IMPROVING EFFECTIVENESS OF FREIGHT TRANSPORT IN LOGISTICS SYSTEMS

Amal S. Kumarage

Professor, Department of Transport & Logistics Management,

University of Moratuwa

kumarage@sltnet.lk

16th February 2010 Short Course on Freight Transport

Freight Transport

� FT is the process of conveying different types of goods from one point to another using a variety of transport modes.

� Hence FT is NOT site specific as other logistic activities.

� Transportation create the place and time value (utility)

� High Transport Costs can off set manufacturing gains and reduce market size.

Transport Costs as % of Logistics Costs is Increasing

3

1980� GDP $2.88 trillion� Logistics Cost $451 billion

� 15.7% of GDP� Trans. Cost $214 billion

� 47.5 % of Logistics Cost

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1999� GDP $9.26 trillion� Logistics Cost $921 billion

� 9.9% of GDP� Trans. Cost $554 billion

� 60.2 % of Logistics Cost

Logistics Transportation

$ b

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0

100

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300

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1980 1999Year

Introduction4

Transport & Logistics Structure

Why attention on FT is important?

� Transportation costs directly affect the location of the firm’s plants, warehouses, vendors and customers.

� Inventory requirements are influenced by the mode of transport used.

The transport modes selected determine the packaging loading and � The transport modes selected determine the packaging loading and unloading facilities required.

� Maximum consolidation of shipments between common points enables a company to give larger shipments to its carriers and take advantage of volume discounts

� Customer service goals influence the type and quality of carrier and carrier service selected by the seller.

FT cost impacts on Economies of Scale

� Wider markets can result in lower per unit production costs

� Lower FT costs lead to decoupling of markets and � Lower FT costs lead to decoupling of markets and production sites.

Top Ten Transport Service Decision Variables

� Time-in-transit

� Reliability

� Door to Door Time

� Rates

� Equipment Availability

� Frequency of Service

� Pick up and Delivery

� Damage-in-transit

� Shipment Tracking

� LTL consolidation services

Freight Traffic

� Freight traffic is influenced by 4 levels of logistical decision making

1. Logistics Structure : Numbers, locations and capacity factors, warehouse, terminals and shops

2. Supply Chain Configuration : Patterns of trading links within the logistical structures

3. Scheduling of Flows : Manifestation of the trading links as discrete freight movements, routing delivery

4. Management of transport resources : relating to the choice of vehicle, utilization of vehicle capacity , etc.

� Level 1 & 2 determines the quantity of freight movement measured in tonne-kms,which needs to be reduced

� Level 3 translate this into vehicle traffic measured in vehicle km which also needs to be reduced

� Level 4 translates to the requirements for resources in terms of vehicles and equipment

Traditional Practise

� The traditional delivery pattern of freight is fewer trips and more loads.

� The delivery companies usually maintained their business independently. independently.

� It means two or more carriers might serve in the same area.

State of the Art Practise

� Trends FT to deliver “Just-in-time” & “door-to-door”.

� Demands more FT trips but lower loads.

� Cooperative freight systems can reduce the burden of cost of such demands.

� Optimum location of warehouses.

Reducing Veh Km/Resources

� Freight Consolidation

� Data Fed Delivery Systems.

� Routing paths, vehicle size and fleet mix � Routing paths, vehicle size and fleet mix

� Use of software to improve these

� Improving Delivery Reliability

Freight Consolidation

� Freight consolidation can be achieved in 4 ways

1. Temporal Consolidation : orders from customers are held so that a few larger shipments may be made at one time, rather than making many smaller shipments at various times. Economies of transportation are achieved through improved routing of the larger shipments as well as through lower per-unit rates.

2. Inventory Consolidation : an inventory of items is created from which demand is 2. Inventory Consolidation : an inventory of items is created from which demand is served. This allows large and even full truck-load (FTL) shipments to be made.

3. Vehicle Consolidation : pickups and deliveries involve less than vehicle-load quantities, more than one pickup or delivery is placed on the same vehicle for more efficient transport. Vehicle routing and scheduling procedures need to be developed.

4. Warehouse Consolidation : allow the transportation of large shipment sizes over long distances and the transportation of smaller sizes over short distances. A warehouse used in a break bulk operation is an example

Freight Consolidation Systems

� In transportation, since rates reduce for larger shipments, it encourages shipments of larger quantities.

� The main objectives of the FCS techniques are � The main objectives of the FCS techniques are

� increase trip loads;

� reduce unnecessary trips;

� reduce trip length from service area overlaps ;

� increasing service quality (specially frequency).

� This will then give a lower transport cost per unit.

Structure of Transport Chain

Structure of Transport Chain

Central Warehouse & Direct delivery

One Central Warehouse

serving customers directly.

Number of smaller vehicles

going to many customer

destinations. Large fleet.

High vehicle kms.

Transfer to different trucks before unloading at final destination

J

L K J L

J

L

K

Origin(Production Plant/

Centralised Warehouse)

L K J L

K

Transloading Point/Cross Docking/

Break-bulk warehouse/

Centralised DC

Break-bulk at a Transload point in between customers and origin and distribute with a smaller truck to each destination

No Central warehouse. Large trucks collect

and distributes to and from many plants.

Smaller vehicles distribute to customers

from each DC.

No warehouses or DCs. Each

location is a cross docking where

trucks bring and distribute after

sorting out. (Lunch carrier operation

or vegetable distribution).

Total Cost Trade off

� Factors Affecting the Total Logistics Cost

� Inventory costs

� Warehousing costs

Transportation costs� Transportation costs

� Cost of lost sales

� Maintenance of customer service levels

� Service small quantity buyers

21

Approach to Dynamic Routing & Scheduling

1. Build on historical data feeds for different inventory items.

2. Build routes so that load factors are reasonably high but do not exceed that of the truck capacity say 95% of time.

3. If desired frequency is achieved or if transport cost per unit need to be reduced then get larger truck.

4. If GPS is fitted to trucks then routing can be dynamically changed to add/drop scheduled stops or routing order depedning on developments after truck is dispactched.

5. The sequence of stops to be designed so that veh kms are minimised.

6. Pickups mixed into delivery routes rather than assigned to the end of routes after checking for capacity of truck at all points of delivery route.

7. Improving turn around time, higher vehicle utilisation, crew assignment will decrease per unit cost further.

Conclusions

� Transport costs make up a significant part of total logistics cost.

� Higher quality of service requirements such as JIT and D2D results in higher transport costs.

� Distribution Centres will reduce transport costs but increase other costs.

� Consolidation, Routing and Scheduling can further reduce transport costs without increasing total logistics costs.

Principles for Good Routing and Scheduling

1. Load Trucks with stop volumes that are in the close proximity to each other

2. Stops on different days should be arranged to produce tight clusters

3. Build routes beginning with the farthest stop from the depot

4. The sequence of stops on a truck should form a teardrop pattern

5. The most efficient routes are built using the largest vehicle available5. The most efficient routes are built using the largest vehicle available

6. Pickups should be mixed into delivery routes rather than assigned to the end of routes

7. A stop that is greatly removed from a route cluster is a good candidate for an alternate means of delivery

8. Narrow stop time window restrictions should be avoided

Consolidation Centres� Freight villages (terminals) applied in several cities, such as

Monaco.

� The goods are reorganised in the freight village before being delivered to the urban areas.

� This system can reduce the required number of trucks used for delivery and handling.

Typical problems in trucking and

deliveries

� Industry has built in inefficiencies that determine price levels. Inefficient utilization of vehicle, poor productivity of crews. Typical trucks in long haul require to operate 250-400 kms per day, city/short haul 150-250 kms.

� Only innovative management techniques and technology can break these.

A capital-intensive business hence keeping investments low is key� A capital-intensive business hence keeping investments low is key

� Need to provide 24/7/365 non-stop service at equal service levels.

� Deciding between reliability vs cost. (calculating the opportunity costs in reliability)

� Setting service levels in freight transport

� Pricing (volume discounts, back haul discounts)

� Determining frequency of deliveries, load and equipment used for optimum cost

Some developments

� Urban Consolidation Centres (modernizing the bicycle lunch delivery system in Colombo).

� Improving Routing Options (real time information to select best route, historical data analysis)

� Correct Fleet mix (matching load to vehicle)

� Pooling of resources (vehicles, equipment and crew, scheduling crew � Pooling of resources (vehicles, equipment and crew, scheduling crew to vehicles, advantage of using single vehicle operators and fleet operators)

� Automated and data fed dispatching (more customers, more deliveries, more equipment means manual systems have limitations)

� Maintaining Delivery reliability (setting delivery windows)

� Improving loading and unloading times.

� Use of ICT and www

The relationship between IT-productivity growth in the

economy at-large is

mirrored in the freight transportation sector.

IT & Logistics

� But linkages can be weakened, even severed, by congestion and delay on the nation’s highways.

� It is one thing for new robotics and intelligent logistics products to come on the market; it is quite another for manufacturing and transportation firms to invest in them. Such investment is costly.

� Threats to the effectiveness of such products are threats to the business case � Threats to the effectiveness of such products are threats to the business case for investing in them.

� Wide-spread testimonials are not at hand, but analytic and anecdotal evidence indicates that congestion and delay is viewed in some sectors as a barrier to obtaining satisfactory pay-back from investment in just-in-time logistical products.

� Take-up of advanced logistics may be waning already, in part due to the economic slowdown, but also to mounting congestion in some strategic corridors around the country.

Future Growth in Freight

Transportation� It is clear that transportation agencies at all levels of government can

bring about improvement in highway freight-carriage. For instance,

� Targeted capacity expansion projects that alleviate high-frequency bottlenecks in the freight system can improve transit time variability.

� Freight planning can help to make sure that freight movement needs are appropriately considered by decision-makers by providing state and local transportation planners with the necessary tools to better account for the impacts of alternative investments on the the necessary tools to better account for the impacts of alternative investments on the efficiency of the freight system.

� Programs that strive to improve operations planning (or the interaction of planning and operations functions within a transportation agency) can improve system performance.

� ITS deployment can enhance the efficiency of the highway system through operational improvements, better user information, and incident management (which is particularly problematic from the perspective of system reliability).

� Federal grant programs that provide financing mechanisms for freight transportation improvements can help to generate the types of investments needed to improve the productivity of the freight system.

Future Growth in Freight

Transportation

� In a nutshell, future (and to some extent current) challenges will center on

� squeezing as much efficiency as possible out of available transportation resources (in particular infrastructure) and

finding scarce resources to implement efficiency-enhancing � finding scarce resources to implement efficiency-enhancing programs and projects.

Transportation and the Economy

How do firms react to improvements in freight Transportation

Improvements in Network

Connectivity and Density

Industry Investment in Advanced

Logistics

Industrial Reorganization and Enhanced Productivity

� Firms reduce stocking points, increase JIT processes and increasing shipping distance.

� Firms react to reduced late-shipping-delays, values highly by shippers by investing more in logistics.

� Inter-industry trading partners are affected

Transport & Logistics Structure

� Traditionally these steps involved separate companies for production, storage, transportation, wholesaling, and retail sale, however basically, production/manufacturing plants, warehousing services, merchandising establishments are all about doing transportation.

� Production or manufacturing plants required the assembly of materials, components, and supplies, with or without storage, processing and material handling within the plant and plant inventory Warehousing services between plants and marketing outlets involved separate transport. Merchandising establishments completed the chain with delivery to the consumers. the consumers.

� The manufacturers limited themselves to the production of goods, leaving marketing and distribution to other firms.

� Warehousing and storage can be considered in terms of services for the production process and for product distribution.

� There have been major changes in the number and location of facilities with the closure of many single-user warehouses and an expansion of consolidation facilities and distribution centres.

� These developments reflect factors such as better transport services and pressures to improve logistics performance.

� There are good examples of cases where logistics reorganization, supported by a good transportation system, leads to lower total logistics costs and also to improved customer service.

� In the late 1980s, Polaroid, for example, decided to centralize its � In the late 1980s, Polaroid, for example, decided to centralize its European inventories by buying more transportation and using fewer warehouses; a large number of warehouses were, in fact, closed. Polaroid’s action resulted with:

1. estimated annual gross savings of $6.9 million and

2. net annual savings of $6.3 million after subtracting $0.6 million per year for increased costs resulting from computer system maintenance and increased warehouse personnel at headquarters

� Polaroid’s Cost Savings from

� Reorganization—The Break-Down

� warehousing personnel—$2.5 million;

� inventory carrying costs—$2.2 million;� inventory carrying costs—$2.2 million;

� warehouse rental costs—$1.0 million;

� facilities and offices—$0.6 million;

� internal transportation between dealers and

subsidiaries—$0.5 million; and

� insurance premiums—$0.1 million.

Polaroid’s Cost Savings

� Besides the savings that Polaroid could quantify, there were other gains that were not measured.

� Prior to centralizing inventory, 69 percent of orders could not be filled at the location that received them, so that items were backordered until they could be filled from other locations. locations.

� This required significant internal transportation among dealers and subsidiaries to reposition inventory.

� Polaroid also achieved freight-cost savings based on volume discounts for consolidated (truckload) shipments to centralized warehouses.

Ford’s Mixing Centers

� Similarly, Ford Motor Company found a way to reduce transportation costs and inventory costs and improve service to its dealers by exploiting the lower cost of rail shipment of finished vehicles and introducing a new distribution system that sped the introducing a new distribution system that sped the movement of vehicles from factories to dealers.

� Ford instituted a system of “mixing centers,” essentially distribution centers, with predominantly rail shipment from factories to mixing centers and the final leg to the dealer by rail and highway or all highway according to the circumstances

� Ford’s Mixing Centers--

� Ford created four national mixing centers

� at Chicago; Shelbyville, Kentucky; Kansas City, Missouri;

and Fostoria, Ohio.

� At the mixing centers, vehicles are sorted and recombined

to meet actual orders from dealers and moved on by rail

or highway. Vehicles are held at the mixing center only as

long as is needed for sorting and transloading, usually

eight to 24 hours.

Modal Distribution of Ton-Miles43

� Distribution of ton-miles

� a ton-mile is one ton of cargo carried one mile, and is a standard statistical measurement used in the transportation industry).

� This shows the usage of rail and water has decreased

� Slide 1 : One Central Warehouse serving customers directly. Show number of smaller vehciles going to many destinations. High fleet. High vehicle kms

� Slide 2: One large truck moves from Central Warehouse to severl DCs. Small trucks distribute to customers. Lower fleet. Lower veh kms (slide 19 is ok) Lower veh kms (slide 19 is ok)

� Slide 3: No Central warehouse. One large truck collects and distributes to and from many DCs. Smaller vehicles distribute to customers from each DC and picks up from suppliers as well.

� Slide 4: No warehouses or DCs. Each location is a cross docking where small trucks bring and distribute after sorting out. (Lunch carrier operation or vegetable distribution).

1

Mixing Warehouse

(outbound logistics)

Plant A, Product 1Customer W

1 2 3 41 2 3 41

Because companies often produceitems at different plants & if acompany that did not have awarehouse has to fill orders fromdifferent plants causing more delays

2

4

Plant B, Product 2

Plant C, Product 3

Plant D, Product 4

Customer X

1 2 3 4

Customer Y

1 2 3 4

3Mixing Warehouse 1

1

2

2

3

3

4

4

2

3

4

With having mixing warehousessuch firms can improve theirorder filing ratesBy having mixing warehousesclose to the dense areas firmscan make deliveries and pickupsin smaller vehicles

ConsolidationWarehouse(outbound logistics)

Plant A

Plant B

Plant C

Consolidation Warehouse Customer

Plant D

40,000 lb

•Reduce the transport cost as well as

storage cost at the production plant

Breaking bulk

.

.

Break-bulk Warehouse(outbound logistics)

Customer 1

Plant Breakbulk Warehouse

Customer 2

Customer 3

1000

Inbound

Movement from an

inbound dock directly to

an outbound dock

Cross-docking:

Outbound

Outbound

Outbound

Outbound

Inbound

Movement directly from

an inbound dock to a

sorting process to an

outbound dock.

Inbound

Sorting area

Structure of Transport Chain

Consolidated Distribution

� It is cheaper to for shipper to consolidate several shipments moving to different destinations in order to take advantage of substantial volume rate breaks while incurring modest stop-off charges.

� There can be two types;

1. Using a single truck or transport equipment

2. Using different trucks or transport equipments