1. Transportation in a Supply ChainBy
Dr. Debadyuti Das

2. Importance of transportation in Supply Chain
Transportation provides significant link among various stages in the supply chain
Significant component of the costs incurred by most supply chains (5-6% of the recommended retail price of the product)
Transportation activity represents around 10% of the GDP of USA
Transportation-related activity accounts for 16% of total US occupational employment
Examples
- Indian Army
- Dell Computers
- Wal-Mart
- IKEA
- Seven-Eleven Japan

3. Importance of transportation in Supply Chain
Transportation strategy in tune with overall supply chain strategy
Transportation-related decisions significantly affect cost as well as responsiveness of the supply chain.
Facility, location, transportation and inventory management are inter-related decisions.

4. Drivers of transportation decisions
Transportation cost structures
Impact of product characteristics
Impact of demand characteristics

5. Drivers of transportation decisions
Transportation cost structures
- Function of distance and quantity of goods shipped
- Economies of distance (with longer distances)
- Economies of scale (with increase in shipment weight)
- Driver and crew-related costs are a function of the distance and do not depend on load.

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

7. Drivers of transportation decisions
Impact of product characteristics
- Value-density (the ratio of rupee value of the product to its weight) reveals the importance of transportation cost in the overall product cost.
- Value-density captures transportation-inventory trade-off
Inventory carrying cost is a function of the value of the product
Transportation cost is a function of the weight of the product.

8. Drivers of transportation decisions
- For high value-density product (High-technology products), firms can use faster and expensive mode of transportation
- For low value-density product (cement, coal etc.), firms have to use slower mode of transportation
- For bulky products like water storage tanks, cycles etc. T.C. is captured by the physical volume rather than the weight
- In air-freight industry, volumetric weight is measured and freight rate is charged based on physical wt or volumetric wt, whichever is higher

9. Drivers of transportation decisions
Impact of demand characteristics
- Volume of demand (cycle stock)
- Uncertainty associated with the product demand (safety stock)
- Long lead time (high safety stock)
- Faster mode of transport for high uncertainty products
- Slower mode of transport for products that have a stable demand

10. Drivers of transportation decisions
Carrier (party that moves or transports the product)
Vehicle-related cost
Fixed operating cost
Trip-related cost
Shipper (party that requires the movement of the product between two points in the supply chain)
Transportation cost
Inventory cost
Sourcing cost
Facility cost
Information processing cost

11. Mode of transportation
Rail
Road
Air
Package Carriers
Water
Pipeline

12. Mode of transportation (Rail)
Suitable for low value-density products
Long and unreliable lead time
Off-track delays (at pickup and delivery end)
Accounts 30% of freight movement in India
Very high in-transit damages and losses
95% of the freight carried is in bulk goods and within that coal accounts for 50% of the traffic.

13. Mode of transportation (Road)
Trucks account for about 65% of freight movement in India
More expensive than rail, but offers the advantages of door-to-door delivery and shorter delivery time
Low freight rate and poor quality of service
Unreliable transit time
High in-transit damages

14. Mode of transportation (Water)
One of the cheapest modes of transport
Very large loads at very low cost
Slowest amongst all
Limited to certain geographic areas
Ocean, inland waterway system, coastal waters
Considerable delays at ports in loading and unloading
Extensively used for international cargo

15. Mode of transportation (Air)
Expensive
Rapid and reliable delivery
Small, time-sensitive and high value-density goods
Preferred mode for e-businesses (e.g., Amazon, Dell, McMaster-Carr)
Consolidation of shipments (especially important for package carriers that use air as a primary method of transport)

16. Mode of transportation (Pipelines)
High fixed cost
Primarily for crude petroleum, refined petroleum products, natural gas
Best for large and predictable demand
Used for getting crude oil to a port or refinery, but not for getting refined gasoline to a gasoline station

17. Multi-modal
Use of more than one mode of transportation to move a shipment to its destination
Most common example: rail/truck
Also water/rail/truck or water/truck
Grown considerably with increased use of containers
Increased global trade has also increased use of multi-modal transportation
More convenient for shippers (one entity provides the complete service)
Key issue involves the exchange of information to facilitate transfer between different transport modes

18. Comparison of modes of transportation on SC performance measures
Freight cost
Lot size
Delivery time
Delivery time variability
Losses and damages

19. Relative ranking of modes of transportation by performance measures
Mode of transportation
Cost (1 = least)
Lot size (1= smallest)
Delivery time (1= fastest)
Delivery time variability (1= least)
Loss and damage (1=least)
Rail 2 3 4
Road
Water 1
Air

20. Total cost approach to performance measures
Transportation cost + Cycle stock inventory carrying cost + Pipeline inventory carrying cost + Safety stock inventory carrying cost + Cost of losses and damages

21. Cost comparisons for different modes of transport for different varieties of product
Problem:
A global company has decided to use India as its manufacturing base for the supply of printers to the European markets. The company offers three types of printers: high-end, standard and low-end. The three models of the printers cost Rs. 20,000, 15,000 and 10,000 per unit respectively. If the firm decides to use air as the mode of transport, it can fly the goods in smaller lots of 100 units, while shipping via sea requires a minimum shipment size of 400 units. Transportation and customs clearance take 1 week if air is used as the mode of transport. The same will take 4 weeks, if sea is used as the medium of transport. The freight by air will be Rs 360 per unit while freight by sea will be Rs 90 per unit. The annual inventory carrying cost for the firm is 20% of the cost of the item.

22. Cost comparisons for different modes of transport for different varieties of product
Case 1: The demand in Europe is stable at 100 units per week for each of the three types of printers (Demand is stable)
Case 2: Average demand in Europe is 100 units per week for each of the three types of printers and standard deviation of demand is 30 units per week (Demand is variable)
The firm has to decide on the optimum mode of transport for different varieties of product under different situations.

23. Cost comparisons for different modes of transport under stable demand
Product
Mode of transport
Cycle-stock
Pipeline inventory
Average inventory
Inventory carrying cost (‘000)
Transportation cost (‘000)
Total cost per annum (‘000)
High end
Sea
Air
200 50
400
100
600
150
2400
468
1872
2868
2472
Standard
1800
450
2268
2322
Low end
1200
300
1668
2172

24. Cost comparisons for different modes of transport under demand uncertainty
Product
Mode of transport
Total cost per annum for stable demand (‘000)
Safety stock inventory carrying cost (‘000)
Total cost
High end
Sea
Air
2868
2472
480
240
3348
2712
Standard
2268
2322
360
180
2628
2502
Low end
1668
2172
120
1908
2292

25. Distribution network design options
A garment manufacturing plant has three plants (A, B and C), each manufacturing a different product line and serving a stable market through three depots (X, Y and Z). Plant A is manufacturing men's wear, plant B ladies’ wear and plant C children’s wear. Each of the plant will be supplying to all the three depots.

26. Distribution network design options
Ship directly from each plant to each market
-Stable demand with high volume
- High cycle inventory
Aggregate demand across depots and using Milk Run from each plant
- Increase in frequency of visit
- Increase in transportation cost
- Lower cycle stock
Ship Via Distribution centre
- Cycle stock almost similar to Milk Run option
- Transportation cost higher than Direct shipping, but lower than Milk Run option
- Setting up of an additional facility at DC
- Additional loading and unloading costs at DC

27. Distribution network design options
Hub and Spoke Model
- Large number of time-sensitive small-size shipments
- All the destinations in a region are inter-connected through a central hub
- Originate from geographically dispersed areas
- To be distributed over large geographical areas

28. Comparison of Distribution network design options
Consider the same problem. Weekly demand at each of the three depots is 100 units for each of the three types of garments. A truck can carry 300 units of garments and the transportation cost is Rs. 2 per km for FTL shipments. To obtain economies of scale, the firm has decided to work with FTL shipments and all the trips will carry 300 units of garments. The firm can bundle men’s wear, ladies’ wear and children’s wear in one trip, but all together it can carry only 300 units in one trip. The inventory carrying cost is 20% of item cost per annum. All the products cost Rs 200 per unit. The facility cost of maintaining a DC is Rs 12,000 per year.
In the Direct shipping option, 3 week’s worth of demand will be supplied in every trip and the cycle will be repeated in every 3 weeks. In the other two options, each trip will have 1 week’s worth of supply and the cycle will be repeated every week.

29. Transportation strategy: linking plants to depots
Spatial data representation
A 100 X DC
Plants
Depots
B 50 O Y
C 0
Z 200
100

30. Computation of distances
Location
(X. Y) Coordinates
Trip
Distance A
(O, 100)
AX, BY, CZ
200 B
(0, 50)
AZ, CX
223.6 C
(0, 0)
AY, BX, BZ, CY
206.15 X
(200, 100)
XY, YZ 50 Y
(200, 50)
AO, CO, OX, OZ
111.18 Z
(200, 0)
BO, OY
100 O
(100, 50)

31. Relevant costs
Transportation costs
Inventory carrying costs

32. Comparison of three shipping strategies
Option
Distance traveled in one cycle
Frequency of transport cycle
Annual transport cost
Annual facility cost
Premium garment (Avg garment cost: Rs 200)
Annual Annual
Inv cost TC
Low-end garment (Avg garment cost: Rs 75)
Direct shipping
3,744
Once in three weeks
1,29,781
54,
,031
Milk Run
1,560
Once a week
1,62,191
18,
,941
Shipping via DC
1,294
1,34,620
12,000
18,
,370

33. Transportation costs in E-Retailing
Benefits of keeping inventory at a central location
Increase in transportation costs
Shipping charges by E-Retailers
- Consist of a fixed and a variable component
- Depends on the type of the items shipped e.g. books, DVDs, Computer, groceries, sport items, automotive items
Firstandsecond.com, Indian E-Retailer of books charges 7% of the order value or Rs 30, whichever is higher for standard shipping of order value of less than Rs

34. Impact of transport cost on Business performance of E-Retailers
Dell Computer
Amazon.com
Webvan
Items
Avg price
Avg weight
Value-density
Shipment
Transport cost*
Shipping cost as a % of price
Laptop
$1500
3 kg
$500/kg
1 laptop
12.4
0.8
Book
$15
0.5 kg
$30/kg
3 books
6.0
13.3
Grocery $5
1 kg
$5/kg
10 kg
18.2
36.4

35. Impact of transport cost on Business performance of E-Retailers
E-Retailing is suitable for high-variety, high value-density and high demand uncertainty products