Chapter 7 Transportation

Content….. Drivers of transportation decisions Modes of transportations Devising a strategy for transportation Vehicle scheduling Transportation cost in e-retailing

Key Transportation Decisions Selection of Transportation Strategy: –Transportation strategy would involve designing the most effective way of reaching products to geographically dispersed markets from plants in a cost effective way. Choice of Transportation Mode: –Choosing the most effective mode of transport from among several feasible options.

C1 C2 C3 C4 C5 C6 VENDORS INBOUND TRANSPORTATION PLANTS CUSTOMERS INTERFACILITY TRANSPORTATION DISTRIBUTION CENTERS OUTBOUND TRANSPORTATION

Drivers of Transportation Decisions Transportation cost structure Economies of distance & scale –FTL versus LTL Product and demand characteristics –Value density –Demand characteristics –Customer requirements ( Delivery time)

Truck Freight Rates (Rs/ tonne) for a Nine-tonne Shipment Source: The Hindu Business Line, 06 November, 2006

Transportation Modes Transportation modes –Air –Pipeline –Rail –Road –Water Mix mode services –Package carriers –Intermodal containers Impact on SCM performance measures

Impact of Mode of Transportation on Supply Chain Performance Measures Freight cost: Lot size: Differences in required shipment sizes translate to differences in cycle stock related inventory. Delivery time: pipeline inventory and safety stock carried in supply chain is a function of lead-time in transport Delivery time variability: safety stock carried in a supply chain is function of the variability in lead time in transport, Losses and Damages Total cost = Fright cost + Cycle stock inventory carrying cost + Pipeline Inventory carrying cost + safety stock inventory costs + Cost of losses and damages

* 1 is most favourable & 5 is least favourable from shipper point of views * * Delivery time variability in absolute terms Relative Ranking* of Transportation Mode by Performance Measures

Choice of Mode of Transport: Illustration Product : Printer High End Standard Low end Value/unit ( Rs.) 20,000 15,000 10,000 Inv. Carrying cost/unit/year 4, Mean Demand/week (units) SD of demand /week(Units) Option Sea Air Lot size (units) Fright/unit (Rs.) Led time(weeks) 4 1 Target service level: 98%

Cost Comparisons for Different Modes of Transport Under Stable Demand* Impact of Value Density Optimal Decision : For high end :Air. For standard and low end : Sea * Assumption : SD of demand = 0 ( No demand uncertainty)

Cost Comparisons in Situation of Demand Uncertainty Impact of Value density and Demand Uncertainty Optimal Decision : For high end and standard: Air. For low- end: Sea

Design of Distribution Network –Direct shipment –Milk Run from each plant (Aggregate demand across depots) –Shipment via Depot –Cross Docking –Hub- and spoke model –Different Strategy for different category of products/customers

Direct Shipping

Shipping Using Milk Run

Shipping via a Central Distribution Centre

HLL Supply Chain Supplier Factory 100 Depot 80 Redistribution Stockists 10,000 + Retailers 1Mn + Consumer SupplierFactory 100 Depot 80 Redistributi on Stockists 10,000 + HPC Business:  More than 400 SKUs (110 brands in 950 packs)

Restructuring of HLL Supply Chain Redistribution Center (RDC) FactoryDepot Redistribution Stockiest (RS) DRP Daily Resource Planning (DRP) Continuous Replenishment Dispatches against order High Volume Items Low Volume Items

Comparison of Distribution Network Design Options: Illustration Manufacturing firm has three plants (A, B &C), each manufacturing a different product line and serving a stable market through three depots ( X, Y &Z). Plant A is manufacturing menswear, plant B is manufacturing ladies wear and plant C is manufacturing children’s wear. Weekly demand = 100 units for each of the three types of garments at each of the three depots

Truck can carry 300 units of garments and the transport cost is Rs 2 per km. for TL shipments. To obtain economies of scale firm has decided to work with TL shipments.. Inventory carrying cost is at 20% per annum. All the products cost Rs 200 per unit, so inventory carrying cost is Rs 40 per unit per year. Facility cost of maintaining a DC is Rs 12,000 per year.

Transportation Strategy: Linking Plants to Markets

Comparison of the Three Transportation Strategies How would network design change if demand at each depot is 300 units per week for each of the product?

Vehicle Scheduling Basic Vehicle scheduling formulation Heuristics –Saving Matrix Method

Typical Vehicle Scheduling Problem Depot at location 0 serving 10 retailers

Saving Algorithm Construct distance matrix Calculate savings for all the pairs of customer i and j S ij = C 1i - C ij + C j1 Order savings in descending order Start at the top link, do following: –If making a given link results in feasible route( feasibility constraints, can be used to extend one of the existing route or starting a new route), append this link to solution, if not reject the link –Repeat above step until no more links are left

Two Independent Routes Versus Merged Routes

Saving Algorithm Node iNode j Depot(1) Ci1 Cj1 C1jC1i Savings if routes are merged = Ci1+Cj1-Cij

Consider an instance of the VRP with the deport at vertex 1 and six customers at vehicles 2, …., 7. The symmetric distance matrix is shown in table. There are two vehicles with capacities Q1=Q2=6. The customer demands are (q2,….q7) = (2,3,1,1,2,1). Distance matrix for a VRP - Vehicle Scheduling Exercise

Saving Matrix Suggested routes based on Saving algorithm: Route1 : Route 2 :

Spatial Representation of Depot and Dealers

Cost Matrix Distance and load related data

Saving Matrix

Final Routes Based on Saving Heurstics

Example Dealer Distance from depot Avg. Demand (tons) Design the vehicle route for a consumer goods company that has 10 dealers. The capacity of the vehicle is 25 units and other relevant data are as follows:

Distance matrix in kilometers

Vehicle Route Planning: Extensions Vehicle can operate multiple routes Time window for a customer Business may involve both deliveries and collections Vehicles ( drivers) may have a time window Time consuming activities other than travel: –Loading & unloading –Queuing at loading and unloading

Vehicle Routing: Strategic Decisions Fixed versus dynamic routes Temporal consolidation –Time based –Quantity based Nature of relationship with transport carrier –Short term versus long term contract Special vehicle versus standard vehicle –Load and volume optimization

E-Retailing Provides the convenience of shopping from home E-retailer can provide higher variety compared to Brick and Mortar store and still mange higher inventory turns –Centralisation versus decentralisation of inventory Transportation cost is higher for e-retailer –Small shipment size –Last-mile transportation

Product/market Characteristic –Value density, Nature of demand uncertainty, Volume of demand Cases –Dell Computers, Amazon, Webvan Grocery on net : Webvan Versus Tesco Indian Experiences: firstandsecond.com, and Rediff.com, Indiaplaza.com