A Firm-Based Freight Demand Modeling Framework: Qi Gong and Jessica Guo, PhD. Transportation and Urban Systems Analysis Lab Civil and Environmental Engineering University of Wisconsin – Madison Capturing Intra-firm Interaction and Joint Logistic Decision Making

Outline Introduction Study objectives Logistics management framework Intra-firm interaction Modeling framework Conclusion

Introduction Freight transportation as derived demand Need to incorporate supply chain concepts in freight demand models Limitation shared by existing supply-chain based models:  Business establishments are treated as separate and independent decision-making agents  Inter-establishment interactions considered only between agents of different roles in the supply chain  Interactions among establishments within a firm not accounted for

Introduction Prevalence and implication of multi- establishment firms on freight movement Source: Statistics of Small Business, 2007 Employment Size of Firm All Industries Number of Firms5,410,367532,39188,58618,311 Number of Establishments5,466,985723,385355,8531,158,795 Average Establishment-to-Firm Ratio Total Sales Receipts ($1,000)3,975,1093,792,9213,612,05018,366,661 Manufacturing Industry Number of Firms213,07455,60313,9454,079 Number of Establishments213,50959,59623,03035,220 Average Establishment-to-Firm Ratio Total Sales Receipts ($1,000)197,171440,740634,7384,019,587 Wholesale Trade Industry Number of Firms286,87336,7837,9073,113 Number of Establishments292,55453,30528,33760,268 Average Establishment-to-Firm Ratio Total Sales Receipts ($1,000)872,353899,444771,8073,442,613

Current Study Objectives Objectives:  To capture the philosophies in logistics management  To better represent the decision-making paradigms of establishments and firms This study proposes a firm-based freight demand modeling framework:  Incorporates supply chain concepts  Accounts for the interdependency of establishments within a firm

Logistics Management Framework Freight transportation demand is derived from business logistics management needs Freight patterns are determined from various business operation and logistics decisions falling within different planning areas Planning AreaEffect of Decisions on Freight Transportation Customer Demand and Service Origin/Destination (OD) of shipments, temporal characteristics Facility Structure and Location OD, shipment temporal characteristics InventoriesOD, shipment frequency, shipment size PurchasingMode, route and shipment size Transportation OD, shipment frequency, shipment size

Logistics Management Framework Customer Demand and Service Facility Structure and Location  Business Economic Activity Boundary (S)  Facility number (S)  Facility size (S)  Facility location (S) Transportation Inventory  Just-in-time/forward buying (S)  Inventory deployment (S)  Replenishment quantity (T)  Replenishment frequency (T) Purchasing  Make-or-Buy (S)  Supplier selection (S)  Sourcing points (T)  Purchasing quantities (T) Kanban system/MRP Push/pull approach Economic order quantity Reorder point model Periodic review model Transaction cost theory Auction sourcing Optimization for sourcing points Profit maximization Optimization of capital and transportation cost Spatial interaction  Customer service level (S)  Inventory level (S)  Carrier selection (S)  Mode choice (T)  Vehicle routing and scheduling (O) Carrier requirements minimization Traveling salesman Inventory routing Logistics Planning Area Key Decisions (Planning Level) Decision Making Principles (S): Strategic decision (T): Tactical decision (O): Operational decision

Customer Demand and Service Facility Structure and Location  Business Economic Activity Boundary (S)  Facility number (S)  Facility size (S)  Facility location (S) Transportation Inventory  Just-in-time/forward buying (S)  Inventory deployment (S)  Replenishment quantity (T)  Replenishment frequency (T) Purchasing  Make-or-Buy (S)  Supplier selection (S)  Sourcing points (T)  Purchasing quantities (T) Kanban system/MRP Push/pull approach Economic order quantity Reorder point model Periodic review model Transaction cost theory Auction sourcing Optimization for sourcing points Profit maximization Optimization of capital and transportation cost Spatial interaction  Customer service level (S)  Inventory level (S)  Carrier selection (S)  Mode choice (T)  Vehicle routing and scheduling (O) Carrier requirements minimization Traveling salesman Inventory routing Logistics Planning Area Key Decisions (Planning Level) Decision Making Principles (S): Strategic decision (T): Tactical decision (O): Operational decision Logistics Management Framework

Customer Demand and Service Facility Structure and Location  Business Economic Activity Boundary (S)  Facility number (S)  Facility size (S)  Facility location (S) Transportation Inventory  Just-in-time/forward buying (S)  Inventory deployment (S)  Replenishment quantity (T)  Replenishment frequency (T) Purchasing  Make-or-Buy (S)  Supplier selection (S)  Sourcing points (T)  Purchasing quantities (T) Kanban system/MRP Push/pull approach Economic order quantity Reorder point model Periodic review model Transaction cost theory Auction sourcing Optimization for sourcing points Profit maximization Optimization of capital and transportation cost Spatial interaction  Customer service level (S)  Inventory level (S)  Carrier selection (S)  Mode choice (T)  Vehicle routing and scheduling (O) Carrier requirements minimization Traveling salesman Inventory routing Logistics Planning Area Key Decisions (Planning Level) Decision Making Principles (S): Strategic decision (T): Tactical decision (O): Operational decision

Logistics Management Framework Customer Demand and Service Facility Structure and Location  Business Economic Activity Boundary (S)  Facility number (S)  Facility size (S)  Facility location (S) Transportation Inventory  Just-in-time/forward buying (S)  Inventory deployment (S)  Replenishment quantity (T)  Replenishment frequency (T) Purchasing  Make-or-Buy (S)  Supplier selection (S)  Sourcing points (T)  Purchasing quantities (T) Kanban system/MRP Push/pull approach Economic order quantity Reorder point model Periodic review model Transaction cost theory Auction sourcing Optimization for sourcing points Profit maximization Optimization of capital and transportation cost Spatial interaction  Customer service level (S)  Inventory level (S)  Carrier selection (S)  Mode choice (T)  Vehicle routing and scheduling (O) Carrier requirements minimization Traveling salesman Inventory routing Logistics Planning Area Key Decisions (Planning Level) Decision Making Principles (S): Strategic decision (T): Tactical decision (O): Operational decision

Logistics Management Framework Customer Demand and Service Facility Structure and Location  Business Economic Activity Boundary (S)  Facility number (S)  Facility size (S)  Facility location (S) Transportation Inventory  Just-in-time/forward buying (S)  Inventory deployment (S)  Replenishment quantity (T)  Replenishment frequency (T) Purchasing  Make-or-Buy (S)  Supplier selection (S)  Sourcing points (T)  Purchasing quantities (T) Kanban system/MRP Push/pull approach Economic order quantity Reorder point model Periodic review model Transaction cost theory Auction sourcing Optimization for sourcing points Profit maximization Optimization of capital and transportation cost Spatial interaction  Customer service level (S)  Inventory level (S)  Carrier selection (S)  Mode choice (T)  Vehicle routing and scheduling (O) Carrier requirements minimization Traveling salesman Inventory routing Logistics Planning Area Key Decisions (Planning Level) Decision Making Principles (S): Strategic decision (T): Tactical decision (O): Operational decision

Logistics Management Framework Customer Demand and Service Facility Structure and Location  Business Economic Activity Boundary (S)  Facility number (S)  Facility size (S)  Facility location (S) Transportation Inventory  Just-in-time/forward buying (S)  Inventory deployment (S)  Replenishment quantity (T)  Replenishment frequency (T) Purchasing  Make-or-Buy (S)  Supplier selection (S)  Sourcing points (T)  Purchasing quantities (T) Kanban system/MRP Push/pull approach Economic order quantity Reorder point model Periodic review model Transaction cost theory Auction sourcing Optimization for sourcing points Profit maximization Optimization of capital and transportation cost Spatial interaction  Customer service level (S)  Inventory level (S)  Carrier selection (S)  Mode choice (T)  Vehicle routing and scheduling (O) Carrier requirements minimization Traveling salesman Inventory routing Logistics Planning Area Key Decisions (Planning Level) Decision Making Principles (S): Strategic decision (T): Tactical decision (O): Operational decision

Intra-Firm Interaction Facility Structure and Location  In the wholesale/retail industry, consumer demand is the key determinant driving the location of retail outlets. The location decision is also affected by  cannibalization and;  market expansion  In the manufacturing industry, facility structure and location decisions depend largely on the production scheme adopted by a firm  product plant strategy  market area plant strategy  process plant strategy  general purpose plant strategy

Intra-Firm Interaction Purchasing  Centralized purchasing strategy (e.g., adopted by Whirlpool, General Motors, Dells, Wal-Mart and IBM)  Decentralized purchasing  Centralized pricing with decentralized purchasing Supplier selection for centralized purchasing scenario Firm i Plant Scenario A: Supplier selection of single-plant firm Supplier Firm b Firm j Plant Supplier Firm a Supplier Firm b Firm i Plant i1 Firm i Plant i2 Scenario B: Centralized purchasing of multi-establishment firm Supplier Firm a

Intra-Firm Interaction Inventory  Push/Pull approach  Vendor-managed inventory (VMI) Inventory replenishment behavior Firm a Firm b Firm c Scenario B: Push approach by multi-establishment firm Supplier i Firm i Plant 1 Firm i Plant 2 Firm i Plant 3 Firm i Warehouse Scenario A: Pull approach by single-establishment firms

Intra-Firm Interaction Transportation  A firm owning multiple establishments has more opportunities of vehicle consolidation during goods movements  The combined shipment size may also make a mode such as rail more attractive

Modeling Framework A hybrid of longitudinal and latitudinal simulation

Modeling Framework Four major modules: Firm Creation Purchasing Inventory & Ordering Transportation

Firm Creation Creates a collection of firms and member establishments located within the study region Accounts for the effects of production scheme Analysis unit:  A firm and all its member establishments

Purchasing Determines annual amounts of commodities to be moved between all pairs of establishments Assumes centralized purchasing strategy Considers the possibility of using in-house sources

Inventory and Ordering Determines the order quantity happened on an average day throughout a year Based on the economic order quantity theory widely adopted in logistics management

Transportation Assigns shipments with modes, consolidation location, vehicles, and routes Follows the transport chain concept developed by de Jong and Ben-Akiva (2007)

Conclusion The intra-firm interdependency in logistics decision-making is captured in the proposed framework  Explicitly represent firm-establishment structures  Consider possibility of internal sourcing within a firm  Apply the popular strategy of centralized purchasing  Consider joint ordering across establishments of the same firm Part of this modeling system has been calibrated using readily available public data

Conclusion Remaining models to be estimated using data from ongoing firm-based surveys in Wisconsin Limitations resulted from certain simplifications and assumptions that are incorporated in framework to assure its operational ability:  The ignorance of horizontal alliance across single- establishment firms  Implicit consideration of price policy  A constant demand pattern assumed for the modeling of ordering behavior

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