Applications in Supply Chain Analytics

Transportation and Transshipment Models

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Design Options for a Transportation Network
• The design of a transportation network affects the performance of a supply chain by
establishing the infrastructure within which operational transportation decisions
regarding scheduling and routing are made.
• A well-designed transportation network allows a supply chain to achieve the desired
degree of responsiveness at a low cost.
• Decisions
• Should transportation be direct or through an intermediate site?
• Should the intermediate site stock product or only serve as a cross-docking location?
• Should each delivery route supply a single destination or multiple destinations (milk run)?

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 routing are made. A well-designed transportation network allows a supply chain to achieve the
desired degree of responsiveness at a low cost. Three basic questions need to be considered when
designing a transportation network between two stages of a supply chain:
1. Should transportation be direct or through an intermediate site?
2. Should the intermediate site stock product or only serve as a cross-docking location?
3. Should each delivery route supply a single destination or multiple destinations (milk run,
discussed later)?
Based on the answers to these questions, the supply chain ends up with a variety of trans-
portation networks. We discuss these options and their strengths and weaknesses in the context
of a buyer with multiple locations sourcing from several suppliers.

Direct Shipment Network to Single Destination

Direct Shipment Network to Single Destination With the direct shipment network to a single destination option, the buyer structures the transpor-
tation network so that all shipments come directly from each supplier to each buyer location, as
shown in Figure 14-2. With a direct shipment network, the routing of each shipment is specified,

• The routing of each shipment is specified, and the supply chain manager Suppliers Buyer Locations
needs to decide only the quantity to ship and the mode of transportation
to use.
• Involves a trade-off between transportation and inventory costs.
• The major advantage is the elimination of intermediate warehouses and its
simplicity of operation and coordination.
• The shipment decision is completely local, and the decision made for one
shipment does not influence others.
• The transportation time from supplier to buyer location is short because
each shipment goes direct.
• Justified only if demand at buyer locations is large enough that optimal
replenishment lot sizes are close to a truckload from each supplier to each
location.
FIGURE 14-2 Direct Shipment Network

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 large enough that ordering was managed locally within the store and delivery to the store arrived
directly from the supplier. The direct shipment network to single destination, however, proved to
be problematic as Home Depot started to open smaller stores that did not have large enough
orders to justify a direct shipment.

Direct Shipping with Milk Runs

A milk run is a route on which a truck either delivers product from a single supplier to multiple
retailers or goes from multiple suppliers to a single buyer location, as shown in Figure 14-3. In
direct shipping with milk runs, a supplier delivers directly to multiple buyer locations on a truck
or a truck picks up deliveries destined for the same buyer location from many suppliers. When
using this option, a supply chain manager has to decide on the routing of each milk run.
Direct shipping provides the benefit of eliminating intermediate warehouses, whereas milk
runs lower transportation cost by consolidating shipments to multiple locations on a single truck.
Milk runs make sense when the quantity destined for each location is too small to fill a truck but
multiple locations are close enough to each other such that their combined quantity fills the
truck. Companies such as Frito-Lay that make direct store deliveries use milk runs to lower their
transportation cost. If frequent small deliveries are needed on a regular basis and either a set of

Direct Shipping with Milk Runs

suppliers or a set of retailers is in geographic proximity, the use of milk runs can significantly
reduce transportation costs. For example, Toyota uses milk runs from suppliers to support its
just-in-time (JIT) manufacturing system in both Japan and the United States. In Japan, Toyota
has many assembly plants located close together and thus uses milk runs from a single supplier

Suppliers Buyer Locations Suppliers Buyer Locations

• A milk run is a route on which a truck either delivers product
from a single supplier to multiple retailers or goes from
multiple suppliers to a single buyer location.

• Direct shipping provides the benefit of eliminating

intermediate warehouses, whereas milk runs lower
transportation cost by consolidating shipments to multiple
locations on a single truck.

• Milk runs make sense when the quantity destined for each
location is too small to fill a truck but multiple locations are
close enough to each other such that their combined quantity FIGURE 14-3 Milk Runs from Multiple Suppliers or to Multiple Buyer Locations
fills the truck. Milk run for delivery Milk run for pickup

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Shipments via Intermediate Distribution Centre
450 Chapter 14 • Transportation in a Supply Chain

Suppliers Buyer Locations

• Supplier ships the product to a distribution
centre. It is then shipped from the distribution
centre to the buyer.
DC
• Shipment via a DC allows for:
• cross-docking and
• intermediate storage

FIGURE 14-4 All Shipments via DC

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to many plants. In the United States, however, Toyota uses milk runs from many suppliers to
each assembly plant, given the large distance between assembly plants.

All Shipments via Intermediate Distribution Center with Storage

Under this option, product is shipped from suppliers to a central distribution center, where it is
stored until needed by buyers when it is shipped to each buyer location, as shown in Figure 14-4.
Storing product at an intermediate location is justified if transportation economies require large
Cross-docking
• When a DC cross-docks product, each inbound truck contains product from suppliers for
several buyer locations, whereas each outbound truck contains product for one buyer
location from several suppliers.
• Major benefits that little inventory needs to be held and product flows faster in the supply
chain.
• Cross-docking also saves on handling cost because product does not have to be moved into
and out of storage.
• Appropriate when economies of scale in transportation can be achieved on both the inbound
and outbound sides and both inbound and outbound shipments can be coordinated.

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Storage at the distribution center
• Justified if transportation economies require large shipments on the inbound side or
shipments on the outbound side cannot be coordinated.
• In such a situation, product comes in large quantities into a DC, where it is held in inventory
and sent to buyer locations in smaller replenishment lots when needed.

• The presence of a DC allows a supply chain to achieve economies of scale for inbound
transportation to a point close to the final destination, because each supplier sends a
large shipment to the DC that contains product for all locations the DC serves.
• Because DCs serve locations nearby, the outbound transportation cost is not very large.

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Optimizing Transportation
208 Chapter 5 Transportation Model and Its Variants

• There are 𝑚 sources and 𝑛 destinations Sources Destinations

c11 : x11
• For each source-destination pair (𝑖 and 𝑗), a1 1 b1
1
the transportation cost per unit is 𝑐!" , and the
amount shipped is 𝑥!" .
Units of Units of
a2 2 2 b2
• The amount of supply at source 𝑖 is 𝑎! , and supply demand
· ·
the amount of demand at destination 𝑗 is 𝑏" . ·
·
·
·
n bn
• The objective of the model is to minimize am m
cmn : xmn
the total transportation cost while satisfying
all the supply and demand restrictions.
FIgure 5.1
Representation of the transportation model with nodes and arcs

Table 5.1 Mileage Chart

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Denver Miami

Los Angeles 1000 2690

Detroit 1250 1350
New Orleans 1275 850
Formulation $ &

min $ $ 𝑐!% 𝑥!% Total cost of transportation: cost/unit * no. of units

!"# %"#

subject to
&
Supply constraint: the total quantity supplied from
$ 𝑥!% ≤ 𝑎! , ∀𝑖 ∈ {1, … , 𝑚} each source should be less than the available
%"# quantity.

$
Demand constraint: the total quantity supplied to
$ 𝑥!% ≥ 𝑏% , ∀𝑗 ∈ {1, … , 𝑛} each destination should be more than the
!"# demand at that destination.

𝑥!% ≥ 0

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The Transshipment Model
450 Chapter 14 • Transportation in a Supply Chain

Suppliers Buyer Locations

• There can be multiple distribution centers
(transshipment points) through which all
shipments must be routed.
DC
• Split this into two transportation problems
• Supplier to DC and DC to Buyer

• Add a balance constraint

• The sum of the quantity shipped in to the
DC must be equal to the sum of the
quantity shipped out of the DC.
FIGURE 14-4 All Shipments via DC

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to many plants. In the United States, however, Toyota uses milk runs from many suppliers to
each assembly plant, given the large distance between assembly plants.

All Shipments via Intermediate Distribution Center with Storage

Under this option, product is shipped from suppliers to a central distribution center, where it is
stored until needed by buyers when it is shipped to each buyer location, as shown in Figure 14-4.
Storing product at an intermediate location is justified if transportation economies require large
 min $ $ 𝑐!% 𝑥!% + $ $ 𝑐%' 𝑥%' Total cost of transportation: sum of cost/unit * no. of
units from supplier to Dc and DC to Buyer.
! % % '

Illustration subject to
Supply constraint: the total (summed over all DCs) quantity
Let
supplied from each source to the DC should be less than the
$ 𝑥!% ≤ 𝑎! , ∀𝑖 available quantity.
𝑖 = the set of suppliers, %

𝑗 = set of warehouses (DC) and Demand constraint: the total (summed over all DCs) quantity
supplied to each destination should be more than the demand at
𝑘 = the set of buyers $ 𝑥%' ≥ 𝑏' , ∀𝑘 that destination.
%
Balance constraint: quantity in = quantity out
The sum (over all suppliers) of quantity supplied
$ 𝑥!% = $ 𝑥%' , ∀𝑗 ∈ {1, … , 𝑛} to each DC must be equal to the sum (over all
buyers) supplied from that DC. Ensure that there
! '
is zero inventory at the DC.

𝑥!% , 𝑥%' ≥ 0

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