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Managing Transportation in a Supply Chain - PowerPoint

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					Transportation Strategy in a
      Supply Chain
Outline
   Key modes of transport and major issues
   Transportation Costs
   Transportation System Design
   Tradeoffs in transportation design
       Transportation and inventory: Choice of mode
       Transportation and inventory: Consolidation
       Transportation and service: Transit points and lead-
        times


                                                               2
Importance of Transportation
   USA Freight in 2006: US $1.4 trillion, ~ 10 % of GDP
       Employs 22 million people, 16% of all workers
   Accessibility to markets
   Greater competition
       more distant markets can be served
   Economies of scale
       wider markets => greater production volume
       production points need not be close to markets
   Lower prices
       increased competition among suppliers
       lower production and transportation costs
   E-Commerce: managing (global) transportation costs is
    crucial
       Amazon.com? Dell Computers?             * US   Bureau of Transportation Statistics
                                                                                             3
         Factors Affecting Transportation Decisions
   Carrier                                           Shipper
    (party that performs the move)                 (party requiring movement of goods)
         investment decisions                             supply chain design
         operating policies                               transportation mode choice
         Costs considerations:                            assignment of shipment to
            Vehicle-related: Type? Number?                 transportation mode
            Fixed operating: e.g. Terminal                Cost considerations:
             facilities                                         Transportation: paid to carriers
            Trip-related: labour and fuel                      Inventory: at intermediate
                                                                 warehouses, retailers, etc.
            Quantity-related: loading/unloading
                                                                Facility: e.g. warehouse operating
            Overhead: planning/scheduling,
                                                                 costs
             information technologies
                                                                Processing: loading/unloading,
         Capacity utilisation                                   invoicing, etc.
         Responsiveness/Service level offered                  Service level: expediting, safety stock,
                                                                 etc.
                                                           Responsiveness; Delivery guarantees

                                                                                                            4
  Transportation Modes                                                              (USA)
   Mode                Freight Value            Intercity               Intercity    Revenue /    Average haul
                          in 2002 a            Ton-milesin             Tonnagea      Ton-mileb    length 2002 a
                         ($ billons)              2002a                (millions)                (miles per ton)
                                                (billions)

     Air                     777                     15                   10          61.20          1429

   Truck                    6,660                  1,449                 9197          9.13           158

Multimodal                  1,111                    226                  213                        1061

    Rail                     388                   1,254                 1,895         2.28           662

   Water                     867                     733                 2,345         0.74           313


Pipeline (Oil)               285                     753                 1,656         1.46           455


    a U.S. Bureau,   Statistical Abstract of the United States: 2002
    b Ballou,   Business Logistics Management, 5th edition, 2004

                                                                                                                   5
Air
   Expensive
       (2 x truck, 20 x rail)
   High security
   Size of shipment constrained
       hold space and lifting capabilities
   Key Issues
       Location/Number of hubs
       Location of fleet bases / crew bases
       Schedule optimization
       Fleet assignment
       Crew scheduling
       Yield management

                                               6
    Truckload (TL)
   Average Capacity = 42,000 - 50,000 lb.
        Smaller dispatch lots (compared with rail)
   Low fixed cost
        carriers do not own or maintain roads
   Door-to-door convenience
   Good speed and frequency (small dispatch lots)
   Cannot carry large loads
   Major Issues
        Utilization
        Consistent service
        Backhauls
                                                      7
    Less Than Truckload (LTL)
   Higher fixed costs (terminals) and low variable
    costs
   Major Issues
       Location of consolidation facilities
       Utilization
       Order assignment/loading
       Vehicle routing
       Customer service
       Utilization vs. delivery-time and reliability
                                                        8
Rail
   Long haul (avg. 720 miles)
   Slow mover (22 mph, 64 miles per day)
   Large load: Average load = 80 tons
   carload, less-than-carload, multiple carload
   consolidation, stop-off, re-route
   High fixed costs, low variable costs
   Key Issues
       Scheduling to minimize delays / improve service
       Off track delays (at pick up and delivery end)
       Yard operations (switching of multiple shipments)
       Variability of delivery times
                                                            9
Pipeline
   limited capabilities: crude oil, water
   slow (3-4 mph)
   high capacity
       3 mph, 12-in pipe = 90,000 gal/hr
   reliable, low risk of disruption and damage
   24-hour service
   high fixed costs
       pipes, pumping equipment
       own or lease right-of-way
   Variable costs
       pump operation
       depends on throughput and pipe diameter
       loss through seepage

                                                  10
Water - Inland and Coastal
   heavy , bulk commodities
   slow (5 mph on Mississippi)
   affected by weather (freezing, floods)
   Fixed costs
       mainly transport equipment
       waterways and harbours publicly owned
       terminal costs: harbour fees, loading/unloading(high costs
        if not containerised)
   Variable costs (low)
       no charge for use of waterways
   favours bulk commodity goods
                                                                     11
    Containerised Freight (COFC)
   first trip:
        trailers on a WWII tanker from New Jersey to Texas in 1956
   soon after:
        specially converted ships to stack van-sized boxes on deck
   now:
        world container fleet capacity 19.3 million TEUs (2004)
         75% of US ocean merchandising trade
        70 % by weight of cargo movement of Hong Kong
        mega-ships: Gudrun Maersk (world‟s largest): 8000 TEUs, 1204 ft.
         long, 140 ft. wide (30 ft. wider than Panama Canal)
   standard size avoids re-handling
        8 x 8 x 20 (TEU)
        8 x 8 x 40 or 8 x 8 x 45
   containerised air freight gaining popularity
                                                                            12
Intermodal Transport
   Truck-Rail        TOFC           “piggyback”
   Truck-water       RORO           “fishyback”

Trailer on Flat Car (TOFC)
 long haul cost economy of rail
 convenience and accessibility of trucks at origin/destination
 shipper: door-to-door service at lower than truck rates
 rail: more business
        17-fold increase 1960-1996
      now 55% of rail loading in USA
      2 million carloads (13 million units) moved in 2004


                                                                  13
    International Transportation
   Mainly by Water (Container)
        over 50% by value
        99% by weight
   By Air: 21% by value
   6.76 billion tons shipped seaborne in 2004
   Complexities:
        customs documentation
        limited entry/exit points to a country
        limited carrier liability
        increased protective packaging
                                                  14
Busiest
Container
Ports in the
World



               15
Hong Kong




            16
    Hong Kong -
    Mid-Stream Operations
   Unique to Hong Kong
   Barges with crane
   Transfer containers from ship (in harbour) to shore
   Transfer rate weather dependent
       approx. 1/3 of container terminal
   Lower Cost
       approx. 1/4 of container terminal
   Handles about 17% of container traffic through Hong Kong
       mostly to South-East Asia
       non-time critical

                                                               17
                                         Cargo Traffic 2006 FINAL


           Last update: July 18 2007




World‟s
                                                                                         Total
           Rank City (Airport)                                                                   % Change
                                                                                        Cargo

           1       MEMPHIS, TN (MEM)                                                 3 692 081        2.6
           2       HONG KONG, CN (HKG)                                               3 609 780        5.1



Busiest
           3       ANCHORAGE, ALASKA (ANC)*                                          2 691 395        5.4
           4       SEOUL, KR (ICN)                                                   2 336 572        8.7
           5       TOKYO, JP (NRT)                                                   2 280 830       (0.5)
           6       SHANGHAI, CN (PVG)                                                2 168 122       16.8
           7       PARIS, FR (CDG)                                                   2 130 724        6.0


Cargo      8
           9
           10
                   FRANKFURT, DE (FRA)
                   LOUISVILLE, KY (SDF)
                   SINGAPORE, SG (SIN)
                                                                                     2 127 646
                                                                                     1 983 032
                                                                                     1 931 881
                                                                                                      8.4
                                                                                                      9.2
                                                                                                      4.2
           11      LOS ANGELES, CA (LAX)                                             1 907 497       (1.6)


Airports   12
           13
           14
                   MIAMI, FL (MIA)
                   TAIPEI, TW (TPE)
                   NEW YORK, NY (JFK)
                                                                                     1 830 591
                                                                                     1 698 808
                                                                                     1 636 357
                                                                                                      4.3
                                                                                                     (0.4)
                                                                                                      0.2
           15      AMSTERDAM, NE (AMS)                                               1 566 828        4.7
           16      CHICAGO, IL (ORD)                                                 1 558 235        0.8
           17      DUBAI, AE (DXB)                                                   1 503 697       14.3
           18      LONDON, UK (LHR)                                                  1 343 930       (3.3)
           19      BANGKOK, TH (BKK)                                                 1 181 814        3.6
           20      BEIJING, CN (PEK)                                                 1 028 909       31.6
           21      INDIANAPOLIS, IN (IND)                                             987 449         0.2
           22      NEWARK, NJ (EWR)                                                   974 961         2.6
           23      OSAKA, JP (KIX)                                                    842 016        (3.2)
           24      TOKYO, JP (HND)                                                    837 262         4.8
           25      GUANGZHOU, CN (CAN)                                                824 907         9.9
           26      DALLAS/FT WORTH, TX (DFW)                                          757 856         2.1
           27      LUXEMBOURG, LU (LUX)                                               752 676         1.3
           28      ATLANTA, GA (ATL)                                                  746 502        (2.8)
           29      COLOGNE, DE (CGN)                                                  691 110         7.4
           30      KUALA LUMPUR, MY (KUL)                                             677 446         3.2

           Airports participating in the ACI Annual Traffic Statistics Collection.
           Total Cargo: loaded and unloaded freight and mail in metric tonnes.
           *ANC data includes transit freightt.

                                                                                                             18
Other key players in the Transportation
Supply Chain
   Freight forwarders
        provide service to small shippers by consolidating shipments to get lower rates
        purchase transportation service from carriers
   Shippers‟ agents
        consolidate shipments for “piggyback” transport
        purchase service “in bulk” and re-sell to individual shippers
   Freight brokers
        arrange door-to-door service, dealing with all modes of transport in between
   Shippers‟ Associations
        common industry or geographical area
        common negotiation line to get better rates



                                                                                           19
    Transportation Costs
   ~ 63% of total logistics expenditures
   Fixed Costs
       road/railway acquisition and maintenance, terminal
        facilities, transport equipment, carrier administration
   Variable Costs
       fuel, labour, equipment maintenance, handling, pickup and
        delivery
   Cost Allocation Difficult
       By shipment? Weight? Volume?
       Insurance value? Delivery guarantees?

Back Haul Costs?

                                                                    20
    Transportation Rates
   Freight classification
       determined by density, stowability, ease of handling, value, liability,
        substitutability, risk of damage, fairness
   Class Rates
       standardized tariffs by weight and distance
       “break weight”
   Contract Rates
       discount rate from class rate tariffs
       depends on volume, direction of movement, valued customer?
   Freight-All-Kinds
       used by freight forwarders
       mixed shipments

                                                                                  21
    Transportation Rates
   Volume-related
        minimum charge (AQ) rate
        less-than-vehicle-load rate
        vehicle load rate
        special rate for high volume shipments
   Distance related
        uniform rate
        proportional rate
        tapering rate
        blanket rate (simplicity, competition)
   Demand related rates
                                                  22
Freight Rate Structures




                          23
Other Transportation Rates
   Incentive rates
       for large shipment
   Cube rates
       for light and bulky goods
   Import/Export rates
   Deferred rates
       used to fill out available space (esp. in air or water mode)
   Released value rates
       limited liability for carrier
   Ocean freight rates
       by weight or space basis
       set by “carrier conference”

                                                                       24
Special Service Charges
   Diversion and Re-consignment
        change destination or change consignee
        ship perishables before markets crystallize
        use carriers as warehouse
   Transit or Stop-off privileges
        cost lower than two separate rates
        partial loading/unloading
   Protection
        refrigeration/heating/ventilation
        additional bracing
   Interlining
        carrier transfer shipment and pays 2nd carrier
   Terminal services
        pickup/deliver, rail switching
        detention and demurrage penalty
             allowed free time: 48 hours for rail cars
             straight plan vs. average plan
                                                          25
Documentation
   Bill of lading
        legal contract between shipper and carrier for freight movement with
         reasonable dispatch and free of damage
        certification of classification and tariffs of goods received
        contract of carriage
        documentary evidence of title
             straight bill of lading (cannot be sold)
             order bill of lading (can be endorsed)
   Freight bill
        invoice of carrier charges
        prepaid by shipper or collected from consignee
   Freight claims
        loss, damage and delay claims
        carrier liable for full value
        overcharge/misclassification amendments
                                                                                26
International Transport Documents- Exporting
      Bill of lading. Receipt for the cargo and a contract for transportation between
       the shipper and the carrier.
      Dock receipt. Used to transfer accountability for cargo between domestic and
       international carriers.
      Delivery instructions. Provides specific instructions to the inland carrier
       regarding delivery of the goods.
      Export declaration. Required by the U.S. Department of Commerce as a source
       document for export statistics.
      Letter of credit. Financial document guaranteeing payment to the shipper for the
       cargo being transported.
      Consular invoice. Used to control and identify goods shipped to particular
       countries.
      Commercial invoice. Bill for the goods from seller to the buyer.
      Certificate of origin. Used to assure the buying country precisely in which
       country the goods were produced.
      Insurance certificate. Assures the consignee that insurance is provided on goods
       while in transit.
      Transmittal letter. A list of the particulars of the shipment and a record of the
       documents being transmitted together with instructions for disposition of the
       documents.
                                                                                           27
International Transport Documents -Importing
   Arrival notice. Informs the estimated arrival time of the shipment along with some details
    of the shipment.
   Customs entries. A number of documents describing the merchandise, its origin, and
    duties that aid in expediting clearance of the goods through customs, with or without the
    immediate payments of duties.
   Carrier’s certificate and release order. Certifies to customs the owner or consignee of the
    cargo.
   Delivery order. Issued by the consignee to the ocean carrier as authority to release the
    cargo to the inland carrier.
   Freight release. Evidence that the freight charges for the cargo have been paid.
   Special customs invoice. An official form usually required by U.S. Customs if the rate of
    duty is based upon the value and the value of the shipment exceeds a fixed dollar amount.

     Preparation of this paperwork is facilitated by the many foreign trade specialists that
     can aid the shipper and receiver of goods moving internationally.



                                                                                                  28
    Transport Service Selection Considerations
   Price
        line haul, terminal handling,, delivery
        door-to-door
   Average Transit time
   Transit Time Variability
        increases for multi-modal or consolidated shipments
   Loss and Damage
Cost, speed and dependability considered most important

                                                               29
Choice of Transportation Mode:
Eastern Electric Corporation
   Average Annual demand = 120,000 motors
   Cost per motor = $120
   Current order size = 3,000 motors
   Safety stock carried = 50% of demand during
    delivery lead time
   Holding cost = 25%
   Each motor weighs 10 pounds
                                                  30
   Eastern Electric – Mode Choices
Alternative              Range of Quantity                    Shipping Cost          Transit
                         Shipped (cwt)                        ($/cwt)                Leadtime
AM Rail                            200+                            $ 6.50                   6

Northeast                              100+                          $ 7.50               4
Trucking
Golden                                50-150                         $ 8.00               4

Golden                               150-250                         $ 6.00               4

Golden                               250-400                         $ 4.00               4

Golden                               250-400                         $ 3.00               4


Marginal discount applies (i.e. first 150 cwt cost $8, next 100 cwt cost $6, etc.)
                                                                                                31
Eastern Electric – Rail option
Minimum shipment = 20000 lbs = 2000 motors
Cycle inventory = Q/2 = 2000/2 = 1000
Safety stock = L/2 days‟ demand = (6/2)(120000/365) =
    986
In-transit inventory = (120000/365)5=1644
Annual holding costs = (1000+986+1644)(120)(0.25) =
    $108900
Annual transportation costs = (120000)(0.65) = $78000

                                                        32
      Eastern Electric Corporation
     Alternative Transport   Cycle     Safety    Transit   Inventory Total
                 Cost        Inventory Inventory Inventory Cost      Cost
     AM Rail     $78,000     1,000     986       1,644     $108,900 $186,900
     (2,000)
     Northeast $90,000       500       658           986        $64,320    $154,320
     Trucking
     (1,000)
     Golden      $96,000     250       658           986        $56,820    $152,820
     (500)
     Golden      $86,400     1,250     658           986        $86,820    $173,220
     (2,500)
     Golden      $78,0001    1,500     658           986        $94,320    $172,320
     (3,000)
     Golden      $67,500     2,000     658           986        $109,320   $176,820
     (4,000)
1
    $78,000  12000 1500 $8 
                     3000
                                     1000
                                     3000
                                            $6    500
                                                   3000
                                                          $3
                                                                                      33
Transport Service Selection
   Tradeoff between transport costs and associated
    inventory costs
       Example: Ballou, p. 221-223
   Competitive considerations
       increased patronage due to better transport services
       better transport reflected in goods price
       transport volume effect on supplier inventory levels




                                                               34
Example:
The Carry-All Luggage Company produces a line of luggage goods. The typical distribution
plan is to produce a finished goods inventory located at the plant site. Goods are then shipped to
company-owned field warehouses by way of common carriers. Rail is currently used to ship
between the East Coast plant to a West Coast warehouse. The average transit time for rail
shipment is T=21 days. At each stocking point, there is an average of 100,000 units of luggage
having an average value of C=$30 per unit. Inventory carrying costs are I=30 percent per year.
              The company wishes to select the mode of transportation that will minimize total
costs. It is estimated that for every day that transit time can be reduced from the current 21 days,
average inventory levels can be reduced by 1 percent, which represents a reduction in a safety
stock. There are D=700,000 units sold per year out of the West Coast warehouse. The company
can use the following transportation services:


  Transportation       Rate ($/unit)     Door-to-door Transit       No. of shipments per
     Service                                 Time (days)                    year
        Rail               0.10                    21                         10
    Piggyback              0.15                    14                         20
       Truck               0.20                    5                          20
        Air                1.40                    2                          40
                                                                                                       35
Example (continued)
Procurement costs and transit-time variability are assumed to be negligible.
           A diagram of the company‟s current distribution is shown below. By selecting
alternate modes of transportation, the length of time that inventory is in transit will be affected.
Annual demand (D) will be in transit by the fraction of the year represented by T/365 days,
where T is average transit time. The annual cost of carrying this in-transit inventory is ICDT/365.
            The average inventory at both ends of the distribution channel can be approximated
as Q/2, where Q is the shipment size. The holding cost per unit is IC, but the item value C must
reflect where the inventory is in the channel. For example. The value of C at he plant is the price,
but at the warehouse it is the price plus the transportation rate.




     East Coast Plant                 21days                    West Coast Warehouse
     Inventory = 100,000 units                               Inventory = 100,000 units

                                                                                                       36
                                                                       Modal Choices
    Cost Type          Method of              Rail             Piggyback              Truck                  Air
                       Computat-
                         iona
Transportation             R D        (0.10)(700,000) =    (0.15)(700,000) =    (0.2)(700,000) =     (1.4)(700,000) =
                                       70,000               105,000              140,000              980,000


In-transit              ICDT/365       [(0.30)(30)          [(0.30)(30)          [(0.30)(30)          [(0.30)(30)
Inventory                              (700,000)(21)]/      (700,000)(14)]/      (700,000)(5)]/       (700,000)(2)]/
                                       365 = 363,465        365 = 241,644        365 = 86,301         365 =34,521
Plant Inventory           ICQ/2        [(0.30)(30)          [(0.30)(30)          [(0.30)(30)          [(0.30)(30)
                                       (100,000)b] =        (50,000)(0.93)c] =   (50,000)(0.84)c] =   (25,000)(0.81)c] =
                                       900,000              418,500              378,000              182,500
Field Inventory         IC’DQ/2        [(0.30)(30.1)        [(0.30)(30.15)       [(0.30)(30.2)        [(0.30)(31.4)
                                       (100,000)] =         (50,000)(0.93)c] =   (50,000)(0.84)c] =   (25,000)(0.81)c] =
                                       900,300              420,593              380,250              190,755
                       Total           $2,235,465           $1,185737            $984,821             $1,387,526
 aR = transport rate; D = annual demand; I = carry cost (%/yr); C = product value at plant; C’=product value at
 warehouse (C+R); T = time in transit; and Q = shipment size.
 b
   100,000 is more than the shipping quantity/2 to account for safety stock..
 c
  Accounts for improved transport service and number of shipments per year.
                                                                                                                           37
Tradeoffs in Transportation Design

   Transportation, facility, and inventory cost
    tradeoff
       Choice of transportation mode
       Inventory aggregation
   Transportation cost and responsiveness tradeoff



                                                      38
    Alloy Steel - Transportation cost and
    responsiveness tradeoff
   Order shipped via LTL
       shipping cost =$100 + 0.01 (shipment weight in pounds)
       plus $10 per delivery
       two day in transit
   Current: ship orders on arrival
       two-day response time
   Three-day response?
       Can aggregate and ship every other day
   Four-day response?

                                                                 39
Alloy Steel - Shipment size and Transportation Costs vs. Response
Time               2-Day Response   3-Day Response   4-Day Response
Day    Demand    Quantity   Cost($)    Quantity   Cost($)    Quantity   Cost($)
 1      19,970    19,970    299.70        0          0          0         0
 2      17,740    17,740    274.70     37,440     474.40        0         0
 3      11,316    11,316    213.16        0          0       48,756     587.56
 4      26,192    26,192    361.92     37,508     475.08        0         0
 5      20,263    20,263    302.63        0          0          0         0
 6      8,381     8,381     183.81     28,644     386.44     54,836     648.36
 7      25,377    25,377    353.77        0          0          0         0

 8      39,171    39,171    491.71     64,548     745.48        0         0

 9      2,158     2,158     121.58        0          0       66,706     767.06
10      20,633    20,633    306.33     22,791     327.91        0         0
11      23,370    23,370    333.70        0          0          0         0
12      24,100    24,100    341.00     47,470     574.70     68,103     781..03
13      19,603    19,603    296.03        0          0          0         0
14      18,442    18,442    284.42     38,045     480.45     38,045     480.45
                            4,164.46              3,464.46              3264.46   40
    Transportation Network Design
   Direct Shipment Network
        Delivery direct from a supplier to a retailer
   Direct Shipment with Milk Runs
        Delivery from single supplier to several retailers
   Central Distribution Centre (DC)
        Suppliers ship only to DC
        DC ship direct to retailers
   Central Distribution Centre with Milk Runs

Tradeoffs? Number and location of DC’s?

                                                              41
Transportation Network Designs
  Suppliers   Retailer Stores        Suppliers   Retailer Stores




Direct Supplier Network         Direct Shipping with Milk Runs
                                                                   42
Transportation Network Designs
 Suppliers        Retailer Stores   Suppliers        Retailer Stores




             DC                                 DC




All Shipment via DC                 Milk Runs From DC

                                                                       43
Physical Inventory Aggregation: Inventory
vs. Transportation cost
   As a result of physical aggregation
        Inventory costs decrease
        Inbound transportation cost decreases
        Outbound transportation cost increases
   Good when:
        inventory and facilities costs high
        product has high value-to-weight ratio
        products with high variability
   On-line store vs. „real‟ retail locations
        store bears out-bound costs as well as in-bound costs


                                                                 44
    Inventory Aggregation at HighMed
    Medical equipment sold direct to doctors
    Madison -> 24 sales territories (each keeping own inventories)
    Highval ($200, 0.1 lbs/unit)
          weekly demand in each of 24 territories H = 2, H = 5
    Lowval ($30/unit, 0.04 lbs/unit)
          weekly demand in each territory L = 20, L = 5
    Cycle Service Level =0.997
    Inventory holding percentage =25%
    Current: Territories re-order every 4 weeks
          UPS rate: $0.66 + 0.26x {for replenishments, lead time = 1 week}
    Option A: Territories re-order every week
    Option B: Aggregate all inventory at central warehouse, replenish warehouse weekly,
     ship direct to customers
          Average customer order: 1 HighVal and 10 LowVal
          FedEx rate: $5.53 + 0.53x {for customer shipping}

                                                                                           45
HighMed: Current Scenario
        Reorder interval = T = 4 weeks
        Replenishment lead-time = 1 week (by UPS)
   Inventory costs (HighVal):
        Lot size = QH = T H = (4)(2) = 8
        Safety stock = ssH= F-1(CSL) (T+L)0.5 H = 30.7
        Average inventory for 24 regions = 24(QH/2 + ssH) = 832.8
        Annual inventory holding cost = (832.8)($200)(0.25) = $41,640
   Inventory costs (LowVal) = (1696.8)($30)(0.25) = $12,726
   Transportation costs:
        Avg. weight of each replenishment order = 0.1 QH + 0.04 QL =
         (0.1)(8)+(0.04)(80)= 4 lbs.
        Shipping costs per order = $0.66+(0.26)(4) = $1.70
        Annual transportation costs = (52/4)(24)($1.70) = $530
   Total Cost = $54, 896

                                                                         46
  Inventory Aggregation at HighMed
                     Current         Option 1       Option 2
                     Scenario
 # Locations         24              24             1
 Reorder Interval    4 weeks         1 week         1 week
 Inventory Cost      $54,366         $29,795        $8,474
 Shipment Size       8 H + 80 L      2 H + 20 L     1 H + 10 L
 Transport Cost      $530            $1,148         $14,464
 Total Cost          $54,896         $30,943        $22,938

If shipment size to customer is 0.5H + 5L, total cost of option 2
increases to $36,729.

                                                                    47
Transportation System Design
   AC Delco: Very high value low volume parts
       Three plants: Milwaukee, Kokomo, Matamoros
       21 assembly plants (customers for above plants)
   What are the distribution options? Which one
    to select? On what basis?




                                                          48
All Shipments Direct            All Shipments via Kokomo

                                              Milwaukee
           Milwaukee

                                                          Kokomo
                       Kokomo




                                       Matamoros
    Matamoros


                                                                   49
Some shipments direct,          Milk Runs from Kokomo
Some from Kokomo
                                          Milwaukee
           Milwaukee

                                                      Kokomo
                       Kokomo




                                   Matamoros
    Matamoros


                                                               50
 Milk Runs From Plants
                           Milwaukee



Number of DCs?                         Kokomo

Location of DC’s?




                    Matamoros




                                                51
Total Costs
 Routes            Transport   Inventory   Total
 Direct, Full Load 2.0         17.5        19.5
 Direct,Optimal    4.0         5.6         9.6
 Load
 Via Kokomo,       2.1         9.7         11.8
 Full Load
 Via Kokomo,       3.0         7.2         10.2
 Optimal Load
 Direct +          3.7         5.8         9.5
 Kokomo
 Milk run from     2.4         7.2         9.6
 Kokomo
 Milk run from     3.5         4.6         8.1
 Plants

                                                   52
    Network Design Tradeoffs
   Direct Shipment Network
        Simple operation
        Delivery Lot-size ~ truckload
        High inventories
        High loading/unloading costs
   Direct Shipment with Milk Runs
        Small lot-size per retailer
        Increased co-ordination complexity
   Central Distribution Centre (DC)
        Inventory consolidation/disaggregation
        Transfer point (allow transportation mode change)
        Lower in-bound transportation costs
   Central Distribution Centre with Milk Runs
        Increased co-ordination complexity
                                                             53
Cross-docking
   Inbound goods transferred directly into
    outbound vehicles without being stored in DC
       Disaggregate goods from one supplier to several
        retailers
       Aggregate different goods from respective
        suppliers to one retailer
       Economies of scale (both in- and out-bound)


                                                          54
Line Haul and Cross Dock
                                    Milwaukee
This approach is useful if
  deliveries are time                           Kokomo
  sensitive and there are
  several dropoffs in
  proximity, not all of
  which can be delivered
  on a single truck.
                             Matamoros




                                                         55
Tailored Network
   Use combination of options to reduce costs and
    improve responsiveness
   High volume: ship direct
   Low volume: consolidate in DC




                                                     56
    Tailored Transportation
   Factors affecting tailoring
        Customer distance and density
             high customer density near DC -> own fleet, milk runs
             customers far away -> use third-party carrier reduce backhaul costs
        Customer size
             TL, LTL, courier
             Replenishment frequency
             Mixed milk runs with large and small customers
        Product demand and value
             high demand, high value : cheap mode for cycle stock replenishment;
              aggregate safety stock, fast transport mode
             high demand, low value: disaggregate inventory location, cheap mode
             low demand, high value: aggregate inventories, fast mode
             low demand, low value: aggregate only safety stock

                                                                                    57
Summary of Learning Objectives
   Strengths and weaknesses of transport modes
   Choices of transportation networks
   Tradeoffs in transportation network design
   Tailored transportation networks

Reference: Chopra & Meindl, Supply Chain Management,
   2004, Prentice-Hall.

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