Outline

The role of transportation in the supply chain

Supply Chain Management Factors affecting transportation decisions
(5th Edition) Modes of transportation and their performance
characteristics
Design options for a transportation network
Chapter 14 Trade-offs in transportation design
Transportation in the Supply Chain Tailored transportation
Routing and scheduling in transportation
Making transportation decisions in practice
© 2007 Pearson Education 14-1 © 2007 Pearson Education 14-2

Factors Affecting
Transportation Decisions Transportation Modes
Trucks
Carrier (party that moves or transports the product)
– TL
– Vehicle-related cost
– LTL
– Fixed operating cost
– Trip-related cost
Rail
Shipper (party that requires the movement of the Air
product between two points in the supply chain) Package Carriers
– Transportation cost Water
– Inventory cost Pipeline
– Facility cost

© 2007 Pearson Education 14-3 © 2007 Pearson Education 14-4

Truckload (TL) Less Than Truckload (LTL)

Low fixed and variable costs Higher fixed costs (terminals) and low variable
Major Issues costs
– Utilization Major issues:
– Consistent service – Location of consolidation facilities
– Backhauls – Utilization
– Vehicle routing
– Customer service

© 2007 Pearson Education 14-5 © 2007 Pearson Education 14-6

1
1
 Rail Air
Key issues: Key issues:
– Scheduling to minimize delays / improve service – Location/number of hubs
– Off-track delays (at pickup and delivery end) – Location of fleet bases/crew bases
– Yard operations – Schedule optimization
– Variability of delivery times – Fleet assignment
– Crew scheduling
– Yield management

© 2007 Pearson Education 14-7 © 2007 Pearson Education 14-8

Package Carriers Water

Companies like FedEx, UPS, USPS, that carry small
Limited to certain geographic areas
packages ranging from letters to shipments of about 150
pounds Ocean, inland waterway system, coastal waters
Expensive Very large loads at very low cost
Rapid and reliable delivery Slowest
Small and time-sensitive shipments Dominant in global trade (autos, grain, apparel, etc.)
Preferred mode for e-businesses (e.g., Amazon, Dell,
McMaster-Carr)
Consolidation of shipments (especially important for
package carriers that use air as a primary method of
transport)
© 2007 Pearson Education 14-9 © 2007 Pearson Education 14-10

Pipeline Intermodal
Use of more than one mode of transportation to move a
High fixed cost
shipment to its destination
Primarily for crude petroleum, refined petroleum Most common example: rail/truck
products, natural gas
Also water/rail/truck or water/truck
Best for large and predictable demand Grown considerably with increased use of containers
Would be used for getting crude oil to a port or Increased global trade has also increased use of
refinery, but not for getting refined gasoline to a intermodal transportation
gasoline station (why?) More convenient for shippers (one entity provides the
complete service)
Key issue involves the exchange of information to
facilitate transfer between different transport modes
© 2007 Pearson Education 14-11 © 2007 Pearson Education 14-12

2
2
 Design Options for a
Transportation Network Trade-offs in Transportation Design
What are the transportation options? Which one to Transportation and inventory cost trade-off
select? On what basis? – Choice of transportation mode
Direct shipping network – Inventory aggregation
Direct shipping with milk runs Transportation cost and responsiveness trade-off
All shipments via central DC
Shipping via DC using milk runs
Tailored network

© 2007 Pearson Education 14-13 © 2007 Pearson Education 14-14

Inventory Aggregation: Inventory

Choice of Transportation Mode vs. Transportation Cost
A manager must account for inventory costs when As a result of physical aggregation
selecting a mode of transportation – Inventory costs decrease
A mode with higher transportation costs can be – Inbound transportation cost decreases
justified if it results in significantly lower inventories – Outbound transportation cost increases
Inventory aggregation decreases supply chain costs if
the product has a high value to weight ratio, high
demand uncertainty, or customer orders are large
Inventory aggregation may increase supply chain
costs if the product has a low value to weight ratio,
low demand uncertainty, or customer orders are small
© 2007 Pearson Education 14-15 © 2007 Pearson Education 14-16

Trade-offs Between Transportation

Cost and Customer Responsiveness Tailored Transportation
Temporal aggregation is the process of combining The use of different transportation networks and modes
orders across time based on customer and product characteristics
Temporal aggregation reduces transportation cost Factors affecting tailoring:
because it results in larger shipments and reduces – Customer distance and density
variation in shipment sizes – Customer size
However, temporal aggregation reduces customer – Product demand and value
responsiveness

© 2007 Pearson Education 14-17 © 2007 Pearson Education 14-18

3
3
 Role of IT in Transportation Risk Management in Transportation

The complexity of transportation decisions demands to Three main risks to be considered in transportation are:
use of IT systems – Risk that the shipment is delayed
– Risk of disruptions
IT software can assist in:
– Risk of hazardous material
– Identification of optimal routes by minimizing costs subject
to delivery constraints Risk mitigation strategies:
– Optimal fleet utilization – Decrease the probability of disruptions
– Alternative routings
– GPS applications
– In case of hazardous materials the use of modified
containers, low-risk transportation models, modification of
physical and chemical properties can prove to be effective

© 2007 Pearson Education 14-19 © 2007 Pearson Education 14-20

Making Transportation
Decisions in Practice Summary of Learning Objectives
Align transportation strategy with competitive What is the role of transportation in a supply chain?
strategy What are the strengths and weaknesses of different
Consider both in-house and outsourced transportation transport modes?
Design a transportation network that can handle What are the different network design options and
e-commerce what are their strengths and weaknesses?
Use technology to improve transportation What are the trade-offs in transportation network
performance design?
Design flexibility into the transportation network

© 2007 Pearson Education 14-21 © 2007 Pearson Education 14-22

4
4
406 Chapter 14 • Transportation in a Supply Chain

14.4 DESIGN OPTIONS FOR A TRANSPORTATION NETWORK

The design of a 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 to achieve the
desired degree of responsiveness at a low cost. Three basic questions need to be considered when
designing a transportation network between two stages of a supply chain:
1. Should transportation be direct or through an intermediate site?
2. Should the intermediate site stock product or only serve as a cross-docking location?
3. Should each delivery route supply a single destination or multiple destinations (milk run)?
Based on the answers to these questions, the supply chain ends up with a variety of trans-
portation networks. We discuss these options and their strengths and weaknesses in the context
of a buyer with multiple locations sourcing from several suppliers.

Direct Shipment Network to Single Destination

With the direct shipment network to a single destination option, the buyer structures the
transportation network so that all shipments come directly from each supplier to each buyer
location, as shown in Figure 14-2. With a direct shipment network, the routing of each shipment
is specified, and the supply chain manager needs to decide only the quantity to ship and the mode
of transportation to use. This decision involves a trade-off between transportation and inventory
costs, as discussed later in the chapter.
The major advantage of a direct shipment transportation network is the elimination of inter-
mediate warehouses and its simplicity of operation and coordination. The shipment decision is
completely local, and the decision made for one shipment does not influence others. The
transportation time from supplier to buyer location is short because each shipment goes direct.
A direct shipment network to single destination is justified only if demand at buyer
locations is large enough that optimal replenishment lot sizes are close to a truckload from each
supplier to each location. Home Depot started with a direct shipment network, given that most of
the stores it opened until about 2002 were large stores. The stores ordered in quantities that were
large enough that ordering was managed locally within the store and delivery to the store arrived
directly from the supplier. The direct shipment network to single destination, however, proved to
be problematic as Home Depot started to open smaller stores that did not have large enough
orders to justify a direct shipment.

Suppliers Buyer Locations

FIGURE 14-2 Direct Shipment Network

 Chapter 14 • Transportation in a Supply Chain 407

Suppliers Buyer Locations Suppliers Buyer Locations

FIGURE 14-3 Milk Runs from Multiple Suppliers or to Multiple Buyer Locations

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, as shown in Figure 14-3. In
direct shipping with milk runs, 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. When
using this option, a supply chain manager has to decide on the routing of each milk run.
Direct shipping provides the benefit of eliminating intermediate warehouses, whereas milk
runs lower transportation cost by consolidating shipments to multiple locations on a single truck.
Milk runs make sense when the quantity destined for each location is too small to fill a truck but
multiple locations are close enough to each other such that their combined quantity fills the
truck. Companies such as Frito-Lay that make direct store deliveries use milk runs to lower their
transportation cost. If frequent small deliveries are needed on a regular basis and either a set of
suppliers or a set of retailers is in geographic proximity, the use of milk runs can significantly
reduce transportation costs. For example, Toyota uses milk runs from suppliers to support its
just-in-time (JIT) manufacturing system in both Japan and the United States. In Japan, Toyota
has many assembly plants located close together and thus uses milk runs from a single supplier
to many plants. In the United States, however, Toyota uses milk runs from many suppliers to
each assembly plant given the large distance between assembly plants.

All Shipments via Intermediate Distribution Center with Storage

Under this option, product is shipped from suppliers to a central distribution center where it is
stored until needed by buyers when it is shipped to each buyer location, as shown in Figure 14-4.
Storing product at an intermediate location is justified if transportation economies require large
shipments on the inbound side or shipments on the outbound side cannot be coordinated. In such
a situation, product comes into a DC in large quantities where it is held in inventory and sent to
buyer locations in smaller replenishment lots when needed.
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 product for all locations the DC serves. Because DCs
serve locations nearby, the outbound transportation cost is not very large. For example,
W.W. Grainger has its suppliers ship products to one of nine DCs (typically in large quantities),
with each DC in turn replenishing stores in its vicinity with the smaller quantities they need.
408 Chapter 14 • Transportation in a Supply Chain

Suppliers Buyer Locations

DC

FIGURE 14-4 All Shipments via DC

It would be expensive for suppliers to try and serve each store directly. Similarly, when
Home Depot sources from an overseas supplier, the product is held in inventory at the DC
because the lot size on the inbound side is much larger than the sum of the lot sizes for the
stores served by the DC.

All Shipments via Intermediate Transit Point with Cross-Docking

Under this option, suppliers send their shipments to an intermediate transit point (could be a DC)
where they are cross-docked and sent to buyer locations without storing them. The product flow
is similar to that shown in Figure 14-4 except that there is no storage at the intermediate facility.
When a DC cross-docks product, each inbound truck contains product from suppliers for several
buyer locations, whereas each outbound truck contains product for a buyer location from several
suppliers. Major benefits of cross-docking are that little inventory needs to be held and product
flows faster in the supply chain. Cross-docking also saves on handling cost because product does
not have to be moved into and out of storage. Cross-docking is appropriate when economies of
scale in transportation can be achieved on both the inbound and outbound sides and both inbound
and outbound shipments can be coordinated.
Wal-Mart has used cross-docking successfully to decrease inventories in the supply chain
without incurring excessive transportation costs. Wal-Mart builds many large stores in a
geographic area supported by a DC. As a result, the total lot size to all stores from each supplier
fills trucks on the inbound side to achieve economies of scale. On the outbound side, the sum of
the lot sizes from all suppliers to each retail store fills up the truck to achieve economies of scale.
Another good example of the use of a transit point with cross-docking comes from Peapod
in the Chicago area. Peapod has a DC in Lake Zurich from which it delivers to its customers
using milk runs. This approach proved effective for customers in the northern and western sub-
urbs of Chicago. Peapod, however, wanted to increase its reach to the city of Chicago and the city
of Milwaukee. Both are far enough from the Lake Zurich DC that a milk run wasted about two
hours in transit making no productive deliveries. These markets were also small enough that they
did not justify a local DC. Peapod’s response has been to set up a cross-docking facility (which
tends to be cheaper than a DC because no storage is involved) at each location. Peapod then
sends out all deliveries to the local cross-dock facility in a larger truck and uses smaller trucks for
local deliveries. The use of cross-docking at a transit point has allowed Peapod to increase the
reach of the Lake Zurich DC without significantly increasing transportation expense.
 Chapter 14 • Transportation in a Supply Chain 409

Suppliers Buyer Locations

DC

FIGURE 14-5 Milk Runs from DC

Shipping via DC Using Milk Runs

As shown in Figure 14-5, 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 example, 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. The use of cross-docking and milk runs allows Seven-Eleven Japan to lower its transporta-
tion cost while sending small replenishment lots to each store. The use of cross-docking with milk runs
requires a significant degree of coordination and suitable routing and scheduling.
The online grocer Peapod uses milk runs from DCs when making customer deliveries to
help reduce transportation costs for small shipments to be delivered to homes. OshKosh B’Gosh,
a manufacturer of children’s wear, has used this idea to virtually eliminate LTL shipments from
its DC in Tennessee to retail stores.

Tailored Network
The tailored network option is a suitable combination of previous options that reduces the cost
and improves responsiveness of the supply chain. Here transportation uses a combination of
cross-docking, milk runs, and TL and LTL carriers, along with package carriers in some cases.
The 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. The complexity of managing this
transportation network is high because different shipping procedures are used for each product
and retail outlet. Operating a tailored network requires significant investment in information
infrastructure to facilitate the coordination. Such a network, however, allows for the selective use
of a shipment method to minimize the transportation as well as inventory costs.
Table 14-2 summarizes the pros and cons of the various transportation network options
discussed. We illustrate some of these choices in Example 14-1.

EXAMPLE 14-1 Selecting a Transportation Network

A retail chain has eight stores in a region supplied from four supply sources. Trucks have a
capacity of 40,000 units and cost $1,000 per load plus $100 per delivery. Thus, a truck making two
deliveries charges $1,200. The cost of holding one unit in inventory at retail for a year is $0.20.
410 Chapter 14 • Transportation in a Supply Chain

Table 14-2 Pros and Cons of Different Transportation Networks

Network Structure Pros Cons

Direct shipping No intermediate warehouse High inventories (due to large

Simple to coordinate lot size)
Significant receiving expense
Direct shipping with Lower transportation costs for small lots Increased coordination
milk runs Lower inventories complexity
All shipments via central Lower inbound transportation cost through Increased inventory cost
DC with inventory storage consolidation Increased handling at DC
All shipments via central Low inventory requirement Increased coordination
DC with cross-dock Lower transportation cost through complexity
consolidation
Shipping via DC using Lower outbound transportation cost for Further increase in coordination
milk runs small lots complexity
Tailored network Transportation choice best matches needs Highest coordination complexity
of individual product and store

The vice president of supply chain is considering whether to use direct shipping from
suppliers to retail stores or setting up milk runs from suppliers to retail stores. What network do
you recommend if annual sales for each product at each retail store are 960,000 units? What
network do you recommend if sales for each product at each retail store are 120,000 units?

Analysis:
We provide a detailed analysis when annual sales of each product at each retail store are 960,000
units. Our analysis assumes that all trucks travel full. A more sophisticated analysis can be
performed for which the optimal load on each truck is calculated and used in the analysis.
We first analyze the direct shipping network and assume that full truckloads will be
shipped from suppliers to retail stores. In this case, we have the following:
Batch size shipped from each supplier to each store 40,000 units
Number of shipments year from each supplier to each store 960,000 40,000 24
Annual trucking cost for direct network 24 1,100 × 4 8 $844,800
Average inventory at each store for each product 40,000 2 20,000 units
Annual inventory cost for direct network 20,000 0.2 4×8 $128,000
Total annual cost of direct network $844,800 $128,000 $972,800
Now we analyze the network in which suppliers run milk runs to retail stores. Milk runs
increase the transportation cost but decrease the level of inventory each store has to hold. We
provide a detailed analysis for the instance of suppliers running milk runs to two stores on each
truck. In this case, we have the following:
Batch size shipped from each supplier to each store 40,000 2 20,000 units
Number of shipments year from each supplier to each store 960,000 20,000 48
Transportation cost per shipment per store (two stores / truck) 1,000 2 100 $600
Annual trucking cost for milk run network 48 600 × 4 8 $921,600
Average inventory at each store for each product 20,000 / 2 10,000 units
Annual inventory cost for direct network 10,000 0.2 × 4 8 $64,000
Total annual cost of direct network $921,600 $64,000 $985,600
 Chapter 14 • Transportation in a Supply Chain 411

This analysis shows that when demand per product per store is 960,000 units, the direct
network is cheaper than running milk runs with two stores per route. Increasing the number of
stores on a milk run ends up costing even more because it raises transportation costs more than it
saves in holding costs.
When demand per product per store is 120,000, we first provide the detailed costs for the
direct shipping network as follows (assuming all trucks travel full):
Batch size shipped from each supplier to each store 40,000 units
Number of shipments year from each supplier to each store 120,000 40,000 3
Annual trucking cost for direct network 3 1,100 × 4 × 8 $105,600
Average inventory at each store for each product 40,000 2 20,000 units
Annual inventory cost for direct network 20,000 0.2 × 4 8 $128,000
Total annual cost of direct network $105,600 $128,000 $233,600
For the direct network, it turns out that it is better not to fill each truck but to send only 36,332
units per truck to minimize total annual costs. The optimal loading increases transportation costs
a bit but decreases total costs to $232,524 per year.
Now we analyze the network in which suppliers use milk runs to retail stores. We provide
a detailed analysis for the instance of suppliers running milk runs to four stores on each truck and
each truck travels full. In this case, we have the following:
Batch size shipped from each supplier to each store 40,000 4 10,000 units
Number of shipments year from each supplier to each store 120,000 10,000 12
Transportation cost per shipment per store (four stores truck) 1,000 4 100 $350
Annual trucking cost for milk run network 12 350 × 4 × 8 $134,400
Average inventory at each store for each product 10,000 2 5,000 units
Annual inventory cost for direct network 5,000 0.2 × 4 8 $32,000
Total annual cost of direct network $134,400 $32,000 $166,400
This analysis shows that when demand per product per store is 120,000 units, the milk run
network with four stores per route is cheaper than the direct network (even when truck loads are
optimized). The direct network ends up costing more because of increased inventory holding costs
even though transportation is cheaper. Observe that milk runs become more attractive as the amount
flowing through the system decreases. In the next section, we discuss a variety of trade-offs that
supply chain managers need to consider when designing and operating a transportation network.

14.5 TRADE-OFFS IN TRANSPORTATION DESIGN

All transportation decisions made by shippers in a supply chain network need to take into
account their impact on inventory costs, facility and processing costs, the cost of coordinating
operations, and the level of responsiveness provided to customers. For example, Amazon’s use of
package carriers to deliver products to customers increases transportation cost but allows
Amazon to centralize its facilities and reduce inventory costs. If Amazon wants to reduce its
transportation costs, the company must either sacrifice responsiveness to customers or increase
the number of facilities and resulting inventories to move closer to customers.
The cost of coordinating operations is generally hard to quantify. Shippers should evaluate
different transportation options in terms of various costs and revenues and then rank them
according to coordination complexity. A manager can then make the appropriate transportation
decision. Managers must consider the following trade-offs when making transportation decisions:
• Transportation and inventory cost trade-off
• Transportation cost and customer responsiveness trade-off
418 Chapter 14 • Transportation in a Supply Chain

both options. Option B, however, becomes more expensive because outbound transportation costs
increase with a decrease in customer order size. With smaller customer orders, the costs under
Option B are as follows:
Average weight of each customer order = 0.1 * 0.5 + 0.04 * 5 = 0.25 pounds
Shipping cost per customer order = $5.53 + 0.53 * 0.25 = $5.66
Number of customer orders per territory per week = 4
Total customer orders per year = 4 * 24 * 52 = 4,992
Annual transportation cost = 4,992 * $5.66 = $28,255 ($28,267
without rounding)
Total annual cost = inventory cost + transportation cost
= $8,474 + $28,255 = $36,729
($36,740 without rounding)
Thus, with small customer orders, inventory aggregation is no longer the lowest-cost option
for HighMed because of the large increase in transportation costs. The company is better off
maintaining inventory in each territory and using Option A, which gives a lower total cost.

The lessons from Example 14-3 (and also Chapter 12) with regard to inventory aggregation
are summarized in Table 14-7.

Key Point

Inventory aggregation decisions must account for inventory and transportation costs. Inventory aggregation
decreases supply chain costs if the product has a high value-to-weight ratio, high demand uncertainty, low
transportation cost, and customer orders are large. If a product has a low value-to-weight ratio, low demand
uncertainty, large transportation cost, or small customer orders, inventory aggregation may increase supply
chain costs.

Trade-off Between Transportation Cost and Customer Responsiveness

The transportation cost a supply chain incurs is closely linked to the degree of responsiveness the
supply chain aims to provide. 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 a lower transportation
cost because of larger shipments. Temporal aggregation is the process of combining orders across
time. Temporal aggregation decreases a firm’s responsiveness because of shipping delay but also
decreases transportation costs because of economies of scale that result from larger shipments.
Thus, a firm must consider the trade-off between responsiveness and transportation cost when
designing its transportation network, as illustrated in Example 14-4.

Table 14-7 Conditions Favoring Aggregation or

Disaggregation of Inventory
Aggregate Disaggregate

Transport cost Low High

Demand uncertainty High Low
Holding cost High Low
Customer order size Large Small
 Chapter 14 • Transportation in a Supply Chain 419

EXAMPLE 14-4 Trade-off Between Transportation Cost

and Responsiveness
Alloy Steel is a steel service center in the Cleveland area. All orders are shipped to customers
using an LTL carrier that charges $100 0.01x, where x is the number of pounds of steel
shipped on the truck. Currently, Alloy Steel ships orders on the day they are received. Allowing
for two days in transit, this policy allows Alloy to achieve a response time of two days. Daily
demand at Alloy Steel over a two-week period is shown in Table 14-8.
The general manager at Alloy Steel believes that customers do not really value the two-day
response time and would be satisfied with a four-day response. What are the cost advantages of
increasing the response time?

Analysis:
As the response time increases, Alloy Steel has the opportunity to aggregate demand over multiple
days for shipping. For a response time of three days, Alloy Steel can aggregate demand over two
successive days before shipping. For a response time of four days, Alloy Steel can aggregate
demand over three days before shipping. The manager evaluates the quantity shipped and trans-
portation costs for different response times over the two-week period, as shown in Table 14-9.
From Table 14-9, observe that the transportation cost for Alloy Steel decreases as the
response time increases. The benefit of temporal consolidation, however, diminishes rapidly upon
increasing the response time. As the response time increases from two to three days, transportation
cost over the two-week window decreases by $700. Increasing the response time from three to four
days reduces the transportation cost by only $200. Thus, Alloy Steel may be better off offering a
three-day response, because the marginal benefit from further increasing the response time is small.

In general, a limited amount of temporal aggregation can be effective in reducing

transportation cost in a supply chain. In choosing response time, however, firms must trade off the
decrease in transportation cost upon temporal aggregation with the loss of revenue because of
poorer responsiveness. Temporal consolidation also improves transportation performance because
it results in more stable shipments. For example, in Table 14-9, when Alloy Steel sends daily
shipments, the coefficient of variation is 0.44, whereas temporal aggregation across three days
(achieved with a four-day response time) has a coefficient of variation of only 0.16. More stable
shipments allow both the shipper and the carrier to better plan operations and improve utilization
of their assets.

Key Point

Temporal aggregation of demand results in a reduction of transportation costs because it entails larger
shipments and also reduces the variation in shipment sizes from one shipment to the next. It does,
however, hurt customer response time. The marginal benefit of temporal aggregation declines as the
time window over which aggregation takes place increases.

In the next section, we discuss how transportation networks can be tailored to supply
customers with differing needs.

Table 14-8 Daily Demand at Alloy Steel over Two-Week Period

Monday Tuesday Wednesday Thursday Friday Saturday Sunday

Week 1 19,970 17,470 11,316 26,192 20,263 8,381 25,377

Week 2 39,171 2,158 20,633 23,370 24,100 19,603 18,442
420 Chapter 14 • Transportation in a Supply Chain

Table 14-9 Quantity Shipped and Transportation Cost as a Function

of Response Time
Two-Day Response Three-Day Response Four-Day Response

Quantity Quantity Quantity

Day Demand Shipped Cost ($) Shipped Cost ($) Shipped Cost ($)

1 19,970 19,970 299.70 0 — 0 —

2 17,470 17,470 274.70 37,440 474.40 0 —
3 11,316 11,316 213.16 0 — 48,756 587.56
4 26,192 26,192 361.92 37,508 475.08 0 —
5 20,263 20,263 302.63 0 — 0 —
6 8,381 8,381 183.81 28,644 386.44 54,836 648.36
7 25,377 25,377 353.77 0 — 0 —
8 39,171 39,171 491.71 64,548 745.48 0 —
9 2,158 2,158 121.58 0 — 66,706 767.06
10 20,633 20,633 306.33 22,791 327.91 0 —
11 23,370 23,370 333.70 0 — 0 —
12 24,100 24,100 341.00 47,470 574.70 68,103 781.03
13 19,603 19,603 296.03 0 — 0 —
14 18,442 18,442 284.42 38,045 480.45 38,045 480.45
$4,164.46 3,464.46 3,264.46

14.6 TAILORED TRANSPORTATION

Tailored transportation is the use of different transportation networks and modes based on cus-
tomer and product characteristics. Most firms sell a variety of products and serve many different
customer segments. For example, W.W. Grainger sells more than 200,000 MRO supply products
to both small contractors and large firms. Products vary in size and value, and customers vary in
the quantity purchased, responsiveness required, uncertainty of the orders, and distance from
W.W. Grainger branches and DCs. Given these differences, a firm such as W.W. Grainger should
not design a common transportation network to meet all needs. A firm can meet customer needs
at a lower cost by using tailored transportation to provide the appropriate transportation choice
based on customer and product characteristics. In the following sections, we describe various
forms of tailored transportation in supply chains.

Tailored Transportation by Customer Density and Distance

Firms must consider customer density and distance from warehouse when designing transportation
networks. The ideal transportation options based on density and distance are shown in Table 14-10.
When a firm serves a 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 good use of the vehicles and provides customer contact. If customer
density is high but distance from the warehouse is large, it does not pay to send milk runs from
the warehouse because empty trucks will travel a long distance on the return trip. In such a
situation, 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 shipments are loaded onto smaller trucks that deliver
product to customers using milk runs. In this situation, it may not be ideal for a firm to own its
own fleet. 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.
 Chapter 14 • Transportation in a Supply Chain 421

Table 14-10 Transportation Options Based on Customer Density and Distance

Short Distance Medium Distance Long Distance

High density Private fleet with Cross-dock with Cross-dock with

milk runs milk runs milk runs
Medium density Third-party milk runs LTL carrier LTL or package carrier
Low density Third-party milk runs LTL or package Package carrier
or LTL carrier carrier

If a firm wants to serve an area with a low density of customers far from the warehouse, even
LTL carriers may not be feasible and the use of package carriers may be the best option as long
as loads are small. Boise Cascade Office Products, an industrial distributor of office supplies, has
designed a transportation network consistent with the suggestion in Table 14-10.
Customer density and distance should also be considered when firms decide on the degree
of temporal aggregation (which affects response time) to use when supplying customers. Firms
should serve areas with high customer density more frequently because these areas are likely to
provide sufficient economies of scale in transportation, making temporal aggregation less
valuable. To lower transportation costs, firms should use a higher degree of temporal aggregation
and aim for somewhat lower responsiveness when serving areas with a low customer density.

Tailored Transportation by Size of Customer

Firms must consider customer size and location when designing transportation networks. Large
customers can be supplied using a TL carrier, whereas smaller customers will require an LTL
carrier or milk runs. When using milk runs, a shipper incurs two types of costs:
• Transportation cost based on total route distance
• Delivery cost based on number of deliveries
The transportation cost is the same whether going to a large or small customer. If a delivery is to
be made to a large customer, including other small customers on the same truck can save on
transportation cost. For each small customer, however, the delivery cost per unit is higher than for
large customers. Thus, it is not optimal to deliver to small and large customers with the same
frequency at the same price. 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. The optimal frequency of visits can be evaluated based on
the transportation and delivery costs (see Section 11.2). If large customers are to be visited every
milk run, medium customers every other milk run, and low-demand customers every third milk
run, 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). This tailored sequence has the advantage that
each truck carries about the same load and larger customers are provided more frequent delivery
than smaller customers, consistent with their relative costs of delivery.

Tailored Transportation by Product Demand and Value

The degree of inventory aggregation and the modes of transportation used in a supply chain
network should vary with the demand and value of a product, as shown in Table 14-11. 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
422 Chapter 14 • Transportation in a Supply Chain

Table 14-11 Aggregation Strategies Based on Value/Demand

Product Type High Value Low Value

High demand Disaggregate cycle inventory. Aggregate Disaggregate all inventories and use
safety inventory. Inexpensive mode of inexpensive mode of transportation
Rice
transportation for replenishing cycle Mobile for replenishment.
inventory and fast mode when using
safety inventory.
Low demand Aggregate all inventories. If needed, Aggregate only safety inventory. Use
use fast mode of transportation for Diamond inexpensive mode of transportation
filling customer orders. for replenishing cycle inventory.

inventory for such products can be aggregated to reduce inventories (see Chapter 12), and a fast
mode of transportation can be used if the safety inventory is required to meet customer demand.
For high-demand products with low value, all inventories should be disaggregated and held close
to the customer to reduce transportation costs. For low-demand, high-value products, all
inventories should be aggregated to save on inventory costs. For low-demand, low-value
products, cycle inventories can be held close to the customer and safety inventories aggregated to
reduce transportation costs while taking some advantage of aggregation. Cycle inventories are
replenished using an inexpensive mode of transportation to save costs.

Key Point

Tailoring transportation based on customer density and distance, customer size, or product demand and
value allows a supply chain to achieve appropriate responsiveness and low cost.

14.7 THE ROLE OF IT IN TRANSPORTATION

The complexity and scale of transportation makes it an excellent area within the supply chain for
the use of IT systems. The use of software to determine transportation routes has been the most
common IT application in transportation. This software takes the location of customers, shipment
size, desired delivery times, information on the transportation infrastructure (such as distances
between points), and vehicle capacity as inputs. These inputs are formulated into an optimization
problem whose solution is a set of routings and a packing list for each vehicle that minimize costs
while meeting delivery constraints.
Along with routing, vehicle load optimization software helps improve fleet utilization. By
accounting for the size of the container and the size and sequence of each delivery, this software
develops a plan to pack the vehicle efficiently while allowing for the greatest ease of unloading
and/or loading along the route. Synchronization between the packing and routing software is
important because how much is packed on a truck affects the routing, while the routing obviously
affects what is packed on a truck.
IT also comes into play in the use of global positioning systems (GPS) for tracking real-
time location of vehicles and electronic notification of impending arrivals. The availability of
current information also allows for real-time dynamic optimization of transportation routes and
deliveries. Electronic notifications and tracking improve customer service and preparedness
throughout the supply chain.
The Internet has also been used by companies such as Freightzone and Echo Global
Logistics to help match shipper loads with available capacity with carriers in the trucking industry.
The most common problems in the use of IT in transportation relate to cross-enterprise
collaboration and the narrow view taken by some transportation software. Given that transportation