Transportation Fundamentals

Transport
Fundamentals
⦁ Transport: moving goods from one place to another.
⦁ Transport involves
⦁ equipment (trucks, planes, trains, boats, pipeline),
⦁ people (drivers, loaders & unloaders),
⦁ decisions (routing, timing, quantities, equipment size,
transport mode).

⦁ In underdeveloped countries we often find it

necessary to locate production close to both markets
and resources, while in countries with developed
distribution systems people can live in places far
from production and resources.
Transport Fundamentals
Transportation involves the physical movement of goods between
origin and destination points.
• The transportation system links geographically separated
partners and facilities in a company’s supply chain
• Transportation facilitates the creation of time and place
utility in the supply chain.
• Transportation service availability is critical to demand
fulfillment in the supply chain.
• Transportation efficiency promotes the competitiveness of
a supply chain
• Transportation has a major economic impact on the
financial performance of businesses.
 Transport
Fundamentals
⦁ Performance
⦁ Average transit time
⦁ Transit time variability
⦁ Loss and damage
⦁ Other factors including availability, capability, frequency of
movement, and various less tangible services

⦁ Cost
⦁ Line haul
⦁ Accessorial or special charges
Transport Cost Characteristics
⦁ Fixed costs:
⦁ Terminal facilities
⦁ Transport equipment
⦁ Carrier administration
⦁ Roadway acquisition and maintenance

⦁ Variable costs:
⦁ Fuel
⦁ Labor
⦁ Equipment maintenance
⦁ Handling, pickup, and delivery
Transport Choices
⦁ Small Shipment Carriers
⦁ UPS
⦁ Postal Services (PTT)
⦁ Primary intercity
⦁ Cargo Companies
carriers
⦁ Air
⦁ Agents
⦁ Truck ⦁ Freight forwarders
⦁ Rail ⦁ Ship associations
⦁ Water
⦁ Pipe ⦁ Others
⦁ Autos
⦁ Bicycles
⦁ Taxis
⦁ Human
⦁ Electronic
 Example:
**Modular design of its furniture allows IKEA to transport its goods
worldwide much more cost effectively than a traditional furniture
manufacturer. The large size of IKEA stores and
shipments allows inexpensive transportation of home furnishings all the
way to the retail store.
Effective sourcing and inexpensive transportation allow IKEA to
provide high-quality home furnishings at low prices globally.
Single-mode Service Choices
and Issues
⦁ Rail (long distance, heavy goods, slow mover)
⦁ Carload (CL) vs. less-than-carload (LCL per hundredweight cwt.)
⦁ Larger cars can carry around 83 tons

⦁ Truck (Smaller goods than rail, medium time duration)

⦁ Trucks can go door-to-door as opposed to planes and trains
⦁ Can hold 30-50 t. depending on the product density

⦁ Air (Smallest size goods, quick transport)

⦁ Low variability in lead time
⦁ Requires transport to and from airport

⦁ Water (Extremely slow, large goods, international trade)

⦁ Up to 40,000 tons
⦁ Requires transport to and from port

⦁ Pipeline (limited product line, liquids, gases)

⦁ Highly reliable
⦁ Low product losses
 Pipeline example Baku–Tbilisi–
Ceyhan pipeline
⦁ The Baku–Tbilisi–Ceyhan pipeline is
a 1,768 kilometres long crude oil
pipeline from the Azeri-Chirag-
Guneshli oil field in the Caspian Sea to
the Mediterranean Sea.
⦁ It connects Baku, the capital of
Azerbaijan; Tbilisi, the capital of
Georgia; and Ceyhan, a port on the
south-eastern Mediterranean coast of
Turkey.
⦁ It is the second longest oil pipeline in
the former Soviet Union after the
Druzhba pipeline.
⦁ The first oil that was pumped from the
Baku end of the pipeline on 10 May
2005 reached Ceyhan on 28 May 2006

Source:
http://en.wikipedia.org/wiki/Baku%E2%80%93Tbilisi%E2%8
0%93Ceyhan_pipeline
Importance of modes
⦁ By Volume Moved

Transportation mode Percent of total volume

Railroads 36.5%

Trucks 24.9%

Inland waterways 16.3%

Oil pipelines 22.0%

Air 0.3%
Transport Cost
Characteristics
⦁ Rail
⦁ High fixed costs, low variable costs
⦁ High volumes result in lower per unit (variable) costs
⦁ Highway
⦁ Lower fixed costs (don’t need to own or maintain roads)
⦁ Higher unit costs than rail due to lower capacity per truck
⦁ Terminal expenses and line-haul expenses
⦁ Water
⦁ High terminal (port) costs and high equipment costs (both
fixed)
⦁ Very low unit costs
⦁ Air
⦁ Substantial fixed costs
⦁ Variable costs depend highly on distance traveled
⦁ Pipeline
⦁ Highest proportion of fixed cost of any mode due to pipeline
ownership and maintenance and extremely low variable costs
Relative Costs of Performance

Transportation mode Price, ¢/ton-mile

Rail 2.28
Trucks 26.19
Water 0.74
Pipelines 1.46
Air 61.20
70
60
50
40
30
20
10
0
Rail Trucks Water Pipelines Air
COMBINED TRANSPORT

Intermodal transport where the major

part of the European journey is by rail,
inland waterways or sea and any initial
and/or final legs carried out by road are
as short as possible.
Intermodal
⦁ Use of more than one mode of Transportation to move a
shipment to its destination
⦁ without any handling of the freight itself when changing modes
⦁ 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 intermodal
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
⦁ Example: Roll-on/roll-off (RORO or ro-ro) ships are vessels
designed to carry wheeled cargo such as automobiles, trucks,
semi-trailer trucks, trailers or railroad cars that are driven on
and off the ship on their own wheels.
İntermodal Taşımacılık
Uygulaması
İntermodal taşımacılık örneği
 Transportation Rate
Structures

⦁ Volume-based rates (based on weight)

⦁ Distance-based rates
⦁ Typically some combination of both of the above
⦁ Freight “class” also very important – the class of an
item depends on its density and bulkiness
Rate Types
⦁ Line haul rates
⦁ Class
⦁ Freight classification of items
⦁ Rate tables of tariffs
⦁ Contract rates
⦁ Commodity and contract rates
⦁ Specific rates for given shipment sizes for specific products
moving between designated points
⦁ Special service charges
⦁ Extra charges
⦁ Stop-off privilege example
⦁ Private carrier costing
Stop-Off Privilege Example
⦁ Suppose 3 shipments of J=8,000 lb., K=12,000 lb.,
and L=10,000 lb. originating at I are to be delivered
in the following way.
Stop-Off Privilege Example

⦁ First, we compare the costs without the stop-off privilege. This would be to
price as if each shipment is a separate shipment from I. Suppose we know
the rates. Hence,
Load, lb. Points Rate, $/cwt. Charges
8,000 I to J 3.05 $244.00
12,000 I to K 3.35 $402.00
10,000 I to L 3.60 $360.00
Total $1006.00

⦁ Now, we price with the stop-off privilege. We assume that all the volume
(30,000 lb.) is to be delivered to the farthest stop and we use the rate to that
point ($3.00/cwt.). A small stop off charge of $15.00 is made for each stop
including the last stop. Hence,
Load, lb. Points Rate, $/cwt. Charges

30.000 I to L 3.00 $900.00

3 stops at $15 each $45.00
Total $945.00
Transportation Network Design
Transport networks

•Given these different modes of transportation

and the location of the facilities in a supply
chain, managers need to design routes and
networks for moving products.
•A route is the path through which products
move and networks are composed of the
collection of the paths and facilities
connected by those paths.
•As a general rule,
– the higher the value of a product (such as electronic components
or pharmaceuticals), the more its transport network should
emphasize responsiveness and
– the lower the value of a product (such as bulk commodities like grain
or lumber), the more its network should emphasize efficiency.
Design Options for a Transportation
Network

⦁ The design of the transportation network affects the

performance of a supply chain by establishing the
infrastructure within which operational transportation
decisions regarding scheduling and routing are
made.
⦁ A well-designed transportation network allows a
supply chain achieve the desired degree of
responsiveness at a low cost.
Design Options for a
Transportation Network

•When designing a transportation network

–Should transportation be direct or through an
intermediate site?
–Should the intermediate site stock product or only
serve as a cross‐docking location?
–Should each delivery route supply a single
destination or multiple destinations?
Design Options for a Transportation
Network
⦁ Direct Shipment Network

No intermediate warehouse.
Simple to coordinate.
High inventories (due to large lot size).
Significant receiving expense.
 Design Options for a Transportation
Network
⦁ Direct shipping with milkruns
⦁ A milk run is a route in which a truck either delivers product from a single supplier
to multiple retailers or goes from multiple suppliers to a single retailer
⦁ Direct shipping provides the benefit of eliminating intermediate warehouses and
milk runs lower transportation cost by consolidating shipments to multiple stores
on a single truck
Cross-docking

⦁ unloading materials from an incoming semi-trailer

truck or railroad car and loading these materials
directly into outbound trucks, trailers, or rail cars,
with little or no storage in between.
Design Options for a Transportation
Network
⦁ All shipments via central distribution center
⦁ Crossdocking is appropriate for products with large predictable volumes and
requires that DCs be set up such that economies of scale in transportation can be
achieved on both the inbound and outbound sides
Advance of CD

•Reduces labor costs through less inventory handling

•Reduces inventory holding costs by reducing storage
times and potentially eliminating the need to retain safety
stock
•Products reach the distributor, and consequently the
customer, faster
•Reduces or eliminates warehousing costs
•May increase available retail sales space
•Less risk of inventory handling
•No need for large warehouse areas
•Easier to screen product quality
Design Options for a Transportation
Network
⦁ Shipping via distribution center using milk runs
⦁ if lot sizes to be delivered to each retail store are small:
Ex. Milkrun from DC
Design Options for a Transportation
Network

⦁ Tailored network
⦁ A suitable combination of previous options that reduces
cost and improves responsiveness of the supply chain
 Pros and C on s of Different Transportation Networks

Cons
Network Structure Pros
High inventories (due to large lot
No intermediate warehouse.
Direct Shipping size).
Simple to coordinate. Significant receiving expense.
Lower transportation costs for
Direct shipping with Increased coordination
small lots.
milk runs complexity.
Lower inventories.

Very low inventory

Increased coordination
All shipments via central requirements.
DC with cross-dock Lower transportation cost complexity.
through consolidation.
Shipping via DC using Lower outbound transportation Further increase in coordination
milk runs cost for small lots. complexity.
Transportation choice best
Tailored network matches needs of individual Highest coordination complexity.
product and store.
Mode/Service Selection
⦁ The problem
⦁ Define the available choices
⦁ Balance performance effects on inventory against the cost of
transport

⦁ Alternatives: Air / Truck / Rail

⦁ Cost types
⦁ Transportation
⦁ In-transit inventory
⦁ Source inventory
⦁ Destination inventory
 Mode/Service Selection
Example
⦁ The four factors to be considered are:
⦁ Transport costs: If R denotes unit transport rate and D denotes
annual demand, then RD gives an estimate of the annual transport
cost
⦁ In-transit inventory: Each unit, valued at $C, spends T days in
transit. If i is annual holding rate, each item costs ICT/365 in
holding charges during transport time. Since D is annual
demand, total in-transit inventory cost equals [ICT/365]*D.
⦁ Letting Q = shipment size, and assuming production occurs
instantaneously at the plant, average annual inventory cost at
the plant equals ICQ/2.(for rail Q/2=100 both at the plant and at
the warehouse)
⦁ Letting C ’ = C + R, i.e., product value at the field warehouse, then
average inventory cost at the field warehouse equals IC’ ‘Q/2,
assuming constant lead time (All of these inventory cost estimates
assume constant and deterministic demand rate).
Example for the Choice of
Transportation Mode Based on Cost
Trade-Offs
⦁ Eastern Electric (EE) purchases all the motors for its appliance from
Westview.
⦁ EE currently purchases 120,000 motors each year from Westview at
a price of $120 per motor. Demand has been relatively constant for
several years and is expected to stay this way
⦁ Each motor averages about 10 kg and EE has traditionally
purchased in lots of 3,000 motors
Westview ships each EE order within a day of receiving it (lead
time is one day more than transit time)
⦁ At its assembly plant, EE carries a safety inventory equal to 50
percent of the average demand for motors during the delivery lead
time
⦁ The plant manager at EE has received several proposals for
transportation and must decide on the one to accept
Transit time using truck is three days and transit time for rail is five
days. Westview ships each EE order within a day of receiving it (lead
time is one day more than transit time)
Example for the Choice of Transportation Mode
Based on Cost Trade-Offs
The details of various proposals for Eastern Electric

Carrier Range of Shipping

Quantity Cost
Shipped (100 ($/100 kg)
kg)
AM Railroad 200 + 6.50
Northeas 100 + 7.50
tern
Trucking
Golden Freightways – 150 8.00
Golden Freightways 150 – 250 6.00
Golden Freightways 250 – 4.00
New Proposal: 400 – 3.00
Golden Freightways
Example for the Choice of Transportation Mode
Based on Cost Trade-Offs
⦁ Annual cost of holding inventory=25%
⦁ Annual holding cost is, therefore,
⦁ H= $120(price)*0.25=$30/motor

⦁ Shipments by rail requires 5 days

⦁ Shipments by truck requires 3 days

 Example for the Choice of Transportation Mode
Based on Cost Trade-Offs
⦁ The transportation decision affects the cycle inventory, safety
inventory, and in-transit inventory.
⦁ The AM Railroad proposal requires a minimum shipment of
20,000 kg(20 tons) which corresponds to 2000 motors
⦁ The replenishment lead time = 5+1=6days
⦁ For Q=2000 motors, the plant manager obtains the following:
Cycle inventory = Q/2 = 2,000/2 = 1,000 motors
Safety inventory = L/2 days of demand (6/2)(120,000/365)
= 986 motors
In-transit Inventory = 120,000(5/365) = 1,644 motors

Total Average Inventory = 1,000 + 986 + 1,644 = 3,630 motors

Annual holding cost using AM Rail = 3,630  30 = $108,900
Example for the Choice of Transportation Mode
Based on Cost Trade-Offs
⦁ The transportation cost:
⦁ AM Rail charges $6.50 per 100 kg, resulting in a
transportation cost of $0.65 per motor because each
motor is about 10 kg.
⦁ Annual transportation cost using AM Rail
=120,000*0.65 = $78,000

⦁ The total annual cost using AM Rail

= inventory holding cost + transportation cost
= $108,900 + $78,000 = $186,900
 Example for the Choice of Transportation Mode
Based on Cost Trade-Offs

Alternative Lot Transport Cycle Safety In- Invento Total Cost

Size a tion Inventor Inventor transit ry
(Motor Cost y y Invento cost
s) ry
AM Rail 2,000 $78,000 1,000 986 1,644 $108,900 $186,900
Northeaster 1,000
n Trucking $90,000 500 658 986 $64,320 $154,320
Golden 500 $96,000 250 658 986 $56,820 $152,820
Golden 1,500 $96,000 750 658 986 $71,820 $167,820
Golden 2,500 $86,400 1,250 658 986 $86,820 $173,220
Golden 3,000 $78,000 1,500 658 986 $94,320 $172,320
Golden 4,000
(old $72,000 2,000 658 986 $109,320 $181,320
proposal)
Golden 4,000
(new
propos $67,500 2,000 658 986 $109,320 $176,820
al)