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Global Logistics and Supply Chain Management
John Mangan Chandra Lalwani Tim Butcher
ISBN: 978-0-470-06634-8
1© 2008 John Wiley & Sons Ltd.www.wileyeurope.com/college/Mangan
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PART II: SCM-Operations “5-11”
© 2008 John Wiley & Sons Ltd.www.wileyeurope.com/college/Mangan
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PART II: SCM-Operations “4-11”
1. Logistics Service Providers
2. Procurement/ Outsourcing
3. Inventory Management
4. Warehousing/ Materials Handling
5. Transportation
6. Information Flow
7. Logistics & Financial Management
8. Measuring Logistics Performance
© 2008 John Wiley & Sons Ltd.www.wileyeurope.com/college/Mangan
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Chapter 8
Transport in Supply Chains
© 2008 John Wiley & Sons Ltd.www.wileyeurope.com/college/Mangan
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Learning objectives
1. Understand the cost structures and operating characteristics of the
different transport modes, and the relationships between freight rates
and consignment weight, dimensions and distance to be travelled
2. Highlight key terms used in transport
3. Identify the range of issues to be considered in planning transport
infrastructure
© 2008 John Wiley & Sons Ltd.www.wileyeurope.com/college/Mangan
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Learning objectives
4. Discuss the roles of distribution centers and highlight the concept of
factory gate pricing
5. Explain the application of a technique known as the transportation
model
6. Identify some of the many issues (including the effect of supply
chain strategies) that can impact the efficiency of transport services
© 2008 John Wiley & Sons Ltd.www.wileyeurope.com/college/Mangan
7© 2008 John Wiley & Sons Ltd.www.wileyeurope.com/college/Mangan
Figure 8.1 Relationship between rate and distance
8© 2008 John Wiley & Sons Ltd.www.wileyeurope.com/college/Mangan
Figure 8.2 Relationship between rate per kilo and consignment weight
9© 2008 John Wiley & Sons Ltd.www.wileyeurope.com/college/Mangan
Table 8.1 A Summary of costs and relative operating characteristics of the different transport modes
Mode Relative Costs and Operating Characteristics by Mode
Air Fixed cost is on the lower side but variable cost, including fuel, maintenance, security requirements, etc., is high. The main advantage of air is speed; it is however limited in uplift capacity, similarly other modes of transport are required to take freight to and from airports, thus air cannot directly link individual consignors and consignees
10© 2008 John Wiley & Sons Ltd.www.wileyeurope.com/college/Mangan
Table 8.1 A Summary of costs and relative operating characteristics of the different transport modes
Mode Relative Costs and Operating Characteristics by Mode
Road Fixed cost is low as the physical transport infrastructure, such as motorways,is in place through public funding; variable cost is medium in terms ofrising fuel costs, maintenance and increasing use of road and congestioncharges. In terms of operating characteristics, road as a mode of transportscores favourably on speed, availability, dependability, and frequency, butnot so good on capability due to limited capacity on weight and volume.Uniquely among transport modes, it can allow direct access to consignor andconsignee sites.
11© 2008 John Wiley & Sons Ltd.www.wileyeurope.com/college/Mangan
Table 8.1 A Summary of costs and relative operating characteristics of the different transport modes
Mode Relative Costs and Operating Characteristics by Mode
Water Fixed cost is on the medium side, including vessels, handling equipment andterminals. Variable cost is low due to the economies of scale that can be enjoyedfrom carrying large volumes of freight, this is the main advantage of the watermode, together with its capability to uplift large volumes of freight. Like air, itcannot offer direct consignor to consignee connectivity, and vessels are sometimes limited in terms of what ports they can use. It is also quite a slow mode.
12© 2008 John Wiley & Sons Ltd.www.wileyeurope.com/college/Mangan
Table 8.1 A Summary of costs and relative operating characteristics of the different transport modes
Mode Relative Costs and Operating Characteristics by Mode
Rail Fixed cost is high and the variable cost is relatively low. Fixed cost is high dueto expensive equipment requirements, such as locomotives, wagons, tracksand facilities, such as freight terminals. On relative operating characteristics,rail is considered good on speed, dependability, and especially capability tomove larger quantities of freight.
13© 2008 John Wiley & Sons Ltd.www.wileyeurope.com/college/Mangan
Table 8.1 A Summary of costs and relative operating characteristics of the different transport modes
Mode Relative Costs and Operating Characteristics by Mode
Pipeline Fixed cost is high due to rights-of-way, construction and installation, but thevariable cost is relatively low and generally just encompasses routine maintenance and ongoing inspection/security. On operational characteristics, the dependability is excellent but this mode can only be used in very limited situations.
14© 2008 John Wiley & Sons Ltd.www.wileyeurope.com/college/Mangan
Figure 8.3 Modal split for freight transport in the EU 25 in 2005 (% tonne kilometres)
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2- Intermodal transport
Where freight moves within a loading unit (known as an ITU – Intermodal Transport Unit), this unit may move upon a number of different transport modes
But the freight remains within the unit at all times Various types of ITUs:
– Standard sized containers (typically 20 and 40 feet in length)
– ‘Igloo’ containers used in air freight
© 2008 John Wiley & Sons Ltd.www.wileyeurope.com/college/Mangan
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2- Intermodal transport
© 2008 John Wiley & Sons Ltd.www.wileyeurope.com/college/Mangan
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2- Intermodal transport
© 2008 John Wiley & Sons Ltd.www.wileyeurope.com/college/Mangan
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2- Intermodal transport
© 2008 John Wiley & Sons Ltd.www.wileyeurope.com/college/Mangan
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2- Intermodal transport
© 2008 John Wiley & Sons Ltd.www.wileyeurope.com/college/Mangan
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2- Intermodal transport
© 2008 John Wiley & Sons Ltd.www.wileyeurope.com/college/Mangan
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2- Intermodal transport
© 2008 John Wiley & Sons Ltd.www.wileyeurope.com/college/Mangan
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2- Intermodal transport
© 2008 John Wiley & Sons Ltd.www.wileyeurope.com/college/Mangan
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2- Intermodal transport
© 2008 John Wiley & Sons Ltd.www.wileyeurope.com/college/Mangan
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2- Intermodal transport
© 2008 John Wiley & Sons Ltd.www.wileyeurope.com/college/Mangan
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2- Intermodal transport
© 2008 John Wiley & Sons Ltd.www.wileyeurope.com/college/Mangan
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2- Intermodal transport
© 2008 John Wiley & Sons Ltd.www.wileyeurope.com/college/Mangan
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2- Intermodal transport
© 2008 John Wiley & Sons Ltd.www.wileyeurope.com/college/Mangan
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3- Planning transport infrastructure
A complex task for policy makers Transport is a derived demand:
– people or freight does not travel for the sake of making a journey, it travels for some other reason
© 2008 John Wiley & Sons Ltd.www.wileyeurope.com/college/Mangan
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4- Factory Gate Pricing-FGP
Retailers take control of the delivery of goods into their distribution centres
This gives a single point of control for the inbound logistics network
FGP is the use of an ex-works price for a product plus the organisation and optimisation of transport by the purchaser to the point of delivery
© 2008 John Wiley & Sons Ltd.www.wileyeurope.com/college/Mangan
30© 2008 John Wiley & Sons Ltd.www.wileyeurope.com/college/Mangan
Figure 8.4 Inbound logistics in the retail sector
31© 2008 John Wiley & Sons Ltd.www.wileyeurope.com/college/Mangan
Figure 8.5 The evolution of grocery distribution
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The impact of the primary consolidation network with FGP
© 2008 John Wiley & Sons Ltd.www.wileyeurope.com/college/Mangan
Table 8.2 The Impact of the Primary Consolidation Network
Product Type
Scenario Weekly Transport Miles (normalised)
Weekly Transport Cost (normalised)
Volume Segregation 100%
Direct Consolidated
Ambient-Temp
As is 100 100 88.7% 11.3%
FGP design 74.7 (25.3) 86.1(13.9%) 16.7% 83.3%
Composite-Temp
As is 100 100 39.0% 61.0%
FGP design 77.0 (23) 82.8 (17.2%) 12.8% 87.2%
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5- The transportation model
Seeks to work out a minimum total transport cost solution for the number of units of a single commodity that should be transported from given suppliers to a number of destinations
© 2008 John Wiley & Sons Ltd.www.wileyeurope.com/college/Mangan
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The transportation model
Understanding Logic– SCM Manager
– Stakeholders• Supplier Side
• Demand Side
• Finance Side
© 2008 John Wiley & Sons Ltd.www.wileyeurope.com/college/Mangan
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The transportation model
Let us assume that the amount of supply at origin i is s i and demand at destination j is
d j and the unit cost between i and j is c ij . Let x ij be the amount or the number units
transported from origin i and destination j. The transportation problem using linear programming can be defined as follows:
Minimise total transport cost C = ij
m
i
n
j
x 1 1
ijc (1)
subject to
iij
n
j
sx 1
for i = 1,2,É É ,m (2)
jij
m
i
dx 1
for j = 1,2,É É ,n (3)
ijx o for all i and j (4)
© 2008 John Wiley & Sons Ltd.www.wileyeurope.com/college/Mangan
•Algorithm
The Transportation ProblemShip items at lowest costSources have fixed suppliesDestinations have fixed demand
Transportation Problem(1)
The Alpha Limited Manufacturers W.M TEXT pp143
Transportation Problem(1)
The Alpha Limited Manufacturers Transportation Cost
Don caster Newcastle
Birmingham 25 ₤/ton 35
Manchester 15 20
Glasgow 40 30
Transportation Problem(1)
The Alpha Limited Manufacturers W.M Transportation Tableau
DC(1)Don caster
DC(2)Newcastle
Plant Capacity
P(1)Birmingham
? ? 300
P(2)Manchester
? ? 200
P(3)Glasgow
? ? 150
DC-Demand 400 250
Solving Transportation Problems
Manual methodsStepping-stoneModified distribution (MODI)
Computer solutionExcelPOM/QM for Windows
Solving Transportation Problems
Computer solutionExcelUsing Solver Adds-In
Solving Transportation Problems
1. Build The Optimization Model
A. Cost Drivers
B. Supply/Demand Model
C. Total Cost (Shipment*Cost)
D. Constraints
2. Optimize (Solve using Solver)
Transportation Problem(1)
The Alpha Limited Manufacturers Optimization Using Solver
DC(1)Don caster
DC(2)Newcastle
Plant Capacity
P(1)Birmingham
300 *25 ---*35 300
P(2)Manchester
100 *15 100 *20 200
P(3)Glasgow
---- *40 150*30 150
DC-Demand 400 250
Total Cost ₤9,000 ₤6,500 ₤15,500
Transportation Problem(2)
• From From GRAIN FARMERGRAIN FARMER SUPPLYSUPPLY
1.Kansas City1.Kansas City 1501502.Omaha2.Omaha 175175Des MoinesDes Moines 275275
600 tons600 tons
• To MILLTo MILL DEMANDDEMAND
A.A. ChicagoChicago 200200B.B. St. LouisSt. Louis 100100C.C. CincinnatiCincinnati 300300
600 tons600 tons
•COST MODELCOST MODEL TO MILLTO MILL
•FROM GRAINFROM GRAIN ChicagoChicago St. LouisSt. Louis CincinnatiCincinnatiFARMERFARMER AA BB CC
•Kansas CityKansas City $6$6 $8$8 $10$10•OmahaOmaha 77 1111 1111•Des MoinesDes Moines 44 55 1212
•SUPPLY/DEMAND MODEL
The Transportation Tableau
•FROM/TO FROM/TO ChicagoChicago St. Louis Cincinnati St. Louis Cincinnati SUPPLY/Ton SUPPLY/Ton
•Kansas CityKansas City $6$6 $8$8 $10$10 150150•OmahaOmaha 77 1111 1111 175175•Des MoinesDes Moines 44 55 1212 275275•DEMAND/TonDEMAND/Ton 200200 100100 300300 600600
•Example 7.1Example 7.1
•Demand (tons)Demand (tons)•Supply (tons)Supply (tons)
•Des Moines (275)Des Moines (275)
•Omaha (175)Omaha (175)
•Kansas City (150)Kansas City (150)
•Chicago (200)Chicago (200)
•Cincinnati (300)Cincinnati (300)
•St. Louis (100)St. Louis (100)
•$7$7
•$11$11•$6$6
•$8$8
•$12$12
•$10$10
The Transportation Tableau•TOTO
•FROMFROM ChicagoChicago St. Louis St. Louis Cincinnati Cincinnati SUPPLY SUPPLY
•Kansas CityKansas City 66 88 1010 150150•OmahaOmaha 77 1111 1111 175175•Des MoinesDes Moines 44 55 1212 275275•DEMANDDEMAND 200200 100100 300300 600600
•$11$11
•$4$4
•$5$5
Transportation Problem(2)
GRAIN/MILLS DISTRIBUTION Optimization Using Solver
Mill(1)Chicago
Mill(2)St.Louis
Mill(3)Cincinnati
Plant Capacity
P(1)Kansas
0 0 150 150
P(2)Omaha
25 0 150 175
P(3)DM
175 100 275
Mills-Demand
200 100 300
Total Cost 4,525$
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6- Transportation Efficiency
© 2008 John Wiley & Sons Ltd.www.wileyeurope.com/college/Mangan
Seeking Efficient Asset utilization Streamlining Shipments Container Load
49© 2008 John Wiley & Sons Ltd.www.wileyeurope.com/college/Mangan
Figure 8.7 Poor asset utilisation in transportStreamlining Shipments
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Full container loads
The term FCL is used in transport to refer to full container loads
The term LCL is used to refer to less than full container loads
When carriers have a consignment that will not fill an entire loading unit they will usually try and build a consolidated shipment to make up a FCL
© 2008 John Wiley & Sons Ltd.www.wileyeurope.com/college/Mangan
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