Module 3

Supply Chain Management

Ms. Archana Vijay
Topics to be covered :
Designing and Planning Transportation Networks
Role of Transportation, Modes and their performance
Transportation Infrastructure and Policies
Design options and their trade offs
Tailored Transportation
ROLE OF TRANSPORTATION
Transportation refers to the movement of product from one location to another as it makes
its way from the beginning of a supply chain to the customer.
It is an important supply chain driver because products are rarely produced and consumed in
the same location.
Transportation is a significant component of the costs incurred by most supply chains.
Role of transportation is even more significant in global supply chains. Dell currently has
suppliers worldwide and sells to customers all over the world from just a few plants.
Transportation allows products to move across Dells global network.
Any supply chains success is closely linked to the appropriate use of transportation. IKEA,
the Scandinavian home furnishings retailer, has built a global network with about 180 stores
in 23 countries primarily on the basis of effective transportation.
Seven Eleven Japan has a goal of carrying products in its stores to match the needs of
customers as they vary by geographic location or time of day. To help achieve this goal,
Seven Eleven Japan uses a very responsive transportation system that replenishes its stores
several times a day so that the products available match customers needs.
TRANSPORTATION NETWORK AS A COLLECTION OF NODES AND LINKS
Transportation originates and ends at nodes and travels on links. For most modes of
transportation, infrastructure such as ports, roads, waterways and airports is required both
at the nodes and links. Nodes: Inventory Points such as Retail stores, warehouses, factories
or vendors
Links: Movement of goods and Information
Firms like Toyota Kirloskar and Amul Dairy have worked with several innovations like crossdocking and use of milk runs to align their transportation strategy with the overall supply
chain strategy.

DRIVERS OF TRANSPORTATION DECISIONS

Transportation Cost Structures The transportation cost for a given mode of transport is a
function of the distance and the quantity of the goods shipped. In general, transport rates
taper with increasing distance. This implies that with increasing distance the rate of increase
of transportation costs will go down. For longer distances travelled, the relative fixed costs
at the points of origin and destination are distributed over more kilometers. Further, longer
the distances travelled, the overall utilization of the vehicle is likely to be higher. This is
known as economies of distance in transportation.
Transportation rates decrease with increase in shipment weight. Thus, truck operators
always prefer a full truckload(FTL) shipment. With a less than full truck load (LTL) shipment,
the transport operator will have to run the vehicle at low capacity utilization or will have to
aggregate a number of small shipments in one trip, which will increase transaction costs for
the operator.
For e.g. Higher load per wagon and lower turnaround time of Indian Railways bring down
the transportation cost. Railways started carrying extra load to the extent of 8 tons per
wagon. It redesigned its operations so that it could run freight trains over longer distances.
By ensuring that the loading operations are carried throughout the day, Indian Railways
managed to bring down the turnaround time of goods trains from 7 to 5 days, and thus
running into profits nowadays.
IMPACT OF PRODUCT AND DEMAND CHARACTERISTICS ON SYSTEM COST
Value Density It captures the ratio of rupee value of the product to its weight. For
products with higher value-density, firms can afford to work with faster and more expensive
modes of transport as transportation cost is a relatively small fraction of the total product
cost, while for low value-density products, firms have to use slower modes of transport
because a small increase in transportation-related cost can affect the profitability of the
product in a significant way.
Demand Characteristics Higher demand uncertainty affects the amount of safety stock
carried by a firm. If a product takes a longer lead time because of a slower mode of

transport, firms end up with high amounts of safety stocks for products with high demand
uncertainty. So for high uncertainty products, firms should use faster modes of transport
and use slower modes of transport for products that have a stable demand.
4 PARTIES INFLUENCING EFFECTIVENESS
1. Shipper Party who wants the products to be moved / transported
2. Carrier Party who practically does the job of moving
3. Owners of Infrastructure ( roads, ports, Rail, airports)
4. Bodies setting transportation policies

MODES AND THEIR PERFORMANCE CHARACTERISTICS

Air -Very fast, expensive, small size/ wt, effective option only for time-sensitive, high-value
density goods. Airports currently managed by Airports Authority of India, a government of
India undertaking. Given the large fixed costs and relatively low variable costs, revenue
management in which airlines vary seat prices and allocate seats to different price classes, is
a significant factor in the success of passenger airlines.
Road Trucks are the dominant mode of transport in India. Consists of two major segments
FTL pricing displays economies of scale with respect to the distance travelled. LTL
operations are priced to encourage shipments in small lots, usually less than half a TL, as TL
tends to be cheaper for larger shipments. Though it is expensive, it offers the advantage of
door to door shipment and shorter delivery time. Direct freight rates are low, the quality of
service is very poor with long and unreliable transit times and in-transit damages. Caught in
a low cost-low service equilibrium, termed as unholy equilibrium.
Rail Ideal for large, heavy, high density products for long distance, low value shipments .
Long and unreliable lead times, ideal for products which are not very time sensitive.
Completely under govt. ownership. A total of 95% of the freight carried by the railways is in
bulk goods and within that coal accounts for 50% of the traffic.
Package carriers Carry small packages from letters to shipments up to 75 Kg, expensive,
rapid and reliable delivery, perfect for e-business, tracking possible. Use for small and time
sensitive shipments. Use air, truck and rail to transport time-critical smaller packages. Pick
up the package from the source and deliver it to the destination.
Water Takes place via the Inland waterway system (great lakes and rivers) or through sea.
Suitable for carrying very large loads, at low cost, Cheapest mode of transport, Used
extensively for international cargo. Slowest mode of transport and significant delays occur at
ports and terminals.
Pipe line - Used for bulk transportation of predictable volumes of Crude petroleum, refined
petroleum products and natural gas, Significant initial fixed cost is incurred in setting up the
pipeline and related infrastructure.
Intermodal : use of more than one mode of transport to move a shipment to its destination.
COMPARISON OF MODES OF TRANSPORTATION ON SC PERFORMANCE MEASURES
Freight cost Water (Least Expensive), Air (Most Expensive).
Lot size Shipment size is least in air, while shipping through water requires at least a
container equivalent load of about 20-30 tons.
Delivery time Water offers the longest delivery time and air shipment offers the shortest
delivery time.
Losses and damages Highest for rail and least for water.
Delivery time variability Highest for water and least for air.
TRANSPORTATION INFRASTRUCTURE AND POLICIES

Roads, seaports, airports, rail and canals are some of the major infrastructural elements that
exist along nodes and links of a transportation network.
In almost all countries, the government has either taken full responsibility or played a
significant role in building and managing these infrastructural elements.
Improved infrastructure has played a significant role in the development of transportation
and the resulting growth of trade.
Government has to either own or regulate a monopolistic transportation infrastructure
asset.
When there is competition, either with in a mode or across modes, private ownership,
deregulation and competition seem to work very well. In India private players have come
into construction of roads. For eg. NICE Road in Bangalore.
Roads, ports and airports are largely public not private.
Economist Vickrey recommended public ownership of assets( infrastructure) and setting
up of Quasi-market prices to improve overall efficiency.
Quasi market prices need to take into account the Discrepancy between incentives of an
individual, using the transportation infrastructure and the public as a whole, that owns the
infrastructure.
A vehicle driver bases his decision to use a high way on the cost and benefit of doing so.

AVERAGE COST AND MARGINAL COST

Different people have different value for making a trip Value is uniformly distributed over
an interval.
Number of users whose value from a trip exceeds a particular cost, is thus defined by the
demand curve
The costs incurred by a motorist include the Cost of time spent on high way and the cost
of operating and maintaining the vehicle
Time spent increases nonlinearly with congestion on the highway

No. of motorists using the road is represented by intersection of demand curve with the
Average cost curve(A)
This results in average cost of motorists (P0) and Traffic flow(Q0)
An additional motorist increases the average cost by a small amount but increases the total
cost across all motorists by a much larger amount.
Marginal cost curve is higher than the average cost curve.
Motorists should be charged a toll P1 P0 so that the cost they bear is the true cost they
are imposing on the highway system.
This toll lowers the vehicle flow rate to Q1.
The absence of a congestion toll results in an overuse of the transportation infrastructure
and a resulting congestion cost on all users.
QUASI MARKET PRICE
Motorist to be charged = P1 P0 i.e, the true
cost they are imposing
on the high way
This toll lowers the vehicle flow, from Q0 to Q1
Absence of Toll results in over use of transportation infrastructure and resulting congestion
cost on all users.
Quasi-market Price results in high price, at peak location and times, and lower price
otherwise.
Congestion is a major factor at several ports and airports (Lack of Capacity, Labor and
Technological issues)
DESIGN OPTIONS FOR A TRANSPORTATION NETWORK
Direct Shipment Network The buyer structures his transportation network so that all
shipments come directly from each supplier to each buyer location.
The routing of each shipment is specified and the supply chain manager only needs to decide
on the quantity to ship and the mode of transportation to use.
It is justified if demand at buyer locations is large enough that optimal replenishment lot
sizes are close to a TL from each supplier to each location.
With small buyer locations, however a direct shipment network tends to have high costs.
Eliminate intermediate warehouses and simple to operate and coordinate.
Shipment decision is completely local and the decision made for one shipment does not
influence others.

Direct Shipping with Milk Runs A milk run is a route on which a truck either delivers
product from a single supplier to multiple retailers or goes from multiple suppliers to a single
buyer location.
A supplier delivers directly to multiple buyer locations on a truck or a truck picks up
deliveries destined for the same buyer location from many suppliers.
Supply chain manager has to decide on the routing of each milk run.
Lower transportation cost by consolidating shipments to multiple locations on a single truck.
Use of milk run allows deliveries to multiple locations to be consolidated on a single truck,
resulting in better utilization of the truck and somewhat lower costs. ( Frito Lay )

All Shipments via Central DC (Distribution Centre) Suppliers do not send shipments
directly to buyer locations. The buyer divides locations by geographic region and a DC is built
for each region. Suppliers send their shipments to the DC and the Dc then forwards
appropriate shipments to each buyer location.
DC is an extra layer between suppliers and buyer locations and can play two different roles.
One is to store inventory and the other is to serve as a transfer location.
The presence of DCs can help reduce supply chain costs when suppliers are located far from
the buyer locations and transportation costs are high. ( W.W Grainger )
The presence of a DC allows a supply chain to achieve economies of scale for inbound
transportation to a point close to the final destination, because each supplier sends a large
shipment to the DC that contains products for all locations the DC serves.
If transportation economies require very large shipments on the inbound side, DCs hold
inventory and send product to buyer locations in smaller replenishment lots. For e.g.
Walmart sources from an overseas supplier in large lot size and the product is held in
inventory at the DC.

CROSS DOCKING
Products arriving from many suppliers on Inbound Trucks, by breaking each inbound into
smaller shipments, that are then loaded onto trucks going to each buyer locations.
Inventory needs to be held, product flows faster
Applicable for large predictable demands and requires that DCs to be set up.
Economies of scale both for in-bound and outbound - to be maintained
Wal-mart uses cross docking successfully All In-bounds , full TLs. Sum of lot sizes- fills up TL
to stores
Shipping via DC using Milk Runs Milk runs can be used from a DC if lot sizes to be
delivered to each buyer location are small.
Milk runs reduce outbound transportation costs by consolidating small shipments. For eg.
Seven Eleven Japan cross docks deliveries from its fresh food suppliers at its DCs and sends
out milk runs to the retail outlets because the total shipment to a store from all suppliers
does not fill a truck.

Tailored Network Suitable combinations of various transportation networks that reduces

the cost and improves responsiveness of the supply chain.
Transportation uses a combination of cross-docking, milk runs and TL and LTL carriers along
with package carriers in some cases.
Goal is to use the appropriate option in each situation. High demand products to high
demand retail outlets may be shipped directly , whereas low demand products or shipments
to low-demand retail outlets are consolidated to and from the DC.

PROS AND CONS OF DIFFERENT TRANSPORTATION NETWORK

1.
2.
3.
4.

Sl
No.

Network
Structure

Pros

Direct shipping

No Warehouse,
Simple
to
coordinate

High Inventories
due to large lot
size
High receiving cost

Direct
shipping
with Milk runs

Low transport
cost
Low Inventory

Increased
coordination
complexity

All shipments via

DC with inventory
storage

Low
in-bound
cost
thro
consolidation

Increased
inventory cost
Increased
Handling Cost

All shipments via

DC with cross
dock

Very
low
inventory
requirement
Low
transportation
cost
thro
consolidation

Increased
coordination
complexity

Shipments via DC
using milk runs

Low out-bound
transport cost

Further Increase in
coordination
complexity

Tailored Network

Transport
choices best
match needs for
product& store

High coordination
complexity

Cons

TRADEOFFS IN TRANSPORTATION DESIGN

All transportation decisions made by shippers in a supply chain network must take into
account:
Impact on Inventory costs
Facility & Processing costs
Cost of Coordinating operations
Level of responsiveness
Dell uses Package carriers, involves high transportation cost but allows Dell to centralize its
facilities and reduces inventory costs.
Dell either to sacrifice responsiveness or increase no. of facilities and resulting inventories.
TRADE OFFS
1. Transportation and Inventory Cost trade-off
Choice of transportation mode The mode of transportation that results in the
lowest transportation cost does not necessarily lower total costs for a supply chain.
Cheaper modes of transport typically have longer lead times and larger minimum

shipment quantities, both of which result in higher levels of inventory in the supply
chain. Modes that allow for shipping in small quantities lower inventory levels but
tend to be more expensive. Faster modes Products with high value to weight ratio.
Cheaper modes Products with a small value to weight ratio.
Inventory aggregation firms can significantly reduce the safety inventory they
require by physically aggregating inventories in one location. Most e-businesses use
this technique to gain advantage over firms with facilities in many locations.
Transportation cost, however generally increases when inventory is aggregated.
Transportation cost and customer responsiveness
trade-off :If a firm has high responsiveness and ships all orders within a day of
receipt from the customer, it will have small outbound shipments resulting in a high
Transportation cost. If it decreases its responsiveness and aggregates orders over a
longer time horizon before shipping them out, it will be able to exploit economies of
scale and incur lower transportation cost because of larger shipments. Temporal
aggregation is the process of combining orders across time.

TAILORED TRANSPORTATION
Use of different transportation networks and modes based on customer and product
characteristics.
1. By customer density and distance
2. By size of customer
3. By product demand and value
Tailored Transportation by Customer Density and Distance When a firm serves a very
high density of customers close to the DC, it is often best for the firm to own a fleet of trucks
that are used with milk runs originating at the DC to supply customers , because this
scenario makes very good use of the vehicles.
If customer density is high but distance from the warehouse is large, it is better to use a
public carrier with large trucks to haul the shipments to a cross-dock center close to the
customer area, where the shipment are loaded onto smaller trucks that deliver product to
customers using milk runs.
As customer density decreases, use of an LTL carrier or a third party doing milk runs is more
economical because the third party carrier can aggregate shipments across many firms.
Firms should serve areas with high customer density more frequently because these areas
are likely to provide sufficient economies of scale in transportation. To lower transportation
costs, firms should use a higher degree of temporal aggregation when serving areas with a
low customer density.
1.TRANSPORTATION OPTIONS BASED ON CUSTOMER DENSITY AND DISTANCE

Sl No

Customer

Sort distance

Medium Distance

Long Distance

Density

(from W/H)

(from W/H)

(from W/H)

High Density

Private (Own) fleet with

Cross-dock with

milk runs

milk runs ( public

Cross-dock with
milk runs

carrier)
2

Medium
Density

Third party milk runs

LTL carrier

LTL or Package
carrier

Low density

Third party milk runs

Or

LTL carrier

LTL

Or

Package Carrier

Package carriers

2. TAILORED TRANSPORTATION BY SIZE OF CUSTOMER

Very large customers can be supplied using a TL carrier, whereas for small customers use LTL
carrier or milk runs. 2 types of costs:

Transportation cost based on total route distance

Delivery cost based on number of deliveries
One option firms have is to charge a higher delivery cost for smaller customers. Another
option is to tailor milk runs so that they visit larger customers with a higher frequency than
smaller customers.
Firms can partition customers into large (L), medium (M) and small (S) based on the demand
at each. If large customers are to be visited every milk run, medium customers every other
milk run, and low demand customers every three milk runs, suitable milk runs can be
designed by combining large, medium and small customers on each run. Medium customers
would be partitioned into two subsets (M1, M2) and small customers would be partitioned
into three subsets (S1, S2, S3). The firm can sequence the following six milk runs to ensure
that each customer is visited with the appropriate frequency : (L,M1,S1),(L,M2,S2),
(L,M1,S3),(L,M2,S1), (L,M1,S2), (L,M2,S3).
Tailored Transportation by Product Demand and Value
The cycle inventory for high-value products with high demand is disaggregated to save on
transportation costs because this allows replenishment orders to be transported less
expensively. Safety inventory for such products can be aggregated to reduce inventories and
a fast mode of transportation can be used if the safety inventory is required to meet
customer demand.
TAILORED TRANSPORTATION BY PRODUCT DEMAND AND VALUE

Product Type

High Value

Low Value

High Demand

Disaggregate cycle inventory, Aggregate safety

Disaggregate all inventor

inventory. Inexpensive mode of transportation

and use inexpensive mod

for replenishing cycle inventory and fast mode

of transportation for

when using safety inventory.

replenishment.

Aggregate all inventories. If needed, use fast

Aggregate only safety

mode of transportation for filling customer

inventory. Use inexpensiv

Low Demand

orders.

mode of transportation f

replenishing cycle invent

For high-demand products with low value, all inventories should be disaggregated and held
close to the customer to reduce transportation cost. For low demand, high value products,
all inventories should be aggregated to save on inventory costs. For low, low value products,
cycle inventories can be held close to the customer and safety inventories aggregated to
reduce transportation cost while taking some advantage of aggregation. Cycle inventories
are replenished using an inexpensive mode of transportation to save costs.

Thank you