1 Supply Chain Management Chapter 6 Transportation Management 2 Why has logistics become increasingly important? Cost reduction pressures are severe Logistics has a high impact on customer service A strong need exists for demand and supply planning consistency A focus on core competencies has placed logistics in the outsourcing “spotlight” Development of IT technology supports integrated logistics management Logistics Overview
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1
Supply Chain
Management
Chapter 6
Transportation Management
2
Why has logistics become increasingly important?
� Cost reduction pressures are severe
� Logistics has a high impact on customer service
� A strong need exists for demand and supply
planning consistency
� A focus on core competencies has placed
logistics in the outsourcing “spotlight”
� Development of IT technology supports
integrated logistics management
Logistics Overview
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Value-added Transportation
Concept
Supplier Manufacturer Customer
Inbound Outbound
Product/Info Flows
Info/Return Goods Flows
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Role of Transportation
Time and Place Utility:
Movement across space or distance.
� Place utility - Where it is needed
� Time utility - created or added by the
warehousing & storage of product until it is
needed. Also a factor in time utility; it
determines how fast and how consistently
a product move from one point to another.
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Transportation Role in Value
Attainment Process
• Critical element of structure,
capacity, and movement decisions
• Both between supply chain
members and intra-organizational
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Transportation-Related Service
Elements
� Speed: time-in-transit
� Availability: accessible to customers when they
want it
� Dependability: pick-up and delivery time variability
� Flexibility: adjustment to shipper’s needs
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� Role of Transportation in Logistics & Supply Chain Management
• Investments in transportation infrastructure (e.g., highways, airports, ports)
• Control of routes, pricing, schedules
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Economic
Types of Transportation Regulation
• Investments in transportation infrastructure (e.g., highways, airports, ports)
• Control of routes, pricing, schedules
Social/Safety
• Protect the public, the environment• Make sure equipment operates safely, cleanly • Safe transportation of hazardous materials (HAZMAT)• Regulating hours worked
• most accessible mode (more highways than railroads, waterways, pipelines); best for transporting medium to high value products short to moderate distances
• very fast; used for transporting high value and/or high perishability product over short to medium distances.
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Cost Structure For Each Transportation
ModePipeline
• highest fixed costs (right of way & construction costs of equipment)
• lowest variable costs (no significant labor or fuel costs)
• slow, but dependable (e.g., no weather, traffic disruptions); no flexibility with regard to types of products that can be transported – must be liquid (e.g., petroleum)
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Basic Modes of TransportationFixed Variable Traffic
costs costs compositionRail high low bulk food, mining, oil
Selected Results of the Changing Environment - Market Impact
� Demand for fast, dependable, responsive service
at lower cost
� Demand for a broader range of services to
integrate supply chain functions
� Core carrier concept - interdependence between
shipper-carrier
� Customized price/service packages/contracts
� Relational view of transportation as a “value-
added” service
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Transportation Management
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Transportation Management
� Network Freight Flows: Macro-
Decisions
� Micro-Decisions
� Information Systems Support
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Transportation Decision Making in an Integrated Supply Chain
Supplier Manufacturer Customer
Inbound Outbound
Dec
isio
n F
low
Understand total network flows
Understand individual lane flows
Understand current
carrier usage patterns
Make mode/carrier
decisions
Routing/Scheduling,
Load Planning, etc.
Strategic
Operational
Macro
Micro
Dec
isio
n S
cope
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Network Freight Flows: A Fully
Integrated Approach
� Managing Inbound-Outbound flows in an optimal manner requires firm to have a good handle on the entire logistics process
� Traditionally view transportation in a vacuum--need to look at it in the context of the total logistics system
� Greatest improvement opportunities lie in integrating transportation with other logistics functional areas such as purchasing, inventory control, forecasting and production scheduling
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Approach to Analysis
1. Analyze lane densities/frequencies: what opportunities emerge for:
� inbound/outbound consolidation
� vehicle consolidation
� temporal consolidation
� network consolidation - cross dock
potential (hub and spoke systems)
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Approach to Analysis (cont.)
2. Once opportunities for consolidation are visible, make
mode/carrier selection based on service/cost mix
� Given similar service, are rates better on 1
mode/carrier than another?
� Does any mode/carrier have relative strengths in a
particular lane?
� Any backhaul opportunities?
3. If so, look to consolidate loads on mode/carrier with best
cost structure - assign private fleet to most costly routes
In the freight industry, freight carried by a trucker to return to his home with a loaded truck, rather than an empty one (as opposed to headhaul, the outgoing freight).
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Consolidation Opportunities
• Inbound-Outbound flow consolidation: look
for opportunities to combine inbound/
outbound freight
• Vehicle consolidation: use one vehicle/multi
stops for LTL volumes vs. one shipment to
each
• Temporal consolidation: hold orders until
large volume shipment possible
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Suggested Analyses
� Network flows
� Lane densities, frequencies, consistency
� Freight distribution by mode, carrier
� Consolidation opportunities
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Summary
Identify:
� Opportunities to achieve balanced flows - obtain
lower rates for providing loads both ways
� Significant volumes for rate negotiation
� Vehicle/temporal consolidation opportunities
� Advantages of reducing number of carriers
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Key Principles of Transportation
Management
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I. Improving Efficiency
� Rule of efficiency: Straight line, minimize stopping--avoid damage and cost (delay)
� Minimize handling: Avoid “handshakes” and attempt to make process “seamless”
� Full capacity: Reduce cost per unit
� Break bulk & consolidation on long haul
� Avoid empty backhauls� Effective Scheduling: “Optimize” labor and equipment
(5%-10%)
� Transportation rates are distance related, not distance proportional
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II. Efficient Use of Technology &
Equipment� High utilization of expensive
assets
� Larger the vehicle, the lower the cost per unit
� Speed does not equal economical operations
� Minimize vehicle gross weight
� Standardized vehicles and equipment
� Balance specialization with adaptability
� Examine trade-offs between IT and traditional logistics functions
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III. Coordinate Operations
� Coordinate operations with requirements to ensure trade-offs and appropriate level of service
� Cost accountability as part of performance measurement
� Reliability is sometimes better than speed
� Look for opportunities to innovate, but recognize proven principles
� The total cost concept recognizes that an optimum cost in one area or function may not lead to an optimum total system cost
� Total cost analysis requires the management of supply chain trade-offs
� Logistical activity areas that drive total logistics costs:
� Customer service level costs
� Inventory carrying costs
� Lot quantity costs
� Order processing and information costs� Warehousing costs
� Transportation costs
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Summary-1
� The transportation mode available to the
logistics manager consists of the basic mode,
intermodal and indirect and special carrier
� The carrier selection is two fold, selection of the
mode and selection of the specific carrier
� Factors determining carrier selection include
transportation rate, transit time, reliability,
capability, accessibility and security
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Summary-2
� Railroads offer low cost for long hauls of large volumes, but they have accessibility limitation and long transit time.
� Motor carriers are very accessible and move product in small quantities with low consistent transit times. However their costs are higher than the other modes except air
� Water transportation is relatively low cost and is desirable for moving large volume over long distances. The prime disadvantage is long transit time and service disruption caused by weather
� Air carriers have very low transit times but very high rates.
� Pipelines offer very low rates for the movement of liquids but are not a viable option for manufactured goods.
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Summary-3
� Intermodal transportation is the combination of two or more basic modes to provide through movement. The dominant form is rail-truck or piggyback
� Containerization is the shipping of freight in a box or container that is subsequently transferred from one carrier to another. It reduces freight handling and damage while improving transit time.
� The transportation system includes a number of indirect and special carriers such as small package carriers, consolidators, freight forwarder, shipper associations, brokers and intermodal marketing companies.
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Reference:
� The Management of Business Logistics by J. J. Coyle, E. J. Bardi and C. J. Langley Jr.