2. 1 1 Transportation & Supply Chain Systems John H. Vande Vate Spring 2005

3. 2 2 Who am I? John H. Vande Vate Professor and EMIL Executive Director Office: 221(?) of the Old ISyE bldg. Used to be the graduate student lounge. Same area as the TLI. Phone: (404) 894-3035 Office Hours: –Tuesday, Thursday 3-5 (after class) or –By appointment

4. 3 3 Our TA Claudio Santiago csantiag@isye.isye.gatech.edu Office: Hours: TBA

5. 4 4 Administrative Details Class Home Page: www.isye.gatech.edu/~jvandeva/Classes/6203/syllabus2005.html Keep up with information here!

6. 5 5 Text Introduction to Logistics Systems Planning and Control by Gianpaolo Ghiani, Gilbert Laporte, Roberto Musmanno Publisher: Wiley ISBN: 0-470-84917-7 Edition: Jan 2004 (This text was used in the Fall Semester, 2004 so it should be possible to get used copies. The hard cover copy lists for $148 at Amazon, the paperback edition lists for $65.12 which is even less expensive than the digital version at $65.95)

7. 6 6 Other Resources You may also want to read: –Contemporary Logistics by Johnson, Wardlow, Wood and Murphy –Logistic Systems Analysis by Daganzo –Business Logistics Management 4th Edition by R. H. Ballou, Prentice Hall, 1999 –Bramel, J. and D. Simchi-Levi, The Logic of Logistics: Theory, Algorithms and Applications for Logistics Management, Springer-Verlag, 1997 –Logistics and Supply Chain Management: Strategies for Reducing Cost and Improving Service (2nd Edition) by Martin Christopher –Modeling the Supply Chain by Jeremy F. Shapiro

8. 7 7 Grading Exams: 40% –January 27 th 20% –March 17 th 20% May 2nd 11:30 - 2:2020% –You may drop your lowest exam Project 1: 20% –Groups of 6 or 7 Project 2:20% Homework:20%

9. 8 8 Objectives Knowledge and understanding of the issues underlying transportation and supply chain management and Mastery of the tools and models to support intelligent resolution of those issues.

10. 9 9 Projects Project 1: Financial Assessment –Team of up to 5 students –Assign a company to each team member –The companies must all be competitors –You will want to select publicly traded companies at least 5 years old

11. 10 Project 1 Cont’d For your assigned company –Part A: Due February 1 st Collect Balance Sheets, Income Statements, Annual Reports, news articles, etc. going back at least 5 years Over a period extending back at least 5 years calculate –Days of Inventory –Days Sales Outstanding –Days Payments Outstanding –NOPAT/Revenue –Revenue/Capital –Return on Investment –Total Shareholder Return Compare these across your teams’ companies Draw conclusions about the relationships between these metrics and Total Shareholder Return.

12. 11 Project 1 Cont’d For your assigned company –Part B: Due April 21 st Imagine you have been hired as VP of Supply Chain for your company, describe what initiatives you would pursue and how they would affect the above measures.

13. 12 Project 1 Deliverables Part A: In a ZIP archive –An HTML page or Word document that organizes the information about the companies (and identifies who was responsible for each company) including references (where possible include copies of the referenced documents in the zip archive) Part B: A Powerpoint presentation (to the executive committee of your company) motivating and explaining your proposals and projecting their value to the company. Submit these documents in electronic format. DO NOT SUBMIT PAPER COPIES

14. 13 Project 2 Also in teams of up to 5 Regional Transportation and Supply Chain Infrastructure and Issues –Asia –Latin America –Europe Approved special topic

15. 14 Project 2: Schedule January 27th: Submit your team composition and selected topic to me via e-mail February 15th: Submit an outline of your report with assigned responsibilities to me via e-mail April 14th: Submit your report to me via e- mail

16. 15 Project 2 Topics Asian Logistic Networks. This should provide a comprehensive overview of the key freight transportation systems in the region bounded by China, India, Australia and Japan. It should describe: –the key goods moving in the region, –the flows of these goods, –the modes these goods move by, –the principal carriers, –the key transport facilities (ports, airports, etc) –the different roles organizations play in the process –special challenges to shippers and carriers in the region –Include a comprehensive annotated bibliography (describe the value of each entry in the bibliography) Example to build on and update available

17. 16 Project Topics Latin American Logistic Networks. This should provide a comprehensive overview of the key freight transportation systems in South and Central America. It should describe: –the key goods moving in the region, –the flows of these goods, –the modes these goods move by, –the principal carriers, –the key transport facilities (ports, airports, etc) –the different roles organizations play in the process –special challenges to shippers and carriers in the region –Include a comprehensive annotated bibliography (describe the value of each entry in the bibliography) Example to build on and update available

18. 17 Project Topics Central and Eastern European Logistic Networks. This should provide a comprehensive overview of the key freight transportation systems in Central and Eastern Europe It should describe: –the key goods moving in the region, –the flows of these goods, –the modes these goods move by, –the principal carriers, –the key transport facilities (ports, airports, etc) –the different roles organizations play in the process –special challenges to shippers and carriers in the region –Include a comprehensive annotated bibliography (describe the value of each entry in the bibliography) See Asian and Latin American examples

19. 18 Project Topics Alternative project proposals are welcome. E-mail me an outline of the content of your report before January 20th. Alternative projects must be approved. Video students may either join a team or work alone as they prefer. I encourage video students to select a project related to their companies. Be careful to ensure that proprietary concerns will not prevent your sharing the project report with me.

20. 19 Algebraic Modeling Languages AMPL –www.ampl.com - Free student versionwww.ampl.com –AMPL A Modeling Language for Mathematical Programming, Fourer, Gay and Kernighan –No full version generally available XPress-MP: –Full version available in the graduate and undergraduate labs.

21. 20 More Options AIMMS: –This application is supported in the Lab. –Student version?? MPL or related tools: –Can be downloaded free from www.maximal- usa.com/download/www.maximal- usa.com/download/ –No full version available OPL Studio Free trial version at www.ilog.com/products/oplstudio/trial.cfm

22. 21 Worst Option Solver in Excel –Not industrial strength –Not reliable –Model and data confounded –But if you’re really struggling…

23. 22 Schedule Working with Certainty –Introductory Example –The role of Frequency –Financial Implications –Network Design –Location –Routing –Case Study

24. 23 Schedule Working with Uncertainty –Forecasting –Planning –Variability and the Bullwhip Effect –Risk Pooling & Postponement –Inventory –Hedging –Revenue Management

25. 24 Schedule Working Internationally –Incoterms –Customs, Duties, Free Trade Zones,…

26. 25 Illustrative Example Develop a distribution strategy to minimize inventory and transportation costs Purpose: –Outline issues covered in outbound logistics –The importance of transportation in the supply chain –Illustrate costs and investments

27. 26 Overview Products: –Computers: CPU, Monitor, Keyboard –Televisions: TV and Console Distribution Centers –100 across the US –Sell 10 TVs and 10 computers per day –250 days/year

28. 27 Components ComputersTV/MonitorConsole Cost$300$400$100 Weight5 lbs10 lbs30 lbs FromGreen BayIndianapolisDenver

29. 28 Initial Strategies to Consider All direct shipments in full truckloads Consolidate in Indianapolis. All shipments in full truckloads

30. 29 Simplification Shipments on the order of 1,000 miles Distances

31. 30 What Costs? Transportation Pipeline inventory – inventory in transit Inventory at Plants Inventory at DCs Handling …

32. 31 Direct:Transportation Cost How many shipments/year? –Green Bay –Indianapolis –Denver –Total 100 stores * Annual Store Demand /Items to fill a truck Items to fill a truck = Cap. of truck/Weight of Item –Green Bay –Indianapolis –Denver 30,000/5 = 6,000 30,000/10 = 3,000 30,000/30 = 1,000 100*2,500/6,000 = 41.67 100*5,000/3,000 =166.67 100*2,500/1,000 = 250 ~ 460

33. 32 What Costs? Direct –Transportation ~ $1/mile*1,000 miles/trip*460 trips/year = $460,000/year –Pipeline inventory –Inventory at Plants –Inventory at DCs –Handling –…

34. 33 Pipeline Inventory How long are goods in transit? –1,000 miles at 50+ miles per hour –2 days + How much inventory is in transit on average? Imagine we send the items one-at-a-time How many items in the pipe?

35. 34 Pipeline Inventory One Day worth of sales at a store –10 TVs at $400+$100 each = $5,000 –10 Computers at $300+$400 = $7,000 –Total $12,000 per day per store Two days of system-wide sales: –2 days * $12,000/store/day * 100 stores = $2,400,000 –Carrying cost 15% of $2,400,000 = $360,000

36. 35 What Costs? Direct –Transportation ~ $1/mile*1,000 miles/trip*460 trips/year = $460,000/year –Pipeline inventory $2,400,000 in capital $360,000 in annual carrying costs –Inventory at Plants –Inventory at DCs –Handling –…

37. 36 Inventory at the Plants Two Extremes –Simultaneous shipments –Staggered shipments

38. 37 Simultaneous Shipments A truckload of computers from Green Bay has 6,000 computers in it A DC sells 2,500 per year So we only need to replenish the DCs every 6,000/2,500 = 2.4 years

39. 38 Inventory at Green Bay Simultaneous Shipments 600,000 2.4 years

40. 39 Simultaneous shipments –Green Bay ships once every 2.4 years Inventory is 1.2 years demand or 300,000 CPUs Inventory value is $90,000,000 Inventory carrying cost is $13,500,000 –Denver ships 2.5 times per year Inventory is 20% of annual demand or 50,000 Consoles Inventory value is $5,000,000 Inventory carrying cost is $750,000 –Indianapolis ships 1.6 times per year Inventory is 500,000/3.2 or about 150,000 items Inventory value is $60,000,000 Inventory carrying cost is $9,000,000

41. 40 Why Not? What are problems with simultaneous shipments? When are simultaneous shipments likely? What alternatives?

42. 41 Inventory at Green Bay Staggered Shipments 6,000 ~6 days

43. 42 What Costs? Inventory at Plants –Simultaneous Shipments Capital Carrying Cost Green Bay $90 million$13.5 million Denver$ 5 million$.75 million Indianapolis$60 million$ 9.0 million Total $155 million$23.25 million –Staggered Shipments (divide by 100!) Capital Carrying Cost Green Bay $900 K $135 K Denver$ 50 K$ 7.5 K Indianapolis$600 K$ 90 K Total $1.55 million $232.5 K

44. 43 What Costs? Direct –Transportation ~ $1/mile*1,000 miles/trip*460 trips/year = $460,000/year –Pipeline inventory $2,400,000 in capital $360,000 in annual carrying costs –Inventory at Plants – Staggered Shipments $1.55 million in capital $232.5 K in annual carrying costs –Inventory at DCs –Handling –…

45. 44 DC Inventory from Green Bay 6,000 ~2.4 years

46. 45 Inventory at DCs At the DC’s? –½ truckload or 3,000 CPUs at $300 each: $900,000 –½ truckload or 1,500 Monitors at $400 each: $600,000 –½ truckload or 500 Consoles at $100 each: $ 50,000 $1,550,000 Carrying cost: 15% of $1,550,000 or $232,500 Total Carrying cost at the DCs: $23,250,000!

47. 46 What Costs? Direct –Transportation ~ $1/mile*1,000 miles/trip*460 trips/year = $460,000/year –Pipeline inventory $2,400,000 in capital $360,000 in annual carrying costs –Inventory at Plants – Staggered Shipments $1.55 million in capital $232.5 K in annual carrying costs –Inventory at DCs $155 million in capital $23.25 million in carrying costs –Handling –…

48. 47 Costs Transportation Costs: $ 460,000 Pipeline Inventory $ 360,000 Inventory Costs at Plants: $ 232,500 Inventory Costs at DCs: $ 23,250,000 Total: $ 24,302,500! Capital Required: Pipeline Inventory $ 2,400,000 Inventory Costs at Plants: $ 1,550,000 Inventory Costs at DCs: $ 155,000,000 Total: $ 158,950,000! Total Cost & Capital Direct

49. 48 Consolidation Strategy 2: Assemble Products in Indianapolis and distribute by truckload from there What will happen to costs? –Transportation –Pipeline –At plants –At Indianapolis Warehouse/Cross Dock –At DCs

50. 49 Via Indianapolis Facts

51. 50 What Costs? Transportation –To Indianapolis –From Indianapolis to DCs Pipeline inventory –To Indianapolis –From Indianapolis to DCs Inventory at Plants Inventory at Indianapolis Cross Dock Inventory at DCs Handling …

52. 51 Indirect: Transportation To Indianapolis –Green Bay 400 miles* 42 trips = 16,800 –Indianapolis 0 miles*167 trips = ~ 0 –Denver 1,100 miles*250 trips = 275,000 –Total $291,800 From Indianapolis to DCs –Same as total transport before, we are moving the same goods the same distance (roughly 1,000 miles to each DC) $460,000

53. 52 What Costs? Transportation –To Indianapolis $291,800 –From Indianapolis to DCs $460,000 Pipeline inventory –To Indianapolis –From Indianapolis to DCs Inventory at Plants Inventory at Indianapolis Cross Dock Inventory at DCs Handling …

54. 53 Pipeline Inventory To Indianapolis –From Green Bay 400 miles ~ 1 day 1,000 per day at $300 each ~ $300,000 capital 15% of $300,000 is $45,000 carrying cost –From Denver 1,100 miles ~ 2 days 2 days at 1,000 per day at $100 each ~ $200,000 capital 15% of $200,000 is $30,000 carrying cost –Total Capital$500,0000 Carrying Cost$ 75,0000 From Indianapolis to DCs –Same as before 2 days of sales –Capital $2,400,000 –Carrying Cost $ 360,000

55. 54 What Costs? Transportation –To Indianapolis $291,800 –From Indianapolis to DCs $460,000 Pipeline inventory –To Indianapolis Capital $500,000 Carrying Cost$ 75,000 –From Indianapolis to DCs Capital$2,400,000 Carrying Cost$ 360,000 Inventory at Plants Inventory at Indianapolis Cross Dock Inventory at DCs Handling …

56. 55 Inventory at Plants Same as before –Green Bay holds ½ of a truckload –Denver holds ½ of a truckload –Assume Indianapolis holds ½ of a truckload for delivery to the cross dock –Capital$1,550,000 –Carrying Cost $ 232,500

57. 56 What Costs? Transportation –To Indianapolis $291,800 –From Indianapolis to DCs $460,000 Pipeline inventory –To Indianapolis Capital $500,000 Carrying Cost$ 75,000 –From Indianapolis to DCs Capital$2,400,000 Carrying Cost$ 360,000 Inventory at Plants –Capital $1,550,000 –Carrying Costs$ 232,500 Inventory at Indianapolis Cross Dock Inventory at DCs Handling …

58. 57 Inventory at Cross Dock ReceivingShipping CPUs, Monitors, Consoles Computers & TVs WIP

59. 58 Inventory at Indianapolis Cross Dock Receiving from the Plants –½ a truckload of CPUs –½ a truckload of Monitors –½ a truckload of Consols Shipping to the DCs –½ a truckload of Computers and TVs WIP – like Pipeline inventory –How long does the process take? Capital $1,550,000 Carrying Cost $ 232,500

60. 59 What’s in a Truck Of Computers and TVs? In the same mix as demand –1:1 computers to TVs –X computers in a truck –Weight of the computers 15X lbs –Weight of the TVs 40X lbs –15X + 40X = 30,000 lbs –X = 30,000/55 = 545 A full truck of finished goods has –545 computers and 545 TVs –545 CPUs, 545 Consoles and 1090 Monitors

61. 60 Inventory at Indianapolis Cross Dock Receiving from the Plants –½ a truckload of CPUs –½ a truckload of Monitors –½ a truckload of Consols Shipping to the DCs –½ a truckload of Computers and TVs 273 CPUs at $300 each or $ 81,900 273 Consoles at $100 each or $ 27,300 545 Monitors at $400 each or $218,000 Total $327,200 Carrying cost$ 49,080 WIP – like Pipeline inventory –How long does the process take? Capital $1,550,000 Carrying Cost $ 232,500

62. 61 Inventory at DCs Inventory at a DC: –Visited by truck 4.6 times per year –Same as before –So inventory costs at DC are the same as before, right?

63. 62 Wrong! Magic? Total Inventory Carrying Cost at DCs: $4,914,000 compared with $23,250,000 under earlier strategy. Explain!

64. 63 The Difference Explain?

65. 64 With Consolidation –Transportation Costs: $ 751,800 –Inventory Costs at DCs: $ 4,891,300 –Inventory Costs at Plants: $ 513,900 Total: $ 6,757,000 Without Consolidation –Transportation Costs: $ 460,000 –Inventory Costs at DCs: $ 23,250,000 –Inventory Costs at Plants: $ 232,500 Total: $ 23,942,500!

66. 65 Comparison Invest some of the $120 million in the cross dock Spend some of the $18 million on handling

67. 66 Deterministic Supply Chain Design Next time: should we be shipping in full truckloads? In early February we will explore to the inventory at the cross dock in more detail