Transportation Management John Vande Vate ISyE 3103 Fall 2001

Identifying and Exploiting Economies of Scale Reduce transportation cost by consolidating, leveraging, ...

Why does Consolidation Help? Freight rates depend on Distance Location Order size!

Dependence on Size Shipment Cost Shipment Size Medium Shipment Large Shipment Small Shipment Medium Shipment

Your Case: What forms of Consolidation? Chinese Factory Port in China Store Port of Long Beach NY DC Cross Dock

Types of Consolidation Time: Wait for full loads Cross Dock Combine shipments Common Carrier, e.g., LTL Carrier Combine shippers loads Shippers Association Combine shippers Collaborations Match-up head hauls Other examples?

Use Leverage Big customers can command lower rates How to be a big customer?

Gaining Leverage Limit the number of carriers you use Is it wise to use just one? Consolidate your shipments Cross Docks concentrate volumes on fewer lanes Negotiate rates across the system rather than lane by lane Combinatorial bidding Join a group Shipper’s Associations Use someone else’s size Freight Forwarders NVO’s

Consolidating Finished Vehicle Deliveries at Ford Cross Docking rail shipments of finished vehicles More about speed than about freight

Why Speed Matters The new BMW Sales and Production System

Ford’s Situation 1996 Average 15 days delivery 3.9 million vehicles/year 10,700 vehicles/day $18 thousand/vehicle $190 million/day $2.8 billion in pipeline

Before 1996

The Price Inventory at the cross dock Added distance traveled Handling at the cross dock Capital costs of the cross dock

1999 Statistics Assembly plants 22 Mixing centers 5 Destination rail ramps 54 Dealer locations 6,000 Production volume 4.4 Mil./Year Freight expense $1.5 Bil. Avg. transit time 16.8 Days Pipeline Inventory $4.1 Bil.

Dealers sourced by multiple ramps Old Ramp Allocation Southern US Dealers sourced by multiple ramps

New Ramp Allocation Southern US

Final Outbound Rail Network with Carriers St Paul Canada Edison Michigan Chicago Ohio St Louis Kentucky Norfolk Kansas City Atlanta Mixing Centers Destination Ramps Union Pacific CSXT FEC BNSF Canadian Pacific Car Haul to Ramp Norfolk Southern Canadian National

Results Cut vehicle transit time by 26% or 4 days Initiative is 6 months ahead of time $1 billion savings in vehicle inventory $125 million savings in inventory carrying costs Avoid bottlenecks Reduce assets in supply chain Less damage Improved inventory turns at dealer By end of Q1 2001 network will be fully operational in US, Canada and Mexico

How to Value this Reduced Inventory Either a one-time windfall for full amount Or capital charge on full amount over several years How long? And Non-capital charge on reduced inventory over several years Theft Insurance Damage Average value of non-capital portion 9-10% For CPU’s and Laptops runs to 35%! What did Ford do?

The Point How Cross Docks Did It? We will discuss more when we talk about Load-driven systems (10-16 and 10-18) Concerned about more than the freight bill! Next Lecture: Total Cost