MCL756 : Supply chain management

Transport tradeoff

1
 Choice of Mode of Transport:
Illustration
Product : Printer
High End Standard Low end
Value/unit ( Rs.) 20,000 15,000 10,000
Inv. Carrying cost/unit/year 4,000 3000 2000
Mean Demand/week (units) 100 100 100
SD of demand /week(Units) 30 30 30

Option Sea Air

Lot size (units) 400 100
Freight/unit (Rs.) 90 360
Lead time(weeks) 4 1
Target service level: 98%

2
 Cost Comparisons for Different Modes of
Transport Under Stable Demand*

Impact of Value Density

Optimal Decision : For high end :Air. For standard and low end : Sea
* Assumption : SD of demand = 0 ( No demand uncertainty)
 How cost is calculated..

 Cycle stock=0.5 * Lot size shipment = 0.5 * 400= 200 units

 Pipeline inventory = Lead time x demand rate = 4 x 100=400 units
 Total inventory = Cycle stock+ Pipeline inventory = 200+400=600 units
 Annual inventory carrying rate = 600 x 20,000 x 0.2= Rs 2,400,000
 Annual Transportation cost = Annual demand x transport rate/unit = 100 x 52 x
90 = Rs 468,000

4 4
 Cost Comparisons in Situation of Demand
Uncertainty

Impact of Value density and Demand Uncertainty

Optimal Decision : For high end and standard: Air. For low-end: Sea
 Pl note
 Cycle stock= 0.5 * Lot size for shipment
 Pipeline inventory= Lead time x Demand Rate
 Total Inventory = Cycle stock + Pipeline inventory
 Annual inventory carrying cost = total inventory * unit carrying cost
 Safety stock= service factor * standard deviation of demand x Sq root of Lead time
 Safety stock for sea transport = 2 x 30 x Sqrt (4) = 120 units
 Safety stock inventory carry cost for sea transport = 120 units x 20,000x 0.2=
480,000

 Safety stock for air transport = 2 x30x Sqrt(1) = 60 units

 Safety stock inventory carry cost for air = 60 units x 20,000 x 0.2 = 240,000

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 Basic Cost Trade-Offs
 When alternative modes are available, the one chosen
should be the one that offers the lowest total cost
consistent with customer service goals.
 Often, cost trade-offs must be used.
 Speed & dependability affect both the seller’s & buyer’s
inventory level, as well as the inventory that is in
transit.
 Slower, less reliable modes require more inventory in
the distribution channel
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 Example
 A luggage company maintains a finished-goods inventory at its plant at B
 Currently, rail is used to ship between B and the firm’s warehouse , WH
 Average transit time is T = 21 days
 100,000 units are kept at each stocking point with the luggage having an
average value of C =Mu 30 per unit
 Inventory carrying costs are I = 30 percent per year
 There are D = 700,000 units sold per year out of the WH

 Mu= Monetary unit (Rs , $ etc.)

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 Example
Transport Services Available to the Firm

Door-to-Door No. of
Transport
Rate (Mu/unit) Transit Time Shipments per
Service
(days) year

Rail 0.10 21 10

Piggyback 0.15 14 20

Truck 0.20 5 20

9 Air 0.40 2 40
 Example
 Different modes affect the time inventory is in transit
 Annual demand (D) will be in transit by the fraction of the year
represented by T/365 days, where T is the average transit time
 Annual cost of carrying this in-transit inventory is ICDT/365
 Average inventory at both ends of the channel can be approximated as
Q/2, where Q is the shipment size
 Holding cost per unit is I x C
◦ Note that C must reflect where the inventory is in the channel
◦ Value of C at the plant is the price (Mu 30 per unit)
◦ Value of C at the WC warehouse is C + transportation rate
 Total annual transportation cost is R x D
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  Mode I : Rail
The shipments are 10 per year.
Shipment size = 700,000/10 = 70,000 units
Average inventory = 70,000/2=35,000
Inventory at the plant = 100,000+ 35,000 = 135,000 units
Inventory at WH = 100,000+35,000=135,000 units

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Example

Cost Type Method of Computation Rail

Transportation RxD (.1)(700,000) = 70,000

[(.3)(30)(700,000)(21)]/365 =
In-transit Inventory ICDT/365
363,465

Plant Inventory ICQ/2 [(.3)(30)(135,000)] = 1,215,000

Warehouse Inventory IC”Q/2 [(.3)(30.1)(135,000)] =1,219,050

Total for Rail Mu 2,540,515

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  Similarly, compute the costs for other alternatives.

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Example
Modal Choice

Method of
Cost Type Rail Piggyback Truck Air
Computation

Transportation RxD 70,000 105,000 140,000 980,000

In-transit
ICDT/365 363,465 241,644 86,301 34,521
Inventory

Plant Inventory ICQ/2 1,215,000 ? ? ?

Warehouse
IC”Q/2 1,219,050 ? ? ?
Inventory

Mu
14 Totals ? ? ?
2,540,515
 Factors Other Than Transportation Cost that Affect
Modal Choices
 Effective buyer/seller cooperation is encouraged if a reasonable
knowledge of the other party’s costs is available
 If there are competing suppliers, buyer & supplier should act rationally
to gain optimum cost-transport service trade-offs
 Offering higher-quality transportation services than the competition
may allow the seller to charge a higher price for the product
 Elements in the mix change frequently
◦ Transport rate fees, product mix changes, inventory cost changes, & transport
service retaliation by competitors
 If buyer makes the transport choice, seller’s inventories are impacted as
well, which may impact price charged for the product

15
 General Principles for Good Routing & Scheduling
 Load trucks with stop volumes that are in the closest
proximity to each other – minimizes interstop travel
between them
 Stops on different days should be arranged to produce tight
clusters – develop overall route, plus daily routes
 Build routes beginning with the farthest stop from the depot
 The most efficient routes are built using the largest vehicles
available – allocate largest vehicles first, then smaller

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 Design of Distribution Network
◦ Direct shipment
◦ Milk Run from each plant (Aggregate demand across depots )
◦ Shipment via Depot
◦ Cross Docking
◦ Hub- and spoke model
◦ Different Strategy for different category of products/customers

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 Direct Shipping

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 Shipping Using Milk Run

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Shipping via a Central Distribution Centre
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 Role of Distributors
 Move goods from different suppliers or producers closer to
consumer at a lower cost than can be performed by any one
supplier or producer.
 How?
◦ Transportation consolidation – warehouses consolidate less-
than-truckload (LTL) quantities into truckload (TL) quantities
◦ Product mixing – grouping a variety of orders into a direct
shipment to the customer.
◦ Cross-docking

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 Cross-docking
 Practice of unloading materials from an incoming
trucks or rail cars and loading these materials onto
outbound trucks or rail cars, with little or no
storage or warehousing in between.
 This may be done to
◦ sort material intended for different destinations,
or to
◦ combine small shipments of materials from
different origins.
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 Cross-docking

 In
practice many "cross-docking" operations
require large staging areas where inbound
materials are sorted, consolidated, and stored
until the outbound shipment is complete and
ready to ship.

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 Cross-docking
 If the staging takes hours or a day, the
operation is usually referred to as a "cross-
dock" distribution center.
 If it takes several days or even weeks, the
operation is usually considered warehousing.

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 Wal-Mart's Cross-docking Distribution System

 Cross docking has been most successfully implemented in

Wal-Mart's distribution system.
 Individual Wal-Mart stores transmit point-of-sale
(POS) data from the cash register back to corporate
headquarters several times a day.

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 Wal-Mart's Cross-docking Distribution System
 This provides instant feedback on customer
demand, which is transmitted up the supply
chain.
 Demand information is used to order
shipments from
◦ suppliers to the Wal-Mart distribution center
and from
◦ the Wal-Mart distribution center to the
store.
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 Major requirements for
justifying and effectively deploying
a crossdock operation
 Significant and steady product flow
 easy to handle material / unit-loads
 Good and reliable information flow across the entire supply chain
◦ pre-distribution crossdocking: the customer is assigned before the
shipment leaves the vendor, so it arrives to the crossdock bagged and
tagged for transfer.
◦ post-distribution crossdocking: the crossdock itself allocates material to
its stores.

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 Wal-Mart's Distribution System
 Wal-Mart’s supply chain is a demand-driven supply
chain.
 Benefits are
◦ JIT delivery,
◦ less inventory,
◦ Fewer stock-outs and shortages,
◦ lower costs throughout the supply chain.

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 Cross docking
 TC has its trucks that aggregate LTL shipments requiring
delivery at other places from smaller towns like Hubli,
Mangalore and Bellary.
 All the trucks from the smaller towns of Karnataka will arrive at
Bangalore hub and the good from these trucks will be cross-
docked into four trucks leaving for Mumbai/Chennai/Delhi and
Kolkata
 Maruti, Toyota and Tata Motors have started using concept of
cross docking.
 Totyota- Cross docking is done at Gurugram and Pune

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 Transportation Strategy: Tata Chemicals –
Soda Ash
 Reach Customer directly via Road
 Reach Customer via Rail + Road
 Reach Customer via Sea + Road
 Reach Customer Via Rajkot dump

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 Direct Shipping

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 Comparison of Distribution Network
Design Options: Illustration

 Manufacturing firm has three plants (A, B &C), each manufacturing a different
product line and serving a stable market through three depots ( X,Y &Z).
 Plant A is manufacturing menswear, plant B is manufacturing ladies wear and
plant C is manufacturing children’s wear.
 Weekly demand = 100 units for each of the three types of garments at each of
the three depots
 Truck can carry 300 units of garments and the transport cost is Rs 2 per km.
for TL shipments. To obtain economies of scale firm has decided to work with
TL shipments.. Inventory carrying cost is at 20% per annum.
 All the products cost Rs 200 per unit, so inventory carrying cost is Rs 40 per
unit per year.
 Facility cost of maintaining a DC is Rs 12,000 per year.

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Transportation Strategy:
Linking Plants to Markets
Comparison of the Three Transportation Strategies
 Cost computation
 Distance travelled per cycle =
2XA+2XB+2XC+2YA+2YB+2YC+2ZA+2ZB+2ZC= 3744 Km
 Travel cost per cycle = 3744 x2 =7488
 Number of cycles per year = 53/3
 Annual transport cost = 7488 x 52/3 = 129,781
 In direct shipment, each depot receives a shipment of 300 units each
products, so average inv = 150 units. This results in 450 garments of
cycle stock at each depot or 3 x 450= 1350 units across 3 depots
 Thus the average inv cost = 1350 x 40 = Rs 54,000

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 Tailored Transportation
 The use of different transportation networks and modes
based on customer and product characteristics
 Factors affecting tailoring:
◦ Customer distance and density
◦ Customer size
◦ Product demand and value

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 Routing and Scheduling
in Transportation
 The most important operational decision related to
transportation in a supply chain is the routing and scheduling of
deliveries
 Decision of which customers to be visited by a particular vehicle
and the sequence in which they will be visited
 basic approaches:
◦ Savings matrix method

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