Transportation

Rohit Kapoor
 Transportation Cost Structures
• Transport rates
– (Rs. per ton)
• Function of?
– Distance and quantity of the goods shipped
 Economies … Concept
• Economies of distance
– Transport rates taper with increasing distance
 Economies of Scale
• Transportation rates decrease
– With increase in shipment weight
 Inventory Angle
• Lower shipment sizes
• Faster mode of transport
– Total cost
• Transportation and inventory carrying costs
Modes of Transportation: Choice
and their Performance Measures
• Choices available
– Rail
– Road
– Water
– Air
– Pipeline
 Rail
• For low-value-density products
– Not sensitive to time dimension
– Long and unreliable lead times
• Trucks
Road
– 65% of freight movement
– More expensive than rail transport
 Water
• Cheapest mode
 Air
• Fast but expensive
 Pipelines
• Bulk transportation
– Predictable volumes
 Total Cost Approach to
Performance Measures
• Total cost
– Transportation cost + Cycle-stock inventory-carrying
cost + Pipeline inventory-carrying cost + Safety stock
inventory cost + Cost of losses and damages
 A Hypothetical Example
• A global company has decided to use India as its manufacturing
base for the supply of printers to the European markets.
• The company offers three types of printers: high-end, standard,
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 three models of the printers cost Rs. 20,000, 15,000, and
10,000 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 a minimum shipment size of 400 units.
Hypothetical Example … Contd.
• The demand in Europe is stable at 100 units per week for
each of the three types of printers.
• Transportation and custom clearance take 1 week if air is
used as the mode of transport; the same will take 4 weeks
if sea is used as the medium of transportation.
• Freight by air will be Rs. 360 per unit while freight by sea
will be Rs. 90 per unit.
• The annual inventory carrying cost for the firm is 20% of
the cost of the item.
• The firm wants to decide on the optimum mode of
transport
 Analysis
• For sea as the mode of transport (High end)
– Cycle-stock?
= 0.5 * lot size of shipment = 0.5 * 400 = 200 units
– Pipeline inventory?
= lead time * demand rate = 4 * 100 = 400
– Total inventory?
= Cycle- stock + Pipeline inventory = 200 + 400 = 600
– Annual inventory-carrying cost?
= 600 * 20000 * 0.2 = 2400000 rupees
– Annual transportation cost?
= annual demand * transport rate per unit = 100 * 52 * 90 = 468000
 Cost Comparisons for Different
Modes of Transport Under Stable
Demand
Inventory Total Cost
Carrying Cost Transportation per Annum
Mode of Cycle-stock Pipeline Inventory Average (Thousand Cost (Thousand (Thousand
Product Transport (units) (units) Inventory Rupees) Rupees) Rupees)
Sea 200 400 600 2400 468 2868
High end Air 50 100 150 600 1872 2472
Sea 200 400 600 1800 468 2268
Standard Air 50 100 150 450 1872 2322
Sea 200 400 600 1200 468 1668
Low end Air 50 100 150 300 1872 2172
 Impact of Demand Uncertainty
• Let us say, that the firm targets a service
level of 98%.
• Each of the three products faces similar
demand uncertainty
– and has standard deviation of demand equal to
30 units.
 Analysis
• Safety Stock = service factor * standard
deviation * sqrt (Lead time)
– Safety stock for sea transport = 2 * 30 * sqrt (4)
= 120 units
– Safety stock for air transport = 2 * 30 * sqrt (1)
= 60 units
 Cost Comparisons in Situations
of High Demand Uncertainty

Total Cost per Safety Stock

Annum for Stable Inventory Carrying Total Cost
Mode of Demand Cost (Thousand (Thousand
Product Transport (Thousand Rupees) Rupees) Rupees)
Sea 2868 480 3348
High end Air 2472 240 2712
Sea 2268 360 2628
Standard Air 2322 180 2502
Sea 1668 240 1908
Low end Air 2172 120 2292
 Devising a Strategy for
Transportation
• A hypothetical example
– A manufacturing firm has three plants (A, B and C)
– Each manufacturing a different product line and serving
a stable market through three depots (X, Y and Z).
– Plant A manufactures menswear, plant B manufactures
ladies wear and plant C manufactures children’s wear.
– The firm is in premium garment business. Each of the
plant will be supplying to all the three depots: X, Y and
Z.
 Transportation Strategies
• Option 1
– Ship directly from each plant to each market
• Option 2
– Aggregate demand across markets and using
milk run from each plant
• Option 3
– Ship via distribution centre
Option 1: Ship Directly from
Each Plant to Each Market

A X

B Y

C Z
 Option 1
• Nine trips
 Option 2: Aggregate Demand
Across Depots and Using a Milk
Run from Each Plant

A X

B Y

C Z
 Option 2
• Three trips
Option 3: Ship via distribution
Centre

A X

B Y
DC

C Z
 Option 3
• Six linkages
 Quantification
• Weekly demand at each of the depot is 100 units for each
of the 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
garments.
• 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% per annum. The
facility cost of maintaining a DC is Rs. 12000 per year.
 Analysis
• Option 1 (Direct shipping)
– 3 week’s demand will be supplied in every trip
• Option 2 and 3 (Milk run and DC)
– Aggregation of demand
• Each trip will have one week’s worth of supply
Computation of Distances

(X, Y) Co-ordinate Trip Distance

A (0, 100) AX, BY, CZ 200
B (0, 50) AZ, CX 223.6
C (0, 0) AY, BX, BZ, CY 206.15
X (200, 100) XY, YZ 50
Y (200, 50) AO, CO, OX, OZ 111.8
Z (200,0) BO, OY 100
O (100, 50)
 Analysis
• Annual transport costs
– For direct shipping option
• Distance travelled per cycle = 2XA + 2XB + 2XC +
2YA + 2YB + 2YC + 2ZA + 2ZB + 2ZC = 3744
Km
• Travel cost per cycle = 3744 * 2 = 7488
• Number of cycles per year = 52/3
• Annual transport cost = 7488 * 52/3 = Rs. 129,781
 Computing Relevant Inventory-
Carrying Cost
• Direct shipping option
– Average cycle stock = 150 * 3 (No. of product
lines) * 3 (No. of depots) = 1350 units
– Inventory-carrying cost = 1350 * 40 = Rs.
54,000
• Option 2 and Option 3
– 50 * 3 * 3 * 40 = Rs. 18000
 Comparison
Low-end
Annual Premium Garment
Distance Frequency Transpor Garment (Average
Travelled of tation Annual (Average Gament
in one Transportat Cost (in Facility ganrment Cost - Rs.
Option Cycle ion Rs.) Cost cost 200) 75)

Annual Annual
Inventory Annual Inventory Annual
Carrying Total Carrying Total
Cost Cost Cost Cost
Once in 3
Direct Shipping 3744 weeks 129781 0 54000 183781 20250 150031
Milk Run 1560 Once a week 162191 0 18000 180191 6750 168941
Shipping Via DC 1294 Once a week 134620 12000 18000 164620 6750 153370