THE IMPACT OF COLLABORATIVE TRANSPORTATION
MANAGEMENT ON SUPPLY CHAIN PERFORMANCE
F.T.S.CHAN
Department of Industrial and Systems
Engineering
The Hong Kong Polytechnic University, Hung
Hom, Kowloon
Hong Kong,
Email: f.chan@inet.polyu.edu.hk
Abstract--Collaborative Transportation Management
(CTM) is based on the interaction and collaboration
between trading partners and carriers participated in the
supply chain. This paper developed a simulation approach
to evaluate the benefits of the proposed CTM. Simulation
results revealed that CTM can significantly improve the
supply chain performances.
Keywords-Collaborative Transportation Management,
simulation, transportation capability, lead time, demand
variation
I. INTRODUCTION
Supply chain collaboration is prevalent in todays business
model. An organization not only optimizes itself but also
collaboratively with other organizations to have larger
optimization planning (Chan et al. 2004). According to the
Collaborative Transportation Management white paper
(2004), CTM is defined as a holistic process that brings
together supply chain trading partners and service providers to
drive inefficiencies out of the transport planning and
execution process.
This paper developed a simple supply chain including one
retailer and one carrier. Three different simulation models
allowing changeable delivery lead time will be built and
different performances will be analysis and discussed. The
three simulation scenarios in this paper are similar as Feng, et
al. (2005), but the simulation models and the performance
measurements are totally different. The changeable delivery
capability in our model is the delivery speed which is
measured by delivery lead time. While, the models built by
Feng, et al. (2005) allowed the changeable delivery amount,
the reason of which is they focused on minimizing the
inventory and the holding cost. While, one focus of this paper
is to minimize the retailers total cost and maximize the
retails service level.
II. THE SIMULATION MODELS WITH CTM
A. Problem Description
Three models will be built to simulate three different
situations as follows:
Model One: unconstrained capability without CTM.
Model Two: constrained capability without CTM
M.T.ZHANG
Department of Industrial and Manufacturing
Systems Engineering
The University of Hong Kong, Pokfulam Road
Hong Kong
Email: tingzhang930@live.cn
Model Three: constrained capability with CTM
The demand generation processes in the three models are
the same and described below.
a) Customer demand arrives
b) The retailer checks the inventory. The customer
demand will be filled if there is enough inventory, otherwise,
the demand backorder along with its penalty cost will be
recorded.
c) The retailer checks inventory level. A delivery
(replenishment) requirement will be put if the inventory level
is lower than the reorder point.
The shipping processes in the three models are different.
In Model One, there is unconstrained delivery capability,
so the delivery requirement from the retailer can be always
met by the carrier.
In Model Two, since there is constrained delivery
capability, the delivery requirement cannot be met if it
exceeds the delivery capability.
In Model Three, there is constrained delivery capability
with CTM, which means the carrier can adjust the delivery
capability according to the delivery requirements. Hence, the
delivery requirement can be met as long as it doesnt exceed
the carriers maximum delivery capability.
B. Nomination and Assumptions
The following notation will be used throughout the
paper:
Di: required delivery lead time at cycle i
Ti: actual delivery lead time at cycle i
Vi: available delivery lead time at cycle I; Vi ~ unif(u,U)
u: shortest delivery lead time, also the lower limit of
available delivery lead time ay cycle i
U: the upper limit of available delivery lead time at
cycle i
TD(t): total customer demand
FD: total immediately filled customer demand
f(t): immediately filled customer demand everyday
 I(t): total on-hand inventory Ti=Di, if uDiVi (4)
inv(t): on-hand inventory everyday Ti=u, if Di<u (5)
B(t): total backorder Eq. (1) and (2) define the required demand and the
b(t): backorder everyday available delivery lead time.

Q: replenishment quantity Refer to Eq.(3), the actual delivery lead time (Ti) is equal
to the required delivery lead time (Di) when Di is longer than
Q1: order-up-to-level, which refers to S in the S-s the available delivery lead time (Vi). The carrier need not
policy, also the initial value of on-hand inventory adjust the delivery planning.
Q2: reorder point Refer to Eq.(4), the Di can still be met even when it is
shorter than Vi as long as it is longer than the shortest
S.s: safety stock
delivery lead time (u). The carrier can shorten the Vi to Di
H(t): total holding cost through the CTM.
h: holding cost per unit per day Refer to Eq.(5), the Ti equals to u when Di is too short.
The carrier can only adjust the Vi to u.
P(t): total penalty cost
The limit condition in Eq.(1)-(5) is as below:
p: penalty cost per unit per day
Di,Ti,Vi,U,u0
O(t): total order cost
fc: fixed order set-up cost Ti,Viu

o(t): delivery cost per order uViU

C(t): total cost Demand and inventory

: service level i ~ norm( m, 12) (6)
i: mean demand in one cycle; i ~ norm(m, 12) t~ norm(i, 22) (7)
m: mean value of mean demand per cycle t
TD(t) = (t ) dt (8)
0
1: standard deviation of mean demand per cycle
t
(t): customer demand everyday; t~ norm(i, 22) FD(t) = f (t ) dt (9)
0
2: standard deviation of everydays customer demand
Eq. (7) defines the customer demand everyday in one
The assumptions are described as followed: cycle and Eq.(8) and (9) tell the total customer demand and
There is only one delivery demand in one simulation total immediately filled customer demand in one cycle.
cycle and there is no delivery backorder. This assumption is t
similar to one made by Hadley and Whitin (1963, p. 162), in I(t) = inv(t ) dt
0
their analysis of the single lead time case.
Lead time has two partsorder lead time and delivery inv(t) =i(t)- (t) (10)
lead time. To simplify the model, we assume order lead time t
is zero, so the lead time in our paper refers to the delivery lead B(t) = b(t ) dt
0
time. The main factor makes impact on the delivery lead time
is the delivery speed capability of the carrier. b(t) = (t)- i(t) (11)
Order cost is the sum of fixed set-up order cost which is Q=Q1-Q2 (12)
constant and delivery cost which is the expression of actual
delivery lead time. Therefore, the order cost is only affected Cost structure
by one decision variable, that is the delivery lead time. In fact, H(t)=h*I(t) (13)
the shorter the delivery lead time, the higher the order cost.
P(t)=p*B(t) (14)
C. Model formulation
O(t)=fc+o(t) (15)
CTM
In which o(t)= k/Ti
Di=I(t)/i (1)
Eq. (13), (14) and (15) indicate the holding cost, penalty
Vi~unif(u,U) (2) cost and order cost respectively.
Ti=Di, if DiVi (3) Supply chain performance measurements
 Two performance indicators as below:
C(t)=H(t)+P(t)+O(t) (16)
=FD(t)/TD(t) (17)
Eq.(16) and (17) define the carriers total cost and
service level.
III. . RESULTS ANALYSIS
A. Comparison of the Three Models
The results of simulation are shown in Table 1.
The service level in model one (0.98393) is higher than
both model two (0.87984) and model three (0.94393). The
reason is in model one, there is unconstrained capability, i.e. CTM no CTM
the required delivery lead time is the actual delivery lead time,
the backorder level is low. But the service level isnt one
hundred percents in model one because of the deviation of Figure 1. change of the total cost with time
customer demand.
The total cost in model one (26735) is lower than model
two (32890), because of the low penalty cost, but higher than
model three (26364), because of the high order cost. It
indicates that its possible to trade off among the major cost
components and find the best solution of total cost.
There is constrained capability in both the models two
and three, but model three is with CTM. The delivery
forecasting information is shared so that the available delivery
capability can be adjusted to the maximum delivery
capability, which will reduce the demand backorders,
resulting in a low penalty cost. Hence, the total cost in model
three is lower than that in model two.
Table 1 Comparison of the Three Models
model One Two Three
Capabilit No Yes Yes CTM no CTM
y limit
CTM No No Yes
Figure 2. change of the service level with time
Total 26735 32890 26364
cost Figure 1 indicates the total cost with CTM is lower than
Service 0.98393 0.87984 0.94393 that without CTM. Moreover, the gap is wider along with the
level time.
Figure 2 presents the service level with CTM is
B. Improvements of CTM obviously higher than that without CTM. Furthermore, both
In the following section, constrained capability scenario of the two service levels converge finally (0.94393 with CTM
will be discussed to study how CTM improves the total cost and 0.87984 without CTM). One point that should be noticed
and service level along with the time. here is the two curves reach the steady-state around 1000
simulation days, however, the gap between the two situations
is still wide even before the curves reach the steady-state.
C. Sensitivity analysis
The slope of a curve refers the dependent variables
sensitivity to independent variable. For example, when we set
the dependent variable is total cost and the independent
variable is delivery capability, the steep curve indicates the
change of delivery capability affects heavily on the total cost,
i.e. the total cost is very sensitive to delivery speed capability.
 In the following section, we study the sensitivity of total
cost and service level to three parametersthe maximum
level of delivery speed capability, the penalty cost per unit per
day and the standard deviation of customer demand per cycle,
in order to study how the CTM improve the supply chain
performance when these important parameters change.
a) Change the maximum level of delivery speed
capability
We will measure delivery speed capability by delivery
lead time, i.e. shorter lead time means higher capability. We
change the shortest delivery lead time but the longest one is
infinite. In the situation with CTM, it means that the carrier
can meet the required delivery lead time when it isnt shorter
than the shortest delivery lead time. While in the situation Figure 4.Sensitivity of Service Level to Delivery Lead Time
without CTM, it means that the carriers available delivery
lead time changes among the shortest delivery lead time and a
fixed delivery lead time, 10 days in this case, according to the b) Change penalty cost per unit per day
uniform distribution. When we adjust the penalty cost per unit Figure 5 indicates the total cost in both situations
per day, we fix the holding cost per unit per day. increase when the penalty cost increase. While, in the
situation without CTM, the increase is much higher than the
Figure 3 indicates the total cost increases regardless of situation with CTM which indicates the total cost without
application of CTM or not. However, it is obviously improved CTM is more sensitive to penalty cost. It suggested that the
when CTM is adopted, especially in the middle stage. But in CTM will improve the total cost obviously when the penalty
the last stage which means the delivery capability is too low, cost is high, for example, the penalty cost can be very high in
the total cost of two curves converge. Another point we a high competition environment; if we cant meet the
should notice is the total cost increases with the delivery lead customers need once, we will lose the customer for ever.
time all the time if there is no CTM. While, if there is CTM,
the total cost reaches a bottom around six days, which means
we can get a best solution in some delivery lead time. In
this case, the best solution is the delivery lead time of six days
in which the total cost is 25642, saving 21% than 31052 in the
situation without CTM.
Figure 4 indicates the service level is obviously
improved when CTM is adopted, especially in the middle
stage. Similar to figure 7, in the last stage, the curves
converge.

Figure 5.Sensitivity of Total Cost to Penalty Cost

c) Change standard deviation of customer demand per

cycle
Figure 6 indicates the total cost increases with the
deviation of customer demand per cycle. While, similar to
figure 10, the increase is quicker in the situation without
CTM. It suggests that CTM will obviously improve the total
Figure 3.Sensitivity of Total Cost to Delivery Lead Time
cost when there is a high unstable demand, for example, the
demand fluctuates heavily due to the seasonal effect in the
market.
 Figure 6.Sensitivity of Total Cost to Deviation
D. Optimum delivery speed capability in CTM model
High delivery capabilities cost a lot for carriers, and it is
a huge waste if they are not necessary, while, the shipment
planning and demand will be hardly met if the delivery
capabilities are too low, and the delivery backorders will also
result in huge cost for carriers. In the past, the planning of
proper delivery capabilities is very difficult resulted from lack
of communication and information sharing between carriers
and retailers, while, the collaboration of the two parties
facilitates the planning work, and the seeking of optimum
delivery capability becomes possible.
Now, let us examine the question whats the optimum
delivery speed capability the carriers should supply in CTM
scenarios. This question can be addressed under two fields,
one is to analyze how the major cost components change with
delivery speed capability. Those cost components changing
significantly are the ones sensitive to delivery speed
capability, hence, it is possible to get the optimum delivery
speed capability when these cost components are tightly
controlled. The other field in this section is to observe the
total costs sensitivity to delivery speed capability in different
situations with various penalty cost per unit per day and
various standard deviation of customer demand per cycle. The
optimum delivery speed capability is different in different
cost structure and demand environments, hence, the carriers
should make the optimum planning according to the real
world.
a) Sensitivity of major cost components
Two important points will be consideredone is how
the amount of the major cost components change with
delivery speed capability, the other is how their sensitivity
change. It should be noted that we measure the delivery
capability with delivery lead time.
Figure 1.Sensitivity of Major Cost Components to Delivery Lead Time
Figure 7 indicates the holding cost decreases with the
delivery lead time. The reason is the replenishment amount is
fixed, so the inventory level decreases when the order cycle is
long.
The order cost also decreases. The expression of order
cost tells us the same information.
The penalty cost increases sharply which indicates it is
very sensitive to the delivery speed capability.
b) Sensitivity of total cost in various penalty cost
In the following part, how the total costs amount and
sensitivity to delivery lead time change in different situations
with various penalty cost, will be discussed.
Figure 8 presents how the total cost changes with the
delivery lead time in three situationsthe penalty cost per
unit per day increases to 100%, 200% and 300% of the initial
value. It can be observed the total cost in each curve almost
keeps the same when the delivery lead time is before six days,
which means the total cost is not so sensitive to delivery lead
time. It suggests that merely from the view of penalty cost, to
decrease delivery lead time to less than six days does not help
a lot to save total cost, moreover, it will be a waste. While, it
can also be observed that the total cost increases sharply after
seven days in all the three curves, furthermore, the gaps
among the three curves become wider along with delivery
lead time, which means the total cost is more sensitive to
delivery lead time when the penalty cost increases. Hence, it
suggests that to improve the delivery capability is very
important when the available delivery lead time is longer than
seven days and the improvement is more pressing when the
penalty cost is high.

Figure 8.Change of Total Cost with Delivery Lead Time When Penalty Cost
Differs
c) Sensitivity of total cost in various customer demand
deviation
In the following part, the impact of the standard
deviation of customer demand per cycle will be discussed.
Figure 9.Change of Total Cost with Delivery Lead Time When Deviation
Differs
Figure 9 presents how the total cost changes with the
delivery lead time in three situations-- the standard deviation
of customer demand per cycle is one, two and three
respectively. It can be observed that the total cost increases
with the deviation and the lowest total cost reaches at an
earlier point (day eight when deviation is one; day seven
when deviation is two; day six when deviation is three) which
means the optimum delivery lead time should be less when
the deviation increases. It suggests that to improve the
delivery capability is very important when the demand is
unstable.
IV. CONCLUSIONS
Appropriate application of CTM can improve the
flexibility in the physical distribution and minimize the
inefficiency of supply chain management. That is why
collaboration among partners in a supply chain has become a
topic of great interest for many and an essential element of
company strategy.
The purpose of this research is looking for a long-term
relationship between retailer and carrier to minimize the
retailers total cost through the two parties collaboration. A
simulation approach is used to evaluate the benefits of the
proposed CTM. Results of the simulation reveal that CTM
can significantly reduce the retailers total costs and improve
its service level. Not as many previous papers in which the
holding cost made a heavy impact on the total cost, the
performance indicators in our models are sensitivity to the
penalty cost, the reason of which is our models are based on a
high changing demand market.
REFERRENCES
Chan, F. T. S., Chung, S. H. and Wadhwa, S. (2004) A
heuristic methodology for order distribution in a demand
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Production Research, Vol. 42, No. 1, 119
Collaborative Transportation Management white paper,
Version 1.0 (2004) CTM Sub-Committee of the Voluntary
Inter-Industry Commerce Standards (VICS) Logistic
Committee, http://www.vics.org
Feng, C. M., Yuan, C. Y., and Lin, Y. C. (2005) The
System Framework for Evaluating the Effect of Collaborative
Transportation Management on Supply Chain, Journal of the
Eastern Asia Society for Transportation Studies, Vol. 6,
2837-2851.
Hadley, G., and Whitin T. M. (1963) Analysis of
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