LOG 408: Global Logistics Management Lecture 7: Transportation in Supply Chain

Examine the global context of logistics and supply chain management – The globalization in the last three decades and its impact on global trade and logistics – More firms are now choosing outsourcing: Benefits and risks in outsourcing The outsourcing framework – Supply chain collaboration and integration What are the barriers and how to overcome them? – Supply chain strategies Lean and agile strategy When to use them? – Some cases for better understanding the SCM context Key Points of First Section (Week 2 to 6) 7-2

Intermodal transport (1) Intermodalism: a system of coordinating different modes of transport for a shipment. Practically, it is the use of intermodal container or vehicle in a coordinated shipment using multiple modes of transportation (road, rail, air, etc.) Where the freight moves within a loading unit (known as an ITU – internodal 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 7-3

Intermodal transport (2) Containerization is the key innovation to support intermodalism – First container ship was built in 1956 – First intermodal service between US West Coat and Hawaii in 1958 – First intermodal crane was put into service in 1959 – Equipment adheres to the same standards worldwide Primarily for medium value cargo, more value than bulk cargo but less valuable that air cargo Common modes used are trucking, rail, and ocean shipping Air intermodal is different due to the small size of air cargo containers (lighter and prone to damage) 7-4

Benefits of intermodal transport Security – Container is hard to get into – Container content is unknown to outsiders (serial number is the only information) – Container have seals on the latches (broken easy to be noticed) Safety – Strong and weather resistant – Workers are safer with machines do the handling Efficiency (fewer workers needed) Speed – Ships are larger and fewer ports are needed 7-5

Intermodal transport operation It requires high-level cooperation and coordination among multiple transportation operators – Often lead to the formation of specific intermodal carriers, either asset based or non-asset based – Supported by sophisticated information system Carriers have to deal with equipment balance – Vehicle may move less that full load (LCL) cargos from a surplus port, and empty containers need proper handling – One solution is to lease containers locally The process: Shipper orders a container from a carrier first. After delivering the empty one, the carrier later takes the loaded container (road or rail) for long distance shipping. After reaching the destination (sea or rail), it was delivered to the customer (road or rail). Container is picked up later. 7-6

Selecting different transport modes A function of: – The volume & value of the freight – The distance travelled – The availability of different services – Freight rates to be charged – etc. Logistics service providers (LSPs) usually apply volumetric charging – Based on consignment dimensions as well as weight 2 7-7

Relationship between rate and distance (economy of distance) 7-8

Relationship between rate per kilo and consignment weight (economy of scale) 7-9

Characteristics of the different transport modes 7-10 modeAdvantagesDisadvantagesMost suitable RoadLow fixed cost, flexibility, direct delivery Low capacity and medium variable cost Short distance door to door delivery RailLow variable cost, high speed & capacity High fixed costMedium to long distance in-land transportation AirHigh speed, low fixed cost High variable cost, capacity low High value long- distance transportation WaterLow variable cost, high capacity Low speed, constraint by available ports and waterways Long-distance transportation or low cost inland shipping PipelineLow variable cost High fixed cost, limited to specific goods For specific & dangerous goods

Modal split for goods transport in the EU 27 in 2008 (% ton kilometers) 7-11

Transport operations, distribution centers and factory gate pricing Since the 1970s, distribution centers (DCs), either regional distribution centers (RDCs) or national distribution centers (NDCs), were introduced in the retail sector. – Suppliers deliver to these DCs in full track loads – DCs serve retailers in one region In the 1990s, consolidation centers (CCs) were added to consolidate delivers from multiple suppliers into full load, for later delivered onto DCs In the 2000s, the new development is factory gate pricing (FGP) – Introduced by Tesco in

Inbound logistics in the retail sector 7-13

The evolution of grocery distribution 7-14

Factory gate pricing Retailers take control of the delivery of goods into their distribution centers (via their CCs) This gives a single point of control for the inbound logistics network FGP is the use of a pick-up price from the supplier for a product plus the organization and optimization of transport by the purchaser to the point of delivery Retailers gain more power from FGP, may face oppositions from logistics service providers (concern over the reduction of haulage rates with retailers’ power). 7-15

Benefits of FGP Retailers have greater visibility of their supply chain – e.g., no need to move supplies to a CC and then move back to a nearby DC. Achieve higher service level A case study in a UK retailer shows – The reduction of transportation distance by 23-25% – The reduction of transportation cost by 14-17% – The reduction of total distribution cost by 6% 7-16

Asset utilization in transport 7-17

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 Capability of managing LCL cargoes is an important indicator of the strength of the logistics sector – The case of Singapore PSA Port versus Malaysia Port Tanjung Pelepas (PTP) in competing for transshipment business along the Strait of Malacca 7-18

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 In planning the long-term infrastructure, planners have to make reasonable assumptions to avoid either underinvestment or overinvestment Cost-benefit analysis is the critical tool, but it does not guarantee the project success – There is a tendency to underestimate costs Other factors such as environmental factors need to be considered also 7-19

Questions to think What are economy of distance and economy of scale? Which factor affects their marginal benefits? Do all transportation modes have the same marginal benefits? Why or why not? Why do we say transportation is a derived demand? How does it have impact on transportation infrastructure projects? What is factory gate pricing? What are its benefits? Which types of supplier—retailer power structure would make it easier to work out? How is it different from VMI? 5-20