Chapter 10 Transportation—Managing the Flow of the Supply Chain

Learning ObjectivesAfter reading this chapter, you should be able to do the following:

Explain the role transportation plays in the supply chain.

Discuss the service and cost characteristics of the primary transportation modes.

Discuss the key activities involved in transportation planning and execution.

Learning Objectives (cont.)After reading this chapter, you should be able to do the following:

Explain current transportation management strategies used to improve supply chain performance.

Use service and cost metrics to analyze transportation performance.

Describe how information technology supports transportation planning and execution.

Introduction Transportation involves the physical movement of

goods between origin and destination points.

The transportation system links geographically separated partners and facilities in a company’s supply.

Transportation facilitates the creation of time and place utility in the supply chain.

Transportation also has a major economic impact on the financial performance of businesses.

Role of Transportation in Supply Chain Management

Transportation provides the critical links between these organizations, permitting goods to flow between their facilities.

Transportation service availability is critical to demand fulfillment in the supply chain.

Transportation efficiency promotes the competitiveness of a supply chain

Challenges to Carrying out This Role

supply chain complexity

competing goals among supply chain partners

changing customer requirements

limited information availability

synchronizing transportation with other supply chain activities

Challenges to Carrying out This Role

Transportation capacity constraints pose a challenge.

Rising transportation rates present another major concern for organizations.

The transportation industry is impacted by governmental requirements that affect cost structures and service capabilities.

Regulation is growing in areas where the transportation industry has the potential to impact the quality of life, the safety of citizens, and the growth of commerce.

Modes of Transportation primary modes of transportation

truck rail air water pipeline intermodal transportation

Modes of Transportation moves approximately 19.5 billion tons valued at nearly $13

trillion Modal breakdown:

Trucking 80.0 % $635 billion

Rail 06.7%

Air 04.7%

Water 04.6%

Pipeline 01.2%

Modes of Transportation Motor Carriers

widely used mode of transportation in the domestic supply chain 573,469 private, for hire, and other U.S. interstate motor carriers economic structure of the motor carrier industry contributes to the

vast number of carriers in the industry comprised of for-hire and private fleet operations

Truckload carriers. Less-than-truckload (LTL) Small package carriers

Low fixed cost, high variable

Modes of Transportation

Modes of TransportationRailroads 7 Class I railroads revenues in excess of $290 million

Activity levels have been achieved despite a lack of direct accessibility to all parts of the supply chain

Railroads are “natural monopolies”

Two carrier types: Linehaul Shortline carriers

High fixed, low variable

Modes of TransportationWater Major facilitator of international trade 81% international freight movement 19% coastal, inland, and Great Lakes traffic High variable and low fixed cost Two primary carrier types

Liner Charter

Options include Container ships Bulk carriers Tankers General cargo ships Roll-on, roll-off (RO–RO) vessels

Modes of TransportationAir Carriers 491 air cargo carriers

Combination carriers Air cargo carriers Integrated carriers Nonintegrated carriers

Domestic market is dominated by 14 major carriers

High variable and low fixed cost

Modes of TransportationPipeline Unique mode of transportation as the equipment is fixed

in place and the product moves through it in high volume 174 operators of hazardous liquid pipelines that primarily

carry crude oil and petroleum products Three primary types

Gathering lines Trunk lines Refined product pipelines

High fixed versus low variable

Modes of Transportation

Intermodal Transportation Use of two or more different modes in movement Greater accessibility Overall cost efficiency Facilitates global trade Development of standardized containers that are

compatible with multiple modes. Product-handling characteristics

Containerized freight Transload freight

Modes of Transportation

Functional Control of Transportation Which department will be responsible for transportation?

Logistics

Procurement

Marketing

Decision to Outsource Transportation Firms choose between “make” or “buy”

Commercial carriers “buy”

Private fleets “make”

External experts move the freight and/or manage the transportation process “buy”

Third-party logistics (3PL) “buy”

Modal SelectionAccessibility

Accessibility advantage: Motor carriage Accessibility disadvantage: Air, rail, and water

Transit Time Transit time advantage: Air and motor carriage Transit time disadvantage: Rail, water, and pipeline

Reliability Reliability advantage: Motor carriers and air carriers Reliability disadvantage: Water carriers and rail carriers

Modal SelectionProduct Safety

Safety advantage: Air transportation and motor carriage

Safety disadvantage: Rail and waterCost

Cost advantage: The cost of transportation service varies greatly between and within the modes

Cost disadvantage: Motor carriage and air transportation

Modal Selection

The nature of a product—size, durability, and value

Durability

Product value

Shipment characteristics—size, route, and required speed

Carrier Selection selecting the individual transportation service providers within the

mode

major difference between modal and carrier selection is the number of options

difference is the frequency of the decision

type of service provided within a mode impacts carrier selection

most carriers have the capabilities to provide a similar level of service

Core carrier limited number of carriers leverage its purchasing dollars

Rate Negotiations

centralized freight rate negotiations

developing contracts with carriers for a tailored set of transportation services at a specific price

leveraging volume with a small set of carriers

Shipment Preparation corporate transportation routing guide

last-minute, cost-saving decisions

consolidate freight

coordinate shipment deliveries

take full advantage of container capacity

an accurate freight count should be taken

Freight Documentation bill of lading

originates the shipment

provides all the information the carrier needs

stipulates the contract terms, including carrier’s liability for loss and damage

acts as a receipt for the goods the shipper tenders to the carrier

in some cases, shows certificate of title to the goods

Freight bill carrier’s invoice for carrier charges lists:

shipment origin and destination consignee items total weight total charges

Freight claims form Filed with the carrier to recoup monetary losses resulting if

carrier fails to protect the shipment. Carriers are not liable for freight claims if the damage is

attributable to: Natural disaster or some other “act of God” Military attack or similar “act of public enemy” Government seizure of freight or “act of public authority” Failure to adequately package the freight or other negligent “act of

the shipper” Extreme fragility, perishability, or similarly problematic “inherent

nature of the goods”

Maintain In-Transit Visibility

manage key events as product moves across the supply chain

technology facilitates the ability to monitor product

visibility tools must be linked to other capabilities and processes to have an impact on supply chain event management

Monitor Service Quality

analyze the outcome of all their transportation strategy, planning, and decision-making

key requirement for service quality monitoring is information

Transportation Metricskey performance indicators (KPIs)

can be used to evaluate current performance versus historical results internal goals carrier commitments

challenge lies in narrowing down metrics available to monitor performance to a manageable number of KPIs

primary categories of transportation KPIs include service quality and efficiency

Transportation Management Systems (TMS) Critical applications include the following:

Routing and scheduling proper planning of delivery routes has a major impact on customer

satisfaction, supply chain performance, and organizational success Load planning

effective preparation of safe, efficient deliveries Load tendering Status tracking Appointment scheduling

Summary Without question, transportation is a very dynamic activity and a critical

supply chain process. Not only is it the largest logistics cost component in most supply chains, but it also directly impacts fulfillment speed and service quality. By providing the physical links between key participants across domestic and global supply chains, transportation facilitates the creation of time and place utilities. Organizations with highly efficient and effective transportation processes can differentiate their product in the marketplace through lower landed costs and greater inventory availability.

Managing the transportation process for maximum supply chain impact requires considerable knowledge of transportation options, planning, decision making, analytical skills, and information sharing capabilities.

Transportation is a key supply chain process and must be included in supply chain strategy development, network design, and total cost management.

Numerous obstacles—global expansion of supply chains, rising costs, limited capacity, and government regulation—must be overcome to synchronize transportation with other supply chain processes.

Fulfillment of supply chain demand can be accomplished through five modal options or the intermodal use of truck, rail, air, water, and pipeline transportation.

Summary (cont.)

Multiple planning activities occur prior to carrier and mode selection: who will be responsible for managing the transportation function within the organization, what terms of sale and payment will be used, and how goods will be transported must all be determined with a strategic supply chain focus.

Mode selection is based on the relative strengths of each modal/intermodal option in terms of accessibility, transit time, reliability, safety and security, transportation cost, and the nature of the product being transported.

Carrier selection focuses on the type of service required (direct or indirect), geographic coverage, service levels, and carrier willingness to negotiate reasonable rates.

Most commercial freight moves under contractual rates that are negotiated directly between freight buyers and transportation companies for specific volumes of tailored services at mutually agreed-upon prices.

Summary (cont.)

Shipment routing guides help organizations ensure internal compliance with service contracts and maintain centralized control over freight tendering decisions.

Freight documentation provides the details of each shipment, sharing critical information that promotes uninterrupted flows of goods through the supply chain. Domestic transportation documents include the bill of lading, freight bill, and freight claims, while international freight requires additional paperwork such as a commercial invoice, shipper’s letter of instructions, certificate of origin, and insurance certificates.

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

Numerous metrics are available to evaluate transportation service quality in terms of carrier timeliness, freight protection, accuracy, and perfect deliveries. Service efficiency measures focus on spending proficiency, asset utilization, and labor productivity.

Summary (cont.)

Transportation management systems are widely used information technologies that support the effective planning, execution, and analysis of transportation processes. Emerging tools such as event management and RFID have the potential to improve supply chain visibility and dynamic response to potential challenges.