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Supply Chain

Management
Chapter 6
Transportation Management

Logistics Overview
Why has logistics become increasingly
important?

 Cost reduction pressures are severe


 Logistics has a high impact on customer service
 A strong need exists for demand and supply
planning consistency
 A focus on core competencies has placed
logistics in the outsourcing spotlight
 Development of IT technology supports
integrated logistics management
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Value-added Transportation
Concept
Product/Info Flows

Inbound Outbound

Supplier Manufacturer Customer

Info/Return Goods Flows


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Role of Transportation
Time and Place Utility:
Movement across space or distance.
 Place utility - Where it is needed
 Time utility - created or added by the
warehousing & storage of product until it is
needed. Also a factor in time utility; it
determines how fast and how consistently
a product move from one point to another.
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Transportation Role in Value
Attainment Process

Critical element of structure,


capacity, and movement decisions
Both between supply chain
members and intra-organizational

Transportation-Related Service
Elements
 Speed: time-in-transit
 Availability: accessible to customers when they
want it
 Dependability: pick-up and delivery time variability
 Flexibility: adjustment to shippers needs

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 Role of Transportation in Logistics &
Supply Chain Management
 Industry Deregulation

 Transportation Functions, Principles,


Participants
 Transportation Regulation
 Transportation Industry Structure
 Transportation Services

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 Transportation Functions, Principles,
Participants
 Transportation Functions
 Transportation Principles
 Transportation Participants

 Transportation Functions, Principles,


Participants
 Transportation Functions
 Product Movement
 Product Storage
 Transportation Principles
 Transportation Participants

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Product Movement

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Product Storage

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New Destination
Multan

Diversion

Original Destination
Lahore

Karachi

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 Transportation Functions, Principles,


Participants
 Transportation Functions
 Transportation Principles
 Economy of Scale
 Economy of Distance (Tapering Principle)
 Transportation Participants

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Economies of Scale
$100/book
The more items (weight)
is transported,
the less the
Transportation transportation costs per
Cost per Book
item (unit of weight)

$.10/book

1 1000
Number of Books in Shipment

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Economies of The larger the distance,


Distance the less the
transportation costs per
Tapering Principle unit of distance (e.g.,
per mile)
$.10/mile
Transportation $.05/mile
Cost per Mile

Transportation rates are distance


related, not distance proportional

$50/mile
1 mile 500 miles 1000 miles
Shipment Distance

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 Transportation Functions, Principles,
Participants
 Transportation Functions
 Transportation Principles
 Transportation Participants

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Transportation Participants
I need something
shipped at the lowest
possible cost!

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Transportation Participants
I need something
shipped at the lowest I need something
possible cost! delivered at the lowest
possible cost!

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Transportation Participants
Carriers: We have the
equipment!

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Transportation Participants
Carriers we can find a shipper!
Shippers we can find a carrier!

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Transportation Participants
the transportation system
is vital for the countrys
economic health

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Transportation Participants

purchase fuel,
transportation
equipment, supplies

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Transportation Participants
track shipments

purchase fuel,
transportation
equipment, supplies

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Transportation Participants
track shipments

purchase fuel,
transportation match products needing to
equipment, supplies be shipped with available
capacity

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Transportation Participants
Creates demand for
transportation by
purchasing products

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 Transportation Functions, Principles,
Participants
 Transportation Regulation
 Transportation Industry Structure
 Transportation Services

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 Transportation Functions, Principles,


Participants
 Transportation Regulation
 Types of Transportation Regulation
 Transportation Industry Structure
 Transportation Services

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 Transportation Functions, Principles,
Participants
 Transportation Regulation
 Types of Transportation Regulation
 Transportation Industry Structure
 Transportation Services

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Types of Transportation Regulation


Economic
Investments in transportation infrastructure
(e.g., highways, airports, ports)

Control of routes, pricing, schedules

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Types of Transportation Regulation

Economic
Investments in transportation infrastructure
(e.g., highways, airports, ports)

Control of routes, pricing, schedules

Social/Safety
Protect the public, the environment
Make sure equipment operates safely, cleanly
Safe transportation of hazardous materials (HAZMAT)
Regulating hours worked

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 Transportation Functions, Principles,


Participants
 Transportation Regulation
 Transportation Industry Structure
 Transportation Services

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Five Basic Transportation Modes
Pipeline

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Five Basic Transportation Modes


Pipeline Water

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Five Basic Transportation Modes
Pipeline Water

Air

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Five Basic Transportation Modes


Pipeline Water

Air

Rail

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Five Basic Transportation Modes
Pipeline Water

Air

Rail Highway

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Cost Structure For Each Transportation Mode


Rail

high fixed costs (land, tracks)


low variable costs (operating costs, e.g., labor, fuel)
slow, but inexpensive way to transport heavy freight
that doesnt require special handling, long distances

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Cost Structure For Each Transportation
Mode
Highway

low fixed costs (government builds, maintains highways)


medium-high variable costs (operating costs, e.g., labor,
fuel)
most accessible mode (more highways than railroads,
waterways, pipelines); best for transporting medium to
high value products short to moderate distances
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Containerization
Significant growth during Vietnam War
 Improves efficiency, protects material,
reduces handling & pilferage
 Sizes: 20 ft (TEU) or 40 ft (FEU)
 Shorter to permit multiple units on railcars

TEU: 20 equivalent unit FEU: 40 Equivalent Unit

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Highway

LTL less than truckload


TL truckload
Specialty

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Cost Structure For Each Transportation


Mode Water

moderate fixed costs (ships and freight handling


equipment)
low variable costs (operating costs, e.g., labor, fuel)
very slow, but inexpensive way to transport large, heavy
freight over long distances (e.g., oceans, rivers, inland
waterways, lakes)
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Cost Structure For Each Transportation
Mode Air

low fixed costs (aircraft and freight handling equipment)


highest variable costs (e.g., labor, fuel, maintenance)
very fast; used for transporting high value and/or high
perishability product over short to medium distances.

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Cost Structure For Each Transportation


Mode
Pipeline

highest fixed costs (right of way & construction costs of


equipment)
lowest variable costs (no significant labor or fuel costs)
slow, but dependable (e.g., no weather, traffic
disruptions); no flexibility with regard to types of products
that can be transported must be liquid (e.g., petroleum)
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Basic Modes of Transportation
Fixed Variable Traffic
costs costs composition
Rail high low bulk food, mining, oil
heavy mfg
Motor low medium consumer goods,
medium/light mfg
Water medium low bulk food, mining,
chemicals
Air low high high-value goods,
rush shipments
Pipe high low petroleum, chemicals,
mineral slurry
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 Transportation Functions, Principles,


Participants
 Transportation Regulation Transportation
Industry Structure
 Transportation Services

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 Transportation Functions, Principles,
Participants
 Transportation Regulation Transportation
Industry Structure
 Transportation Services
 Non Operating Intermediaries
 Traditional Transportation Carriers
 Package Services
 Intermodal Transportation
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 Transportation Functions, Principles,


Participants
 Transportation Regulation Transportation
Industry Structure
 Transportation Services
 Non Operating Intermediaries
 Freight Forwarders
 Transportation Brokers
 Shipper Associations/Cooperatives/Agents

 TraditionalTransportation Carriers
 Package Services
 Intermodal Transportation
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 Transportation Functions, Principles,
Participants
 Transportation Regulation Transportation
Industry Structure
 Transportation Services
 Non Operating Intermediaries
 Freight Forwarders
 Transportation Brokers
 Shipper Associations/Cooperatives/Agents

 TraditionalTransportation Carriers
 Package Services
 Intermodal Transportation
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Third Party Providers


 The offering of nearly any form of
transportation to a shipper or receiver
as part of a total package of logistics
services
 Shipper or user avoids capital outlays
and investment
 Focus on core competency--let experts
do logistics

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Freight Forwarders
 Formerly common carriers
non-asset owning
 Earn difference between what they charge
(LTL, LCL) and what they pay (CL, TL)
 Issue bill of lading

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 Transportation Functions, Principles,


Participants
 Transportation Regulation Transportation
Industry Structure
 Transportation Services
 Non Operating Intermediaries
 Freight Forwarders
 Transportation Brokers
 Shipper Associations/Cooperatives/Agents

 TraditionalTransportation Carriers
 Package Services
 Intermodal Transportation
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Freight Brokers
 Intermediaries who bring shippers and carriers
together for a fee
 Find customers for carriers or carriers for
shippers
 Reduce burden for carriers & shippers
 Find best means/rate for shippers
 Help maximize capacity for carrier
 Information Systems expanding opportunities

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 Transportation Functions, Principles,


Participants
 Transportation Regulation Transportation
Industry Structure
 Transportation Services
 Non Operating Intermediaries
 Freight Forwarders
 Transportation Brokers
 Shipper Associations/Cooperatives/Agents

 TraditionalTransportation Carriers
 Package Services
 Intermodal Transportation
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 Transportation Functions, Principles,
Participants
 Transportation Regulation Transportation
Industry Structure
 Transportation Services
 Non Operating Intermediaries
 Traditional Transportation Carriers
 Package Services
 Intermodal Transportation

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Owner-Operator
 Own or lease a truck and trailer and make
services available to for-hire carriers
 Contract out their services to other carriers
 Provide overflow capacity and flexibility
 Reduce financial risk to carriers

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 Transportation Functions, Principles,
Participants
 Transportation Regulation Transportation
Industry Structure
 Transportation Services
 Non Operating Intermediaries
 Traditional Transportation Carriers
 Package Services
 Intermodal Transportation

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Express & Courier


 TCS, UPS, FEDEX, DHL
 Fast, door-to-door service
 Operate large network of terminals, pick up
and delivery vehicles, and line haul
 Typically under 200 lbs
 Compete with Postal Service
 Future good due to expansion and
innovative practices
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 Transportation Functions, Principles,
Participants
 Transportation Regulation Transportation
Industry Structure
 Transportation Services
 Non Operating Intermediaries
 Traditional Transportation Carriers
 Package Services
 Intermodal Transportation

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What is Intermodal
Transportation?
 The use of two or modes of transportation in
moving a shipment from origin to destination
 Mostly associated with piggyback or container
shipments
 Combines advantages (and disadvantages) of
each mode used
 Reduces risk of theft and loss
 Shortens customer order cycle time and
effectively reduces costs
 Promotes seamless product movement:
Eliminates unnecessary handling
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Intermodal

Rail Truck

Air Water

 Enables shippers to benefit from advantages


of multiple modes of transportation
 minimizes disadvantages of individual modes
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Changing Transportation
Environment

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Changing Transportation Environment

 Deregulation
 Time-based competition
 Expanding geographic coverage
 Information technology
 Social and environmental concerns

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Selected Results of the Changing
Environment - Economic Impact

 Increased competition in individual markets - both


within modes and between modes
 More efficient carrier operations - less interlining,
more direct routing, efficient pricing
 Transportation costs declined in real terms and as
percent of GDP
 Transportation service quality improved

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Selected Results of the Changing


Environment - Industry Impact
 Consolidation in rail, air and LTL trucking
 Proliferation of TL carriers
 Strong growth in regional trucking - networks
 TL growing faster than LTL
 Air freight growth
 Intermodal growth: rail-truck, air-truck, rail-ship
 Growth of one-stop shopping - 3PL
 Private fleet conversion
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Selected Results of the Changing
Environment - Market Impact
 Demand for fast, dependable, responsive service
at lower cost
 Demand for a broader range of services to
integrate supply chain functions
 Core carrier concept - interdependence between
shipper-carrier
 Customized price/service packages/contracts
 Relational view of transportation as a value-
added service
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Transportation Management

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Transportation Management

 Network Freight Flows: Macro-


Decisions
 Micro-Decisions
 Information Systems Support

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Transportation Decision Making in an Integrated Supply Chain

Macro Understand total network flows Strategic


Understand individual lane flows
Decision Flow
Decision Scope

Understand current
carrier usage patterns

Make mode/carrier
decisions
Routing/Scheduling,
Load Planning, etc.
Operational
Micro
Inbound Outbound

Supplier Manufacturer Customer

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Network Freight Flows: A Fully
Integrated Approach
 Managing Inbound-Outbound flows in an
optimal manner requires firm to have a good
handle on the entire logistics process
 Traditionally view transportation in a vacuum--
need to look at it in the context of the total
logistics system
 Greatest improvement opportunities lie in
integrating transportation with other logistics
functional areas such as purchasing, inventory
control, forecasting and production scheduling

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Approach to Analysis

1. Analyze lane densities/frequencies:


what opportunities emerge for:
 inbound/outbound consolidation
 vehicle consolidation
 temporal consolidation
 network consolidation - cross dock
potential (hub and spoke systems)

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Approach to Analysis (cont.)
2. Once opportunities for consolidation are visible, make
mode/carrier selection based on service/cost mix
 Given similar service, are rates better on 1
mode/carrier than another?
 Does any mode/carrier have relative strengths in a
particular lane?
 Any backhaul opportunities?
3. If so, look to consolidate loads on mode/carrier with best
cost structure - assign private fleet to most costly routes

In the freight industry, freight carried by a trucker to return to his home with a
loaded truck, rather than an empty one (as opposed to headhaul, the outgoing
freight).
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Consolidation Opportunities

Inbound-Outbound flow consolidation: look


for opportunities to combine inbound/
outbound freight
Vehicle consolidation: use one vehicle/multi
stops for LTL volumes vs. one shipment to
each
Temporal consolidation: hold orders until
large volume shipment possible

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Suggested Analyses

 Network flows
 Lane densities, frequencies, consistency
 Freight distribution by mode, carrier
 Consolidation opportunities

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Summary
Identify:
 Opportunities to achieve balanced flows - obtain
lower rates for providing loads both ways
 Significant volumes for rate negotiation
 Vehicle/temporal consolidation opportunities
 Advantages of reducing number of carriers

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Key Principles of Transportation
Management

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I. Improving Efficiency
 Rule of efficiency: Straight line, minimize stopping--
avoid damage and cost (delay)
 Minimize handling: Avoid handshakes and attempt to
make process seamless
 Full capacity: Reduce cost per unit
 Break bulk & consolidation on long haul
 Avoid empty backhauls
 Effective Scheduling: Optimize labor and equipment
(5%-10%)
 Transportation rates are distance related, not distance
proportional

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II. Efficient Use of Technology &
Equipment
 High utilization of expensive
assets
 Larger the vehicle, the lower the
cost per unit
 Speed does not equal
economical operations
 Minimize vehicle gross weight
 Standardized vehicles and
equipment
 Balance specialization with
adaptability
 Examine trade-offs between IT
and traditional logistics functions
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III. Coordinate Operations


 Coordinate operations with requirements to
ensure trade-offs and appropriate level of
service
 Cost accountability as part of performance
measurement
 Reliability is sometimes better than speed
 Look for opportunities to innovate, but
recognize proven principles

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Customer Service Measures
 Order cycle lead time
 Stock availability/fill rates/stock-outs/back
orders/partial shipments
 Record integrity
 Frequency of delivery
 Delivery reliability
 Order tracing capability
 Volume flexibility
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Customer Service Measures


 Invoice accuracy
 Order status information
 Technical support responsiveness
 Unscheduled service responsiveness
 Speed of product feature changes
 Product and service quality

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Total Cost Concept
 The total cost concept recognizes that an optimum cost
in one area or function may not lead to an optimum total
system cost
 Total cost analysis requires the management of supply
chain trade-offs
 Logistical activity areas that drive total logistics costs:
 Customer service level costs
 Inventory carrying costs
 Lot quantity costs
 Order processing and information costs
 Warehousing costs
 Transportation costs

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Summary-1
 The transportation mode available to the
logistics manager consists of the basic mode,
intermodal and indirect and special carrier
 The carrier selection is two fold, selection of the
mode and selection of the specific carrier
 Factors determining carrier selection include
transportation rate, transit time, reliability,
capability, accessibility and security

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Summary-2
 Railroads offer low cost for long hauls of large volumes,
but they have accessibility limitation and long transit
time.
 Motor carriers are very accessible and move product in
small quantities with low consistent transit times.
However their costs are higher than the other modes
except air
 Water transportation is relatively low cost and is
desirable for moving large volume over long distances.
The prime disadvantage is long transit time and service
disruption caused by weather
 Air carriers have very low transit times but very high
rates.
 Pipelines offer very low rates for the movement of liquids
but are not a viable option for manufactured goods.
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Summary-3
 Intermodal transportation is the combination of two or
more basic modes to provide through movement. The
dominant form is rail-truck or piggyback
 Containerization is the shipping of freight in a box or
container that is subsequently transferred from one
carrier to another. It reduces freight handling and
damage while improving transit time.
 The transportation system includes a number of indirect
and special carriers such as small package carriers,
consolidators, freight forwarder, shipper associations,
brokers and intermodal marketing companies.

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Reference:
 The Management of Business Logistics by
J. J. Coyle, E. J. Bardi and C. J. Langley
Jr.

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