426 W5: Case Discussion

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Ch11PPT10e.pptx

CHAPTER 11

Transportation—Managing the Flow of the Supply Chain

Supply Chain Management: A Logistics Perspective (10e)

Coyle, Langley, Novack, and Gibson

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May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Discussion Outline

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The role of transportation in supply chain management

Modes of transportation

Transportation planning and strategy

Transportation execution and control

Transportation technology

The Role of Transportation in Supply Chain Management (SCM)

Transportation provides the critical links between organizations in a supply chain network, permitting goods to flow between their facilities. Transportation also influences supply chain design, strategy development, and total cost management.

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Transport service availability

Transport efficiency

Customer-focused transport

Effective transport

Demand fulfillment

Supply chain competitiveness

Organization success

Supply chain flexibility

The Role of Transportation in SCM Role Inhibitors

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Offshore manufacturing

Changing customer requirements

Transportation capacity constraints

Transportation rate variation

Growing governmental requirements

Modes of Transportation

Modes of Transportation

The five basic modes of transportation and intermodal transportation each has different economic and technical structures, and each can provide different qualities of link service.

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Mode of Transportation Value of Goods Tons (Millions) Ton-Miles (Billions)
Truck 72.9% 70.2% 40.2%
Rail 3.6% 11.1% 26.4%
Water 1.3% 3.6% 8.2%
Air 2.2% <1% <1%
Pipeline 4.8% 8.7% 15.0%
Multiple modes 11.5% 3.2% 8.4%
Other/Unknown 3.6% 3.1% 1.6%

Source: Table 11.1

Freight Shipments within the US (2015)

Modes of Transportation Motor Carriers

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Motor carriage is the most widely used mode of transportation in the US domestic supply chain, and is useful for shipping goods to an adjacent countries like Canada and Mexico.

Much of the freight moved by the trucking industry is regional in nature, moving within a 500-mile radius of the origin.

Multiple equipment types and sizes allow motor carriers to transport a wide variety of commodities and shipment sizes.

Trucking is a high-variable-cost, low-fixed-cost business.

Images courtesy of Forbes

Modes of Transportation Motor Carriers (continued)

The trucking industry is highly competitive, comprising of 532,024 interstate carriers and intrastate hazardous materials carriers that range in size from single-truck, owner-operator service providers to conglomerate like UPS.

Key challenges: Labor, costs, and competition

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Motor Carrier Industry

For-Hire (48%)

Truckload (TL)

Less-than-Truckload (LTL)

Small Package

Private (42%)

For-Hire/Private Hybrid (8%)

Others(2%)

Modes of Transportation Railroads

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Images courtesy of pixgood.com

Railroads is a high ton-mile mode of transportation, moving nearly 2.2 billion tons of freight with average shipment length of 805 miles annually.

Railroad transportation is primarily used for the long-distance movement of low-value goods. Railroads also handle some high-value goods, primarily automobiles and intermodal containers.

Railroads cost structure consists of high fixed costs in proportion to variable costs due to a large investment in terminals, equipment, and trackage.

Rail equipment can be organized into loads and transported in one of the three primary ways: mixed trains, unit trains, and intermodal trains.

Modes of Transportation Railroads (continued)

There are 575 railroads in the US, but the industry is dominated by seven Class I railroads. No single rail carrier services the entire country. Carriers use interline agreements to provide coast-to-coast rail service.

Key challenges: Captive shippers’ demand for rate relief, external factors e.g. fluctuating economic conditions & severe weather events, and capacity.

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575 Freight Rail Carriers

7 Class-I Linehaul Freight Carriers

BNSF, Canadian National, Canadian Pacific, CSX, Kansas City Southern, Norfolk Southern, Union Pacific

568 Shortline Carriers

Modes of Transportation Air Carriers

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Air cargo transportation is specialized mode in terms of tonnage with U.S. spending at $28 billion in 2014, $12 billion of which is international cargo.

Air transportation is used to ship small quantities of high-value, low-weight goods.

The air carrier cost structure consists of high variable costs in proportion to fixed costs.

Images courtesy of imgkid.com

Modes of Transportation Air Carriers (continued)

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Key challenges: Decreased demand for products previously moved in large volume via air, mode-shifting of freight from air to ocean, new rail connections in Asia, near-shoring and on-shoring strategies.

Combination Carriers

Air Cargo Carriers

Integrated carriers (e.g. FedEx and UPS) provide door-to-door service, scheduled pickup and delivery windows, and expedited service through their hub-and-spoke networks.

Nonintegrated carriers provide on-demand, air-only service from airport to airport.

Air Carriers

Modes of Transportation Water Carriers

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Domestic water carriers compete with railroads for long-distance movement of low-value, high-density, bulk cargoes.

Globally, water carriers dominate all other modes, garnering approximately half of the international freight revenue and handling nearly all tonnage.

Images courtesy of pixshark.com

Water transportation is a high variable cost business.

The fleet of U.S. flagged fleet moves 2.2 percent of the nation’s freight value.

The international ocean fleet includes approximately 50,000 merchant ships: 16,800 bulk carriers, 11,651 tankers, 10,381 general cargo ships, and 5,106 containerships.

Modes of Transportation Water Carriers (continued)

Key challenges: Significant overcapacity in the container shipping sector, congestion at major ports and transfer points for containers, schedule reliability of liner service lagging behind other modes.

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Water Carriers

For-Hire

Liner Services

Charter Services

Private

Widely used specialized ships include:

Containerships

Bulk carriers

Tankers

General cargo ships

Roll-on, roll-off (RO–RO) vessels

Modes of Transportation Pipelines

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Images courtesy of Hi-tech Online

The United States has the largest network of energy pipelines of any nation in the world.

Pipelines is the most economical form of transport with the lowest cost per ton of any mode.

The major difference of natural gas pipeline network from that of oil is the direct delivery of natural gas to homes & businesses via local distribution lines.

Pipelines handled 5.6 percent of U.S. freight tonnage, the vast majority of products moved are liquids and gases.

The oil system is made up of three primary types of pipelines: gathering lines, trunk lines, and refined product pipelines.

Pipeline costs are predominantly fixed as pipeline operators must build their own right-of-way.

Modes of Transportation Pipelines (continued)

Key challenges: Network capacity, Health and environmental safety

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Pipeline Carriers

For-Hire

Private

For-hire carriers of liquid products can move different products through their system at the same time.

Private carriers include petroleum & natural gas companies that use pipelines to move product to and from their facilities. Companies, like a power plant or a chemical plant, may operate a small pipeline system to move fuel or feed-stocks.

Modes of Transportation Intermodal

Intermodal transportation service refers to uses of two or more carriers of different modes in the origin-to-destination movement of freight.

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Greater accessibility

Overall cost efficiency without sacrificing service quality or accessibility

Global trade facilitation

Primary Benefits

Number of containers flowing through North American ports more than doubled in 20 years; from 24.7 million TEUs in 1995 to 56.9 million TEUs in 2014

Importance & Volume Growth

Development of standardized containers

Better information systems

New generations of ocean vessels, railcars, and truck trailers

Growth Drivers

Modes of Transportation Intermodal (continued)

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The freight services provided by intermodal transportation can be viewed in terms of product-handling characteristics or the type of service used.

Containerized freight is loaded into or onto storage equipment at the origin and delivered to the destination in or on that same piece of equipment with no additional handling.

Transload freight involves goods that are handled and transferred between transportation equipment and mode multiple times.

Product-Handling Characteristics

Type of Service Used

Pick up

Linehaul

Delivery

Transportation Planning & Strategy

Transportation Planning and Strategy

Framework of Transportation Management Planning Activities

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Source: Figure 11.3

Transportation Planning and Strategy Functional Control of Transportation

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Often, this decision-making structure leads to missed opportunities to generate transportation efficiencies and service improvements.

In most organizations, responsibility for transportation decisions falls to one or more of the following departments: logistics, procurement, and marketing.

Inbound transportation typically controlled by the purchasing department

Outbound transportation typically controlled by marketing or logistics

Transportation Planning and Strategy Terms of Sale: Freight Control & Payment Terms

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Source: Table 11.4

Terms of sale clarify the delivery and payment terms agreed upon by a seller and buyer. Wise selection of these terms is critical as the decision determines where the buyer’s responsibilities begin and where the seller’s responsibilities end.

Transportation Planning and Strategy Terms of Sale: Incoterms

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Images courtesy of NDF Freight Forwarding Ltd

Transportation Planning and Strategy Decision to Outsource Transportation

The organization with FOB freight control and procurement responsibility must analyze and choose between using a private fleet (the “make” option) and using external service providers to move freight (the “buy” option).

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Account for nearly half of all U.S. freight transportation spending & more than half of miles traveled.

A well-run private fleet can operate at costs competitive with for-hire carriers while providing greater scheduling flexibility and control over transit time.

Intangible benefits: Promotional impact and prestige of having highly visible company trucks on the road

Private Fleet

External Service Providers

For-hire carriers. Using for-hire carriers avoids large capital cost of starting a private fleet, time needed to build transportation expertise, and challenges inherent in operating a private fleet.

3PLs. Provide a wide array of transportation services: (1) dedicated contract carriage, (2) traffic management, (3) specialized international freight 3PLs, notably International Freight Forwarders (IFF), Non Vessel-owning Common Carriers (NVOCC), and Customs Brokers

Transportation Planning and Strategy Modal Selection: Capabilities, Product Characteristics & Pricing

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Source: Table 11.5

Transportation Planning and Strategy Modal Selection: Performance Ratings of Modes

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Source: Table 11.6

*1 = Best to 5 = Worst

**1 = Lowest cost to 5 = Highest cost

Mode of Transportation
Truck Air Rail Water Pipeline
Accessibility* 1 3 2 4 5
Transit time* 2 1 3 4 5
Reliability* 2 3 4 5 1
Security* 3 2 4 5 1
Cost** 4 5 3 2 1

Transportation Planning and Strategy Carrier Selection

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Modal selection

More options

Carrier selection

Fewer options

Number of options available

Frequency of the decision

Modal selection

More long-range

Carrier selection

More active & frequent

Modal Selection vs. Carrier Selection

Carrier Selection Factors:

Geographic coverage

Transit time average and reliability

Freight rates

Equipment availability and capacity

Product protection

Transportation Planning and Strategy Carrier Selection (continued)

Core carrier strategy. Carrier selection strategy commonly focuses on concentrating the transportation buy with a limited number of quality carriers, while striving to be carrier-friendly shippers.

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Advantages

Helps the organization leverage its purchasing dollars for lower overall rates.

Allows the company to focus its attention on other supply chain issues.

Promotes strong relationships with the carriers that produce mutual understanding of requirements, coordination of processes, and service improvement.

Give a company priority access to the carriers’ limited capacity.

Transportation Planning and Strategy Rate Negotiations

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BUYERS

Key negotiation issues: Equipment availability, freight rates, and service levels

CARRIERS

Key negotiation issues: Volume commitments, shipment frequencies, origin–destination combinations, freight characteristics, and related cost issues

Negotiation Approaches

Adversarial Approach

Seeks to minimize transportation cost regardless of the impact on carrier financial performance or long-term viability.

Collaborative Approach

Focuses on developing contracts with carriers for a tailored set of transportation services at rates that fairly compensate the carriers.

Transportation Execution & Control

Transportation Execution and Control

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Shipment Preparation

Freight Documentation

Maintain In-Transit Visibility

Transportation Metrics

Monitor Service Quality

Transportation Execution and Control Common Transportation Metrics

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Metric Formula Typical Target
On-time Delivery Total on-time deliveries / Total deliveries > 95%
Transit Time Average Sum of transit times / Total deliveries Low variation around goal
Damage Rate Total units damaged / Total units shipped < 1%
Shortage Rate Total units lost or stolen / Total units shipped < 1%
Billing accuracy Total accurate freight bills / Total freight bills > 99%
Perfect Delivery Index On-Time % × Damage-Free % × Billing Accuracy % > 95%

Source: Table 11.7

Transportation Execution and Control Performance Scorecard

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Source: Table 11.8

Transportation Technology

Transportation Technology

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Transportation buyers and managers leverage a variety of tools and technologies to support supply chain success. The carrier community relies on technology to coordinate the flow of customer freight.

Individual applications e.g. load planning optimization, freight rating, and load tendering

Integrated supply chain tools e.g. global trade management software, and transportation management systems (TMS)

Buyers

Carriers

Routing and load planning tools promoting optimization of pickup, linehaul, and delivery

Dispatching software facilitating management of drivers, in-transit visibility, & regulatory compliance.

Brokerage solutions helping to match loads with available capacity and transaction financial manage

Tracking and communication technology supporting visibility and control of freight

Others e.g. pricing strategy, documentation

Transportation Technology Transportation Management System (TMS)

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Images courtesy of S2B Group

Summary

Transportation is the largest logistics cost in most supply chains that directly impacts fulfillment speed and service quality.

Fulfillment of supply chain demand can be accomplished through five modal options or the intermodal use of these options.

Most commercial freight moves under contractual rates that are negotiated directly between freight buyers and transportation companies.

Organizations must continue to manage freight after it has been tendered to carriers by maintaining in-transit visibility of shipments and monitoring carrier performance.

Transportation management systems and related tools are widely used to support effective planning, execution, and analysis of transportation processes.