International Journal of Physical Distribution & Logistics Management

Transport Selection: Computer Modelling in a Spreadsheet Environment

John E. Tyworth
Article information:
To cite this document:
John E. Tyworth, (1991),"Transport Selection: Computer Modelling in a Spreadsheet Environment", International Journal of
Physical Distribution & Logistics Management, Vol. 21 Iss 7 pp. 28 - 36
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 28 IJPD & LM 21,7
T
he spreadsheet environment is superb for
applications with many variables and com-
plex relationships.
Transport
Selection:
Computer
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Modelling in
a Spreadsheet
Environment
John E. Tyworth
International Journal of Physical Distribution & Logistics Management,
Vol. 21 No. 7, 1991, pp. 28-36 © MCB University Press, 0960-0035
Introduction
Knowledgeable transport buyers consider the impact of their
purchases on logistics cost and service elements. This is
a challenging task because the interdependence of elements
such as shipping-time performance, replenishment quantities,
price and freight-rate structures, inventory levels, and
customer service requirements, form an intricate web that
complicates the analysis of trade-offs. Such analyses are
especially complex when uncertain demand and lead time
conditions prevail. The complexity primarily arises from the
task of quantifying the effects of transport performance
attributes on inventory holding costs. Additionally, the
number of variables and calculations needed to produce a
solution complicate the analysis. A detailed examination of
the interactions would be hopelessly impractical without use
of computers and management science models.
Received February 1991
Revised June 1991, September 1991
Thus the transport buyer needs a tool capable of handling
many variables, complex relationships, and "What if?"
scenarios. The spreadsheet environment is superb for
applications like this. When combined with many of the
commercially available add-in software modules, the
spreadsheet's capabilities encompass linear and non-linear
optimisation, goal seeking, risk analysis, Monte Carlo
simulation, and multiple scenario analysis. Not surprisingly,
spreadsheet software has had extraordinary acceptance
in the business community. The spreadsheet medium,
moreover, has entered the domain of legitimate
management science problem solving[1,2,3].
This article presents a microcomputer application of a
"micro-level" transport selection model designed to
support the analysis of key cost and service trade-offs
involved in tactical transport planning. This model exploits
some of the recent advances in spreadsheet technology,
such as graphical solution capabilities, three-dimensionality
features, multiple "What if" tables, and optimisation
methods, to determine a solution quickly and conveniently.
The spreadsheet medium, moreover, facilitates the
relaxation of conventional, but restrictive, transport
selection model assumptions to develop more realistic
models.
The article proceeds in three sections. The first section
reviews the transport selection setting. This review
includes a discussion of the nature and scope of the
problem and the general model framework. In addition,
it highlights several refinements and extensions that would
cause severe difficulties in analytic models but can be
incorporated easily in a spreadsheet environment. The
second section specifies a transport selection model using
Lotus 1-2-3 version 3.1 and presents several illustrative
applications. The last section observes the key limitations
of transport selection models and includes the conclusions.
Setting
The purchase of transport to haul freight involves both
strategic and tactical transport and inventory decisions.
Strategic transport planning encompasses the choice of
mode and the method of acquisition (freight tariffs,
contracts, third parties, and lease-buy arrangements),
while key tactical planning elements include the selection
of specific carriers and the shipment size for specific lanes.
Inventory planning must consider strategic decisions about
the aggregate level and deployment of inventories
throughout the logistics network and tactical decisions
about mix of cycle, safety, and pipeline stock for specific
links and nodes. Thus an integrated planning approach
encompasses both lane and network analyses.
The microcomputer model presented here applies to the
single-lane scenario, which proceeds as follows. A firm
stocks a single item to meet uncertain, but stationary and
independent, customer demand. When the units on hand
 TRANSPORT SELECTION: COMPUTER MODELLING IN A SPREADSHEET ENVIRONMENT
deplete to a certain level (s), thefirmorders a replacement
quantity (Q)froma single supplier having multiple carriers
(from one or more modes) available to transport the order.
The supplier may represent: (1) a company-owned plant
or distribution centre, or (2) an independent partner or
channel ally. Furthermore, each carrier has uncertain
delivery times and offers an independent schedule of
freight rates. The problem is to determine the transport
option, the shipment size (Q), and the replenishment level
(s) that will minimise the expected total annual costs for
a predetermined level of service.
General Model Specification
The general model specification follows the inventory
theoretic framework, which was originally developed by
Baumol and Vinod as the framework for a simplified
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transport demand model[4]. The purpose of such "macro
level" demand models is either to predict freight flows
(or market shares) among the modes of transport or to
explain transport choice behaviour among firms[5,6]. Other
"micro level" models, however, have adapted this
framework for the analysis of transport-inventory trade-
offs within thefirm[7].Although most of these micro level
models concentrate on the single-lane setting, several
models[8,9,10] focus on the logistics network.
Briefly stated, the inventory theoretic approach defines
each transport option in terms of speed, on-time
consistency, and unit shipping cost. It also defines the
product shipped in terms of expected annual transport,
inventory, and procurement cost elements. As Figure 1
shows, the expected total annual logistics cost for a
prespecified level of service and a given shipment
size is the sum of transport, inventory, procurement costs.
29
The transport costs include the direct shipping costs, as
well as other kinds of accessorial charges for activities
such as haulage, loading or unloading. The inventory costs
represent the sum of in-transit, cycle and safety stock
holding cost components, while the procurement costs
represent the sum of ordering (or set-up) costs and the
purchase cost. The mathematical terms that calculate the
holding costs of in-transit and safety stock include the
mean (speed) and variance (consistency) of shipping time.
This arrangement allows the model to capture the effects
of shipping time performance on holding costs.
As the previous review indicates, the model specification
does not include qualitative and behavioural elements such
as a customer's preference or a carrier'sfinancialstatus.
Although commentators [10,11] have observed that the
absence of such elements is a serious deficiency of the
macro level inventory theoretic models, the general
framework is appropriate for internal analyses. In the
transport planning process, for example, the transport
buyer can easily combine the quantitative analysis of
transport alternatives with the appropriate qualitative
considerations.
Assumptions and Refinements
Table I summarises the standard micro level transport
selection model assumptions and lists the refinements of,
and extensions to, these assumptions that are included
in the spreadsheet model. The refinements involve the
characterisation of unit shipping costs and customer
service. The conventional approach is to assume that unit
shipping costs are either constant[12-15] or may be
modelled adequately by some mathematical function[16].
One exception is the Stenger et al. [17] model which used
 30 IJPD & LM 21,7
a computer program to determine the correct unit shipping
costs from alternative multi-tier volume freight rate
structures. More recent studies[18-21], however, use a
simple mathematical model that approximates the shipping
cost per unit by dividing the fixed cost of a fully loaded
vehicle by the units ordered. By contrast, the model
presented here relies on the power and flexibility of the
spreadsheet environment to determine unit shipping costs
precisely and conveniently — even for the traditional multi-
tier volume freight rate structure that makes unit shipping
costs a discontinuous function of the shipment size.
The second refinement relates to the service control
criterion. The conventional approach sets the desired
probability of no stockout per replenishment cycle (P1 to
be the same for each transport alternative. The realised
P1 will differ from the target, however, because larger
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order sizes produce fewer cycles per year and fewer
chances of a stockout. Unlike the P1 criterion, the
fraction of annual sales not lost (P2), adjusts safety stock
so that each transport option tested will experience the
same level of expected annual shortages. Thus the service
effect is constant for the alternatives evaluated. On the
other hand, although the order fill (1-P2) criterion is
conceptually superior to the cycle stockout (1-1) criterion
in transport selection models, the order fill measure entails
more complexity[22]. Indeed, only Stenger et al.[17] have
tried to incorporate this service element in a micro level
model. As this microcomputer application will illustrate,
however, the spreadsheet environment can readily
encompass the use of the order fill (P2) criterion.
The spreadsheet model also encompasses two extensions.
The first extension is to add the annual acquisition costs
to the total cost equation coupled with the capability to
evaluate the impact of multilevel volume discount prices
on acquisition costs. The current microlevel models
assume that the unit cost of an item is constant, which
makes the total annual acquisition cost the same for each
transport alternative and thus irrelevant to the solution.
Yet in a channel alliance setting,firmsoften offer quantity
discounts, which can influence the trade-offs when carriers
have independent volume rate structures of their own.
The second extension permits the analyst to express the
speed and consistency of delivery as a function of the
shipment size. For example, the large shipments that by-
pass terminals should experience better shipping time
performance than the small shipments that move through
terminals.
In addition, the spreadsheet model differs from the best
known microcomputer application[21], ShipSmart, in at
least two basic ways. The ShipSmart model opts for an
analytic approach that rests on two key assumptions: (1)
that demand is deterministic; (2) that a continuous
mathematical function can reasonably approximate unit
shipping costs. By contrast, the spreadsheet model
Table I. Assumptions, Refinements and Extensions
Standard assumptions
1. Single item and lane with multiple transport
options
2. Stationary, probabilistic and independent
distributions for demand and lead time
3. Demand during lead time is normally distributed
4. Continuous review (s,Q) inventory system
5. P1 (fraction of cycles experiencing a stockout)
service policy
6. No crossover orders
7. Freight rates constant or estimated by
mathematical model
8. Constant unit cost
Refinements or extensions
1. Actual unit shipping costs derived from with
multilevel freight rate structures
2. P2 (fraction of annual sales not lost or
backordered) service policy
3. Acquisition costs and multilevel volume discount
prices
4. Shipping speed and consistency as a function of
shipment size
assumes that both demand and lead time are uncertain.
Although the dual uncertainty assumption is generally
more realistic, it greatly complicates the task of modelling
lead time demand accurately[23]. In addition, the
spreadsheet model uses a computer-based approach,
which can easily accommodate the kind of changes
previously discussed that would severely hinder the
development of elegant analytic models with neat solution
equations.
Spreadsheet Design
As Figure 2 shows, the display version of the spreadsheet
consists of two major sections. Each section identifies the
model variables along with their symbols, values, and units
of measure. Cell formulas produce the values shown in
italics.
Input Section: Model Calibration
The first section of the spreadsheet contains the basic
information needed to calibrate the model. This
information consists of product, inventory, and transport
elements. The product zone of this section assumes that
thefirmhas a forecasting system to estimate the standard
deviation of period forecast errors (SFE). An estimate
of the standard deviation of daily demand, however,
would also satisfy this input requirement[24]. In addition,
 TRANSPORT SELECTION: COMPUTER MODELLING IN A SPREADSHEET ENVIRONMENT 31
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 32 IJPD & LM 21,7

Figure 3. Transport Options Input

B A B C D E F
1 Transport option 0 = LTL truck Worksheet B
2
3 Row/column 0 1 2 3 4
4 Minimum Freight Other Shipping performance
5 weight rate charges Speed On-time
6 0 1 $36.75 $0.00 7.00 1.21
7 1 500 $31.03 $0.00 6.00 1.21
8 2 1,000 $25.85 $0.00 6.00 1.21
9 3 2,000 $22.94 $0.00 5.00 1.21
10 4 5,000 $18.44 $0.00 5.00 1.21
11 5 10,000 $17.58 $0.00 4.00 1.10
12 6 20,000 $12.05 $0.00 4.00 1.05
13 7 30,000 $10.27 $0.00 4.00 1.05
14 8 40,000 $8.98 $0.00 4.00 1.05
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15
C A B C D E F
1 Transport option 1 = TL truck Worksheet C
2
3 Row/column 0 1 2 3 4
4 Minimum Freight Other Shipping performance
5 weight rate charges Speed On-time
6 0 30,000 $8.50 $0.25 4.50 1.00
7 1 40,000 $8.50 $0.25 4.00 1.00
8 2 45,000 $8.50 $0.25 4.00 1.00
9 3 45,000 $8.50 $0.25 4.00 1.00
10 4 45,000 $8.50 $0.25 4.00 1.00
11 5 45,000 $8.50 $2.50 4.00 1.00
12 6 45,000 $8.50 $0.25 4.00 1.00
13 7 45,000 $8.50 $0.25 4.00 1.00
14 8 45,000 $8.50 $0.25 4.00 1.00
15
D A B C D E F
1 Transport option 2 = TOFC Worksheet D
2
3 Row/column 0 1 2 3 4
4 Minimum Freight Other Shipping performance
5 weight rate charges Speed On-time
6 0 36,000 $7.75 $0.50 6.00 2.00
7 1 36,000 $7.75 $0.50 6.00 2.00
8 2 40,000 $7.75 $0.50 6.00 2.00
9 3 45,000 $7.75 $0.50 6.00 2.00
10 4 45,000 $7.75 $0.50 6.00 2.00
11 5 45,000 $7.75 $0.50 6.00 2.00
12 6 45,000 $7.75 $0.50 6.00 2.00
13 7 45,000 $7.75 $0.50 6.00 2.00
14 8 45,000 $7.75 $0.50 6.00 2.00
15

this zone contains a unit cost schedule to capture volume-
sensitive acquisition cost structures. The inventory zone
offers separate holding cost factors for in-transit and
warehouse stock and includes the ordering (set-up) cost
and the P2 service criterion (simply identified as P in
Figure 2).
The transport cost-performance table takes advantage
of the three-dimensional capability provided by the latest
versions of spreadsheet software. As Figure 3 illustrates
the analyst places the transport data for each option on
separate, but identically arranged, worksheets (or pages).
The computer retains these worksheets in memory and
saves them as part of worksheet file on a disk. An
"©Index" function uses the transport selection code in
cell G6 to pull up the correct information. This
arrangement not only organises data entry, but makes
it possible to automate the multiple "What if?" analyses
that form a key part of the model's output section.
 TRANSPORT SELECTION: COMPUTER MODELLING IN A SPREADSHEET ENVIRONMENT 33

Output Section: Analysis and Solutions
The second section of the spreadsheet represents the heart
of the model. The "Elements" and "Expected annual cost"
zones contain the working equations, which provide a
detailed study of the impact of a transport option on total
logistics costs for preset values of Q and P. The "Solution
table" enumerates the expected total annual logistics cost
(TAC) of each transport option over a range of Q values.
The specific equations producing the italicised values in this
section are shown in Figure 4. Since the foundation for these
equations is well established in the logistics production
management literature, a brief survey of the key aspects
of the transport, inventory and procurement working and
cost equations should suffice[22,25].
Transport equations. The computer model examines the
"weight breaks" to identify the correct freight rate and
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input section of the worksheet. As previously indicated,
this information is important because transit-time
performance affects the in-transit and safety stock
calculations.
Inventory equations. The most complex task involves the
computation of safety stock. The procedure entails
calculations for:
(1) the standard deviation of lead time forecast errors
(SDLTFE);
(2) the partial expectation (E(Z)), which represents the
expected units short per replenishment cycle per
unit of SDLTFE;
(3) the directly corresponding safety stock multiplier (Z).
The model makes these calculations as follows. First, the
standard compounding technique is used to determine

minimum weight for any order size Q. This step enables
the model to determine the correct "billed" weight as either
the actual weight or the minimum weight and then calculate
the true shipping cost per order. The model uses the same
method to identify the speed and on-time performance
values in the "Transport cost-performance table" in the
SDLTFE from the parameter estimates of demand (DD
and SFE2) and transit time (LT and VARLT)
distributions[26]. Second, the partial expectation equation,
which assumes the complete lost sales case, is easily
determined from other input values[22]. Third, the model
uses Brown's[27] rational approximation method to

Model Equations
F

A B C G H
Results given Q and P
Elements Expected annual costs

Transport Transport Q
28 Shipment weight SW (Q*UW) Direct shipping SC +BW*0.01* RATE *R/Q
29 Minimum weight MW @VL00KUP(SW,TABLE,1) Other charges AC (R*UW*0.01*CHGS)
30 Billed weight BW @MAX(SW,MW) Total TRN @SUM(H28..H29)
31 Freight rate RATE @VLOOKUP(SW,TABLE,2)
32 Other charges CHGS @VLOOKUP(SW.TABLE,3)
33 Speed (mean periods) LT @VLOOKUP(SW.TABLE,4)
34 On-time (variance) VARLT @VLOOKUP(SW,TABLE,5)
35
36 Inventory Inventory
37 Units/period DD (R/PY) Cycle stock CSC + CS*(US+TRN/R)*IW
38 Unit cost UC @VLOOKUP(Q,PRICES,1) In-transit stock ISC + IS*(US+TRN/R)*IT
39 Cycle stock CS (Q/2) Safety stock ssc + SS*(UC+TRN/R)*IW
40 In-transit stock IS @VL00KUP(SW,TABLE,4)*DD Total INV @SUM(H37..H39)
41 Safety stock SS (Z*SDLTFE)
42 Std.dev.LTD SDLTFE @SQRT(LT*SFE2 + DD2*VARLT)
43 Partial expectation E(Z) ((1-P)/P)*(Q/SDLTFE>
44 Multiplier Z @IF(C43<0.398,(C43-0.39894228)
*(-1.75294+0.4442135 *C43
-(0.07061455*C432)
-0.17592241/C43+0.044212641)
-0.0012267386/(C43 + 0.00030570313)),0)
Procurement Procurement
47 Reorder level s (LT*DD)+SS Ordering cost OC (R/Q*A)
48 Reorder quantity Q 444 Purchase PUR +R*@VL00KUP(Q,PRICES,1)
49 Cycles per year RY +R/Q Total PRO @SUM(H47..H48)
50 Total costs TAC @SUM(TRN,INV,PR0)

Table references:
Table - F11..K19 keys on weight breaks to lookup transport cost and performance elements
Prices - B11..C14 keys on order size to lookup unit price
 34 IJPD & LM 21,7

estimate the safety stock multiplier Z that directly

corresponds to E(Z)[cf.28]. Although it is a bit tedious
to enter this formula into a spreadsheet cell, it eliminates
the larger problem of including all, or part of, a normal
probability distribution table in the spreadsheet and the
use of an extensive table look-up procedure.
Procurement equations. The equations found in this zone
of the spreadsheet are straightforward, except perhaps
for the annual purchase cost. The model uses the value
of Q to determine the unit cost from the "Item cost
schedule" in the first section of the worksheet.

Solution procedure. The solution procedure has two steps.

The first step involves the explicit enumeration of the
expected total annual logistics costs (TAC) for each option
over a range of Q values. A single key stroke can produce
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the Q and corresponding TAC values, which, altogether,

constitute the Solution Table. A second key stroke will
present this information into graphical form for an
approximate solution. The second step is to refine the
Q-scale as needed to develop more precise solution values
for Q and s. Alternatively, the analyst may invoke
"manager-friendly" optimisation modules, which offer reduced, while the unit cost schedule dominates the
powerful mainframe procedures such as the Generalised solution quantities of each option (300 units).
Reduced Gradient approach, to determine the exact order
quantity[29]. The "Solution Q" zone at the bottom of the The graphical solution shown in Figure 7 entails the same
worksheet shows the results for this approach. input as Figure 1, except that the annual demand and unit
weight are 10,000 units and 100 lb. The truckload carrier
now offers the lowest total costs, which coincidentally
occurs for a shipment of 300 units. The backward search
Illustrative Applications: LTL, TL and TOFC Options capability of leading spreadsheet software can easily
The first example encompasses the input elements determine how much the TOFC freight rate must be
depicted in Figures 2 and 3. The firm operates about 250 reduced (about 4.5 per cent) to match the TL option's
business days per year and has a time-series forecasting total logistics cost.
system. This system's period forecast error is about 15
per cent of daily demand. The inventory control goal is
to fill at least 98 per cent of all sales directly from the
shelf. The firm's supplier offers no discounts for larger
order sizes, and its transport buyer has three options:
less-than-truckload (LTL), truckload (TL) and trailer-on-
flat-car (TOFC). Each option offers a different cost-
performance mix (see Figure 3). The LTL option offers
a flexible schedule of minimum weights and service
performance that becomes competitive for larger
shipments. The TL option has a minimum weight of at
least 30,000 lb, but offers relatively low freight rates and
the best transit time performance. The trailer-on-flat-car
option has the lowest rates coupled with the worst transit
performance.

Figure 5 shows the graphical solution based on the results

tabulated in the Solution Table of the spreadsheet. The
LTL option is the clear winner with an order size of 125
units and a reoder level set at 93 units. Suppose, however,
that the supplier offers a unit cost schedule of $300, $290,
$280, $270 for minimum order quantities of 1, 100, 200
and 300 or more items, respectively. As shown in Figure
6, the total logistics cost advantage of the LTL carrier is
 TRANSPORT SELECTION: COMPUTER MODELLING IN A SPREADSHEET ENVIRONMENT
References
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Limitations and Conclusions
The computer model has several limitations. Two
conceptual limitations involve assumptions used in the
conventional inventory theoretic framework — specifically
that lead time demand is normally distributed and that
transit-time represents lead time. Little theoretical or
empirical evidence exists to support the use of the normal
distribution to model lead time demand[7,30]. Thus,
although the normal distribution is convenient to use, it
is liable to provide a coarse approximation of lead time
demand. In addition, transit-time is only part of lead time.
Thus the assumption that transit-time defines lead time
will cause the model to underestimate reorder points and
safety stock holding costs. Further, one may wish to
expand the model to include set-up costs at origin, adjust
the unit costs to reflect the absorption of shipping costs
by the firm and add elements such as loss and damage
and packaging to shipping costs. Proficient users of
spreadsheet software can overcome most of these
limitations by adding the appropriate terms to the total
cost equation. Further research, however, is needed to
address the conceptual limitations. Nonetheless, the
model's solutions can provide transport buyers with
valuable insights.
12. Das, C , "Choice of Transport Service: An Inventory
From a practical standpoint, microcomputer tools are
essential to the quantitative analysis of the cost and service
trade-offs linked to transport purchases. The electronic
spreadsheet offers a powerful and flexible medium to
model such trade-offs. Although some modellers may
eschew spreadsheet applications, the emerging capabilities
of this technology conveniently permit computer models
to capture a rich level of detail that is well beyond the scope
of analytic models.
35
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