Dynamics of Supply Chains: A Multilevel Network Perspective on Sustainable Freight Movements Frank Southworth* STELLA Workshop on Globalization, E-Economy and Trade University of Siena, Italy June 7- 9, 2002 * On Assignment at the Bureau of Transportation Statistics, US Department of Transportation, Washington DC 20590

Outline of This Presentation: 1. Problem Statement 2. Some Trends That Need Addressing 3. A Multilevel Modeling Framework 4. Summary

The Problem: Rapid Growth in The Freight Sector Is Producing … More Traffic Congestion-Induced Delays More Fossil Fuel Consumption More Environmental (Air, Water, Noise) Pollution Greater Consumption of Land How Are We Going To Handle This Growing Demand For Goods Movement?

The Freight Sector Is Expected To Grow Substantially: * Source: FHWA, Office of Freight Management & Operations, July Some 9.1 billion tons of freight, worth $9.4 trillion, were moved into, out of, and within the USA in calendar year 1998* Forecasts suggest that (from )*: US-Domestic freight will grow at 2.8% per year (= 87% cumulative increase) US-International freight will grow 3.4% per year (= 107% cumulative increase) In the United States, for example: Implication:We’ll need a good deal more freight handling capacity

The Freight Sector Is Also Changing Rapidly: Demand Side Changes (Market Evolution): Advances in real time, high capacity information technology have encouraged/opened the way for: -- Rapid growth in e-commerce -- Growing demand for just-in-time delivery services (transfers of costs up the supply chain) and a shift of emphasis towards demand-driven supply chains -- An increasingly global marketplace for low cost goods delivery

5 Source: Based on a U.S.Department of Transportation, Secretary’s Office of Intermodalism Presentation Inventory Information System Transport System “PUSH” METHODS OF CONTROL (relative importance) Inventory Information System Transport System “PULL” METHODS OF CONTROL (relative importance) Trend Towards Customer (Demand) Driven Logistics Systems

The emergence of new business relationships: -- The development of enterprise-wide, integrated, multi- step product supply chains. -- The emergence of freight intermediaries, including large 3PLs & (global) 4PLs Supply Side Changes : Some trends in freight handling and storage: -- A growing interest in intermodal and containerized forms of transportation. -- The design and use of larger, more cost-effective vehicles/vessels -- The emergence of large consolidation/break-bulk facilities and ”freight villages” -- Interest in/emergence of high volume freight corridors.

Implication : To understand trends and policy options in the freight sector we must understand the “SOUP to NUTS” of freight transportation logistics. To do this we need to: 1) Treat transportation as part of a broader, and increasingly global logistics exercise 2) Recognize that “ON-TIME IS MONEY” and that reliability of service is now a very high priority with many shippers and receivers 3) Develop a better understanding of freight economies of scale 4) Develop sufficiently comprehensive analytic frameworks for modeling/simulating sustainable freight transport solutions.

An Example of Trying To Get “FROM SOUP TO NUTS”:

Supply Chain Decision Making Simulator (SSDMS) Real-time Information Simulator (RTIS) Freight Traffic Simulator (FTS) Databases (Static and Dynamic) I-O Interface Major Components of the Regional Goods Movement Simulator Physical Transportation Network Multilevel Logistical/Financial/ Informational Network

Physical Transportation Network Plant Raw material sources Retail Markets Plant Distribution centers Raw material sources Retail Markets Logistical (Product Supply Chain) Network Financial Network Transaction cost information Demand or order information Travel time information Unexpected issues information Information Network Two-way information exchanges between specific decision-makers Supply Chain -Transportation Supernetwork Representation

Supply Chain Decision Making Simulator (SSDMS) Real-time Information Simulator (RTIS) Freight Traffic Simulator (FTS) Databases (Static and Dynamic) I-O Interface Physical Transportation Network Multilevel Logistical/Financial/ Informational Network Freight Traffic Simulator

Logistical Network: Simulating the Supply Chain

m i 1 k 1 1 j n o Three-Tier Supply Chain Representation Used in Model Development i = 1…m firms (manufacturing plants) j = 1…n retailers k =1 …o demand markets Tier 1: Tier 2: Tier 3:

* From: Nagurney, Ke, Cruz, Hancock & Southworth, 2001,“Dynamics of Supply Chains: A Multilevel (Logistical/Informational/Financial) Network Perspective” Multilevel Network Structure of the Supply Chain Decision Making Simulator Flows are commodity movements (top-down, supply driven) i 1 k 1 1 j m n o Logistical Network q11 qmn qno Financial Network Flows are prices (bottom-up, market driven payments) i 1 k 1 1 j m n o p11p1ip1m p2n p3o p31 Informational Network Flows are information on prices and movements (bi-directional)

This Multilevel, Dynamic Supply Chain System has now been: Formulated as a complex network systems problem (based on Nagurney and Dong, 2000) Formulated as a dynamical system with a set of behavioral rules that focus on the dis-equilibrium aspects of supply chains under competition. Translated into a variational inequality problem with a unique and stable equilibrium solution Solved algorithmically using an iterative, discrete time adjustment process (based on the scheme in Dupuis & Nagurney,1993) Made operational as a FORTRAN program

Supply Chain Simulator -- System Costs Firms (producers) have production costs and transaction (with retailer) costs Retailers have commodity purchase costs (from producers), transaction costs (with both producers and consumers) and product handling and storage costs Consumers (market demand) have purchase costs plus transaction (with retailer) costs. Note Bene: “Transaction costs” can be quite general, and include transportation, financial, and information gathering costs.

Supply Chain Simulator -- Behavioral Rules Producers and retailers are profit maximizers. Consumers are cost minimizers. The commodity is homogeneous. The system tends towards a spatial equilibrium of prices and commodity flows. ( Samuelson, 1953; Takayama and Judge, 1971; Nagurney, 1999)  It is assumed that a fair price for producing firms to charge for a commodity = the marginal costs of production + transaction costs.  At equilibrium, commodity flows occur between a producer- retailer pair if the marginal cost of production plus the marginal cost of transaction and handling is equal to the price of the commodity at the retail outlet. If marginal cost exceeds price, no shipments occur.  At equilibrium, the volume purchased from retailers exactly equals the demand at that product market. For shipments to occur the price paid at market must equal each retailer’s marginal production + transaction costs.

Supply Chain Simulator -- System Dynamics Consumer demands drive the supply chain (based on market demand functions) If a retailer’s price plus transaction costs exceeds a market’s willingness to pay, the volume of goods moved between that retailer-demand market pair decreases. If the retailer’s price is below willingness to pay the volume of goods moved increases in relation to this difference.  If demand at a specific market location exceeds existing retail supply, then the price consumers are willing to pay at that location increases in relation to the size of this unmet demand.  Prices charged at retail locations reflect both market demand conditions and producer supply conditions  The volume of a commodity shipped between a producing firm and a retailer evolves according to the difference between the retailer’s charged price and its marginal costs.These costs include transaction costs and the price charged for the commodity by the producing firm.

Supply Chain Decision Making Simulator (SSDMS) Real-time Information Simulator (RTIS) Freight Traffic Simulator (FTS) Databases (Static and Dynamic) I-O Interface Freight Traffic Simulator Physical Transportation Network Multilevel Logistical/Financial/ Informational Network

Micro-Simulation is used to assign the origin-to-destination shipment volumes estimated by the Supply Chain Simulator to the physical transportation network.  Complete cargo movements from production point to final consumption point are to be modeled.  This may involve different modes at different stages in the physical supply chain. These movements are simulated over the ORNL multi-modal freight transportation network (Southworth & Peterson, 2000).  Congestion-induced delay costs will be modeled on each link along a route, including congestion at intermodal terminals. These will include the economic cost of highly variable day-to-day travel times ( as a “service reliability” cost).  Transportation cost calculations will eventually require vehicle/container type and cargo size as well as type of carriage (for-hire vs. private) to be modeled. Freight Traffic Simulator

Principal Steps in the Complete Freight Traffic Micro-Simulator (under construction )

The ORNL North American Truck-Rail-Water Intermodal Network

This network is functionally linked to the ORNL Highway-Rail-Inland and Coastal Waterways Network database to allow routing of foreign imported and exported freight, including US Land-Bridge Traffic. The ORNL Trans-Oceanic Waterways Network

An Intermodal Freight Routing Example

local rail spur line Route Impedance = modal line-haul travel costs + intra-terminal transfer costs + inter-carrier (interlining) costs + local network access and egress costs + network-to-terminal local access costs Railroad #1 Railroad #2 origin destination interline transfer terminal transfer terminal notional local access link to highway network local terminal access road rail line haul highway network link(s)

Supply Chain Decision Making Simulator (SSDMS) Freight Traffic Simulator (FTS) Databases (Static and Dynamic) I-O Interface Freight Traffic Simulator Physical Transportation Network Multilevel Logistical/Financial/ Informational Network Real-time Information Simulator (RTIS)

Useful Applications of the Simulator Include Explorations of : 1) The benefits of more accurate and timely information on: ---- at-market commodity prices ---- the pattern of freight flows ---- fuel consumption and related pollutants production ---- profitability, and longer term facility (re)locations 2) The benefits of alternative forms of supply chain, including: ---- the use of mixed, multiple level business connections between firms in different network tiers (e.g.direct producer-to-consumer purchases and deliveries, as well as transactions through intermediaries). 3) The effects of traffic congestion (and the value of its avoidance) on: ---- at-market commodity prices ---- the pattern of freight flows ---- mode choice ---- fuel consumption and related pollutants production ---- profitability, and longer term facility (re)locations 4) The functional links between different supply chain configurations and different network/terminal configurations.