software are cost savings. Some of
the benefits that can accrue through implementation of routing software are: increased
utilization and fleet size reduction, increased productivity, reduction of personnel,
decreased fuel expenses and increased customer service.
Interactive approaches utilize a combination of simulation, cost calculator or graphics
capability to support an interactive decision process. The decision maker identifies the
alternatives for evaluation. The interactive decision support system then determines
plots and calculates the performance characteristics in terms of the time and costs. The
drawback of this approach is the dependence on the skill of the operator as the size and
the complexity of the problem increases.
Combination of the above approaches has proven very effective. Two criteria are
important when evaluating alternative solution approaches—generalization and
accuracy. Generalization is the ability to efficiently incorporate extensions for special
situations like pick up and deliveries time restrictions, vehicle capacities, legal driving
time etc; Accuracy refers to the ability to closely approximate performance
characteristics and come up with an optimal solution.
The above transportation analysis techniques require three types of data: network, pick
up or delivery demand and operating characteristics. The network defines all the
possible routes and is the backbone of any transportation system analysis. The network
can be defined using street maps of the delivery zone. Each intersection is a node and
the streets become links. The network contains the links and the nodes, the road
distance, the transit time and any other constraints such as limitation on weights or
timing.
This type of street level network is very difficult to develop and maintain. The other
approaches involve plotting the customer points on a grid and then computing the
possible links using the straight line distance. Latitude or Longitude co-ordinates are
often used. An example of this type a grid level system is illustrated below.
The manager of a Distribution centre has orders from 6 customers that are to be
delivered. The location of the DC, each customer on the grid and the order size from the
customer is shown in the table below. The manager feels that the delivery costs are
strongly linked to the distance traveled by the truck and also the distance between
points. The manager has two trucks each capable of carrying 200 units. The goal of the
manager is to assign customers to the trucks and identify a route for each truck with the
goal of minimizing the total distance traveled.
X coordinate Y coordinate Order size
DC 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
The DC manager must first assign customers to each vehicle and then decide on the
vehicles route. After this phase the sequencing of the routes and the route improvement
procedures can be used to decide on the route for each vehicle. One way of doing this is
to use a computational method called savings matrix method. This is a simple to
implement and can be used to assign customers to vehicles even when delivery timings
and other constraints exist. The steps in the savings matrix method are:
Identify the distance matrix
Identify the savings matrix
Assign customers to vehicles or routes
Sequence customers within routes
Transportation Administration
The transportation administration process is concerned with: 1) Operations and Fleet
Management 2) Freight consolidation 3) Rate negotiation 4) Freight control
Operations Management
From an operational perspective the key activities within this are vehicle scheduling, load
planning, routing and carrier management. Vehicle scheduling is the major responsibility
of the transportation department. This is important both while using private carrier or
contracted carrier. This function also avoids bottlenecks that can result from vehicles
waiting to be loaded or unloaded. Proper scheduling requires load planning, equipment
utilization and driver scheduling. Additionally vehicle maintenance must be planned,
coordinated and monitored. Some of the ways in which the vehicle utilization can be
improved is through pre-scheduling dock positions and slots.
Load planning directly impact transportation efficiency. In the case of road
transportation, the capacity is limited on weight or volume. Hence load planning must
consider the characteristics of the product being shipped, size of the individual package
and delivery sequence of multiple shipments if they are to be delivered using a single
vehicle. The load planning in turn drives the downstream activities for instance
warehousing picking and assembly.
The earlier discussion on selection of a route focused on matching individual customer
requirements to vehicles and allotting vehicles to routes to save on cost and time. The
operational level of routing involves monitoring adherence to the route while meeting key
customer requirements. This will have to also take of individual customer requirements
like timing of delivery, location and special instructions.
Carrier Management involves continuous carrier performance measurement and
evaluation. The normal procedure for this is to ask the consignee to record the time and
condition of the goods delivered. But with the integration of IT systems this process is
getting more streamlined for better control over the carriers. The carrier management
process has three inter-related set of activities –carrier selection, integration and
evaluation. Most organizations are moving towards reducing the carrier base ie; they are
looking to work with a small number of identified carriers. This concentration of carriers
seeks to build a business relationship that standardized operational procedures and
administrative processes.
The use of ISP (integrated service providers) is a trend which reflects the above thinking
by organizations. The ISP seeks to perform many value added functions apart from
consolidation of freight across a wide variety of shippers. Carrier evaluation involves
judging the performance of a carrier on a set of criteria. While developing these criteria it
is important to consider them from the view point of the consignee rather than the
shipper. The typical criteria used are- cost, transit time, reliability, capability, accessibility
and security.
Freight consolidation
Earlier sections dealt with the concepts of economies of scale and economies of
distance. These two concepts highlight the importance of consolidating freight to reduce
the overall transportation cost. The traditional approach to freight consolidation was to
combine LTL or parcel loads moving to a general location. The objective was to
outbound consolidation to have savings in moving single consolidated shipments versus
multiple single shipments. But the overall trend in the supply chain members is to reduce
inventory carrying cost. This is being achieved by more frequent ordering of smaller
quantities.
This has an impact in terms of higher transportation cost and leads to more handling. To
plan for freight consolidation it is important to have reliable information concerning both
current and planned inventories. It is also desirable to be able to reserve or promise
scheduled production to complete planned consolidation. From a strategic view point
freight consolidation should be planned much before rather than on receipt of the
material at the plant or the warehouse.
The freight consolidation is achieved through consolidating orders for a market area by
consolidating small shipments going to different customers within a geographical area.
This procedure does not interrupt the natural flow of freight by changing the time of the
shipments. This is difficult to achieve in practice due to the daily fluctuation in the
inbound and outbound volumes. Freight consolidation can also be achieved through
scheduled delivery which consists of shipments to specific markets on selected days of
the week. The scheduled delivery plan is communicated to customers in such a way that
the benefits of freight consolidation are mutually beneficial. The shipping firm commits to
the customer that all the orders received prior to a specified cut- off date/time will be
guaranteed for delivery on the scheduled day.
The overall objective of a scheduled delivery is to offer a solution that the customer can
depend upon while also achieving consolidation benefits. Another way in which freight
consolidation can happen is through pooled delivery where in the transporter, shippers
and warehouses participate in a plan to pool all their shipments for a delivery area to
achieve the consolidation of shipments. The consolidation company takes the lead in the
process and also performs value added services such as sorting, sequencing or
segregation of inbound freight to accommodate customer requirements.
All the above methods of freight consolidation can be considered to be reactive in the
sense that the freight consolidation is initiated only upon facing a problem of sequencing
or routing. Shippers could also follow a proactive freight consolidation by pre-order
planning. This is a process wherein consolidation of order quantities is and timings are
done to facilitate consolidation.
Rate negotiation
It is the responsibility of the transportation function managers to achieve the lowest rate
consistent with the service requirements. The prevailing price for each transportation
alternative is found by reference to tariffs. The key to effective negotiation is to seek win-
win situations for the shipper and transporter. For example if a 1 day delivery is required
the transportation department must first select the mode and then negotiate the rate to
meet this delivery commitment. The focus in this process must be to get fair and
equitable rates.
Freight Control
Other important responsibilities of transportation management are tracing and
expediting. Tracing is a procedure to locate lost or late shipments. Shipments committed
across a transportation network are bound to be misplaced or delayed from time to time.
Most large transporters maintain online tracing to aid shippers to locate a shipment. The
tracing action must be initiated by the shipper but once initiated it is the transporters
responsibility to provide the information. Expediting involves the shipper notifying a
carrier that it needs to have specific shipment move through the carriers system as
quickly as possible and with no delays. Problems with enabling tracing and expediting
have been significantly reduced through the use of information technologies such as bar
coding, online freight information systems, satellite and internet based communication.
All these technologies provide real time and accurate information through direct access
to the transporters IT systems.
Trends in Transportation and usage of IT Applications
There are multiple expectations from the supply chain due the changing demand supply
dynamics and various competitive pressures. The changing Logistics and Supply Chain
scenario can be looked at as evolving due to these forces:
Transportation and Distribution
a. Increasing service level expectations of the customer in terms of shorter delivery
time windows. There is also an increased demand and move towards visibility of
the material and information across the supply chain
b. The customer order mix is moving towards a smaller more frequent mix, as the
cost pressure to reduce inventory is increasing. This means more frequent and
timely deliveries.
c. The distribution centers have historically evolved based on concentration of
demand pockets. This trend is now being reversed and the consolidation of
multiple local warehouses to Regional Warehouses and companies are moving
towards a lower tiered network.
Planning level mix
1. The planning extends to beyond the boundaries of the traditional organization
and includes the supplier arms also. This is true of the connectivity with the
transport service providers and the warehouse service providers
2. Technology is being extensively used to provide real time answers to the
complex situations of order delivery and inventory stocking decisions.
E- commerce
a. Technology is shifting the power to the buyers of products and services, which
has traditionally been tilted towards the suppliers. This is impacting the nature of
the current channels of distribution and simultaneously new channels are
evolving.
For instance for ordering PCs, e-ticketing, procurement of MRO items etc; The case for
e-commerce is observed in the $21 billion US toys industry. This industry has been
traditionally dominated by the large manufacturers who had well defined distribution
channels for each product category. But the online retailers such as FAO Schwartz, e-
toys and amazom.com are changing the fundamental way in which toys are bought. The
convenience factor for parents to buy online and have it home delivered has shaken the
older traditional retailers who were operating in a brick and mortar scenario.
Based on the above discussion it can be concluded that technology is affecting the way
the supply chain is organized and since transportation is an important component of the
supply chain there are various applications which are coming into play for increasing the
efficiency of transportation – location based systems, smart containers, transportation
management systems and automatic planning and routing systems. A brief discussion of
some of the trends in transportation and the specific applications being considered and
currently deployed follows.
Intelligent Transportation Management Systems (ITMS)
ITMS are identified as the means to achieve sustainable and environmental friendly
transportation for the 21st Century. Advanced information and communication
technologies are required for ITMS. These include Data Storage & Processing
Equipment, Wireline & Wireless Communication Systems, Global Positioning Systems
(GPS), Sensors, Smart Cards etc. In addition to the above technologies, institutional
and market factors play an important role in successful ITMS deployment. ITMS
application functionality includes collection and processing of real-time data,
generating and utilizing information for various purposes such as controlling and
managing traffic, handling fleet operations (public transport and private carriers),
emergency management and assisting users in their travel related decisions.
The benefits of ITMS include Reduction of traffic congestion, Enhanced safety,
Mitigation of environmental impacts of transportation systems, enhanced energy
performance, and improved productivity. Many users are appreciating the benefits of
ITMS and deploying them in their regions. The major ITMS applications are centered
on – communication systems, automatic vehicle location systems, transit operations
software and geographic information systems.
COMMUNICATIONS SYSTEMS
Effective and efficient operation of transit systems relies on a communications
infrastructure and vehicle-based communications technologies. Communications
systems are used to transmit voice and data (both raw and processed) between transit
vehicles and operations (e.g., dispatch) centers, and to transmit commands between
operators and technologies (e.g., signal priority commands to traffic signal systems).
Transit communications systems are comprised mostly of wireless technologies and
applications. The two-way voice radio system used for fleet management and vehicle
dispatching remains at the heart of most transit operations. However, other
communication technologies are becoming common; for example, short-range data
links for traffic signal priority. Mobile voice and data communication systems for bus
transit include the use of analog, digital, and cellular digital packet data (CDPD).
AUTOMATIC VEHICLE LOCATION (AVL) SYSTEMS
AVL systems are computer-based vehicle tracking systems that function by measuring
the real-time position of each vehicle and relaying the information back to a central
location. They are used most frequently to identify the location coordinates of vehicles
in order to better satisfy demand. They also serve to provide location coordinates to
respond to emergency situations. The location technologies found on AVL systems are
usually one of the following, but can also be used in combination:
Global Positioning System (GPS);
Signpost and Odometer interpolation, both active and passive;
Ground-Based Radio, such as Loran C; and
Dead Reckoning
The benefits of AVL include:
Improved dispatch and operational efficiency;
Improved overall reliability of service;
Quicker responses to disruptions in service, such as vehicle failure or unexpected
congestion;
Quicker response to threats of criminal activity (via silent alarm activation by the ·
driver); and
Extensive information provided at a lower cost for future planning purposes.
10. Transit Operations Software
Data collected from vehicle-based fleet management systems is relayed to centralized
computer systems and is made useful by transit operations software. This software
helps the operator monitor the fleet’s performance in meeting demand, identify
incidents, manage response, and restore service more effectively. Para transit
operations software and reporting systems integrate applications such as passenger
registration, automatic geocoding, mapping, real-time and batch trip scheduling,
dispatching and brokering for multiple carriers. These systems often use a GIS
platform that assists in optimizing route planning, and can be combined with an AVL
system. Mobile data terminals (MDTs) can be installed in vehicles to display dispatch
messages (e.g., passenger pickup and drop-off addresses and instructions), record
and temporarily store certain types of information about each passenger pickup and
drop-off, and collect statistical and performance data on services provided. Software
programs can include billing, and accounting and reporting.
Computer-Aided Dispatch (CAD) systems are currently the most visible software
application in fixed-route bus operations. Transit agencies use this software for bus
service and operations planning. CAD fixed route software falls into four primary
categories:
o Transfer connection protection software
o Expert systems for service restoration
o Itinerary planning systems; and
o Service planning applications
CHAPTER - 10
The benefits of transit operations software are:
o Permits optimum use of existing resources
o Assists in evaluation of operational efficiency
o Speeds response to emergency situations
o Improves schedule reliability and Operating efficiency
o Reduces per trip cost
o Increases customer service to disabled, elderly, and aids ADA compliance
o Ability to reschedule and re-route transit vehicles
GEOGRAPHIC INFORMATION SYSTEMS
Geographic Information Systems (GIS) provides a current, spatial, visual
representation of transit operations. It is a special type of computerized database
management system in which geographic databases are related to one via a common
set of location coordinates. This allows information to be developed and displayed to
assist operators, dispatchers, and street supervisors to make on-the spot decisions,
and to assist planners in service assessment, restructuring and development. GIS is
most often used for:
o Transportation planning and modeling;
o Demographic analysis;
o Route planning, analysis and restructuring;
o Bus dispatch and scheduling;
o Bus stop and facility inventory;
o Ridership analysis;
o AVL and monitoring;
o Paratransit scheduling and routing; and
o Accident reporting and analysis.
11. Advanced Fleet Management System
The prime functions of AFMS is to assist in monitoring, control and management of
vehicle operations as listed below:
o To monitor whether the vehicles are adhering to its scheduled route and
timetable through out the route and identify if there are any deviations.
o To monitor whether the vehicles are halting at all the scheduled stops
especially for KM- Scheme Operators, which is resulting in loss of revenue.
o Automatic generation, collection, storage and retrieval and analysis of
information related to fleet and thus eliminating human errors.
o Generation of exception reports like deviation from schedule route, timing,
o Missing stops, Punctuality factor etc. based on captured vehicle data.
o Provide billing software to generate automatically billing details for the
vehicles.
o Dispatching of emergency vehicles to Breakdown vehicles or vehicles in
distress, whenever it is sought.
o Help in working out realistic schedules according to traffic conditions based
on speed of vehicles during different hours of the day and at different
segments
o Provision for Real Time Information System – both within the vehicles as well
at major Terminuses.
In addition to the above primary functions, AFMS also provides following
Secondary functions:
o Vehicles management
o Monitoring drivers & performance evaluation
o Monitoring traffic potential
o Conducting traffic analysis
o Financial accounting
o Personnel information maintenance
CHAPTER - 11
o Stores management
o Budget management
Benefits to User
AFMS system would be generating exception reports for any vehicle skipping any stop,
improper stopping at stops, over speeding, deviations from schedules etc. All this would
translate into very efficient and effective service and the user would be able to avail
trouble free, hassle free transportation. Finally but not the least, there is customized
messaging facility available with the driver to alert the Central Control Station with the
help of one touch “hot keys”. The two ways messaging facility can be utilized for
emergency conditions like robbery, accidents, breakdown, tyre puncture, riots, traffic
jams. In case of traffic jams, transporter can divert other vehicles on alternate routes and
users will benefit from reduced disruption in transportation on account of the dynamic
routing facility of the AFMS software.
Benefits to Fleet Owner
o Complete Control over the fleet on the road anywhere and every where all
the time.
o Facilitate faster exchange of critical information between various departments
o Substantial reduction of paperwork
o Better use of human resources
o Ability to access valid information in minimal time
o Streamlines the related workflow in government machinery
o Centralized database
o Higher efficiency and effectiveness
o Greater coordination
o Instant system-wide alerts
o Messaging feature in case of breakdown/medical emergency provides the
driver facility to alert the fleet controllers to provide instant help by mobilizing
appropriate resources
12. Intermodal Freight Technology
In recent years, increasing volumes of freight, growing passenger travel, and an
increasing emphasis on security have strained the efficiency of freight transportation in
many locations, particularly at gateways and along major transportation corridors.
Although efforts have been made to improve the efficiency and reliability of the
intermodal freight network, congestion remains a problem. Congestion degrades the
reliability and performance of carriers, shippers, and terminal operators—a serious
problem for businesses. Predictable travel times are important in an economy where
just-in-time delivery and tightly scheduled production and distribution processes are the
norm.
The lack of information sharing is also a concern. It leads to operational inefficiencies
and heightens concerns about safety and security. Information about the ownership and
location of containers and their contents, as freight moves from origin to destination, is
crucial to enhancing the security and productivity of the transportation network.
Over the past decade, the volume of intermodal containers moving through ports
worldwide doubled. Similarly, the volume of intermodal freight moving by air, rail, and
trucks grew just as dramatically. In 2001, an estimated 19 million containers were moved
through U.S. water and land ports. Few of these containers are tracked as they are
transported to their final destinations. The use of Intelligent Transportation Systems
(ITS) and other technologies will play a key role in providing this much needed
information and balancing freight transportation productivity with security concerns.
In an ITS project, electronic seals were affixed to containers to track cargo from its point
of origin to its point of destination between gateways in Canada and the Pacific
Northwest. The E-seal is an electronic device that is about the size of a pack of playing
cards and weighs a little more than a pound. It uses a radio frequency that emits a signal
as it passes reader devices, displaying information about container tampering.
CHAPTER - 12
The use of this ITS technology in dedicated truck lanes on both sides of the border in the
Pacific Northwest can dramatically reduce truck delays by 800,000 hours per year. This
reduction in delay can save an estimated $150 million annually in truck operating costs,
including fuel, driver wages, and maintenance.
The Asset Cargo Tracking project was designed to 1) improve visibility and productivity
via the monitoring of transport assets and cargo during movement between freight
terminals and customers and 2) provide asset and cargo information in a standard
format to a variety of users. The prototype electronic tracking system collects data on
cargo location, status, and timestamped information via sensors affixed to transport
assets. The tracking system can reduce costs through improved efficiencies in chassis
and container utilization and enhanced recognition of potential security and routing
issues. These benefits are estimated to save $225 million annually.
A simulation model, called Border Wizard, was developed to identify infrastructure and
operational needs at border crossings. It lets users identify and test possible
infrastructure, operating, and staffing improvements by simulating cross-border
movement of automobiles, buses, trucks, and pedestrians. Developed cooperatively with
the General Services Administration (GSA), U.S. Customs, and other federal inspection
agencies, Border Wizard has been deployed at 57 U.S. ports of entry. Border Wizard will
eventually be linked to traffic simulation tools to provide corridor planning capability in
the border region. The GSA has mandated its use as a budgetary tool, and U.S.
Department of Transportation is now evaluating Border Wizard as a transportation-
planning tool. Canada is installing Border Wizard at the Detroit-Windsor crossing, and
Mexico has expressed interest in using the model.
Growth in trade, changes in business practices, and concerns about security have also
underscored the need for government and industry partnerships to standardize
information exchange and implement best practices throughout the global supply chain
network
Future Directions
Evaluate the costs and benefits of leveraging ITS technology in the intermodal freight
arena
Explore opportunities to deploy freight ITS technology best practices as identified in
the operational tests through industry and government champions, along with
expanded freight stakeholder networks
Conduct research, testing, and evaluation of new and emerging technologies to
facilitate the intermodal movements of goods
Work with inspection agencies to improve freight mobility and security at gateways
Work cooperatively with international partners and lead in the development of freight
data standards to facilitate the movement of freight
13. Transportation Security Initiatives And Role Of Technology
Post September 11 attack, there has been major concerns regarding safe movement of
cargo across borders. To combat this threat many technology applications are being
pursued and deployed at major transit points. Some of the common technology
applications with respect to transportation movement are described below.
Radiation Detection Pagers
Radiation detection pagers are small, self contained gamma-ray radiation detectors
that alert its carrier to the proximity of radioactive materials. Such devices were
specifically developed to be used by government agencies and emergency
responders and are approximately the size of common message communication
pagers. Radiation pagers can be hundreds of times more sensitive than
commercially available Geiger-Muller tube type detectors which are of similar size.
An example of the international usefulness of these pagers, on March 21, 2000, a
radiation pager detected radioactive material in a shipment that was transiting
Uzbekistan in route to Pakistan. Future developments would be to install radiation
detection devices on quay cranes, gantry cranes, and other container handling
devices.
X-Ray Inspection Systems
X-ray based inspection systems are the most common form of non-invasive
inspection technology in use today. X-rays detect differences in material densities
in order to produce an image of the vehicle or container contents. Contraband
detection actually occurs by the system operator who visually, sometimes with the
help of sophisticated software, inspects the x-ray images for anomalies. When
cargo and contraband are of similar densities, contraband detection is very difficult.
For example, “the density of a plantain appears exactly the same as that of cocaine
molded and painted to look like a plantain when both are put through an X-ray”.
The density differences are projected across the entire width of the container; if a
container is very cluttered, then again detection of contraband may be very difficult
as the X –Ray image will also be cluttered and visually complex.
CHAPTER - 13
Additionally due to the projection methods, contraband could be hidden in the
shadow of a very dense piece of cargo. However, the use of multiple x-ray beams
can erase most of the shadow effects. Due to the nature of x-ray methods, specific
materials cannot be identified; more advanced technologies like gamma-ray
systems can detect specific materials like drugs and explosives. X-ray systems
generally take a few minutes to scan a standard 40-foot container while some more
advanced systems can take only a few seconds . However, total inspection cycle
times may range from 7-15 minutes or longer due to image analysis (this could
result in scanning less than 100 containers per day!).
Gamma-Ray Inspection systems
Gamma-ray inspection systems are an alternative to standard x-ray inspection
systems. These systems directly use gamma-rays or use pulsed fast neutrons to
generate gamma-rays to produce images of the container’s contents, 3-D
mappings of content location, as well as other important information. For example,
some systems can also determine certain types of material inside the container
based on atomic characteristics; a few of these detectable materials are carbon,
nitrogen, oxygen, silicon, chlorine, aluminum, and iron.
Claiming many benefits over x-ray technology, these gamma-ray systems may be
a key step towards for efficient, 100% container inspection. Gamma-ray systems
can scan standard 40-foot containers in a few seconds and generate a total
inspection time of less than a minute. The average inspection throughput of
gamma-ray systems is more than 10 times greater than the fastest x-ray system In
a trial at the Port of Miami in 1998, a single gamma-ray inspection unit resulted in
the inspection of over 1,300 TEU’s in a single shift.
Gamma-ray systems can be produced as fixed-site, semi-fixed-site, or mobile
units. The semi-fixed-site units can be moved and set-up up in 1-2 days while the
mobile units can be driven to any spatially accommodating location in the port and
can be made operational by three people in approximately 10- 15 minutes. Fixed-
site systems may be of a pass-through form where the inspection unit is stationary
and trains, trucks, or containers pass through the inspection unit. Current vehicle
pass-through speeds are approximately 4- 5 miles-per-hour with future plans of
more than 10 miles-per-hour. The systems can scan almost all types of cargo
handled in the port including standard containers, bulk cargo containers, truck
trailers, and rail cars.
Gamma-ray systems can cost from 3-20 times less than x-ray systems in terms of
initial capital investment, 4-5 times less in terms of installation and when
considering other benefits, gamma-ray systems can yield a cost per inspection that
is 50 times less than that of conventional x-ray systems. Mobile gamma-ray
inspection units were heavily utilized at the Port of Vancouver, Canada in 1999 and
2000 and were responsible for the discovery of $700,000 worth of stolen
automobiles ready for illegal exportation. In the previously mentioned 1998 trial at
the Port of Miami, during the first 90-days of use, gamma-ray inspection units were
responsible for the recovery of six vehicles worth over $200,000.
References:
1. Sunil Chopra and P Meindl, Supply Chain Management: Strategy, Planning and
Operations, 2nd Ed., Pearson Education, Singapore
2. E H Frazelle, Supply Chain Strategy, Tata McGraw Hill, New Delhi.
3. D Bowersox, D Closs, and M B Cooper, Supply Chain Logistics Management,
McGraw Hill Int., New York.
PRACTICE AREA
Objective Type Question
1. The transportation mode selection process tries to achieve two goals –.(b)a. Minimize costs and maximize the transit volume
b. Minimize costs and maximize the service level
c. Minimize costs and maximize the load carried
d. Maximize costs and minimize the inventory costs
2. All the below factors drive transportation costs , EXCEPT (a)a. Handling of returns
b. Distance traveled
c. Density of products
d. Volume of products
3. Fuel expenses incurred in Transportation represent (b)a. Fixed costs
b. Variable costs
c. Joint costs
d. Common costs
4. Which statement is TRUE for Air Transportation (b)a. It has a low transit time and low cost
b. It offers faster delivery lead time and high cost
c. It can carry a wider variety of material than other modes
d. It is most suitable for voluminous products
5. All the below factors influence shipper decisions EXCEPT (d)a. Transportation cost
b. Inventory Cost
c. Facility Cost
d. Trip related cost
6. For road transportation, loading time per consignment is an example of a
performance metric (c)a. Dispatching efficiency
b. Space utilization
c. Loading efficiency
d. Handling equipment efficiency
7. An important component of effective fleet management is (b)a. Lower inventory costs
b. Maintenance of transit time
c. Shorter distances
d. Long hauls
8. All of the following are critical success factors in Road Transportation, EXCEPT
(c)a. Dependable placement
b. Error free delivery
c. Number of trucks
d. Accurate documentation
9. Which of the following is true of Marine transportation (b)a. It is the fastest mode of transportation
b. Suited for shipment of very large shipments at low cost.
c. Utilization is an important measure
d. Routing is a critical measure of efficiency
10. Dispatching efficiency of a road transport vehicle is measured by (b)a. Loading volume per person
b. Turn around time per vehicle
c. Loading value per person
11. A typical use of a GIS system:
a. Load planning
b. Route planning and analysis
c. Vehicle selection
d. Manpower productivity reporting
12. If the cost of transportation is Rs.5000 and the profit margin desired is 10%, the
transporter would charge Rs.5500. This is an example of which of the following
pricing strategies:
a. Rate contract
b. Combination pricing
c. Cost of service
d. Value of service
13. Higher density products are assessed at a lower transportation cost per unit
weight. True / False
14. CSI refers to :
a. Co-operative system integration
b. Common system interface
c. Container security initiative
d. Container security information
15. The overall objective of transportation analysis is to maximize the combination of
vehicles, kilometers and people required to deliver products. True / False
16. The principle of economy of scale states that as ____________ increases the
____________ transported decreases
a. Cost per unit; distance
b. Quantity of shipment; cost per unit
c. Transit time; quantity of shipment
d. none of the above
17. _________ is primarily used for transportation of natural gas. This mode of
transportation has a high ________ for setting up.
a. Marine transport; lead time
b. Air transport ; fixed cost
c. Pipeline; fixed cost
d. Rail transport; transit time
18. Companies competing on customer responsiveness need to focus on?
a. Inventory costs
b. Delivery lead time
c. Transportation costs
d. None of the above
19. One of the disadvantages of a direct delivery model is:
a. High inventory cost
b. High warehousing cost
c. High transportation cost
d. Low product variety
20. A facility focused on serving local or regional demand is commonly termed as:
a. Offshore facility
b. Source facility
c. Server facility
d. Contributor facility
21. A “node” refers to:
a. a form of transportation
b. a type of packaging irregularity
c. a special storage area in a warehouse
d. points to and from which shipments are made
22. Consignees are:
a. preferred suppliers
b. receivers of freight
c. shippers of freight
d. extremely large LTL carriers
23. Which of the following is not likely to move by air transportation?
a. wearing apparel
b. fruits and vegetables
c. cut flowers
d. auto parts
e. all are likely to move by air
24. Freight forwarders:
a. are the same as shippers’ cooperatives
b. consolidate the shipments of several carriers
c. represent the consignees’ interests
d. consolidate the shipments of several shippers
25. Many third-party logistics providers were spun off from carriers or management
consulting firms. True / False
26. The major factors influencing locational decisions are ____________ and
____________.
a. markets; resource availability
b. labor; transport services
c. markets; labor
d. transport services; resource availability
e. none of the above
27. With respect to facility location decisions, firms are seeking the most
____________ at the least ____________ in the least elapsed amount of time.
a. customers; cost
b. value; effort
c. value; cost
d. sites; distance
28. Which of the following is not a general factor influencing facility location?
a. transportation considerations
b. natural resources
c. customer considerations
d. trade patterns
e. all are general factors
29. The existence of transportation competition, whether intermodal or intramodal,
tends to:
a. have cost, but not service, benefits to a user
b. have service, but not cost, benefits to a user
c. have both cost and service benefits to users
d. have neither cost nor service benefits to users
30. The center-of-gravity approach to location analysis minimizes:
a. labor costs
b. warehousing costs
c. taxes
d. distance to existing facilities
31. The transportation mode selection process tries to achieve two goals –. (b)a. Minimize costs and maximize the transit volume
b. Minimize costs and maximize the service level
c. Minimize costs and maximize the load carried
d. Maximize costs and minimize the inventory costs
32. All the below factors drive transportation costs , EXCEPT (a)a. Handling of returns
b. Distance traveled
c. Density of products
d. Volume of products
33. Fuel expenses incurred in Transportation represent (b)a. Fixed costs
b. Variable costs
c. Joint costs
d. Common costs
34. Which statement is TRUE for Air Transportation (b)a. It has a low transit time and low cost
b. It offers faster delivery lead time and high cost
c. It can carry a wider variety of material than other modes
d. It is most suitable for voluminous products
35. All the below factors influence shipper decisions EXCEPT (d)a. Transportation cost
b. Inventory Cost
c. Facility Cost
d. Trip related cost
36. For road transportation, loading time per consignment is an example of a
performance metric (c)a. Dispatching efficiency
b. Space utilization
c. Loading efficiency
d. Handling equipment efficiency
37. An important component of effective fleet management is (b)a. Lower inventory costs
b. Maintenance of transit time
c. Shorter distances
d. Long hauls
38. All of the following are critical success factors in Road Transportation EXCEPT
(c)a. Dependable placement
b. Error free delivery
c. Number of trucks
d. Accurate documentation
39. Which of the following is true of Marine transportation (b)a. It is the fastest mode of transportation
b. Suited for shipment of very large shipments at low cost.
c. Utilization is an important measure
d. Routing is a critical measure of efficiency
40. Dispatching efficiency of a road transport vehicle is measured by (b)a. Loading volume per person
b. Turn around time per vehicle
c. Loading value per person
d. Space optimization
41. FOB refers to (c)a. Offer delivery after unloading
b. To make the goods available at the premises
c. Offer delivery on board
d. To place the goods alongside the ship on the quay
42. Port operations include all of the following EXCEPT (c)a. Cargo Handling
b. Security
c. Surveying
d. Traffic
43. Major benefit of Containerization (c)a. Reduced manpower costs
b. Reduced inventory costs
c. Reduced Shipping cost
d. None of the above
44. Ex-factory sale refers to (a)a. To make goods available at premises
b. To load on the carrier and obtain clear transport documents
c. To place the goods alongside the ship on the quay
d. To pay cost and freight necessary to destination
45. The major emphasis of rail transportation is to (c)a. Economize distances traveled
b. Increase capacity utilization
c. Reduce idle time
d. Increase turn around time
46. Factors influencing freight cost (b)a. Transit time and Product Type
b. Distance and Product Density
c. Distance and Inventory value
d. Product Shape and Transit time
47. With the ____________ ,the cost of operations is distributed over a larger
volume resulting in lower per unit cost (c)a. Economies of Distance
b. Higher Product density
c. Economies of scale
d. Lower inventory
48. _________ refers to moving goods in boxes or trailers that are easy to transfer
between two transportation modes (b)a. Consolidation
b. Containerization
c. De-stuffing
d. Multi-modality
49. Which statement is TRUE for Air Transportation (b)a. It has a low transit time and low cost
b. It offers faster delivery lead time and high cost
c. It can carry a wider variety of material than other modes
d. It is most suitable for voluminous products
50. All the below goods are compatible for transportation through air cargo EXCEPT
(d)a. Perishables
b. High value goods
c. Project goods
d. Low value goods
51. Which of the following is TRUE of a Point-to-Point transportation system (c)a. Less routes more frequency
b. More routes more frequency
c. More routes less frequency
d. Less routes less frequency
52. Which is the correct sequence as per the operations of a hub and spoke system
(b)
a. Pickup; Sort; Consolidate; Deliver
b. Pickup; Consolidate; Sort; Deliver
c. Consolidate; Pickup; Sort; Deliver
d. None of the above
53. The advantages of a Direct delivery model(directly from manufacturer to
customer) are (b)a. Reduction in Transportation cost
b. Inventory consolidation
c. Reduction in delivery lead time
d. Ease in handling product returns
54. Cross docking strategy (c)a. Increases the warehousing cost
b. Does not affect the warehousing cost
c. Decreases the warehousing cost
d. Increases the lead time to the customer
55. All of the following are examples of ‘value added’ services by a Freight forwarder
EXCEPT (b)a. EDI connectivity
b. Preparation of a documents
c. Specific rate contracts
d. Negotiated rate contracts
56. In a hub and spoke network, the role of the ‘hub’ (c)a. Delivery points
b. Central sorting facilities
c. Ordering points
d. Storage points
57. All of the following are critical success factors for Air Cargo Transportation
EXCEPT (c)a. Customs procedures
b. Ground handling
c. Location
d. Traffic handled at terminals
58. The ‘critical’ role of integrators in a Logistics chain (b)a. Provide information support
b. Provide tailor made solutions
c. Reduce documentation requirement
d. None of the above
59. CSI refers to (a)a. Container Security Initiative
b. Container Services Infrastructure
c. Containerized Safety Information
d. Container Safety Initiative
60. The major emphasis of CSI (c)a. Increase containerized movement of goods
b. Better container handling facilities
c. Identify containers that pose risk to security
d. Reduce turn around time for containers
Paragraph Type Question
1. Explain the roles and importance of transportation in SCM.
2. What are the primary considerations in selecting the mode of transportation?
3. Compare distribution network models. Explain three important factors that
influence network decisions.
4. Explain the role of technology in transportation.
5. Describe the role of logistics in the distribution channel of a firm
6. Discuss the role of information technology in logistics and channel management
7. Discuss the role of containerization at the micro and macro level
8. What is meant by Unholy Equilibrium of Transportation Sector in India
9. Describe intermodal transportation with an example.
10. What are the important dimensions of customer service level that are relevant in
making decisions on Distribution network planning?
11. What are the major advantages and disadvantages of a “Direct delivery model
from manufacturer to customer”?
12. What types of distribution networks are suited for a specialty chemicals company
and an apparel retailing company? Justify.
13. Discuss the role of Information Technology in transportation and distribution and
the common applications used.
14. Discuss and detail the factors that drive transportation costs
15. Discuss and detail the multi-channel distribution model
16. Discuss and detail “Channel Mapping” strategy
17. Discuss the factors which influence the Distribution network decisions
18. Discuss the factors and decision making involved in Transportation
Administration.
Model Case Study
1) Dilkhush Products Ltd.
Dilkhush Products Ltd is a typical FMCG company with an annual turnover of nearly 700
crores. It has six factories, 30 depots and 3500 distributors spread over the entire
country. It product profile comprise of ten categories such as branded coconut oil, jam,
cooking oil and special flavors.
At one time, Dilkush was faced with considerable difficulties in terms of forecasting. At
the depot or the godown level, variations on some SKUs were in the range of as much
as 100%. There were also complexities in distribution on account of the large number
(3,500) of distributors across the country. This would invariably lead to a pile up of
inventories at certain places and stock-outs in others. Visibility of stocks at the distributor
level was low, because after invoicing, it was impossible to determine the level of stock
that distributors were holding. The only source for this was the secondary sales figure.
These figures were collated manually once a month, and their accuracy was always
questionable (in the FMCG industry, secondary sales calculation is the bigger challenge;
primary sales are always easier to collate). Because planning cycles were fixed,
decisions could not be taken online. Processes were highly individual or employee-
dependent, and in the absence of an integrated approach, there was little or no
communication.
The planning cycle was only 15-20 days - hardly enough to allow corrective action. Apart
from the annual budget, the firm operated on a fixed 3-month cycle. Thus, once the
output at the end of these 3 months was decided, nothing could be done in the interim.
The result was that if the output for the first month were in excess, the next 2 months’
stock would simply pile up. Invisibly therefore, there were skews towards the ends of
quarters. The firm had fixed dispatch plans for the quarter – these were followed even if
sales were low. There were coordination difficulties between the sales and
manufacturing department, as managers were not using the same data. Typically, sales
staff would complain they lost sales because of stock-outs, while the back room would
say that there were excess supply lines somewhere in the system, about which they
were unaware. The planning cycles for sales and manufacturing did not match. There
was no system for distribution planning – one would wait for the sales person or
distributor to call up and place the order. Some means of replenishment order
generation was tried – however, they were on stand-alone systems and did not succeed.
There were several ‘islands’ of information, inconsistencies in the MIS and no data
visibility across the system. The firm had to do a lot of cleaning up before new
technology could be brought in.
Mr. Kelkar, the Sales and Distribution manager recently attended a seminar on ‘Supply
Chain Management’ organized by an Institute of Management. He realized them that
Integrated SCM approach is the only way to get out of all the present ills of the company.
He also saw a huge opportunity for cost savings with such an approach. However he
was confused as to how to proced since any wrong move or faulty implementation will
have serious consequences to the company.
Answer all the Questions:
1. Summarize Dilkhush’s present problems in Sales and Distribution.
2. Identify the potential areas for cost savings with an integrated SCM.
3. Identify specific action plans for implementing integrated SCM including the role
of IT.
4. Indicate appropriate performance metrics to measure the various aspects of
Supply Chain performance in FMCG business such as DilKHUSH Products Ltd.
2) Earthbound Farm
Earthbound Farm grew from humble beginnings to become North America’s largest
grower and shipper of organic produce. Getting its highly perishable products from West
Coast farms to stores across the country presents a daunting logistics challenge.
Salad-in-a-bag is one of those great ideas that makes so much sense you wonder why
no one thought of it before. Make the salad inside beautiful, delicious and organic and
you have a combination that perfectly meets the needs of millions of time-starved,
health-conscious Americans.
The company behind the bagged-salad concept is Earthbound Farm and behind the
company are its two unlikely founders, Drew and Myra Goodman. The Goodmans both
grew up in Manhattan and were city kids through and through, with no knowledge of
farming. While attending school in California, however, they fell in love with the Carmel
Valley and with each other. After completing college in the early 1980s, the couple
decided to take a year off and work with their hands before graduate school. They soon
fell in love with organic farming as well. Their small, two-and-a-half acre garden
produced enough greens to sell locally to specialty markets and restaurants. Then, one
day in 1986, faced with a bumper crop of baby lettuce and the loss of a large restaurant
customer, the couple bought some plastic bags, filled them with a mix of baby lettuce
leaves, and sold the hand-labeled bags to a natural foods market in San Francisco. The
rest is history.
Today Earthbound Farms distributes its fresh, organic lettuce mixes, as well as other
organic produce, to all 50 states, Canada and Mexico. Its certified organic produce is
grown on more than 24,000 acres—land that it owns and that it farms in partnership with
other growers, primarily in California, Arizona and Mexico. Revenue for fiscal year 2003
topped $350m, with a 75 percent year-over-year growth rate, which shows no signs of
slowing down. Other companies have followed Earthbound Farms’ example, making
bagged lettuce a staple in most grocery stores, but the company continues to dominate
the market in organic salads with more than a 70 percent market share. It processes 22
million salad servings each week at state-of-the art facilities in San Juan Bautista, Calif.,
and Yuma, Ariz.
As the company’s product and geographic range expanded, so did its logistical
challenges. The tender baby greens that form the basis of its core products must be
picked, washed, packaged and shipped within a matter of days in order to ensure that
they arrive at a customer’s location while still fresh. Maintaining the proper temperature
is critical as well as ensuring that the bags do not get crushed along the way.
“Product quality is really key to us,” says Anneke Leigh, director of information
technology business applications and development at the company. “All of our facilities
are completely refrigerated. It is not just that they have to be cold as opposed to hot, but
a consistent temperature must be maintained across the entire life of the product.”
The way that Earthbound Farm processes its greens is proprietary and it is not willing to
share many details. The company developed most of the production-line technology
itself, designing machines that gently clean, spin and mix the greens with a minimum of
damage to the leaves. “Each mix has its own recipe or formula,” says Leigh. A bag of
Mixed Baby Greens, for example, contains eight different varieties, mixed for just the
right combination of taste, texture and color. “The production schedule will call for so
many pounds of all these different leaves,” says Leigh. “They are brought into a mixer,
which gently turns and mixes the salad in the right portions. Then the mixture goes down
the production line and gets put into bags.” The bags are put into boxes and are stored
in a refrigerated warehouse or loaded directly onto a customer’s truck. Some product
also is sent directly to the forward distribution centers that Earthbound Farm opened this
year in Cranbury, N.J., Indianapolis (at a customer’s location) and Atlanta. These
centers “allow us to better serve our East Coast and Midwest customers,” says Leigh. “If
a store is out of spinach we can do a same-day turnaround rather than a five-day trip
across the country.”
With only a 15-day to 21-day shelf life for its products, velocity and visibility are key
success factors for Earthbound Farm. “We need to know precisely where our product is
at all times and how long it has been since that product was picked,” says Leigh. “We
need to make sure we are following FIFO [first in, first out] and FEFO [first expire, first
out] processes for getting product out of the warehouse.”
Not surprisingly, these capabilities were at the top of Earthbound Farm’s shopping list
when it went looking for an IT system. “We looked at many solutions peripherally and at
several of them in depth to make sure that they met our needs for inventory tracking and
rapid turns,” says Leigh. “We also needed a system that would fit into our existing
environment, which is Microsoft PeopleServer, and that we could support in house. Also,
we needed a system that was flexible enough to change and grow with us. All of that
brought us around to High Jump, which scored very high on flexibility.”
One of the initial configurations that was important to Earthbound Farm was the ability to
sequence products for direct shipment off the production line, with no putaway. “Doing
direct ship can take as much as a day out of our cycle time, which is the same as adding
a day to the life of the product,” says Leigh. “We try to have as much product as possible
in and out the same day, but we do rack a fair amount.” Using logic based on such
factors as frequency of demand and relationship to other products, the system
determines the best location for the product and directs the worker to that location. “The
quickest moving pallets are placed in forward locations in the warehouse,” says Leigh.
“We want to minimize travel time for picking those items.”
The picking process begins when an order is dropped into the system. Items are
prioritized for the most efficient picking and directions are sent to the picker’s scanner.
Importantly, the software also applies constraints based on expiration dates to ensure
that products with the earliest dates are picked first. “Before putaway, each pallet is
assigned a pallet tag with the lot number and aging dates, as well as the stock number,”
says Leigh. “So when a picker gets an order for 10 cases of spring mix, for example, the
system already has determined where the oldest cases in the warehouse are located
and that is where it directs the picker. The picker doesn’t have to do any thinking at all.
He simply goes to the location, picks and scans the pallet. Now, if he chooses the wrong
pallet, the system alerts him to that, so we have validation all the way through, which
eliminates errors.”
Automating and optimizing the picking process has shaved precious minutes off order
picking time, adds Leigh. “Initially, we cut our order pick time by 10 to 15 minutes, but I
think we have significantly improved on that number, now that our employees are
completely comfortable with the system. Even 10 to 15 minutes is significant when you
project it over 200-plus orders per day,” she says.
Another configuration crucial to Earthbound Farm are rules about which products can
and cannot be packed together on the same pallet, even when they are part of a single
order. “Our customers don’t just order bagged salads from us,” says Leigh. “They order
from our entire product line, which includes other produce, such as broccoli, cauliflower,
onions, potatoes, apples and citrus. These have to be stacked in specific ways on the
pallet so that one product doesn’t harm another. For example, citrus puts out a gas that
can be harmful to other products so we don’t put those on the same pallet. We want to
maintain the highest quality during transportation and the software allowed us to put in
the logic necessary to correctly palletize our products to meet our particular
transportation needs.”
The software also optimizes the loading and scheduling of trucks. With the truck
scheduling software, a trucker can get an appointment over the internet, by e-mail or by
phone. Then the system coordinates the scheduling of orders for picking, or directs the
sequencing of orders that are loaded straight from production, so that driver wait time is
kept to a minimum. “Before, Earthbound Farm had trucks just showing up and waiting to
get loaded,” says Heim. “Now, they get the truck there when they want to pick for that
order. And then, because the system is so efficient, whether live-loading off the end of
the production line or directing the worker to pick an order, they can complete the task
very quickly and get drivers on their way.”
This is especially important at this time, he adds, given the hours-of-service
requirements for drivers and fuel surcharges. “It is really important to keep those trucks
moving and workers productive,” he says.
“This software solution gives us a really clear view, not only of how long product sits in
our warehouse, but also of how fast we turn an order and how quickly we get that truck
back on the road,” says Leigh.
Earthbound Farm has never had to recall product, but it is, of necessity, concerned
about its ability to do so quickly should the need ever occur. “Like any food company,
there are tracking and quality requirements from the Food and Drug Administration that
we have to meet, but our internal standards are higher than anything the government
requires,” says Leigh. A part of those standards are regular recall practices, she notes.
Since implementing the software, the time it takes for Earthbound Farm’s quality group
to track a given product back to its source during these practices has dropped below 15
minutes, compared with a couple of hours before. “The system does this for us very,
very quickly,” she says.
This ability will be further enhanced as Earthbound Farm begins to implement the
software for receiving raw materials as well as for tracking goods through production and
distribution. That activity was set to start around the end of September. “We will be
getting the information into the software at raw receiving,” so the tracking will start from
there, says Leigh. Raw lettuce arrives in bins and totes, having been cooled on the way
from the field. After receiving, it is moved into another cold room for a very short time,
before it moves to the production line for cleaning, mixing and bagging. “Now we will
know when each lot is in raw receiving, when it is in the cold room and when it goes into
production. So we will know, down to the minute, how long that particular product has
been in our facility,” she says.
After a couple of months, the company plans to move the receiving activity to the field.
“Then we will know how long it has been since each lot was picked,” Leigh says.
Questions:
1. Highlight the complexities in the current supply chain of Earthbound Farms and
the sources of these.
2. Evaluate the strategic responses to the current supply chain demands initiated by
Earthbound Farms
3. Identify the key success factors for the Earthbound’s distribution model and
suggestions going forward.
3) Supply Chain of Pizza World Ltd.
Pizza World limited is a leading Fast Food chain. The mission of the company is to be the
leader in off premise Pizza convenience to the consumers. The supply chain of Pizza
World is given below. In the below figure we can see there are various types of material,
information and finance flow and also it has an integration with various suppliers. The
distribution center and the number of franchises in Chennai (21 Franchises) spread its
prominence in all the locations to attract customers.
Supplier –Supplier relationship
It is based on the network of the various suppliers who are located in close proximity to
the CPD so that there is no delay as such in procurement of the items. Suppliers located
far away are treated as secondary suppliers. Information to suppliers is given through
phone, fax etc.
Supplier – CPD relationship
When CPD wants to procure any material from market, then the supplier-Chennai Pizza
Distribution (CPD) relationship comes into picture according to the requirements of its
franchisees. Quality problems do not arise, as there is regular quality inspection.
Distribution Center – Franchises Relationship
A parent-child relationship exists between CPD and franchise as each and every
franchisee operation is monitored and in turn CPD advises them to take necessary steps
for every facility. The entire supply chain is regulated by the CPD since it has well-
trained people.
Supplier DistributionCenter
Customer
Corporate Office
Finance/Information Flow
Material/Information Flow
Micro View
Every customer order is entered into the computer. If the ordered item is in the menu,
the customer is served immediately. A special dish, which is not in the menu, takes 15-
20 minutes. If customer is not satisfied with the service, he will either be given a
replacement pizza or refund.
If the item ordered is there in daily menu then there is an inventory level of about 2-3 at a
time depending upon the demand of the same at that particular place where it is
forecasted from the past sales. The information flow is two ways between the customers
invoicing and the order management section. Orders of the customer at a particular
moment flow from customer invoicing to order management section. In the reverse
direction, information flow gives information whether the same is procured or not and
what time it will be delivered to customer.
On completion of the order, the personnel at the order management section enter the
data into the database of the computer of PW franchise. There is a continuous
monitoring of inventory done by this person so that there is no shortage in the daily
requirements as he has access of the present stock of the inventory at the material
receiving section, which is actually the store of the franchisee. The data is delivered to
planning and control section, which monitors the work at the manufacture section as well
as the material distribution section. This section has both the records, accordingly orders
the manufacturing section when to slog and when to stop production for a particular
item.
Figure 1: Supply Chain at the franchise End
There is a two-way information flow between order management and distribution section.
Here the person knows what is to be delivered, how much quantity and the customer to
whom he is supposed to deliver. As he knows the information, he informs the person at
the distribution center where the item is kept at a particular place after being
manufactured. This is delivered at the delivery counter where the order management
person receives the same and delivers to the customer.
A two-way information flow between material ordering section and planning and control
section ensures that inventory level is maintained periodically. If there is a shortfall in
inventory at a particular time, then the person gets in touch with material order section
and delivers an invoice to the same which is to be procured from the distribution center.
The material ordering section is in touch with material receiving section and they keep
track whether the material that has been ordered has reached the stores in time or not.
The ordered material is informed to the supplier paying section so that the payment is
done to the distribution center without any delay. The material ordered is maintained in
the inventory database by the distribution center and the bill is sent to the supplier
paying section for the record of the franchise.
SupplierPaying
MaterialOrdering
Planning &Control
OrderManagement
Pizza
Receive Convert Distribute Deliver
CustomerInvoicing
Bill
The material ordered to the distribution center is delivered to the franchise, where a
thorough check takes place for the quality of the material that is to be delivered as well
as the quantity, which has been ordered
Pizza World’s Distribution CenterQuality check for raw materials is done here on behalf of franchises for saving time. Raw
materials are converted into another form for better taste in the pizza. The supplier
paying section has two-way relationship with the material ordering section. If the
franchise requires any item to be ordered, they places an order to the material ordering
section in the order management section of the distribution center.
Figure 2: Chennai Pizza Distribution (CPD) supply chain
The Information Flow between the Distribution Center and Planning and Control section
is two ways. The planning and control section contacts primary stores as well as
secondary stores to know the present positions of inventory levels. Normally, distribution
center forecasts requirements using the previous data, so there would not be any
shortfall. Thus, planning and control section has record of stock levels at primary and
SupplierPaying
MaterialOrdering
Planning &Control
OrderManagement
Convert Deliver
CustomerInvoicing
Bill
Bill
PrimaryStores
Material InSecondary
Stores
Material Out
secondary stores. The requisite amount of material from stock is sent to delivery
counter. Material is loaded into PW’s private fleet of vans that load the same material
and send them to respective franchises. The order management is in touch with the
delivery counter and the customer invoicing people at the distribution center. The
customer invoicing section prepares the receipt and sends it to the respective
franchisee. In case there is any requirement in the distribution center they are in
constantly touch with the planning and control section and also with the order
management section. Here the flow of information in all the departments is both ways.
Questions
1. Comment on the order management mechanism at the distribution center and
the franchise end.
2. What are the drawbacks in the present model of supply chain?
3. How can the distribution network be structured to ensure good customer service
with optimum utilization of resources?
*****