Transportation

Management
Transport Management in Supply Chain
Why Transport Management?
• Most important component of logistics cost (usually 1/3 to 2/3 of total
cost)
• Permits wider and deeper penetration of new markets far from the point of
production
• Permits distributors to leverage economies of scale (by lowering the per
unit cost of transporting the product
• Enables distributors/manufacturers to reduce selling price by holding cost
down
• Enables more competitive product positioning

Goal
To provide highest level of customer service at lowest possible price
Focus of Transportation Strategy

• Customer requirements
• Timely shipments
• Mode selection
• Carrier relationships
• Performance measures
• Regulatory impact (like CNG etc.)
• Flexibility
 3 R’s of Transport Selection

Aim to reduce overall logistic cost

• Responsiveness

• Reliability

• Relationship
Trade off between Efficient Vs Flexible Transport System
Efficient Transport System
• Minimize inventory at each link (economies of scale)
• Mostly applicable in mature products
• Cost reduction dominance
• Max. capacity utilization
Flexible Transport System
• Varying quantity
• Short lead time
• High inventory
• Quality dominance
• More applicable in innovative products
 Transportation Cost Structure
Factors determining transport cost structure
(A)Distance
• Transport rates (rupees per ton) taper with increasing distance
(B) Shipment size
• Transport rates decrease with increase in shipment weight
Therefore, transport operators prefer full-truck load (FTL) shipment
(C) Point of origin and destination
• Demand and supply at origin and destination have impact on freight rates
For Example –Rate for the Delhi –Mumbai trip is not same as the Mumbai-Kolkata
trip for the same shipment size

Note : FTL and LTL shipments carry different rates in all mode of transport
Pricing schemes used by courier firms are different and simple rate structures
when compared with other companies in the transport business
(D) Product Density – Weight per unit volume of product
• Limitation on volume for low density product
• Limitation on weight for high density product
No.
Vehicle Capacity
Vehicle Payload Dimensions(in feet)
Type (ton) Length Width Height

1 HCV 3-Axel 17 40 8.5 9.0

2 HCV 2-Axel 9 29.0 8.5 9.0
3 MCV 2-Axel 7.5 9.8 6.5 9.0
4 ICV 2-Axel 6 13.0 7.0 6.5
5 LCV 2-Axel 3.5 7.5 5.1 7.3
(E) Product Size and Shape
• Operating cost is very high for heavy payloads, heavy duty electrical
transformers, long and odd shaped steel products, large size chemical
processing steel vessels etc

(F) Product Type

• Refrigerated vehicles for products like fruits, food items,
pharmaceutical products and hence costing double (and having
operating cost three to four times than that of a normal vehicle)
• Products susceptible to explosion, evaporation, damage and thefts
require special transportation arrangements
 Modes of Transportation

• Rail
• Road
• Air
• Pipeline
• Ropeways
• Intermodal
Rail
• Freight cost is low
• Ideal for low value-density products
• Usually for products not sensitive to time
• Products: Heavy industry, minerals, chemicals, agricultural products,
autos, etc.
• Suffers from long and unreliable lead times
• Accounts for 30% of freight movement in india
• Bulk goods constitute 95% of the freight carried by Indian railways
• Coal accounts for 50% of the freight in bulk goods by railways
Road
• Trucks are dominant mode of transport in India
• Accounts for 65% of freight movement
• More expansive than rail transport
• Products: Medium and light manufacturing, food, clothing, all retail goods
• Offers advantage of door-to-door shipment and shorter delivery time
• India has one of the most extensive road network of 3.32 million Kilometres
• National Highways carry about 40% of freight, but accounts for just 2% of length
of roads in India
• Most highways are congested and average truck speed is 30-40 km/h
• Trucking industry is deregulated
• 90% of the vehicles are owned by entrepreneurs having less than 5 trucks
• High in-transit damage/loss
Water
• One of the cheapest and slowest modes of transport
• Used extensively for international cargo
• India has extensive coastline of 7,517 km
• None of its ports figure in top 10 ports of the world
• India’s largest container port Jawaharlal Nehru port handles around
40 million tons of cargo against 5,000 million tons handled by
Shanghai port
Inland Water Transportation (IWT)
• An eco-friendly transportation mode
• Comprising of rivers, lakes and channel
• India has potential of 1,45,000 KM of IWT infrastructure
• Cargo movement through IWT in India is meagre 1% as against 10-12% in UK,
Europe and China
• 100 KM waterways can be developed at the cost of 1 KM highway
construction cost of INR 6 crores
• For every one rupee spent for IWT development, the corresponding cost of
development of roadways and railways would be INR 2 and INR 5 respectively
• Another major advantage of IWT is doubling of load capacities for a small
increase in depth and thereby providing flexibility and cost elasticity
Air
• Fairly fastest but most expansive
• Effective option for time-sensitive, high-value density, low weight and perishable
goods (Flowers, produce, electronics, mail, emergency shipments, documents, etc)
• Preferred mode over longer distance
• Often combined with trucking operations

Pipelines
• Used for bulk transportations of predictable volumes
• An eco-friendly transportation mode
• For specialized products like petroleum products and natural gas
• Reduced operational cost, though initial investment is high
• Transportation cost of moving oil is INR 1.15/tonne/km against INR 2.00/tonne/km
through rail
Ropeways

• Cause least damages to the ecology

• Inaccessible hilly areas can be reached with short distance
• Bulk material can be moved faster over short distance
• In views of oil shortages, ropeways can prove to be more economical
and faster than road transport, particularly in hilly areas
 Intermodal Transport

• Use of more than one mode of transportation to move a shipment to its

destination
• 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
Advantages and disadvantages of five modes of transportation
 Basis of comparison of Modes of Transport

• Freight Cost
• Lot Size
• Delivery Time
• Delivery Time Variability
• Losses and Damages

Different modes of transport perform differently on different

performance measures
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
• Sea (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
 Total cost approach to performance measures

Total cost = Transportation Cost

+ Inventory Carrying costs
(Cycle Stock+Pipeline+Safety Stock)
+ Cost of losses & damages
Impact of Delivery Speed

Illustration: A global company decides to use India as its manufacturing base for
the supply of printers to the European markets. The company offers types of
printers: high-end, standard and low-end. All three types of printers offered by
the firm are similar in size and shape. The only differences are in the software
and the chip used in the printers. The models of printers cost Rs.20,000,
Rs.15000 and Rs.10000 per unit respectively. If the firm decides to use air as the
mode of transport, it can fly the goods in smaller lots of 100 units, while
shipping via sea requires minimum shipment size of 400 units. The demand in
the Europe is stable at 100 units per week for each of three types of the three
printers. The transportation and custom clearance take one week if air is used as
the mode of transport, the same will take four weeks if sea is used the medium
of transport. Air freight is Rs.360 per unit while sea freight is Rs.90 per unit. The
annual inventory carry cost for the firm is 20 per cent of the cost of the item.

Q. Which is the optimum mode of transport?

Sample calculations for High-end printers (Sea as the mode of transport)
Formula:
Total cost = Transportation Cost
+ Inventory Carrying costs
(Cycle Stock+Pipeline+Safety Stock)
+ Cost of losses & damages
Calculation:
Cycle stock = 0.5 X Lot size of shipment = 0.5 X 400 =200 units
Pipeline inventory = lead time X Demand rate =4 X 100 =400 units
Total Inventory = Cycle stock + Pipeline inventory = 200 + 400 = 600 units
Annual inventory carrying cost = 600 X 20000 X 0.20 = 2,400,000/-
Annual Transportation cost = Annual demand X Transport rate per unit
100 X 52 X 90 = 468000/-
 Devising a Strategy for Transportation

(I) Distribution Network Design Options

• Ship directly from each plant to each market
Applicability : FTL (high volume) shipment in each trip, low degree of demand
uncertainty
Limitation : High cycle stock at each depot for each product line, more number of
trips required.

• Demand aggregation across depots and using a milk run from each plant
Applicability : All depots are in close proximity
Advantages : Depots get served frequently, lower cycle stock, fewer trips
Limitations : Increased transportation cost

• Ship via Distribution Centre

(Hub-and-spoke model)
(II) Cross Docking

Goods unloaded from incoming vehicles at DC are straightaway loaded on

to trucks that originates from the DC

• Transit of FTL shipment and frequent delivery of supply

• No actual investment in physical DC
• Zero inventory at DC (or warehouse)
Applicability : Predictable volumes
lower uncertainty in transit times
Mostly popular in trucking and automobile industries
 Performance of Transport Strategy
Let us examine three options of shipment i,e Direct Shipment, Milk run
and Shipping via Distribution Centre, for a garment company involving
three plants (each plant specializing in one product-line) and three
depots. Weekly demand at each of three depots is 100 units for each of
three types of garments. A truck can carry 300 units of garments and
the transportation cost is Rs.2 per km for FTL shipments. To obtain
economies of scale, the firm has decided to work with FTL shipments
and all the trips will carry 300 units of garment. The firm can bundle
menswear, ladies wear and children’s wear in one trip but all together it
can carry only 300 units in one trip. The inventory carrying cost is at 20
percent per year. All products cost Rs.200 per unit. The facility cost of
maintaining a DC is Rs 12000 per year. Suppose that the location of
plants, depots and DC are provided.

Q. How will you decide the best transportation strategy?