The Effects of Terminal Costs The Effects of Terminal Costs on Supply Chains with LTL on Supply Chains with LTL

ShippingShippingObserved causes and effects

By Ryan ConradBy Ryan Conrad

Presentation Outline

• Introduction• Summary of Research• Defining Terminal Costs• Causes of Increased Terminal Costs• Remedial measures and solutions• Conclusions/Future Research

Introduction

How the freight industry values time• Delays

– Consistent travel times and schedules are of prime importance

– Low overall travel time is next most important(2)

• Sources of delays– In transit (congestion)– Terminal delays

Summary of Research

• Developing research into congestion effects on LTL costs– Figliozzi (2006, 2007)– Golob, et al (2001, 2004)

• Research into impacts of congestion on supply chain costs– Hensher & Puckett (2004)

• Various research into terminal efficiencies and scheduling problems.– Ballis (2004)– Morris & Kornhauser

• So far complete picture of terminal costs and effects on supply chains not conceptualized

Type of Terminal Costs and Effects on Supply Chain

• Depend on supply chain/market structure• Three categories of TC influences and how they affect a Supply Chain:

– Internalized Endogenous– Externalized Endogenous– Exogenous

• TCs increase when– Delays increase– The value of time increases

Relative influence of Externalized Endogenous TCs

Exogenous TCs

Relative influence of Internalized Endogenous TCs

Boundary of effective external influence from supply chain.

Internalized Endogenous

Distribution of Costs1. Carrier is delayed at

supplier freight terminal• Imparts delay cost• Carrier charges

detention fee2. Late carrier arrival at

shipping customer• Imparts inventory cost

(e.g. inventory buffers)• Customer charges late

appt. fee

Supplier

Carrier

Customer

Delay cost

Inv. cost

Detention Fee

Late Appt. Fee

Terminal Delay

Late shipment

Internalized Endogenous

Supply Chain Properties• Late appt. and detention fees can be continually shifted

through supply chain– Effect may mimic “bullwhip” effect that sometimes occurs

in volatile markets• Near-perfect market structure (numerous substitutes):

– internalizes TCs to companies with incompatible competitive strategies

– In some supply chains may actually make TC exchanges (detention/late fees) insignificant, especially if order volatility is high

Internalized Endogenous

Example: Galvak Corporation• Market/Company properties

– Metal galvanizing plant– Competitive market– Developing foreign competition

• Problems faced– Delayed truck traffic at

receiving terminal– Costs incurred due to inefficient

order processing/receiving

Internalized Endogenous

Example: Galvak Corporation• Solutions

– Shift in competitive strategy; efficient to responsive

– Computerized inventory management

– Receiving Terminal redesign (potential ITS applications)

• Outcomes– Due to market structure,

lack of change in competitive strategy would result in Galvak losing business

– Terminal cost increases largely affect only Galvak

Supply Chain

•Supplier•Carriers•Terminals/Ports

Change in Competitive

Strategy

Incompatible/ infeasible competitive strategy with rest of SC

Technological Solutions

Organizational Solutions

Com

petitive Strategy

Responsive

Efficient

Externalized Endogenous

Distribution of Costs1. Carrier delayed at port

• Imparts delay cost• Carrier unable to levy

detention fee (lack of market power)

2. Late carrier arrival at customer• Imparts inventory cost• Late appt. fee charged• Carrier unable to recoup

costs3. Governmental intervention

• Requires port to pay detention fees to carriers

• Can be controversial and source of conflict

Detention Fee

Can be source of controversy

Large privately-operated port

Carrier

Customer

Delay cost

Inventory cost

Government intervention

Mandatory fee paid

Late Appt. Fee

Terminal Delay

Late shipment

Externalized Endogenous

Supply Chain Properties• Monopolistic market forces (ports)• Conflicting competitive strategies between carriers and port facilities

– Not balanced or rectified by market– Induces incompatible interactions

• Governmental intervention– Problematic: sometimes creates more problems than are solved– Disrupt free-market system– Can intensify carrier-port conflicts– Can impose additional costs on supply chain (bureaucratic,

regulatory, private lobbying for favorable legislation)• Gov’t assistance necessary

– Market-based solutions could successfully remedy problems and decrease rather than increase supply chain costs significantly

Externalized Endogenous

Example: Southern California Ports• Market/Company Properties

– Large, privately-owned port; competitive strategy -> efficient

– Small private LTL carriers; competitive strategy -> responsive

• Problems– Carriers delayed at ports with

impunity– Carriers unable to levy

detention fees– Regulations fair to both

carriers and ports difficult to enact

Externalized Endogenous

Example: Southern California Ports• Potential Solutions

– Private intermodal freight logistics/management services (many ITS-related improvements)

– Gov’t assistance (avoid intervention)

– Private Logistic services provide “buffer” between companies with incompatible competitive strategies

• Outcome– Problems continue to exist– Ports may resist changes if

strategies are interventionist/overbearing

– Solutions need to be highly-adaptive in some areas, consistent in others to work with carrier and port competitive strategies and business models

Private Port/Terminal

Facility

LTL Carriers

Incompatible competitive strategies not rectified by market forces

Private Freight Logistics Services

Gov’t economic assistance

Technological Solutions

Organizational Solutions

Com

petitive Strategy

Responsive

Efficient

Exogenous Terminal Costs

Distribution of Costs• Many independent sources of

Exogenous TCs– Congestion delays– Parking problems in urban

areas– Hours of Service changes– Cities that ban trucks from

certain streets• Enter supply chain via existing

service/detention/appt. fees• Costs exist outside direct

influence of SC– Governmental/regulatory– Political

Supplier

Carrier

Customer

Late Appt. Fee

Detention/ service fee

Detention fee

Late Appt. Fee

Truck regulations (e.g. HOS)

Parking problems

Traffic Congestion

Street truck bans

Exogenous Terminal Costs

Supply Chain Properties• Mostly uninfluenced by Supply Chain

– Instead influences SC (can cause shift in competitive strategies).

– Can exacerbate costs of existing inefficiencies in SC

• Increased costs to supply chain may also reduce market competitiveness by introducing barriers to entry for firms

Exogenous Terminal Costs

Examples• HOS changes

– Shorter working hours (shorter routes, more trucks, etc.)

– Carriers respond with higher detention/service fees; attempt to minimize stopped time

– Impose high costs as companies must simultaneously raise existing driver wages while hiring new drivers (or reducing service)

• Parking problems– In some areas (e.g. NYC) parking fines

inevitable (drivers must often illegally double-park)

– Increased service/detention fees levied to customers (many have special rate for NYC only due to horrendous parking problems!)

“…several managers said their companies are among those that have already decided to increase charges for driver delays.”

“The recent hours-of-service rewrite, which now counts time waiting at shipper and consignees’ docks against the new 14-hour daily on-duty time limit, makes a driver’s day even more pressure-packed.”

Exogenous Terminal Costs

Examples• Traffic Congestion

– Persistent problem in many urban areas

– Some companies outsource deliveries to congested areas due to high costs and delivery difficulties

– Costs supply chains and industries billions of dollars a year

• Truck bans– Often political decisions (e.g. safety,

livability reasons) that do not consider freight impacts

– Sometimes force circuitous detours to reach customers

– Delay costs compounded when alternate routes congested

Exogenous Terminal Costs

Potential Solutions• HOS Changes

– Increase specialization of loading/unloading tasks (minimize driver tasks)– Improve terminal efficiencies wherever possible

• Parking Problems– Consignee businesses sometimes add freight receiving docks– Some problems simply unavoidable

• Traffic Congestion– Truck-only freeway lanes and corridors– Congestion tolls with favorable rates for freight companies– Political action allying freight companies with other organizations interested

in mitigating congestion problems• Truck Bans

– Largely political; more involvement of freight companies in decision processes likely most effective measure

Conclusions and Recommendations

• Supply Chains with Externalized Endogenous TCs most in need of ITS-based solutions

• Multimodal freight connections a well-studied subject– Unify/generalize logistical

theories with respect to TCs to streamline solution developing process

– Economic impacts on supply chains of poor multimodal interactions needs more research (may be most influential factor on terminal costs)

Container management automation

Conclusions and Recommendations

Improving existing practices• Facility Design

– Improve compatibility with existing technology

– Design to allow flexibility with shipping and receiving practices

• Redesign practices affected by uncontrollable TC factors to be more adaptable

– Example: Cross-docking (C-D) at distribution centers

– Highly sensitive to synchronization of inbound and outbound shipments

– Can be severely impaired by traffic congestion

– Design dynamic processes to switch between C-D and put-away operations (may benefit substantially from improved predictive models of traffic congestion)

Above: Facility planning simulation software allows the design of flexible terminal and distribution facilities

Left: Cross docking at distribution centers reduce inventory costs but can be severely impaired by traffic congestion

Conclusions and Recommendations

Simulations and Computer Modeling• Operations Management

– Appears to be underutilized compared to other industries

– Port terminal complexity often necessitates computer simulation(3)

– High initial capital cost that has high return on investment (estimated return of $10 for every $1 spent(1))

– Highest flexibility for responding to TC factors (e.g. differing competitive strategies, market conditions, etc.)

– May best area for governmental economic stimulation and assistance

• Facility Design– Improved ability to select appropriate

facility design– Allows operational efficiency to be tested

before beginning construction– May help improve compatibility between

supply chain firms with differing competitive strategies

Screen shots of various terminal simulation programs

Thank You

References

1. Lean and Mean Terminal Design Benefits from Advanced Modelling - Freight International. http://www.freight-int.com/categories/container-terminal-design/lean-and-mean-terminal-design-benefits-from-advanced-modelling.asp, Accessed 4/13/2009, 2009.

2. A. S. FOWKES,1 P. E. FIRMIN,1 G. TWEDDLE & A. E. WHITEING. How Highly does the Freight Transport Industry Value Journey Time Reliability—and for what Reasons? International Journal of Logistics: Research and Applications, Vol. 7, No. 1, March 2004.

3. Bruzzone, A. G., P. Giribone, and R. Revetria. Operative Requirements and Advances for the New Generation Simulators in Multimodal Container Terminals. Simulation Conference Proceedings, 1999 Winter, Vol. 2, 1999, pp. 1243-1252 vol.2.

4. Chopra, S., and P. Meindl. Supply Chain Management. Pearson Education, Inc., Upper Saddle River, New Jersey, 2007.

5. Figliozzi, M. A. Impacts of Congestion on Commercial Vehicle Tour Characteristics and Costs. In Transportation Research Board 87th Annual Meeting, pp. 28.

6. McKinnon, A. C. The Impact of Traffic Congestion on Logistical Efficiency. No. 2, Institute of Logistics, Edinburgh, Scotland, 1998.