Role of Transportation in
Supply Chain
Session 14
Learning objectives
• Role of transportation in the supply chain
• Key role players and factors that influence transport
decision
• Transportation Modes, performance characteristics and
selection
• Transportation performance, costs and value measures
• Transportation mode selection and speed of delivery
and choice of mode
• Inventory aggregation and transportation cost
management
• Vehicle scheduling and routing
Introduction
• Transportation interacts closely with facilities
and inventory
• Key to the success for businesses especially
where responsiveness and product availability
are prime competitive factors
• Transportation decisions would have strategic
impact through network decisions
Key Role Players
Transport Decisions
For Shipper
• Transportation Cost: This is calculated as the total cost paid to
the transporters for inbound and outbound transportation
• Inventory cost: These costs are towards holding inventory in
various stages of the supply
• Facility cost: considered as fixed for making transportation
decisions.
• Processing cost: costs associated with loading, unloading and
handling of goods.
Transport Decisions
For Transporter
• Vehicle related costs: costs towards the purchase or lease of a
vehicle. Considered fixed for the short term and for the
medium or long term these costs are considered as variable.
• Fixed operating expenses: Costs associated with maintaining
transportation assets like insurance, taxes, labour etc.
• Operations related expenses: Include labour, fuel and depend
on the duration of the trip
• Quantity related costs: costs in loading, unloading and
handling.
• Overhead costs: Costs are incurred for planning, coordination,
scheduling and any investment in IT tools and applications.
Transportation Principle
• The principle of Economy of Scale - as the size
of the shipment increases, the cost of weight
transported per unit decreases
• The principle of Economy of Distance - the
transportation cost per unit weight decreases
as the transportation distance increases
• Goal - maximize the shipment size and the
ship for longer distance by offering the desired
service level to the customer.
Intermodal Transportation
An appropriate mix of various modes to lower cost
• Piggybacking or TOFC (trailer on flatcar) - a
combination of convenience and flexibility of
trucking with long haul economy of rail.
• Fishyback - a system of transportation requiring the
transfer of containers from truck to ship.
• Birdyback - a system of transportation requiring the
transfer of containers from truck to airplane.
Comparison of various modes
Factors driving costs
critical factors that drive transportation costs are :
distance
Volume
density
handling
Relative Ranking* of Transportation
Mode by Performance Measures
*1 is most favourable & 5 is least favourable from shipper point of views
* * Delivery time variability in absolute terms
Cost relationships
Carrier pricing strategies
• Cost-of-service - a cost plus approach where the transporter
adds a margin on base costs.
• Value-of-service - based on the value as perceived by the
shipper.
• Combination Pricing - an intermediate level between the cost-
of-service and the value-of-service
• Rate contracts - the shipper assures of specific volumes in a
period of time in return for committed rates for that period
with a clause for escalation in this period in case of increase in
inputs like fuel.
Value added service
• COD – Collect payment on delivery
• Inside delivery
• Marking or tagging
• Notify before delivery
• Reconsignment of delivery
• Redelivery
• Residential delivery
• Sorting and segregation
• Storage
Transportation Mode Selection
Goal : minimize costs and max the service levels
The general principles for mode of
transportation are:
• Match the shipment characteristic with the
appropriate mode of transportation.
• Evaluate on the basis of cost
• Developing selection criteria is the final step
and the modes should be evaluated on the
basis of these.
Speed of delivery and choice of mode
• A selected mode for continued support for
business under strategic decision framework.
• The decision would be based on:
– Total inventory holding cost which is a function of
cycle inventory, safety inventory, in-transit
inventory and annual cost of holding inventory
that result from using each of alternative modes
of transportation
– Cost of transportation using each of mode
Inventory aggregation
• Aggregation would result in reduction in facility costs
and inventory management cost.
• Increases transportation cost mainly because out
bound transportation to each customer would be
small and expensive mode like express cargo carrier.
• Works when inventory and facility form a large part
of supply chain costs.
• Useful for products with high value to weight ratio
and for products of with high demand uncertainty
Responsiveness
• Temporal aggregation refers to aggregating of
stock dispatches over time buckets
• Depends on arriving at a balance between
transportation cost and responsiveness.
• Helps to reduce transportation costs for a
given nature of fixed and variable costs of
transportation and distribution of demand
pattern
Vehicle Scheduling and routing
Decisions situations involve:
– Number of nodes to be serviced
– Vehicle capacity
– Time window of service
Savings Matrix
The methodology of arriving at allocation of
customers in a route and vehicles for all nodes
to be serviced.
Approach - heuristic rather than optimality.
Steps are:
– Identify the distance matrix
– Identify the savings matrix
– Assign customers to vehicles or routes
– Sequence customers within routes
Milkrun
• Milk run is a transportation model for the
collection and transportation of goods from
suppliers with a defined delivery route, in
which various stops are planned and executed
in terms of quantities and timing. The same
concept is applied in forward linkages for
distribution of goods.
Milkrun
• Multiple pick-up / delivery points in a time
window for a production schedule.
• Route optimization by LSP especially when
load is less than the capacity of vehicle and
there is scope for multiple pick – up or drop
• Effective deployment of JIT, VMI or any
integrated service.
Milkrun – Variable that influence
• Distance to be covered
• Cost of running a route and adding any
particular point in a route
• Priority of delivery / pick-up - regular
schedules and non-regular
• Frequency depends on fixed versus variable
demand / supply from each node.
• Cycle-time or longevity of a product.
Cross Docking
• A practice in transportation of unloading
materials from an in-bound vehicle and
loading these materials directly into outbound
trucks, trailers, or rail cars.
• Little or no storage in between.
• Purpose - to combine small loads from
different points and redistribute saving on
dwell time, storage and costs.
Advantages
• Effective utilisation of vehicle space
• Provides responsiveness
• Reduces costs of storage and inventory and
optimises transportation cost for a given
service level
• In retail situation, helps for better handling of
backroom storage space which stocks safety
inventory
