855-14-2006.ppt

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Dr. CholetteDS855 – Fall 2006

Transportation in the Supply Chain

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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

Will skip routing and scheduling in transportation• Making transportation decisions in practice

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Transportation Modes• Trucks (75%+ US freight transit bill)

• TL

• LTL• Rail• Air• Small Package Carriers• Water• Pipeline

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Factors AffectingTransportation Decisions

• Carrier (party that moves or transports the product)• Vehicle-related cost• Fixed operating cost• Trip-related cost

• Shipper (party that initiates the movement of the product between two points in the supply chain)• Transportation cost, if charged externally by Carrier• Inventory cost• Facility cost

• Consignee (party that receives the shipment) • Responsiveness needs• Does Consignee bear part of cost? (i.e. S/H for e-commerce)

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Truckload (TL)

• Typical use: Supplier to Manufacturer, Manufacturer to Warehouse

• Average revenue per ton mile (1996) = 9.13 cents• Average Capacity = 42,000 - 50,000 lb.• Low fixed and variable costs• Major Issues

• Utilization• Consistent service• Backhauls

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Less Than Truckload (LTL)• LTL fills gap between TL and mailing packages• Average revenue per ton-mile (1996) = 25.08 cents• Higher fixed costs (terminals) and low variable costs• Major issues:

• Location of consolidation facilities

• Utilization

• Vehicle routing

• Customer service

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Rail

• Best for heavy, low value shipments that are not time sensitive (coal, scrap)

• Average revenue / ton-mile (1996) = 2.5 cents• Average load = 80 tons• 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

• Large fixed costs and lower variable costs• Fastest mode, often used for global transit of

expensive items (hi-tech)• Key issues (for the air carriers…)

• Location/number of hubs

• Location of fleet bases/crew bases

• Schedule optimization

• Fleet assignment

• Crew scheduling

• revenue management

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Small Package Carriers• FedEx, UPS, USPS, etc. carry small packages ranging from letters to

parcels of about 150 pounds• Rapid and reliable delivery, can be door to door!• Preferred mode for e-businesses (e.g., Amazon, Dell)• Key Issues

• Expensive (best for small and time-sensitive shipments)

• IT important, for tracking and also possibly consolidation of shipments (especially important for package carriers that use air as a primary method of transport)

• Carriers have to optimize their location and capacities of transfer points as well as route delivery trucks

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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.)• (not in book) subject to bottlenecks at Ports

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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,

but not for getting refined gasoline to a gasoline station (why?)

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Inter-modal• 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 inter-modal 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

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Design Options for aTransportation Network

• DRP -Distribution Requirements Programming

• Book lists several possible design networks 1. Direct shipping network

2. Direct shipping with milk runs

3. All shipments via central DC

4. Shipping via DC using milk runs

5. Tailored network (combination of options)

• Given that Chapter 4 showcased distribution networks, many of which have parallels here, we will not repeat the exercise

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Trade-offs in Transportation

• Transportation trade-offs…• Choice of transportation mode (TL vs. LTL, water vs. air)

• Inventory aggregation (either physical or temporal)

• Transportation cost and responsiveness trade-off• 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 or is necessary to maintain strategic level of responsiveness

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Tradeoffs: Physical Inventory Aggregation

• Example: Use stores for ordering only, and store inventory at a central DC, then deliver it to the customer rather than holding at store for customer pick-up

• 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

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Trade-offs: Temporal Aggregation

• 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 & increases inventory costs (and the facility has to support short term storage)

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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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Example of Solving for Transportation Options

• A toy manufacturer, TBC, needs to deliver its newest teddy bear model to customers’ DCs: • 3 Customers: WeBToys, J-Mart and BigW

• To use the company’s existing logistics, teddy bears must first be shipped to either of TBC’s 2 regional warehouses (North and South), then to the customer DC using pre-approved LTL carriers

• Each route has specific per-unit costs (set by contract) and, due to space constraints on the trucks for TBC’s other products, capacity limits exist for all routes serviced from the South Warehouse (500 item limit) • There are no minimum usage requirements

• TBC would like to minimize shipping costs while fulfilling all customer orders

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Distribution Diagram

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DRP Example Data• Demand data for the customers

WeBToys: 600 units J-Mart: 500 units BigW: 900 units

• Shipping from the plant to TBC’s 2 warehouses, N (North) and S (South) incurs per-unit costs of $1.25/unit and $.75/unit, with transit limits of 1500 units and 1100 units, respectively

• The trucking company that ships from the South warehouse has a 500 unit limitation on shipments per customer warehouse. There is no such transit limitation for shipments from the North warehouse

• With the diverse locations of TBC’s warehouses and the customers’ warehouses, per-unit transportation costs differ (but are assumed linear)

• Assume a single time period of 1 month, no hold-over of inventory• How should we solve this problem?

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One way to Solve DRP: LPs • Our decision variables…

X_n_wbt - units shipped to WeBToys via North warehouse

• Add upper bounds to variables shipping from the South Warehouse

• Any guesses as to a feasible solution? Is it optimal?

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DRP Solution

• Solving the model shows that we are constrained both by the outbound South transit limits and the overall handling constraint at the South warehouse

• We therefore need to use some of the costlier North routes

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Extension to the DRP Example

• Assume we could chose to bypass TBC’s established logistical path by using a direct shipment service, which would allow us to ship from the plant to the customer warehouse directly

• This service has a flat fee of $4 per unit

• Would we consider using it, and if so, how would we model this?

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Distribution Diagram

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DRP Example Data• Add 3 more variables to the model, in the form:

X_ds_wbt - units sent to WeBToys by direct shipment

• Each of these new variables has a per-unit cost of $4 and has no capacity limits specified

• Modify the demand constraints to include direct shipment in the summation of all sources of fulfillment

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Making TransportationDecisions 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

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Review & Mini-Summary• Remember back to Aggregate Planning ….

• A model can incorporate elements from Chapters 8,9,10,11,4,5 and 14 and consider all the following:• what plants to source from (and when to subcontract or use overtime, if

allowed), • how much inventory to pre-build • where to transport to (which plants to which DCs, or bypass DCs

through direct shipping)

• The overall corporate goal is… to maximize profits

• Need to consider that warehousing costs may increase if pre-building inventory can offset capacity, transit costs elsewhere

• Need to be able to convey this information to the executives (especially the warehouse managers) and reward employees and partners for overall supply chain improvements