Growth in international trade Caused greater reliance on intermodal connections, ports, and air terminals

Growth not from neighbors

Major Gateways

Logistics Cost Professor Goodchild Spring 09

How do goods get to market? Asian Factories West Coast Port Distribution Center Destination Store Container on marine vessel Drayage truck Short or Long-haul truck Transportation cost is typically much less significant than the reductions in manufacturing.

Logistics Costs Transportation cost Transportation cost The cost incurred through the need to move products over space. The cost incurred through the need to move products over space. In a vehicle, with a forklift, etc. In a vehicle, with a forklift, etc. Inventory cost Inventory cost The cost incurred through the need to hold goods over time. The cost incurred through the need to hold goods over time. In a vehicle, in a distribution center, etc. In a vehicle, in a distribution center, etc.

In-transit inventory or pipeline inventory: inventory that is in the process of movement from point of receipt or production and between points of storage and distribution. In-transit inventory or pipeline inventory: inventory that is in the process of movement from point of receipt or production and between points of storage and distribution. Inventory-at-rest: inventory that is NOT in the process of movement from point of receipt or production and between points of storage and distribution, rather it is stationary, typically at a production facility, warehouse, distribution center, or consumption facility. Inventory-at-rest: inventory that is NOT in the process of movement from point of receipt or production and between points of storage and distribution, rather it is stationary, typically at a production facility, warehouse, distribution center, or consumption facility.

How does REI get goods to market? Asian Factories West Coast Port Distribution Center Destination Store Container on marine vessel Drayage truck Short or Long-haul truck In transit inventory

Initial gains from deregulation (restructuring of networks), stalling in the mid-90s dropping off again after 9/11, but increasing with congestion and fuel prices After 2003.

Currently inventories are piling up

Follow the path of an item Carried from production area to storage area Carried from production area to storage area Held in temporary storage Held in temporary storage Loaded into transport vehicle Loaded into transport vehicle Transported to the destination Transported to the destination Unloaded, handled, and held for consumption Unloaded, handled, and held for consumption

What incurs cost? Overcoming distance (motion): Overcoming distance (motion): transportation cost (over the road/rail) transportation cost (over the road/rail) handling cost (through a terminal, in and out of vehicles) handling cost (through a terminal, in and out of vehicles) Overcoming time (holding): Overcoming time (holding): holding cost: holding cost: Rent (proportional to D’H) Rent (proportional to D’H) Waiting (value*time*interest rate) Waiting (value*time*interest rate) In transit In transit pipeline pipeline How you calculate the value depends on the analysis you are doing (cost or price) We will include all costs, regardless of who pays them (we are designing systems)

Cumulative Number of Items Diagram time cumulative number of items Production (rate D’) shipments arrivals Consumption (D’) An item is a fixed quantity of infinitely divisible quantity (e.g. person, parcel, case of beer) tmtm H Consider units on area

Queue Discipline FIFO: First In First Out FIFO: First In First Out LIFO: Last In First Out LIFO: Last In First Out Others Others If LIFO inventory cost is usually underestimated

Holding cost: Rent proportional to max. accumulation proportional to max. accumulation Independent of flow rate, D’ Independent of flow rate, D’ Proportional to max. time between dispatches Proportional to max. time between dispatches

Holding cost: Waiting Cost associated with delay to items Cost associated with delay to items c i H i + c i t m c i H i + c i t m Stationary + pipeline inventory Stationary + pipeline inventory Determining c i is difficult Determining c i is difficult

Transportation Cost Shipment cost has fixed and variable portions: c f + c v v (v is number of items) Shipment cost has fixed and variable portions: c f + c v v (v is number of items) Fixed cost: driver wage Fixed cost: driver wage Variable cost: increased fuel consumption Variable cost: increased fuel consumption Cost for n shipments: c f n + c v V (V is total items across shipments, n is number of shipments) Cost for n shipments: c f n + c v V (V is total items across shipments, n is number of shipments)

Transportation cost Cost per item: (c f n + c v V)/V = c f /v avg +c v Cost per item: (c f n + c v V)/V = c f /v avg +c v Economies of scale from sharing fixed cost Economies of scale from sharing fixed cost v avg =D’H avg so cost per item is (c f /D’H avg )+c v v avg =D’H avg so cost per item is (c f /D’H avg )+c v Transportation cost decreases with increasing average headway Transportation cost decreases with increasing average headway Holding cost increased with maximum headway Holding cost increased with maximum headway Therefore shipments should be spread so as to minimize the maximum (all the same) Therefore shipments should be spread so as to minimize the maximum (all the same)

Transportation cost and distance c f (fixed shipment cost) is independent of v (items) c f (fixed shipment cost) is independent of v (items) both c f and c v are typically functions of distance (d) both c f and c v are typically functions of distance (d) c f =c s +c d d c f =c s +c d d c v =c’ s +c’ d d c v =c’ s +c’ d d Cost for n shipments: c f n+c v V Cost for n shipments: c f n+c v V c s n+c d dn+c’ s V+c’ d dV c s n+c d dn+c’ s V+c’ d dV Add cost of multiple stops: c s (1+n s )n+c d dn+c’ s V+c’ d dV Add cost of multiple stops: c s (1+n s )n+c d dn+c’ s V+c’ d dV So small we neglect it

Transportation cost Cost per item (divide by nv avg ): Cost per item (divide by nv avg ): c s (1+n s )/v avg +c d d/v avg +c’ s or c s (1+n s )/v avg +c d d/v avg +c’ s or c s (1+n s )/D’H avg +c d d/D’H avg +c’ s c s (1+n s )/D’H avg +c d d/D’H avg +c’ s If headways vary a lot so do shipment sizes, and therefore truck sizes, better to use consistent truck sizes (second reason to keep shipment sizes consistent) If headways vary a lot so do shipment sizes, and therefore truck sizes, better to use consistent truck sizes (second reason to keep shipment sizes consistent)

shipment size Trans. Cost Per shipment Capacity Restrictions v max – number of items that will fit in vehicle cfcf vc v Slope is cost per item, lowest when truck full

shipment size Trans. Cost Per shipment Relationship to size Magnitude of fixed and variable cost determine most economic choice as a function of shipment size. As shipment size increases, favor lower variable and higher fixed costs.