Transportation in the Supply Chain
© 2004 Prentice-Hall, Inc.
Outline
The role of transportation in the supply chain
Factors affecting transportation decisions
Modes of transportation and their performance
characteristics
Design options for a transportation network
Trade-offs in transportation design
Tailored transportation
Routing and scheduling in transportation
Making transportation decisions in practice
© 2004 Prentice-Hall, Inc.
Factors Affecting
Transportation Decisions
Carrier (party that moves or transports the product)
– Vehicle-related cost
– Fixed operating cost
– Trip-related cost
Shipper (party that requires the movement of the
product between two points in the supply chain)
– Transportation cost
– Inventory cost
– Facility cost
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Transportation Modes
Trucks
– TL
– LTL
Rail
Air
Package Carriers
Water
Pipeline
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Truckload (TL)
Major Issues
– Utilization
– Consistent service
– Backhauls
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Less Than Truckload (LTL)
Major issues:
– Location of consolidation facilities
– Utilization
– Vehicle routing
– Customer service
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Rail
Key issues:
– Scheduling to minimize delays / improve service
– Off-track delays (at pickup and delivery end)
– Yard operations
– Variability of delivery times
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Air
Key issues:
– Location/number of hubs
– Location of fleet bases/crew bases
– Schedule optimization
– Fleet assignment
– Crew scheduling
– Yield management
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Package Carriers
Companies like FedEx, UPS, that carry small packages
ranging from letters to shipments of about 150 pounds
Expensive
Rapid and reliable delivery
Small and time-sensitive shipments
Preferred mode for e-businesses (e.g., Amazon, Dell,
McMaster-Carr)
Consolidation of shipments (especially important for package
carriers that use air as a primary method of transport)
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Water
Limited to certain geographic areas
Ocean, inland waterway system, coastal waters
Very large loads at very low cost
Slowest
Dominant in global trade (autos, grain, apparel, etc.)
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Pipeline
High fixed cost
Primarily for crude petroleum, refined petroleum
products, natural gas
Best for large and predictable demand
Would be used for getting crude oil to a port or
refinery
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Intermodal
Use of more than one mode of transportation to move a shipment to
its destination
Most common example: rail/truck
Also water/rail/truck or water/truck
Grown considerably with increased use of containers
Increased global trade has also increased use of intermodal
transportation
More convenient for shippers (one entity provides the complete
service)
Key issue involves the exchange of information to facilitate transfer
between different transport modes
© 2004 Prentice-Hall, Inc.
Design Options for a
Transportation Network
What are the transportation options? Which one to
select? On what basis?
Direct shipping network
Direct shipping with milk runs
All shipments via central DC
Shipping via DC using milk runs
Tailored network
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Trade-offs in Transportation Design
Transportation and inventory cost trade-off
– Choice of transportation mode
– Inventory aggregation
Transportation cost and responsiveness trade-off
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Choice of Transportation Mode
A manager must account for inventory costs when
selecting a mode of transportation
A mode with higher transportation costs can be
justified if it results in significantly lower inventories
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Inventory Aggregation: Inventory
vs. Transportation Cost
As a result of physical aggregation
– Inventory costs decrease
– Inbound transportation cost decreases
– Outbound transportation cost increases
Inventory aggregation decreases supply chain costs if
the product has a high value to weight ratio, high
demand uncertainty, or customer orders are large
Inventory aggregation may increase supply chain
costs if the product has a low value to weight ratio,
low demand uncertainty, or customer orders are small
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Trade-offs Between Transportation
Cost and Customer Responsiveness
Temporal aggregation is the process of combining
orders across time
Temporal aggregation reduces transportation cost
because it results in larger shipments and reduces
variation in shipment sizes
However, temporal aggregation reduces customer
responsiveness
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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
Two basic approaches:
– Savings matrix method
– Generalized assignment method
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Savings Matrix Method
Identify the distance matrix
Identify the savings matrix
Assign customers to vehicles or routes
Sequence customers within routes
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Generalized Assignment Method
Assign seed points for each route
Evaluate insertion cost for each customer
Assign customers to routes
Sequence customers within routes
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Making Transportation
Decisions in Practice
Align transportation strategy with competitive
strategy
Consider both in-house and outsourced transportation
Design a transportation network that can handle
e-commerce
Use technology to improve transportation
performance
Design flexibility into the transportation network
© 2004 Prentice-Hall, Inc.
Summary of Learning Objectives
What is the role of transportation in a supply chain?
What are the strengths and weaknesses of different
transport modes?
What are the different network design options and what
are their strengths and weaknesses?
What are the trade-offs in transportation network
design?
What methodologies are available for routing and
scheduling deliveries in transportation networks?
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