Growth in international Growth in international tradetrade

Caused greater reliance on intermodal connections, ports, and air terminals

Growth not from Growth not from neighborsneighbors

Major GatewaysMajor Gateways

Logistics CostLogistics Cost

Professor GoodchildProfessor Goodchild

Spring 09Spring 09

How do goods get to How do goods get to market?market?

Asian Factories

West CoastPort

Distribution Center

Destination Store

Container on marine vessel

Drayage truck

Short orLong-haul

truck

Transportation cost is typically much less significant than the reductions in manufacturing.

Logistics CostsLogistics Costs

Transportation costTransportation cost The cost incurred through the need to The cost incurred through the need to

move products over space.move products over space. In a vehicle, with a forklift, etc.In a vehicle, with a forklift, etc.

Inventory costInventory cost The cost incurred through the need to The cost incurred through the need to

hold goods over time.hold goods over time. In a vehicle, in a distribution center, In a vehicle, in a distribution center,

etc.etc.

In-transit inventory or pipeline inventoryIn-transit inventory or pipeline inventory: : inventory that is in the process of movement inventory that is in the process of movement from point of receipt or production and from point of receipt or production and between points of storage and distribution. between points of storage and distribution.

Inventory-at-restInventory-at-rest: inventory that is NOT in : inventory that is NOT in the process of movement from point of the process of movement from point of receipt or production and between points of receipt or production and between points of storage and distribution, rather it is storage and distribution, rather it is stationary, typically at a production facility, stationary, typically at a production facility, warehouse, distribution center, or warehouse, distribution center, or consumption facility.consumption facility.

How does REI get goods to How does REI get goods to market?market?

Asian Factories

West CoastPort

Distribution Center

Destination Store

Container on marine vessel

Drayage truck

Short orLong-haul

truck

In transit inventory

Initial gains from deregulation (restructuring of networks), stalling in the mid-90sdropping off again after 9/11, but increasing with congestion and fuel prices After 2003.

Currently inventories are Currently inventories are piling uppiling up

Follow the path of an Follow the path of an itemitem

Carried from production area to Carried from production area to storage areastorage area

Held in temporary storageHeld in temporary storage Loaded into transport vehicleLoaded into transport vehicle Transported to the destinationTransported to the destination Unloaded, handled, and held for Unloaded, handled, and held for

consumptionconsumption

What incurs cost?What incurs cost? Overcoming distance (motion): Overcoming distance (motion):

transportation cost (over the road/rail) transportation cost (over the road/rail) handling cost (through a terminal, in and out handling cost (through a terminal, in and out

of vehicles)of vehicles)

Overcoming time (holding): Overcoming time (holding): holding cost:holding cost:

Rent (proportional to D’H)Rent (proportional to D’H) Waiting (value*time*interest rate)Waiting (value*time*interest rate)

In transitIn transit pipelinepipeline

How you calculate the value depends on the analysis you are doing (cost or price)We will include all costs, regardless of who pays them (we are designing systems)

Cumulative Number of Cumulative Number of Items DiagramItems Diagram

time

cumulative number of items

Production (rate D’)

shipments

arrivals

Consumption (D’)

An item is a fixed quantity of infinitely divisible quantity (e.g. person, parcel, case of beer)

tm

H

Consider units on area

Queue DisciplineQueue Discipline

FIFO: First In First OutFIFO: First In First Out

LIFO: Last In First OutLIFO: Last In First Out

OthersOthers

If LIFO inventory cost is usually underestimated

Holding cost: RentHolding cost: Rent

proportional to max. accumulationproportional to max. accumulation Independent of flow rate, D’Independent of flow rate, D’ Proportional to max. time between Proportional to max. time between

dispatchesdispatches

Holding cost: WaitingHolding cost: Waiting

Cost associated with delay to itemsCost associated with delay to items cciiHHi i + c+ ciittmm

Stationary + pipeline inventoryStationary + pipeline inventory Determining cDetermining cii is difficult is difficult

Transportation CostTransportation Cost

Shipment cost has fixed and variable Shipment cost has fixed and variable portions: portions: ccf f + c+ cvvv (v is number of items)v (v is number of items) Fixed cost: driver wageFixed cost: driver wage Variable cost: increased fuel consumptionVariable cost: increased fuel consumption

Cost for n shipments: cCost for n shipments: cffn + cn + cvvV V (V is total items across shipments, n is (V is total items across shipments, n is number of shipments)number of shipments)

Transportation costTransportation cost Cost per item: Cost per item:

(c (cffn + cn + cvvV)/V = cV)/V = cff/v/vavgavg+c+cvv Economies of scale from sharing fixed costEconomies of scale from sharing fixed cost vvavgavg=D’H=D’Havg avg so cost per item is (cso cost per item is (cff/D’H/D’Havgavg)+c)+cvv

Transportation cost decreases with Transportation cost decreases with increasing average headwayincreasing average headway

Holding cost increased with maximum Holding cost increased with maximum headwayheadway

Therefore shipments should be spread so as Therefore shipments should be spread so as to minimize the maximum (all the same)to minimize the maximum (all the same)

Transportation cost and Transportation cost and distancedistance

ccff (fixed shipment cost) is independent of (fixed shipment cost) is independent of v (items) v (items)

both cboth cff and c and cvv are typically functions of are typically functions of distance (d)distance (d)

ccff=c=css+c+cdddd ccvv=c’=c’ss+c’+c’dddd Cost for n shipments: cCost for n shipments: cffn+cn+cvvVV

ccssn+cn+cdddn+c’dn+c’ssV+c’V+c’dddVdV Add cost of multiple stops: Add cost of multiple stops:

ccss(1+n(1+nss)n+c)n+cdddn+c’dn+c’ssV+V+c’c’dddVdVSo small we neglect it

Transportation costTransportation cost

Cost per item (divide by nvCost per item (divide by nvavgavg):): ccss(1+n(1+nss)/v)/vavgavg+c+cddd/vd/vavgavg+c’+c’ss or or

ccss(1+n(1+nss)/D’H)/D’Havgavg+c+cddd/D’Hd/D’Havgavg+c’+c’ss

If headways vary a lot so do shipment If headways vary a lot so do shipment sizes, and therefore truck sizes, sizes, and therefore truck sizes, better to use consistent truck sizes better to use consistent truck sizes (second reason to keep shipment (second reason to keep shipment sizes consistent)sizes consistent)

shipment size

Trans. CostPer shipment

Capacity RestrictionsCapacity Restrictions

vmax – number of items that will fit in vehicle

cf

vcv

Slope is cost per item, lowestwhen truck full

shipment size

Trans. CostPer shipment

Relationship to sizeRelationship to sizeMagnitude of fixed and variable cost determine most economic choice as a function of shipment size.

As shipment size increases, favor lower variableand higher fixed costs.