A Firm-Based Freight Demand Modeling Framework:

A Firm-Based Freight Demand Modeling Framework:

Qi Gong and Jessica Guo, PhD.Transportation and Urban Systems Analysis

LabCivil and Environmental Engineering

University of Wisconsin – Madison

Capturing Intra-firm Interaction and Joint Logistic Decision Making

OutlineIntroductionStudy objectivesLogistics management frameworkIntra-firm interactionModeling frameworkConclusion

Introduction Freight transportation as derived demand Need to incorporate supply chain

concepts in freight demand models Limitation shared by existing supply-chain

based models: Business establishments are treated as

separate and independent decision-making agents

Inter-establishment interactions considered only between agents of different roles in the supply chain

Interactions among establishments within a firm not accounted for

Introduction Prevalence and implication of multi-

establishment firms on freight movement

Source: Statistics of Small Business, 2007

Employment Size of Firm1-19 20-99 100-499 500+

All IndustriesNumber of Firms 5,410,367 532,391 88,586 18,311Number of Establishments 5,466,985 723,385 355,853 1,158,795Average Establishment-to-Firm Ratio 1.01 1.36 4.02 63.28Total Sales Receipts ($1,000) 3,975,109 3,792,921 3,612,050 18,366,661Manufacturing IndustryNumber of Firms 213,074 55,603 13,945 4,079Number of Establishments 213,509 59,596 23,030 35,220Average Establishment-to-Firm Ratio 1.00 1.07 1.65 8.63Total Sales Receipts ($1,000) 197,171 440,740 634,738 4,019,587Wholesale Trade IndustryNumber of Firms 286,873 36,783 7,907 3,113Number of Establishments 292,554 53,305 28,337 60,268Average Establishment-to-Firm Ratio 1.02 1.45 3.58 19.36Total Sales Receipts ($1,000) 872,353 899,444 771,807 3,442,613

Current Study Objectives Objectives:

To capture the philosophies in logistics management

To better represent the decision-making paradigms of establishments and firms

This study proposes a firm-based freight demand modeling framework: Incorporates supply chain concepts Accounts for the interdependency of

establishments within a firm

Logistics Management Framework

Freight transportation demand is derived from business logistics management needs

Freight patterns are determined from various business operation and logistics decisions falling within different planning areas

Planning Area Effect of Decisions on Freight TransportationCustomer Demand and Service

Origin/Destination (OD) of shipments, temporal characteristics

Facility Structure and Location

OD, shipment temporal characteristics

Inventories OD, shipment frequency, shipment size

Purchasing Mode, route and shipment size

Transportation OD, shipment frequency, shipment size


Customer Demand and Service

Facility Structure and Location Business Economic Activity Boundary (S)Facility number (S)Facility size (S)Facility location (S)

Transportation

InventoryJust-in-time/forward buying (S)Inventory deployment (S)Replenishment quantity (T)Replenishment frequency (T)

PurchasingMake-or-Buy (S)Supplier selection (S)Sourcing points (T)Purchasing quantities (T)

•Kanban system/MRP•Push/pull approach•Economic order quantity•Reorder point model•Periodic review model

•Transaction cost theory•Auction sourcing•Optimization for sourcing points

•Profit maximization

•Optimization of capital and transportation cost •Spatial interaction

Customer service level (S)Inventory level (S)

Carrier selection (S)Mode choice (T)

Vehicle routing and scheduling (O)

•Carrier requirements minimization•Traveling salesman•Inventory routing

Logistics Planning Area

Key Decisions (Planning Level)

Decision Making Principles

(S): Strategic decision (T): Tactical decision (O): Operational decision



Transportation
















Intra-Firm Interaction Facility Structure and Location

In the wholesale/retail industry, consumer demand is the key determinant driving the location of retail outlets. The location decision is also affected by cannibalization and; market expansion

In the manufacturing industry, facility structure and location decisions depend largely on the production scheme adopted by a firm product plant strategy market area plant strategy process plant strategy general purpose plant strategy

Intra-Firm Interaction Purchasing

Centralized purchasing strategy (e.g., adopted by Whirlpool, General Motors, Dells, Wal-Mart and IBM)

Decentralized purchasing Centralized pricing with decentralized

purchasing Supplier selection for centralized

purchasing scenario Firm iPlant

Scenario A: Supplier selection of single-plant firm

SupplierFirm b

Firm jPlant

SupplierFirm a

Supplier Firm b

Firm iPlant i1

Firm iPlant i2

Scenario B: Centralized purchasing of multi-establishment firm

SupplierFirm a

Intra-Firm Interaction Inventory

Push/Pull approach Vendor-managed inventory (VMI)

Inventory replenishment behavior Firm a

Firm b Firm c

Scenario B: Push approach by multi-establishment firm

Supplier i

Firm iPlant 1

Firm iPlant 2

Firm iPlant 3

Firm iWarehouse

Scenario A: Pull approach by single-establishment firms

Intra-Firm Interaction Transportation

A firm owning multiple establishments has more opportunities of vehicle consolidation during goods movements

The combined shipment size may also make a mode such as rail more attractive

Modeling Framework A hybrid of

longitudinal and latitudinal simulation

Modeling Framework Four major modules:

Firm Creation

Purchasing

Inventory & Ordering

Transportation

Firm Creation Creates a collection of firms and member

establishments located within the study region

Accounts for the effects of production scheme Analysis unit: A firm and all its

member establishments

Purchasing Determines annual amounts of

commodities to be moved between all pairs of establishments

Assumes centralized purchasing strategy Considers the possibility of using in-

house sources

Inventory and Ordering Determines the order quantity happened

on an average day throughout a year Based on the economic order quantity

theory widely adopted in logistics management

Transportation Assigns shipments with modes, consolidation

location, vehicles, and routes Follows the transport chain concept developed

by de Jong and Ben-Akiva (2007)

Conclusion The intra-firm interdependency in logistics

decision-making is captured in the proposed framework Explicitly represent firm-establishment

structures Consider possibility of internal sourcing within

a firm Apply the popular strategy of centralized

purchasing Consider joint ordering across establishments

of the same firm Part of this modeling system has been

calibrated using readily available public data

Conclusion Remaining models to be estimated using

data from ongoing firm-based surveys in Wisconsin

Limitations resulted from certain simplifications and assumptions that are incorporated in framework to assure its operational ability: The ignorance of horizontal alliance across

single-establishment firms Implicit consideration of price policy A constant demand pattern assumed for the

modeling of ordering behavior

Thank You

A Firm-Based Freight Demand Modeling Framework:

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