Freight Logistics Fundamentals
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Freight Logistics and Strategies:
Fundamentals of Freight DecisionsAlan Erera
Associate Professor, Industrial and Systems EngineeringFaculty Director, MS in Supply Chain Engineering Program
Planning for the Future of Freight MovementSoutheast Diesel Collaborative
September 16, 2013
Supply Chain Engineering at Georgia Tech ISyE
• 25 faculty in logistics/manufacturing • Graduate programs
– MS in Supply Chain Engineering• 50 grads/yr
• Exec MS in International Logistics (EMIL)– 20 grads/yr
• Ph.D. in IE: Supply Chain Engineering– 5-10 grads/yr
My role
• MS in Supply Chain Engineering– Faculty Director
• Research program– Co-director, Center for Global
Transportation – Optimizing design and control of
logistics systems– Research program funded by
• NSF, DHS, USDOT• Industry partners (trucking, freight
railroads, manufacturers)
What to remember
• Shippers focus on total logistics costs when making freight transport decisions
• Providers (carriers) configure freight systems to deliver excellent customer service at lowest possible cost
• Supply chains continuously evolve, but fundamentals change little
Supply chain 101
• People demand products– Food, clothing, staples (must have),
everything else (nice to have)• Supply chain networks
– Procure/produce products– Get them to people
• “Logistics” systems– Connect suppliers to customers cost-
effectively, using freight transportation networks and logistics facilities
• Inbound logistics (procurement)
Supply chain 101
auto assembly
Tier 1 supplier
• Inbound logistics (procurement)
Supply chain 101
auto assembly
Tier 1 supplier
• Inbound logistics (procurement)
Supply chain 101
auto assembly
Tier 1 supplier
• Inbound logistics (procurement)
Supply chain 101
auto assembly
Tier 2 supplier
• Outbound logistics (distribution)
Supply chain 101
medical supplies
primary DC
• Outbound logistics (distribution)
Supply chain 101
medical supplies
primary DC
regional DCs
• Outbound logistics (distribution)
Supply chain 101
medical supplies
primary DC
regional DCs
customer facilities
Fundamental 1: Transportation Cost EOS and Batching
• Cost economies of scale (EOS)– Average transportation cost per
unit decreases as units increase
items
Truckload Shipment Price on Lane (o, d)
full
trailer 1
trailer 2
Fundamental 1: Transportation Cost EOS and Batching
• Cost economies of scale (EOS)– Average transportation cost per
unit decreases as units increase
items
LTL Shipment Price on Lane (o, d)
Fundamental 2: Balancing Freight and Inventory Costs
• Selecting shipment quantity– Small shipments sent frequently lead
to high freight bill spending– Larger batched shipments take
advantage of cost scale economies and reduce freight spend, but
– Larger shipment quantities create larger cycle inventories• Working capital increase (cost)• Storage capacity increase (cost)• Other inventory carrying costs:
obsolescence/perishability, insurance, …
Fundamental 2: Balancing Freight and Inventory Costs
t
I(t)
safety stock
cycle stock
Fundamental 2: Balancing Freight and Inventory Costs
t
safety stock
Reduce inventory costs 50% by shipping twice as frequently
cycle stock
Fundamental 2: Balancing Freight and Inventory Costs
• Another implication– Although freight cost scale
economies often create incentives for sending full trailer (container, …) shipments, cycle inventory costs sometimes make it worthwhile to send partially-loaded equipment
Fundamental 3: Pipeline Inventory and Mode Selection
• Pipeline inventory– Items on order, that have not yet
arrived, often in transit– Although not stored in a facility, still
creates working capital and inventory cost!!
• For shippers of very high value goods or with high storage costs, inventory costs dominate freight costs– Hard to shift to slower modes
Fundamental 3: Pipeline Inventory and Mode Selection
t
Time items spend in inventories
in plant cycle stockin-transitin DC cycle stock
Items
Fundamental 3: Pipeline Inventory and Mode Selection
t
Items
Reducing pipeline inventory may substantially reduce cost
in plant cycle stockin-transitin DC cycle stock
Fundamental 3: Pipeline Inventory and Mode Selection
t
in plant cycle stockin-transitin DC cycle stock
Items
Low cost goods with high storage costs may better off in pipeline!
Fundamental 4: Safety Stock and Mode Selection
• Safety stock inventory– Buffer inventory held in a supply
chain to hedge against uncertainty• Customer demand uncertainty• Procurement quality and reliability
uncertainty• Freight transit time uncertainty
• Shippers with high costs of inventory will strongly prefer freight modes with little transit time variability
Fundamental 5: More Ton-Miles is Often Cheaper
• Batching over geography (usually called consolidation) can be as important as batching over time– for shippers– and, for consolidation carriers like
LTL, package express, …• Freight ton-miles may increase,
but total equipment miles and total costs may decrease– More time, and extra handling
Fundamental 5: More Ton-Miles is Often Cheaper
• Inbound cross-docking for retail
crossdock
suppliers
destination DC
direct LTL
Fundamental 5: More Ton-Miles is Often Cheaper
• Inbound cross-docking for retail
crossdock
suppliers
destination DC
consolidated TL
Fundamental 5: More Ton-Miles is Often Cheaper
• LTL cross-docking terminal network
Fundamental 5: More Ton-Miles is Often Cheaper
• LTL cross-docking terminal network
Fundamental 5: More Ton-Miles is Often Cheaper
• 40’ to 53’ domestic container transload
destination DCPOLA/LB
ATL ramp40’ service
from Asia
Fundamental 5: More Ton-Miles is Often Cheaper
• Pack three 40’ into two 53’ domestic containers
crossdock
destination DCPOLA/LB
ATL ramp53’ domestic service
from Asia
Fundamental 5: More Ton-Miles is Often Cheaper
• “Consolidation” onto freight intermodal trains of truckload shipments
originMOD ramp
IND ramp destination
53’ domestic service
Fundamental 5: More Ton-Miles is Often Cheaper
• Non-stop sleeper team truckload
originMOD ramp
IND ramp destination
Fundamental 6: Trailers and Containers Must Move Empty
• Geographic imbalance between freight origins and destinations– Certain areas net producers of freight
traffic (by mode, carrier, …)– Other areas net consumers– Imbalance!
• Freight transport mobile resources are reusable– Always travel in cycles: (A, B, C, … ,
A)
California
Midwest
Southwest
15
106
Weekly flow (10s)
56
8
Fundamental 6: Trailers and Containers Must Move Empty
California
Midwest
Southwest
Weekly flow (10s)
6 net arrivals
8 net arrivals
14 net departures
Fundamental 6: Trailers and Containers Must Move Empty
Fundamental 6: Trailers and Containers Must Move Empty
Empty Plan Weekly flow (10s of 53’ tractor-trailers)
California
Midwest
Southwest
6 empty supply
8 empty supply
8
6
14 net departures
Fundamental 7: Freight Demand, Supply, and Pricing
• Backhaul lanes– Light volume origin-destination
pair lanes that help move equipment back toward high volume lanes
– Freight pricing can be significantly lower• Carrier gets paid for otherwise
empty move
Fundamental 7: Freight Demand, Supply, and Pricing
California
Midwest
Southwest
6 empty supply
8 empty supply
8
6
14 net departures
6
8
No backhaul from Southwest to California, due to network effect
Not all imbalanced lanes are backhaul lanes!
Fundamental 8: Last-mile Freight Efficiency is Hardest
• Last-mile– Consolidation modes– Pickup from shipper into first terminal– Delivery to consignee from last terminal
• Examples– Container drayage into seaport/IM
terminal– Package express pickup/delivery routes– LTL pickup/delivery routes– Distribution delivery routes into stores
Fundamental 8: Last-mile Freight Efficiency is Hardest
• Challenges to efficiency– Small shipment sizes– Multiple stop vehicle tours– Tour duration constraints,
deadlines– Customer delivery constraints,
time windows– Urban logistics: congestion,
parking, regulation
Parting Thoughts: Trends for Supply Chains
1. Global manufacturing here to stay2. Consumers continue to demand better
cheaper products, faster 3. Retailing is more and more a supply
chain business4. Ubiquitous sensors, connected
devices, data, automation will continue to drive efficiency gains
5. Alternate fuel technologies will expand steadily into fleets as total costs to own/operate decrease
What to remember
• Shippers focus on total logistics costs when making freight transport decisions
• Providers (carriers) configure freight systems to deliver excellent customer service at lowest possible cost
• Supply chains continuously evolve, but fundamentals change little
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