transportation in a supply chain

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Transportation in a Supply

Chain

The role of transportation in a supply

chain

Transportation refers to the movement of

product from one location to another as it

makes its way from the beginning of a

supply chain to the customer’s hands

Products are rarely produced and consumed in

the same location


chain

Transportation is a significant component of

the cost most supply chains incur

Transportation is a larger fraction of the

delivered cost of products sold on-line:

small packages versus full trucks


chain

Any supply chain’s success is closely linked

to the appropriate use of transportation.

Examples:

Wal-Mart crossdocking

7-Eleven responsive transportation system

Amazon.com relies on parcel carriers and the

postal system

Cross-docking

Crossdock Shapes

7-Eleven: A Convenience Store

With more than 17,000 stores in more than 20

countries, 7-Eleven is one of the largest convenience store chains in the world.

It has more than 7000 stores in Japan and at most 5000 in the United States.

Its growth in Japan has been phenomenal, given that the first 7-Eleven store opened in Japan in 1974.

SEJ is one of the most profitable companies listed on the Tokyo stock exchange.


It has seen tremendous growth in sales and profitability while simultaneously decreasing its inventory relative to sales.

SEJ’s success is attributed primarily to its supply chain design and management ability.

A key reason for its success is 7-Eleven’s efforts to obtain a strategic fit between its competitive strategy and its location, transportation, inventory, and information strategy in the supply chain.


7-Eleven aims to provide customers with what they want, when they want it.

From a strategic perspective, one of the company’s key objectives is to micro-match supply and demand by location, season, and time of day.

7-Eleven designs and manages location, inventory, transportation, and information to support this objective.

7-Eleven follows a dominant location strategy and opens new stores in target areas to establish or enhance a strong presence.


In Japan, for example, 7-Eleven stores are present in less than half of the prefectures (roughly equivalent to a county in the United States).

However, 7-Eleven has a strong presence, with several stores, in each prefecture where they are located.

The dominant location strategy allows the company the benefits of consolidation in both warehousing and transportation.

In Japan, fresh food constitutes a significant percentage of 7-Eleven’s sales.


Most of the fresh food is cooked off site and delivered to the stores.

In Japan, a store placing an order by 10 A.M. has it delivered by dinnertime the same day.

There are at least three fresh food deliveries a day per store so that the stock can change for breakfast, lunch, and dinner.

All stores are electronically connected to the head office, distribution centers (DCs), and suppliers.

All store orders are passed on to the suppliers who package store-specific orders and deliver them to the DC.


At the DC, all orders of like products (categorized by temperature at which they are maintained) from different suppliers are combined and delivered to the stores.

Each delivery truck delivers to more than one store and tries to visit stores during the off-peak hours.

SEJ has made an effort to have no direct store delivery from vendors to the stores. Rather, all deliveries pass through and are aggregated at a 7-Eleven DC from which they are shipped to the stores. Note that the location strategy helps facilitate this supply strategy


It has seen tremendous growth in sales and profitability while simultaneously decreasing its inventory relative to sales.

7-Eleven Japan’s success is attributed primarily to its supply chain design and management ability.

A key reason for its success is 7-Eleven’s efforts to obtain a strategic fit between its competitive strategy and its location, transportation, inventory, and information strategy in the supply chain.

Factors affecting transportation

decisions

There are two key players in any

transportation that takes place within a

supply chain:

The shipper is the party that requires the

movement of product between two points in

the supply chain

The carrier is the party that transports the

product

Factors affecting transportation

decisions

A carrier makes investment decisions

regarding the transportation infrastructure,

and then operating decisions to try to

maximize the return from these assets

A shipper, in contrast, uses transportation to

minimize the total cost of the supply chain,

while providing an appropriate level of

responsiveness to the customer

Factors affecting carrier decisions

1. Vehicle-related cost

2. Fixed operating cost

3. Trip-related cost

4. Quantity related cost

5. Overhead cost

Factors affecting shippers decisions

1. Transportation cost

2. Inventory cost

3. Facility cost

4. Processing cost

5. Service level cost

Transport cost characteristics

A transportation service incurs a number of

costs, such as labor, fuel, maintenance,

terminal, roadway, administrative and

others.

These can be arbitrarily divided in costs that

vary with service or volume (variable costs)

and those that do not (fixed costs)


Fixed costs are those for roadway acquisition

and maintenance, terminal facilities,

transport equipment, and carrier

administration.

Variable costs usually include line-haul costs

such as fuel and labor, equipment

maintenance, handling, and pickup and

delivery.


Definition of Line-haul

Movement of cargo between two major cities

or ports, specially those more than about

1,500 kilometers or 1,000 miles apart.

Line-haul transportation rates are based on

two important dimensions: distance and

shipper volume.

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Modes of transport and their

performance characteristics

1. Air

2. Parcel carriers

3. Truck

4. Rail

5. Water

6. Pipeline

7. Intermodal

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1. Air

• Revenue management for passengers

• Fast and fairly expensive mode of

transportation

• Small, high-value items or time-sensitive

emergency shipments that have to travel a

long distance are best suited for air

transport

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1. Air

• Location and number of hubs

• Assigning planes to routes

• Setting up maintenance schedules for

planes

• Scheduling crews

• Managing prices and availability at

different prices

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2. Parcel Carriers

• Package carriers use air, truck, and rail to

transport time-critical smaller packages

• Small packages weigh less than 150 pounds

• Expensive

• Fast and reliable delivery

• Tracking order status

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2. Parcel Carriers

Consolidation of shipments is a key factor in

increasing utilization and decreasing costs

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3. Truck

• It is the dominant mode of freight

transportation in the United States and

accounts for over 75% of the nation’s

freight bill.

• In Mexico:

Truckload (TL)

• Low fixed costs

• Idle time and travel distance between

successive loads adds to cost in the TL

industry

• Economies of scale with regard to the

distance traveled

Explain how the cost per

trip for 150 kilometers is

obtained.

Less-than-truckload (LTL)

• LTL operations are priced to encourage

shipments in small lots, usually less than

half truckload. TL tends to be cheaper for

larger shipments

• LTL carriers use consolidation centers.

Improve truck use, but increase delivery

time

• Key issues: assigning loads to trucks,

scheduling and routing of pickup and

delivery

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4. Rail

• Rail carriers incur a high fixed cost in terms

of rails, locomotives, cars and yards

• There is also a significant trip related labor

and fuel cost that is independent of the

number of cars but does vary with the

distance traveled and the time taken

• Idle time is very expensive and occurs when

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4. Rail

…trains exchange cars for different

destinations or track congestion

• Rail is priced to encourage large shipments

over a long distance

• Keep locomotives and crew well utilized

• Trains are not scheduled, they are “built”

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5. Water

• Water transport is ideally suited for carrying

very large loads at low cost

• It is the slowest of all the modes, and

significant delays occur at ports and

terminals

• Cars, grains, apparel, and other products are

shipped to and from the US by sea

• Management of containers is an issue

What is a TEU?

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6. Pipeline

• Primarily used for transport of crude

petroleum, refined petroleum products, and

natural gas

• A significant initial fixed cost is incurred in

setting up the pipeline and related

infrastructure

• Pipeline operations are typically optimized

at about 80 to 90 % of pipeline capacity

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6. Pipeline

• Stable and large flows

• Sending gasoline to a gas station does not

justify investment in a pipeline

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7. Intermodal

• Truck on Flat Car (TOFC). Also known as

piggyback

• Container on Flat Car (COFC).

• Containerized freight often uses

truck/water/rail combinations

• Key issues: exchange of information

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Why is it important to have an effective

transportation system?

• More competition

Example: perishable products

• Economies of scale in production

Example: auto-parts manufactured in

Taiwan, Indonesia, Korea and Mexico to be

distribuited in the United States

• Reduced price

Example: petroleum, oil

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What is a transportation

service?

A transportation service is a set of

performance characteristics bought at a

given price

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How to choose a transportation service ?

• It can be chosen from any of the seven

modes of transportation

• There are usually few options for

transportation given a particular situation

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Basic characteritics common to all

transport services

• Price

• In-transit time and variability

• Loss and damage

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Loss and damage

• Who is responsible when the product gets

damaged?

• What is the loss for the shipper when the

product is damaged?

• How do the carriers try to prevent damage?

Who ends up paying for it?

Design options for a transportation

network

• Direct shipment network

• Direct shipping with milk runs (what is a

milk run?)

• All shipments via central distribution center

• Shipping via distribution center using milk

runs

• Tailored network

Exercice

• Transportation Exercise in besana.

• Problems 3, 4, 16 and 20 in pages 181-183

of Ballou’s book (4th edition in English)

Next: Routing and scheduling in

Transportation

• Savings Matrix Method

• Sweep algorithm and sequence customers

within routes

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Problem 21 (page 183)

A traffic manager has two options in

scheduling a truck to make multiple pickups

and deliveries. The pickup-delivery

problem is shown pictorially below. The

traffic manager can ship the accumulated

volumes as single shipments between the

designated points or can use the stop-off

privilege at $25 per stop for any or all

portions of the trip.

Problem (cont.)

If the traffic manager wishes to minimize

shipping costs, which alternative should be

chosen? Assume that the final destination

point incurs the stop-off charge.

(Note. cwt means hundredweight.)

Bibliography

Ballou, R.H. Business Logistics Management.

Fourth Edition. Englewood Cliffs, NJ:

Prentice Hall, 1999.

Chopra, S. and P. Meindl. Supply Chain

Management. NJ: Upper Saddle River,

2001.

Ruiz-Olmedo, S.A. Tratado práctico de los

transportes en México. Mexico City:

Editorial 20+1, 2007.

transportation in a supply chain

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