Topic 8: Transportation

Ref: Chapter 14

Agenda
Understand the role of transportation in a supply
chain
Evaluate

the

strengths

and

weaknesses

of

different modes of transportation

Discuss the role of infrastructure and policies in
transportation
Identify trade-offs that shippers need to consider
when designing a transportation network

Role in Supply Chain

Movement of product from one location to
another
Products rarely produced and consumed in the
same location
Significant cost component
Shipper requires the movement of the product
Carrier moves or transports the product

Key modes of transportation

Air
Package carriers
Truck
Rail
Water
Pipeline
Intermodal

Modes, indicative load, value

Mode
Air (includes
truck and air)

Freight
Value
($ billions)
in 2002

Freight
Tons
(billions)
in 2002

Freight
Ton-Miles
(millions)
in 2002

Value
Added to
GNP
(billion $)
in 2009

563

13

61.9

9,075

11,712

1,515

113.1

Rail

392

1,979

1,372

30.8

Water

673

1,668

485

14.3

Pipeline

896

3,529

688

12.0

1,121

229

233

Truck

Multimodal

Air
Cost components
o

Fixed infrastructure and equipment

Labor and fuel

Variable passenger/cargo

o Key issues
o

Location/number of hubs

Fleet assignment

Maintenance schedules

Crew scheduling

Prices and availability

Package Carriers
Courier companies such as Blue Dart,

FedEx, UPS, Gati, etc

Focus on small packages letters, parcels
from 10 kg to 500 kg
Expensive compared to other modes of
transport
Often provide value added services
Door-to-door delivery
Real-time information regarding location
Insurance, etc

Increasingly being used by e-commerce

companies

Trucks
Accounts for a major part of shipments
Full Truck Load or Truck Load (TL)
Focus on maximum utilization
Low fixed costs
Imbalance between flows

Challenges
Minimizing idle time
Minimizing time run without load

Trucks
LTL (Less than Truck Load)
Encourages shipment in small lots
Often takes longer due to pick up, drop off
at several points during the run
Calls for consolidation of load
Often used in intra-city dispatch of goods
Industry development closely in line with the
market requirement:
For example, the increasing usage of 0.5, 1
ton trucks within cities short distance
transportation
Mahindra, Tata, Ashok Leyland etc have
products catering to this customer group

Rail
Move commodities over large
distances
High fixed costs in equipment and
facilities
Scheduled to maximize utilization

Transportation time can be long

Intermodal Services
Trailer on Flatcar (TOFC)
Refers to transporting truck trailers on rail road flat cars over longer distances
TOFC is a blend of convenience and flexibility
Different tariff plans
Railroads transport the trailers of highway common carriers
Billing is through highway carriers ; railroads charge a portion of the carriers rate or

a flat fee per trailer

Railroads use their own trailers and containers and transport these on their own
flatcars to provide a door-to-door service. Railroads contract with local truckers to
handle loading / unloading services

Intermodal Services
Indian examples
Konkan Railway Corporation
introduced Roll-On-Roll-Off (RoRo) service in 1999 between
Mumbai and Goa
Covers 720 km in 15-16 hours
Goods are loaded into trucks
either at Mumbai or at Mangalore
and are brought to Kolad, near
Mumbai
Trucks then ride piggyback on
train
The service was extended to
Mumbai and Mangalore from June
2004

Freight coupled with

industries
Often, the rail road is extended into the

shipping section of certain factories

cement, coal, etc
The product is then loaded into wagons or
containers, which are then part of the rail
road
At destination point, the trucks take over
for the last mile delivery

Containerized freight
A trailer can be visualized in two ways
A container or box in which goods are

packaged
A trailers chassis
In truck-rail intermodal service, it is

possible to haul only the container, thus

saving the dead weight of understructure
and wheels. This service is called containeron-flatcar (COFC)

Containerization in India
CONCOR (Container Corporation of India Ltd.)
Started with just 7 inland container depots
Aimed at providing a suitable enabling environment for

container transport
Increased the capacity and efficiency of long haul
transport of high value general cargo
CONCORs turnover in 1991-92: Rs. 50 crores and in
2009, approx Rs. 3628 crores, for the year 2013-14: Rs.
5356 crores, PAT of Rs. 984 crores
Its efforts are on to increase topline through
Addition of wagons
Increasing its fleet of leased trucks, thereby linking with

road transport

International Transportation
Water carriers dominate with more than 50% volume
Slower, more prone to natural factors such as wind,

tide, presence of ocean currents, etc

More difficult to monitor
Absence of advanced systems
Inability to predict arrival times

Requires excessive documentation since cargo

crosses national boundaries

Presence of intermediaries often leads to delays,
disruptions, etc
Advantages
Large volumes can be handled

International Transportation
Trade Zones
Duty-free areas established at one or more
entry points within a country such as
seaports and airports
Here, foreign goods can enter, be held or
processed in some way
Re-shipment can be done without incurring
any duties
About 225 general-purpose zones located
in the United States

Operation of a Foreign Free trade

zone
Products
from
abroad

CUSTOMS
Manufacturing /
storage

To
domestic
markets,
duties paid

To
overseas
markets
no duties
paid

Important advantages of foreign

trade zones
Imported goods can be left at TZs for
Storage
Assembly
Re-packing, etc

Foreign governments pay duties on goods

in the TZ only when they enter the

customers territory (of importing country
Goods that undergo shrinkage to spoilage,
evaporation or damage do not incur duties
on the amount lost

Important advantages of foreign

trade zones
Capital tied up in duties and bonds can be

released for more profitable uses

Products may await foreign buyers / foreign

buyers are ready for delivery

Importers may obtain privileged foreign

trade status whereby duties are frozen

against future increases
Customs security requirements provide
protection against theft

Snapshot of Dorcy International Inc.

An assembler of flashlights, LED Headlamps, etc
Supplies to US markets from China
Historically, paid 12.5% duty as soon as they arrived

on the west coast of the US

Currently, the cargo reaches the coast and it is
shipped to Rickenbacker trade zone near Columbus,
Ohio (a Free Trade Zone)
Goods are assembled, packed and shipped to
customers Sears, Walmart, Kmart, etc
Postponed payment of duties; delayed payment is a cost

saving
If the flashlights are assembled and exported to

another country, no duties are paid.

Transportation Infrastructure,
Policies
Governments generally take full responsibility or
played

significant

role

in

building

and

managing infrastructure elements

Without a monopoly, deregulation and market
forces help create an effective industry structure
Pricing should reflect the marginal impact on the
cost to society

NHAI Indian Projects

Source: www.NHAI.org

Issues with Indian Road

Projects
The National Highways Authority of India (NHAI):

cannot award any project on toll mode during 201314 if the prevailing conditions don't improve.
In addition, it wants government to start awarding
projects only when all conditions are fulfilled, and
work can begin without delay.
Currently, private investment in highway sector
comes for two types of projects - BOT (toll) and BOT
(annuity).
In the first instance, a private player recovers its
investment from collecting toll, while for the latter
government pays back the entire investment with
interest in installments.
http://articles.timesofindia.indiatimes.com/2013-04
-14/india/38528410_1_highway-ministry-nhai-toll-mod
e

Design Options for

transportation
When

designing

transportation

network
o

Should transportation be direct or through

an intermediate site?

Should the intermediate site stock product

or only serve as a cross-docking location?

Should each delivery route supply a single

destination or multiple destinations (milk
run)?

Direct Shipment Network

to Single Destination

Direct Shipping with Milk

Runs

All Shipments via Intermediate

Distribution Center with Storage

Network Structure Analysis

Network Structure

Pros

Cons

Direct shipping

No intermediate warehouse
Simple to coordinate

High inventories (due to

large lot size)
Significant receiving
expense

Direct shipping with

milk runs

Lower transportation costs for small

lots Lower inventories

Increased coordination
complexity

All shipments via

central DC with
inventory storage

Lower inbound transportation cost

through consolidation

Increased inventory cost

Increased handling at DC

All shipments via

central DC with
cross-dock

Low inventory requirement

Lower transportation cost through
consolidation

Increased coordination
complexity

Shipping via DC
using milk runs

Lower outbound transportation cost

for small lots

Further increase in
coordination complexity

Tailored network

Transportation choice best matches

needs of individual product and
store

Highest coordination
complexity

Trade-offs in transportation
design
Transportation and inventory cost trade-off
Choice of transportation mode
Inventory aggregation

Transportation cost and responsiveness

trade-off

Customized Transportation
The use of different transportation

networks and modes based on customer

and product characteristics
Factors affecting customization
o

Customer density and distance

Customer size

Product demand and value

Transportation Rate Profiles

Volume Related Rates
Costs of service are related to the shipment size
Shipments in consistently high volumes are

transported at lower rates than smaller shipments

Example
How would you send a 2 kg, 3 bound volume

book?
Not a high value item
Options: private parcel service, postal service
Professional courier charged Rs. 300 approx.
India Post would cost Rs 100 approx.
Reliability?

Transportation Rate Profiles

Household cargo
Only when total cost goes beyond Rs 5000

(for example), private transport companies

are willing to accept
GATI, Agarwal Packers & Movers, etc look for
overall value and volume
Safexpress does not pick up household stuff
except books and clothes
Safex (Campus to Home) is focused on
students returning home after completing
studies

Documentation
3 basic document types in domestic freight

transportation
Bill of Lading
Freight Bill
Freight Claim

In India, domestic goods have simpler

forms
Airway Bill (AWB)
Copy of the shippers booking form

Within city transport

Sales tax permits, delivery challan, etc

Documentation
Bill of Lading
Serves as the receipt for goods, subject to
classifications and tariffs as applicable on
the date of issue
Certifies that the goods described in the bill
of lading were in good order
It serves as a contract of carriage; identifies
contracting parties and prescribes terms
and conditions of the agreement
Serves as documentary evidence of title

Documentation
Freight Bill
Contains information about charges
Detailed information about product type,
technical specifications (if applicable) and
quantity, weight
Pre-paid or (TO PAY) is also indicated
Credit terms may be mentioned
It also serves as an invoice of carrier
charges

Documentation
Freight Claim
2 types of claims are made against carriers
Arises from carriers legal responsibilities
Due to overcharges

Loss, Damage and Delay Claims

Are described in the document
A provision is made at the point of booking
Customer can choose to insure goods and

specify value

Freight in International
Transport
Freight is measured by weight:
Short ton (American) 2000 lbs
Long ton (English) 2240 lbs
Metric ton 2204.6 lbs (1000 kgs)
Transportation equipment (vehicles, vessels,

etc.) has pre-specified weight and volume

capacities; e.g.,
Deadweight: The number of long tons that a vessel

can transport of cargo, supplies and fuel.

TEU (Twenty-foot equivalent unit): Method for
specifying a vessel load or capacity in units of
containers that are 20ft long. (e.g., a 3000 TEU vessel
can accommodate - at most 1500 numbers of 20ft
containers).
FEU (Forty-foot equivalent unit)

International Transport: Mediators,

Integrators
Freight

forwarder: An agency that

receives freight from the shipper and
then arranges for transportation with
one or more carriers for transport to the
consignee. Typically, consolidates freight
from many shippers to obtain better
rates. Often provides pickup and
delivery services, as well as other
shipping services: packaging, temporary
storage, customs clearing.
Transportation Broker: An agency that
obtains negotiated large-volume
transportation rates from carriers and

International Transport: Mediators,

Integrators
NVOCC (Nonvessel-operating common carrier):

Owns no vessels, but provides ocean shipping

freight-forwarding services.
Shippers Association: Not-for-profit association of
shippers using collective bargaining and freight
consolidation to obtain lower, high-volume
transportation rates. Avoids premium charge paid
to forwarders. Only non-competitive shippers may
associate, due to monopoly restrictions.
Integrators: Companies providing door-to-door
domestic and international air- freight service.
Owns and operate aircraft as well as ground
delivery fleet of trucks (e.g., UPS, FedEx, Emery
Worldwide).

Selecting a transportation
network
Problem situation
A retail chain has 8 stores in a region supplied from 4
supply sources. Trucks have a capacity of 40,000 units
and cost $1000 per load plus $100 per delivery. Thus a
truck making 2 deliveries charges $1200. The cost of
holding one unit in inventory at retail for a year is $0.20
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 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?

Solution
Assumptions
All trucks travel full.
Scenario I: Direct shipping
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 x 1100 x 4 x 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 x 0.2 x 4 x 8
= $128,000
Total annual cost of direct network = $844,800 + $128,000 =
$972,800

Solution
Scenario II: Suppliers run milk runs to retail stores; a supplier runs
milk runs to2 stores on each truck
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 (2 stores / truck) =
1000/2 + $100 = $600
Annual trucking cost for milk run network = 48 x 600 x 4 x 8 =
$921, 600
Average inventory at each store for each product = 20,000 / 2 =
10,000 units
Annual inventory cost for this network = 10,000 x 0.2 x 4 x 8 =
$64,000
Milk
runs increase the transportation cost, but
Total annual cost of this network = $921,600 + $64,000 = $985,600

decrease the level of inventory each store has to hold.

We observe that for annual demand of 960,000, the
direct to store delivery approach yields lower total
costs.