Cha (Ter 6 - Transportation Management

Supply Chain
Management
Chapter 6
Transportation Management
Logistics Overview
Why has logistics become increasingly
important?
Cost reduction pressures are severe

Logistics has a high impact on customer service
A strong need exists for demand and supply
planning consistency
A focus on core competencies has placed
logistics in the outsourcing spotlight
Development of IT technology supports
integrated logistics management
2
1
Value-added Transportation
Concept
Product/Info Flows
Inbound Outbound
Supplier Manufacturer Customer
Info/Return Goods Flows

3
Role of Transportation
Time and Place Utility:
Movement across space or distance.
Place utility - Where it is needed
Time utility - created or added by the
warehousing & storage of product until it is
needed. Also a factor in time utility; it
determines how fast and how consistently
a product move from one point to another.
4
2
Transportation Role in Value
Attainment Process
Critical element of structure,

capacity, and movement decisions
Both between supply chain
members and intra-organizational
Transportation-Related Service
Elements
Speed: time-in-transit
Availability: accessible to customers when they
want it
Dependability: pick-up and delivery time variability
Flexibility: adjustment to shippers needs
3
Role of Transportation in Logistics &
Supply Chain Management
Industry Deregulation
Transportation Functions, Principles,

Participants
Transportation Regulation
Transportation Industry Structure
Transportation Services
4
Participants
Transportation Functions
Transportation Principles
Transportation Participants

Participants
Product Movement
Product Storage
10
5
Product Movement
11
Product Storage
12
6
New Destination
Multan
Diversion
Original Destination
Lahore
Karachi
13

Participants
Economy of Scale
Economy of Distance (Tapering Principle)
14
7
Economies of Scale
$100/book
The more items (weight)
is transported,
the less the
Transportation transportation costs per
Cost per Book
item (unit of weight)
$.10/book
1 1000
Number of Books in Shipment
15
Economies of The larger the distance,

Distance the less the
transportation costs per
Tapering Principle unit of distance (e.g.,
per mile)
$.10/mile
Transportation $.05/mile
Cost per Mile
Transportation rates are distance

related, not distance proportional
$50/mile
1 mile 500 miles 1000 miles
Shipment Distance
16
8
Participants
17
I need something
shipped at the lowest
possible cost!
18
9
I need something
shipped at the lowest I need something
possible cost! delivered at the lowest
possible cost!
19
Carriers: We have the
equipment!
20
10
Carriers we can find a shipper!
Shippers we can find a carrier!
21
the transportation system
is vital for the countrys
economic health
22
11
purchase fuel,
transportation
equipment, supplies
23
track shipments
purchase fuel,
transportation
equipment, supplies
24
12
track shipments
purchase fuel,
transportation match products needing to
equipment, supplies be shipped with available
capacity
25
Creates demand for
transportation by
purchasing products
26
13
Participants
27

Participants
Types of Transportation Regulation
28
14
Participants
29

Economic
Investments in transportation infrastructure
(e.g., highways, airports, ports)
Control of routes, pricing, schedules
30
15
Economic
Investments in transportation infrastructure
(e.g., highways, airports, ports)
Control of routes, pricing, schedules
Social/Safety
Protect the public, the environment
Make sure equipment operates safely, cleanly
Safe transportation of hazardous materials (HAZMAT)
Regulating hours worked
31

Participants
32
16
Five Basic Transportation Modes
Pipeline
33

Pipeline Water
34
17
Pipeline Water
Air
35

Pipeline Water
Air
Rail
36
18
Pipeline Water
Air
Rail Highway
37
Cost Structure For Each Transportation Mode

Rail
high fixed costs (land, tracks)

low variable costs (operating costs, e.g., labor, fuel)
slow, but inexpensive way to transport heavy freight
that doesnt require special handling, long distances
38
19
Cost Structure For Each Transportation
Mode
Highway
low fixed costs (government builds, maintains highways)

medium-high variable costs (operating costs, e.g., labor,
fuel)
most accessible mode (more highways than railroads,
waterways, pipelines); best for transporting medium to
high value products short to moderate distances
39
Containerization
Significant growth during Vietnam War
Improves efficiency, protects material,
reduces handling & pilferage
Sizes: 20 ft (TEU) or 40 ft (FEU)
Shorter to permit multiple units on railcars
TEU: 20 equivalent unit FEU: 40 Equivalent Unit
40
20
Highway
LTL less than truckload

TL truckload
Specialty
41

Mode Water
moderate fixed costs (ships and freight handling

equipment)
low variable costs (operating costs, e.g., labor, fuel)
very slow, but inexpensive way to transport large, heavy
freight over long distances (e.g., oceans, rivers, inland
waterways, lakes)
42
21
Mode Air
low fixed costs (aircraft and freight handling equipment)

highest variable costs (e.g., labor, fuel, maintenance)
very fast; used for transporting high value and/or high
perishability product over short to medium distances.
43

Mode
Pipeline
highest fixed costs (right of way & construction costs of

equipment)
lowest variable costs (no significant labor or fuel costs)
slow, but dependable (e.g., no weather, traffic
disruptions); no flexibility with regard to types of products
that can be transported must be liquid (e.g., petroleum)
44
22
Basic Modes of Transportation
Fixed Variable Traffic
costs costs composition
Rail high low bulk food, mining, oil
heavy mfg
Motor low medium consumer goods,
medium/light mfg
Water medium low bulk food, mining,
chemicals
Air low high high-value goods,
rush shipments
Pipe high low petroleum, chemicals,
mineral slurry
45

Participants
Transportation Regulation Transportation
Industry Structure
46
23
Participants
Industry Structure
Non Operating Intermediaries
Traditional Transportation Carriers
Package Services
Intermodal Transportation
47

Participants
Industry Structure
Freight Forwarders
Transportation Brokers
Shipper Associations/Cooperatives/Agents
TraditionalTransportation Carriers
Package Services
48
24
Participants
Industry Structure
Freight Forwarders
Package Services
49
Third Party Providers

The offering of nearly any form of
transportation to a shipper or receiver
as part of a total package of logistics
services
Shipper or user avoids capital outlays
and investment
Focus on core competency--let experts
do logistics
50
25
51
Freight Forwarders
Formerly common carriers
non-asset owning
Earn difference between what they charge
(LTL, LCL) and what they pay (CL, TL)
Issue bill of lading
52
26
53

Participants
Industry Structure
Freight Forwarders
Package Services
54
27
Freight Brokers
Intermediaries who bring shippers and carriers
together for a fee
Find customers for carriers or carriers for
shippers
Reduce burden for carriers & shippers
Find best means/rate for shippers
Help maximize capacity for carrier
Information Systems expanding opportunities
55

Participants
Industry Structure
Freight Forwarders
Package Services
56
28
Participants
Industry Structure
Package Services
57
Owner-Operator
Own or lease a truck and trailer and make
services available to for-hire carriers
Contract out their services to other carriers
Provide overflow capacity and flexibility
Reduce financial risk to carriers
58
29
Participants
Industry Structure
Package Services
59
Express & Courier

TCS, UPS, FEDEX, DHL
Fast, door-to-door service
Operate large network of terminals, pick up
and delivery vehicles, and line haul
Typically under 200 lbs
Compete with Postal Service
Future good due to expansion and
innovative practices
60
30
Participants
Industry Structure
Package Services
61
What is Intermodal
Transportation?
The use of two or modes of transportation in
moving a shipment from origin to destination
Mostly associated with piggyback or container
shipments
Combines advantages (and disadvantages) of
each mode used
Reduces risk of theft and loss
Shortens customer order cycle time and
effectively reduces costs
Promotes seamless product movement:
Eliminates unnecessary handling
62
31
Intermodal
Rail Truck
Air Water
Enables shippers to benefit from advantages

of multiple modes of transportation
minimizes disadvantages of individual modes
63
64
32
Changing Transportation
Environment
65
Changing Transportation Environment
Deregulation
Time-based competition
Expanding geographic coverage
Information technology
Social and environmental concerns
66
33
Selected Results of the Changing
Environment - Economic Impact
Increased competition in individual markets - both

within modes and between modes
More efficient carrier operations - less interlining,
more direct routing, efficient pricing
Transportation costs declined in real terms and as
percent of GDP
Transportation service quality improved
67

Environment - Industry Impact
Consolidation in rail, air and LTL trucking
Proliferation of TL carriers
Strong growth in regional trucking - networks
TL growing faster than LTL
Air freight growth
Intermodal growth: rail-truck, air-truck, rail-ship
Growth of one-stop shopping - 3PL
Private fleet conversion
68
34
Environment - Market Impact
Demand for fast, dependable, responsive service
at lower cost
Demand for a broader range of services to
integrate supply chain functions
Core carrier concept - interdependence between
shipper-carrier
Customized price/service packages/contracts
Relational view of transportation as a value-
added service
69
70
35
Network Freight Flows: Macro-

Decisions
Micro-Decisions
Information Systems Support
71
Transportation Decision Making in an Integrated Supply Chain
Macro Understand total network flows Strategic

Understand individual lane flows
Decision Flow
Decision Scope
Understand current
carrier usage patterns
Make mode/carrier
decisions
Routing/Scheduling,
Load Planning, etc.
Operational
Micro
Inbound Outbound
Supplier Manufacturer Customer
72
36
Network Freight Flows: A Fully
Integrated Approach
Managing Inbound-Outbound flows in an
optimal manner requires firm to have a good
handle on the entire logistics process
Traditionally view transportation in a vacuum--
need to look at it in the context of the total
logistics system
Greatest improvement opportunities lie in
integrating transportation with other logistics
functional areas such as purchasing, inventory
control, forecasting and production scheduling
73
Approach to Analysis
1. Analyze lane densities/frequencies:

what opportunities emerge for:
inbound/outbound consolidation
vehicle consolidation
temporal consolidation
network consolidation - cross dock
potential (hub and spoke systems)
74
37
Approach to Analysis (cont.)
2. Once opportunities for consolidation are visible, make
mode/carrier selection based on service/cost mix
Given similar service, are rates better on 1
mode/carrier than another?
Does any mode/carrier have relative strengths in a
particular lane?
Any backhaul opportunities?
3. If so, look to consolidate loads on mode/carrier with best
cost structure - assign private fleet to most costly routes
In the freight industry, freight carried by a trucker to return to his home with a
loaded truck, rather than an empty one (as opposed to headhaul, the outgoing
freight).
75
Consolidation Opportunities
Inbound-Outbound flow consolidation: look

for opportunities to combine inbound/
outbound freight
Vehicle consolidation: use one vehicle/multi
stops for LTL volumes vs. one shipment to
each
Temporal consolidation: hold orders until
large volume shipment possible
76
38
Suggested Analyses
Network flows
Lane densities, frequencies, consistency
Freight distribution by mode, carrier
Consolidation opportunities
77
Summary
Identify:
Opportunities to achieve balanced flows - obtain
lower rates for providing loads both ways
Significant volumes for rate negotiation
Vehicle/temporal consolidation opportunities
Advantages of reducing number of carriers
78
39
Key Principles of Transportation
Management
79
I. Improving Efficiency
Rule of efficiency: Straight line, minimize stopping--
avoid damage and cost (delay)
Minimize handling: Avoid handshakes and attempt to
make process seamless
Full capacity: Reduce cost per unit
Break bulk & consolidation on long haul
Avoid empty backhauls
Effective Scheduling: Optimize labor and equipment
(5%-10%)
Transportation rates are distance related, not distance
proportional
80
40
II. Efficient Use of Technology &
Equipment
High utilization of expensive
assets
Larger the vehicle, the lower the
cost per unit
Speed does not equal
economical operations
Minimize vehicle gross weight
Standardized vehicles and
equipment
Balance specialization with
adaptability
Examine trade-offs between IT
and traditional logistics functions
81
III. Coordinate Operations

Coordinate operations with requirements to
ensure trade-offs and appropriate level of
service
Cost accountability as part of performance
measurement
Reliability is sometimes better than speed
Look for opportunities to innovate, but
recognize proven principles
82
41
Customer Service Measures
Order cycle lead time
Stock availability/fill rates/stock-outs/back
orders/partial shipments
Record integrity
Frequency of delivery
Delivery reliability
Order tracing capability
Volume flexibility
83
Customer Service Measures

Invoice accuracy
Order status information
Technical support responsiveness
Unscheduled service responsiveness
Speed of product feature changes
Product and service quality
84
42
Total Cost Concept
The total cost concept recognizes that an optimum cost
in one area or function may not lead to an optimum total
system cost
Total cost analysis requires the management of supply
chain trade-offs
Logistical activity areas that drive total logistics costs:
Customer service level costs
Inventory carrying costs
Lot quantity costs
Order processing and information costs
Warehousing costs
Transportation costs
85
Summary-1
The transportation mode available to the
logistics manager consists of the basic mode,
intermodal and indirect and special carrier
The carrier selection is two fold, selection of the
mode and selection of the specific carrier
Factors determining carrier selection include
transportation rate, transit time, reliability,
capability, accessibility and security
86
43
Summary-2
Railroads offer low cost for long hauls of large volumes,
but they have accessibility limitation and long transit
time.
Motor carriers are very accessible and move product in
small quantities with low consistent transit times.
However their costs are higher than the other modes
except air
Water transportation is relatively low cost and is
desirable for moving large volume over long distances.
The prime disadvantage is long transit time and service
disruption caused by weather
Air carriers have very low transit times but very high
rates.
Pipelines offer very low rates for the movement of liquids
but are not a viable option for manufactured goods.
87
Summary-3
Intermodal transportation is the combination of two or
more basic modes to provide through movement. The
dominant form is rail-truck or piggyback
Containerization is the shipping of freight in a box or
container that is subsequently transferred from one
carrier to another. It reduces freight handling and
damage while improving transit time.
The transportation system includes a number of indirect
and special carriers such as small package carriers,
consolidators, freight forwarder, shipper associations,
brokers and intermodal marketing companies.
88
44
Reference:
The Management of Business Logistics by
J. J. Coyle, E. J. Bardi and C. J. Langley
Jr.
89
45

Cha (Ter 6 - Transportation Management

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Supply Chain

Cost reduction pressures are severe

Supplier Manufacturer Customer

Info/Return Goods Flows

Critical element of structure,

Transportation Functions, Principles,

Transportation Functions, Principles,

Transportation Functions, Principles,

Economies of The larger the distance,

Transportation rates are distance

Transportation Functions, Principles,

Types of Transportation Regulation

Control of routes, pricing, schedules

Control of routes, pricing, schedules

Transportation Functions, Principles,

Five Basic Transportation Modes

Five Basic Transportation Modes

Cost Structure For Each Transportation Mode

high fixed costs (land, tracks)

low fixed costs (government builds, maintains highways)

TEU: 20 equivalent unit FEU: 40 Equivalent Unit

LTL less than truckload

Cost Structure For Each Transportation

moderate fixed costs (ships and freight handling

low fixed costs (aircraft and freight handling equipment)

Cost Structure For Each Transportation

highest fixed costs (right of way & construction costs of

Transportation Functions, Principles,

Transportation Functions, Principles,

Third Party Providers

Transportation Functions, Principles,

Transportation Functions, Principles,

Express & Courier

Enables shippers to benefit from advantages

Changing Transportation Environment

Increased competition in individual markets - both

Selected Results of the Changing

Network Freight Flows: Macro-

Transportation Decision Making in an Integrated Supply Chain

Macro Understand total network flows Strategic

Supplier Manufacturer Customer

1. Analyze lane densities/frequencies:

Inbound-Outbound flow consolidation: look

III. Coordinate Operations

Customer Service Measures

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