Distribution and Transportation - Final

INDEX

DISTRIBUTION.......................................................................4

1. Role of Distribution in the Supply Chain....................................................................4

2. Designing Distribution Channels.................................................................................8

3. Distribution Network Planning..................................................................................35

4. Network Design & Optimization Approach and Techniques....................................45

TRANSPORTATION...............................................................57

5. Role of Transportation in the Supply Chain..............................................................58

6. Transportation Principles and Participants................................................................62

7. Transportation Modes, Performance Characteristics and Selection..........................65

8 . Transportation Performance, Costs And Value Measures........................................73

9. Transportation Routing Decisions.............................................................................80

10. Transit Operations Software....................................................................................90

11. Advanced Fleet Management System.....................................................................92

12. Intermodal Freight Technology...............................................................................94

13. Transportation Security Initiatives And Role Of Technology.................................97

PRACTICE AREA......................................................................................................101

DISTRIBUTION

In this module you would learn the concepts behind physical distribution of products, the

channels of distribution, the decision criteria for designing and selecting distribution

channels.

1. Role of Distribution in the Supply Chain

2. Designing Distribution Channels

3. Distribution Network Planning

4. Network Design & Optimization Approach and Techniques

1. Role of Distribution in the Supply Chain

The Supply Chain comprises of various activities in the fulfillment of demand of the

customer and involves various intermediate stages for value addition and the

accompanying flow of material, information and financial transactions. Within the range

of activities in the Supply Chain, Distribution is concerned with the physical fulfillment of

the customer demand. The Customer could be the end consumer with the manufacturing

plant as the supplier or further backward Distribution could also involve moving raw

materials and components to the intermediary (manufacturer or retailer).

With the rapid growth of the trade channels for meeting the customer demand and the

various intermediaries involved within the Supply Chain, Distribution has evolved as a

key business function for various organizations. Considering the case of an Automobile

manufacturer, the distribution channel spans the entire chain from the vendors who

supply raw material (steel, rubber, plastic); components ( pumps, engines, valves, tyres)

sub-assemblies and finally the end product distribution in a complete or SKD (semi-

knocked down) form to the dealer network within or outside the country.

CHAPTER - 1

In the case of exports the distribution channel might span multiple levels upstream in

terms of consolidation, product mixing, and culminating in the final sale. This might not

be the end of the Distribution function as channels for supply of spare parts and other

replacement items would have to be established as also in some cases reverse

distribution channels for return of non-biodegradable parts like batteries would have to

be ensured to meet the various environmental regulations. The above example

illustrates the range of activities and the scope of one of the important Supply Chain

activities.

The National Council of Physical Distribution Management (NCPDM) now known as The

Council for Logistics defines Physical Distribution as:

Physical distribution is a broad range of activities concerned with efficient movement of

finished goods, products from the end of the production line to the customer. In some

cases includes movement of raw material from the source of supply to the beginning of

the production line. These activities include freight, transportation, material handling,

protective packaging, order processing and customer service.

Distribution is a key activity for companies as it significantly influences the supply chain

costs and the service levels offered to customers. Hence most companies within the

same industry sometime follow different distribution strategies to accommodate for the

differences on the two fronts –costs and service levels. For instance Dell and HP

belonging to the IT industry (hardware manufacturing) follow different strategies, with

Dell setting up direct delivery channel at a reasonable delivery lead time and HP setting

up extensive reseller network that offers more responsive service to the customer in

terms of the delivery lead time. These significantly affect the cost structure of the two

companies with Dell reporting a lower level of Inventory holding compared to the industry

norm. It has been observed that for a manufacturing company distribution costs account

for close to 20% of the total costs. Taking the case of the cement industry the cost of

outbound distribution of cement (to the point of sale) is approximately 30% of the total

cost of production and selling.

Most companies involved in manufacturing or retailing have established internal

department(s) to look into this important function. The responsibilities generally include

many inter-related and highly coordinated set of activities: transportation, order

processing, warehousing, inventory control and location analysis. Out of these set of

activities, the key functions are transportation, warehousing and inventory control. These

have been discussed below

Transportation Management

An in-depth look at Transportation would follow in the subsequent section, but it is

essential to realize that this is one of the most important focus activities which has

significant impact on cost and responsiveness. On a broad level it can be considered to

be a function involved in moving raw material to the manufacturing unit or warehouse

and moving finished or semi-finished products to the next level of the supply chain or to

the final consumption point.

There is a great amount of detailed planning required for this function, especially in

India, since the sector is still within the sphere of unorganized sector. A strike by the

road transporters recently crippled the manufacturing units because of non-availability of

raw material and also led to a pile up of finished product inventory. The five basic modes

that are looked at for transportation are –road, rail, air, waterways and pipelines. While

making a choice of a transportation mode, the criteria used are –cost, transit time,

service level, safety of the products.

Inventory Control

The role of distribution in inventory control is critical as it involves material in warehouse

stages of the supply chain –in transit, in storage and ready to be shipped out. In fact one

of the important responsibilities of distribution managers in companies is to optimize the

level of inventory in the distribution network based on the customer service norms. In

the example of Dell discussed above which has a high focus on costs and uses a direct

distribution network, the level of inventory held in the total supply chain was around 7

days (2003). It is moving to bringing this down further through innovative planning and

distribution.

Warehousing

Warehousing provides “space” utility to the material in the supply chain. But in the recent

years this has become a significant aspect of the total distribution because of the value

added service that it is engaged in like postponement, repackaging etc; The strategic

level decision in setting up a distribution network is often the location, size and the role

of a warehouse. The warehousing structure often depends on the overall distribution

strategy. For instance FMCG companies in India have traditionally followed an intensive

distribution due to the need for ‘reach’. This required high level of availability of products

in shop shelves in metros, cities, towns and villages. To support this spread and the

depth of penetration they follow a Decentralized distribution which emphasizes on

availability and reach –warehouses in all major states of the country(regional

warehouses) and some warehouses close to the major demand points (local

warehouses) and some close to the premises of the major customers. Managing this

kind of an extensive distribution network requires resources both for planning and

execution.

2. Designing Distribution Channels

In the previous sections we saw the role of Distribution in the Supply Chain and the

various types of Distribution Channels and their characteristics. This section details the

different options available to companies (suppliers or manufacturers) to reach their

customers (end consumer or manufacturer).

The choice of a distribution network at the strategic level should be based on two

important criteria:

1. The customer service level expected and offered

2. The cost involved in offering the level of service

These two criteria need to be balanced out by choosing the appropriate elements in the

supply chain. This process of balancing out is called “optimization” and is discussed

subsequently. Ultimately the decision is based on the customer requirements that are

met, the revenue generated from that and the cost of serving the same profitably.

The customer service level has many dimensions and the important ones that constitute

are given below:

1. The Delivery Lead time

2. The product mix in the order

3. Availability of products

4. The overall customer satisfaction

5. The visibility of orders in the pipeline –downstream and upstream

6. Handling of returns

CHAPTER - 2

The delivery lead time is the time from the customer placing an order to the time of

receipt of material from the supplier? In certain cases the delivery lead time are short as

in the case of FMCG type of products, where the availability should be instantaneous

when the customer shops in a retail outlet. In other cases the delivery lead time

encompasses product design, manufacturing, testing and installation as in the case of

large engineering products like boilers and windmills, where the delivery lead times are

longer.

The product variety refers to the number of products and configuration options available

to the customer from the manufacturer. The higher the number of product variety and

options the greater the complexity that the distribution network would have to handle,

because of the need to multiple delivery modes, packaging and handling requirements,

documentation and coordination amongst the different channel partners. In some cases

where there is a bundled offering, for instance on purchase of a product A, product B is

offered free of cost. This is also a case of a high product variety.

Availability within the supply chain is defined as the number of times a product is

available whenever the order for the product is received. This factor is a critical

differentiator in the case of many supply chains. For instance in the case of FMCG type

of product the primary focus of the distribution channel and the channel members is to

ensure high availability through an optimal mix of inventory holding.

Customer experience is related to the earlier factors of delivery lead times and

availability and also has the experiential elements involved like the overall experience of

placing the order, the interactions with the staff and the service level offered.

Order visibility refers to the ability of the customer to track the various orders and also to

know the current status of the orders. Some of the service organizations like cargo and

courier operators offer this feature to their customers. Also with integrated IT tools like

ERP and EDI, the process of order tracking is becoming enabled at various levels.

Handling of product returns is one of the key factors emerging of late because of the

various environmental and social issues which are being enforced by the government.

Manufacturers need to work out separate distribution channels in the case of handling

product returns in the case of some products like batteries and tyres.

Though customers would like superior performance on all the above factors from their

suppliers, in reality the balancing needs to be done with respect to some of the factors.

For instance a customer ordering from Dell is willing to wait longer than a customer

walking to the nearby hardware outlet and buying a home PC (delivery lead time factor).

But the customer also gets a higher product variety and mix and customize his needs

better when he buys through Dell (product variety factor). In general companies targeting

customers who can accommodate a longer lead time can offer the same at lower cost as

the investment in other supply chain elements like inventory, facilities etc; is much lower.

The distribution network design affects the following costs –inventory, transportation,

warehousing and information. The impact of the various elements discussed above on

the cost structure of the distribution network is detailed below. The interrelationships

which are discussed below are:

1. Number of Warehouses and the Delivery lead time

2. Number of Warehouses and the Total Inventory cost

3. Number of Warehouses and the Transportation cost

4. Number of Warehouses and the total Warehousing Cost

1. Number of Warehouses and the Delivery lead time

As the number of warehouses in the supply chain increases the delivery lead time to the

customer shrinks. This relationship exits because of greater responsiveness to the

customer and shorter transit time to the customer site. This is being adopted by the auto

component manufacturers who have to respond to the major automotive manufacturer’s

requirement of lead times of sometimes less that an hour by establishing a chain a

warehouses in major manufacturing hubs like Chennai, Gurgaon, Faridabad etc; where

the automotive manufacturers like Ford, Hyundai, Maruti are present. Some times these

warehouse facilities are located very close to the customer site to cut down on the transit

time.

The increase in the number of warehouses to offer shorter delivery lead times also has

implications in terms of the cost which needs to be balanced against the potential for lost

sales or additional revenue or bargaining power.

Delivery Lead time

Number of Warehouses

2. Number of Warehouses and the Inventory costs

As the number of warehouse facilities in the supply chain increases the level of inventory

increases as also the associated inventory carrying cost. This problem is attacked by

strategies like consolidation of certain classes of inventory and decentralizing the

inventory holding for other classes of inventory. Sometimes the level of inventory held

has a significant impact on the service level that needs to be offered and this need to be

optimized.


Inventory Costs

3. Number of Warehouses and the Transportation costs

The transportation activity can be classified as Inbound and Outbound. The Inbound

transportation for a manufacturer refers to the transportation of raw materials and other

manufacturing supplies to the production unit and the Outbound transportation refers to

the costs incurred in sending finished products from the manufacturing unit to the

customer. In general it has been observed that the per unit transportation costs tend to

be much higher than the inbound transportation cost.

This is because the inbound raw materials normally come as a full truck load (FTL)

which optimizes the weight and volume capacity of the carrier. By increasing the number

of warehouse facilities the average transportation distance to a customer site is reduced

because the overall transportation distance is a smaller fraction of the total distance

traveled by the product. It can thus be seen that as the number of facilities increases,

initially the total transportation cost decreases. But if the number of warehouse facilities

is increased to a point where the inbound lot size decreases beyond the normal lot size

economies, the total transportation costs start to rise.


Transportation Costs

4. Number of Warehouses and the Warehouse facility cost

As the number of warehouses increases the total warehouse facility cost increases

because of the increase in the fixed and variable cost components like rent, manpower,

equipment etc;

The above discussion illustrates the range of variables that are impact the overall

distribution network. The following discussion illustrates certain common distribution

channels and the key characteristics of these distribution network models.

Distribution Network ModelsWhile designing a distribution network many factors are considered including the cost

and service trade-off and also three other important questions:

1. Will the product be delivered directly to the customer?

2. Will the customer pick up the product from the pre-decided site

3. Will there be intermediaries (warehouse, retailers, stockiest etc;) involved in the

distribution network?


Total Warehouse Facility cost

Depending on the options available and the resources the commonly adopted

distribution networks are detailed below:

1. Direct delivery from the manufacturer to the customer

2. Delivery through in-transit mixing from the manufacturer storage facility

3. Delivery through packaged carrier delivery from the distributor storage facility

4. Last mile delivery from the distributor storage facility

5. Customer pickup from the manufacturer/distributor storage facility

6. Multi-channel distribution network

Each individual distribution network model is discussed in detail and the performance

and the applicability of each is evaluated on cost and service level dimensions.

1. Direct delivery from the manufacturer to the customer

The key Features of this distribution model are:

The products are delivered directly from the manufacturer to the customer. The

retailer is bypassed in this model of distribution and in some cases he serves the

function of only order communication to the manufacturer. The process of direct

distribution from the manufacturer to the customer is also referred to as drop

shipping.

The manufacturer carries the inventories in various forms –components, sub

assemblies, finished products and starts the manufacturing or assembly of the

finished product only on receipt of a confirmed order. In this case the retailer

does not carry any inventory. Well known and successful examples of this

distribution model are Dell Computers, amazon.com.

Manufacturer

Retailer

Customers

Product Flow

Information Flow

The Advantages of this distribution model are:

Consolidating inventory: The manufacturer is able to consolidate the orders

from various retailers. Due to this the product availability is enhanced with

lower inventory holdings. The benefits from consolidation of inventory are

higher for products which have a low and unpredictable demand pattern and

which are of high value. Due to this the need to carry high value inventory

over long periods of time is eliminated.

Postponement: Manufacturers can also postpone the manufacturing till the

last mile. This involves customization based on the actual customer demand

and offering a higher product variety but with lowered inventory holding cost.

An example of this is Dell which assembles the final PC based on the specific

customer configurations by holding sub assemblies of common parts in large

numbers and few components specific to the customer order in small

numbers.

Low warehousing and fixed costs: Due to the direct delivery from the

manufacturer to the customer, the most obvious benefit is the saving from

maintaining and operating warehousing facilities.

High product variety: High level of product variety can be offered to the

customer in this model. Even slow moving items can be offered to the

customer because of the centralized inventory holding for this category of

items.

The Disadvantages of this distribution model are:

High Delivery lead time: The delivery lead time is high because of the higher

in-transit time from the manufacturer location to the customer. If the order

from the customer is mixed then the delivery might happen in partial lots as

the manufacturer might ship from different locations.

Higher transportation costs: The transportation costs are higher because of

the distance involved and also the use of expensive package courier service,

since the manufacturer is handling multiple smaller lot quantities, due to

which he is unable to get the benefit of a larger transportation weight/volume.

Difficulty in handling product returns: Due to the absence of an intermediary

in the proximity of the customer the cost for handling returns is more than the

cost for distribution. The cost of coordination and documentation for the

returns is also higher.

The Pre-requisites for this distribution model are:

Good information infrastructure: This is extremely important for providing

product information and also other functions like the customer directly

processing the order using the manufacturers Information systems. Thus this

distribution model requires significant investment in Information system

infrastructure.

Order visibility and tracking: This is a crucial feature of this distribution model

as it can impact the customer satisfaction. This requires a complete

integration of the order processing and the manufacturing and supply chain

systems, to enable the customer to track his individual order.

In summation it can be said that this distribution model is ideally suited for a

manufacturer dealing with a large variety of low demand and high value items where

customers are accommodative of the longer delivery lead times because of the benefit

of lowered costs and ability to customize their orders.

2. Delivery through in-transit mixing from the manufacturer storage facility

Manufacturing Plants

Retailer

Customers

Product Flow

Information Flow

In-transit merge


The previous distribution model involved supplying from the manufacturer each

individual order/product. Due to this the per unit transportation cost is high. Under

a in-transit merge option the individual products/orders are clubbed and the

customer gets a single consolidated order. For instance if a customer orders a

home PC from company A and a printer from company B as a single order, the

PC and printer are merged at a single location and the customer gets the

complete order.


As in the case of direct delivery from the manufacturer to the customer, in-transit

merge option enables aggregation of inventory and postponement of

customization

The greatest benefit would be in reduction of the transportation costs due to the

merging which takes place. This merge normally happens at a transporters dock.

Assuming the usage of package couriers in the case of the direct delivery and in-

transit merge, the delivery lead time would still be the same, or marginally higher

due to the extra time required for merge.

The overall customer satisfaction would be much higher as he receives a single

receipt instead of multiple deliveries.


The processing and coordination costs are much higher due to the increased

deployment of information systems due to the complexity involved in merging

multiple customer orders.

The investment in information infrastructure will also be higher.


Initial set up and planning for the operation and location of the merge point is

important

Investment in IT infrastructure which gives visibility in the entire chain –

manufacturer, distributor, and customer is essential.

This distribution model has similar performance characteristics as the dropship

model but reduces the overall transportation cost and also enhances the customer

experience. This model requires good IT infrastructure and planning systems for

planning and coordination of the merge.

3. Delivery through packaged carrier delivery from the distributor storage facility


Customers

Product Flow

Information Flow

Storage at Distributor or Retailer


The manufacturer does not hold stock at his facility but moves it to an

intermediate warehouse owned/operated by a retailer or distributor. The

customer orders registered at the manufacturer or distributor are serviced from

the distributor or retailer facility.

The inbound transportation to the distributor is handled by the manufacturer and

the outbound transportation from the distributor to the customer is handled by the

distributor.

The information flows directly from the customer to the retailer or from the

customer to the manufacturer.

This distribution model is pre-dominant is FMCG industry and others where there

is a need to be closer to the customer and ensure a good reach for the products.

For example, a detergent manufacturing company manufacturing the same

product (or brand) at multiple factories would transport the material to distributors

who in turn would service the demand from retailers or end consumers.


The delivery lead time to customers (or the response time) is very short in this

model due to the proximity of the seller to the customer. This is very crucial in

cases where there are multiple parity products competing and availability would

ensure sale, like in the case of personal and hygiene products.

The overall customer experience in this model is also enhanced more than in the

case of direct delivery from the manufacturer. For instance in buying a book from

a retailer the customer has no waiting time but when he order from the publisher

the delivery lead time might range from couple of days to a week.

Handling of product returns is also easier in this case as the customer can easily

reach out to the retailer or distributor due to proximity, thus reducing the

transportation cost for the manufacturer.

Postponement is a strategy which is feasible for this model, though it requires

capital investment at the distributor warehouse. This is being attempted by

bicycle manufacturers who are evaluating the option of setting up a paint shop at

the warehouse, to offer more product (color) variety to the customer. But this can

increase the overall cost to the customer.

The transportation cost is also lower in this model as the manufacturer can ship

out limited FTL (full truck loads) to the retailer instead of multiple LTL (less than

truck load).


This model requires a higher level of inventory as the inventory holding can not

be aggregated as in the case of direct distribution model at the manufacturer.

Also inventory is held at multiple levels in the supply chain due to the demand

uncertainty and benefits of aggregating overall customer demand are not

realizable.

The overall warehouse facility cost are much higher in this case due to the

operating and fixed costs of the warehouse.


Good warehouse facilities at the distributor end to enable faster turnaround time

of customer orders

Right product mix and quantity availability to ensure customer service

This distribution model is suitable for products which do not have a high demand

unpredictability and the product variety is limited. This model enables lower delivery lead

times and in cases where the customer can not wait for his order to be fulfilled.

4. Last mile delivery from the distributor storage facility

Customers

Product Flow

Information Flow




In this distribution model, the distributor delivers to the customer premises

instead of the customer picking up.

In this model, more number of distributor warehouses are needed to be in the

proximity of the demand points to efficiently service the customer orders.


This distribution model offers a good customer response time and overall

customer experience.

This model is especially efficient where there is a “dense” demand concentration

so that multiple customers can be served in the same route.


This model requires a high level of inventory because it can not aggregate

inventories based on specific customer orders.

Also the overall transportation cost is on the higher side. The transportation route

and network planning process is crucial for this distribution model to economize

on the transportation costs.

The warehousing and facilities costs are also higher because of the need to set

up multiple warehouses closer to the customer for efficient service.


Good planning capabilities for route and transportation planning

Good information infrastructure to support order tracking and processing

This distribution model is feasible in cases where the customer values the experience

of delivery to his premises and is willing to pay for the extra service provided. It is

particularly useful in cases where the order sizes are large to justify economies of

scale in storage and transportation. This model works extremely well, when it is

clubbed with an existing distribution network and selectively utilize this model where

the order sizes and the transportation distances justify this.

5. Customer pickup from the manufacturer/distributor storage facility

Customers

Product FlowInformation Flow

Cross Dock


Retailer

Pick up sites

Customer Flow


This distribution model uses some features of a direct distribution model but

economizes on the customer service cost. The products are held at the

manufacturer or distributor warehouse, the customer places orders online or over

phone and then picks up the orders from the pick up sites upon intimation of the

availability.

This distribution model is used both for B2C (selling to the customer) or B2B

(selling to intermediary).


The inventory levels can be kept low due to the visibility of customer order and

the ability to aggregate inventory based on the customer order.

The transportation costs are also much lower due to the ability to aggregate

orders over longer distances. This means that more FTL vehicles can be used

saving significantly on the costs.

This model can offer better product variety at lower costs due to the ability to plan

for different orders and segregate.

If the cross-docking is used then the routing to the various pickup points can be

done more efficiently thus economizing further on the transportation costs.


The delivery lead times are longer due to the time required to move products

from the manufacturer plant to the pick up site. This can be lowered with

investment in IT systems to enable viewing of customer orders and the

committed delivery schedules.

The overall facilities and handling costs can be higher if multiple such pick up

sites are operated.


Good information infrastructure to support order tracking and processing

Planning and coordination for routing and cross-docking

The major benefit of this distribution model is that it can lower the transportation and

delivery costs. The inventory can be aggregated at the manufacturer level if good

Information systems support tracking and visibility of customer orders, thus lowering

the level of inventory held at the same time offering better product variety.

6. Multi-channel distribution model

Customers

Product Flow

Information Flow




The manufacturer has the flexibility to cater to different category of customers

based on the costs and service level expectations. For instance LG (the

consumer durables company) has set up a multi channel distribution model,

wherein the customer could select products and choose the required product at

lgezbuy.com and ask for direct delivery to his home or choose to pick up the

product from the nearest retail outlet. The conventional channel of the customer

going to the retail shop, placing an order and picking up the product or the

retailer delivering to the customer’s home are also available. Alternately the

customer can place an order for some categories of products at the retailer and

be served directly by the manufacturer.

The various options given above have different implications on cost and delivery

lead time. A customer placing an order directly with the manufacturer has a

longer wait time for the product to be delivered but his overall cost of transaction

might be lower. If the manufacturer services the order through the retailer nearest

to the customer, the transportation cost is lower compared to delivery from the

manufacturing location.

The advantages of this distribution model are:

The manufacturer can choose an appropriate service level strategy depending on

the customer expectation and the product. For some products which have a low

demand and which are of high value, it is preferable to centralize the stock at the

manufacturing location and deliver based on direct customer order or order

through the retailer.

More product variety can be offered to the customer in this case

The disadvantages of this distribution model are:

This model requires a higher investment in IT resources and connectivity at all

levels –manufacturer, retailer and customer.

The planning and coordination efforts are also higher

There might be instances of conflict of interest with the other channel partners

The pre-requisites of this distribution model are:

Good IT systems to enable order processing and order tracking

Tight central coordination and planning

With the increasing product variety and the customer buying behavior undergoing a

change due to the multiple modes available for servicing demand, most manufacturers

are looking at establishing a multi-channel distribution model to be in closer touch with

the customer. This model requires trained and experienced planners who can exert a

strong control and monitoring of the entire channel and a good IT backbone network to

enable real time information flow.

Comparing Distribution Network Models

The above discussion explored the options available to manufacturers in setting up

distribution networks. The comparison of these can be done on an objective basis based

on observation on many variables. This is presented as a compiled set for consideration

as thumb rules. Within each the performance characteristic can vary depending on the

product and customer expectations. The ranking of each of these has been done on the

cost and service level variables. A ranking of 1 indicates a higher level of performance

than a ranking of 5

Direct

delivery

from the

manufact

urer to the

customer

Delivery

through in-

transit

mixing from

the

manufactur

er storage

facility

Delivery

through

packaged

carrier

delivery from

the

distributor

storage

facility

Last mile

delivery

from the

distributor

storage

facility

Customer

pickup

from the

manufactu

rer/distribu

tor

storage

facility

Response time 5 3 2 1 1

Product variety

1 1 3 3 3

Product availability

1 1 2 2 3

Customer experience

5 4 3 1 2

Order visibility 5 5 3 2 2

Inventory levels

1 1 3 3 3

Transportation cost

5 3 3 3 1

Warehousing cost

1 1 3 3 4

Information cost

5 5 2 3 3

The multi-channel distribution network has not been included in the above tables as the

all the above options are potentially available to the planner and he could select the best

option, based on the product, cost and service level requirements.

3. Distribution Network Planning

The discussion above gave a framework to plan for distribution based on the

performance on various characteristics like inventory, transportation, service levels,

facilities cost etc; . But when the actual design of the distribution channel is approached

one tool which is employed frequently is Channel Mapping.

A Channel map, which is essentially a map of the product and information flow amongst

the various participants in the channel. A channel map is developed at the strategic level

after detailed discussion and analysis since the decisions can not be easily reversed.

Hence lot of research and usage of analytical techniques goes into the design of

distribution channels.

The purpose of the channel mapping is to provide a blueprint for the possible design

options based on the current markets served, the buying characteristics, the cost

structure, the viability in terms of transportation and warehousing, the capital investment

required and the future demands to be addressed. As can be seen all these decisions

flow from the overall Business plan of the firm. For firms which have a distribution

network in place, the Channel mapping exercise proves useful as it helps to review and

for firms which are in the process of establishing a channel structure, the channel

mapping process the market knowledge gets distilled through the channel mapping

process.

An example of a Clothing company which manufactures fashion garments as well as

uniforms and the like for institutional customers and deals with multiple market segments

in outlined below.

CHAPTER - 3

MANUFACTURER

Agents National Account Sales

Military Distributors

Military installations

Garments Distributors

Company Sales Force

Wholesalers

Large multi brand retail stores

Exclusive retail storesHospitals Hotels Factories

Consumers

In the above distribution channel map, three distinct market segments have been

identified 1) consumers 2) institutional user and 3) military installations.

The mapping process details the fulfillment to these segments through the other channel

partners and intermediaries. Some of these intermediaries could be on an exclusive

basis with the manufacturer or they could be the channel partners for competing

products also.

The channel mapping should not construct the flow of material and information

schematically but also analyze the volume of material which passes through each

individual network. For example the volume of goods that passes to the channel catering

to the military installations and to exclusive retail outlets should be done and the range of

distinctive activities performed by each channel member should be detailed. The costs

associated with serving each customer segment should be captured.

One advantage of channel mapping is the identification of duplication and justification or

solution for the same. In the above example the institutional segment identified above,

there is duplication in terms of the brokers, wholesalers and the manufacturers’ sales

team interaction. It should be looked into if there are specific characteristics of the

market which necessitate this kind of interaction. The channel mapping also helps

determine the financial implication at each stage of the channel. In the above example,

is it financially viable to merge the broker and the wholesaler channel to achieve greater

economies in transportation? Or is there some other reconfiguration required to achieve

the efficiencies? Channel mapping helps to understand and is the starting point for

developing options and tradeoffs.

Though the Channel mapping is a useful tool to understand the entire channel structure,

the material and information flow, the specific decisions which need to be taken for

network planning are:

Role of facilities –warehouse, plant, transportation related facilities

Location of facilities – geographical spread of the facilities

Allocation of capacity to facilities – the installed capacity of the facilities

Matching the market and sources of supply – identifying the appropriate supply

source and the markets that can be served from there.

One of the key facts in considering the above factors for network planning is that each

one is inter-related and has a significant impact on the supply chain performance.

The role of facilities is an important decision as it determines the amount of flexibility that

is available in the supply chain. Some of the facilities could be wholly owned or partly

owned or outsourced to a third party. The role varies depending on the overall supply

chain strategy. For example in automotive manufacturing the role of the facility in China

and India is to serve as a supply base to the assembly locations located in Europe or

North America. Some of the facilities are wholly owned through backward integration by

the primary automobile manufacturer and some are captive outsourced relationships.

Any imbalance of demand and supply can affect the entire supply chain because of the

huge installed capacity. In the case of an outsourced relationship the manufacturer has a

greater flexibility to scout for alternative channels where as the owned facility might

required a fixed capacity to be advantageous in terms of cost saving.

The next level of decision is in terms of locating the facility. The common approach is to

be close to the demand concentration points. But this approach might not be correct in

terms of overall supply chain costs. Location identification is crucial because it helps to

achieve low costs while being responsive to the demand.

Capacity allocation is a also an important decision which determines the costs and the

responsiveness of the supply chain. Though capacity allocation decisions are easier to

change than facility location, they tend to be fixed for the medium term. Allocating too

much capacity to a facility might risk in terms of high costs if the demand falls due to

non-utilization of capacity and at the same time, allocating too less capacity affects the

responsiveness of the supply chain to cater to the demand.

The next level of decision regarding the matching of supply sources and demand points

is a important since it determines the level of inventory, the transportation modes and

cost and the service level offered. This decision could be dynamic to accommodate

changes in the market. An example of this is the emergence of e-commerce as an

integral part of the supply chain ordering. Manufacturers are trying to innovate around

this by setting up mixed supply sources for orders which are originating though the

internet channels like direct delivery from the manufacturing locations or from the

nearest storage facility.

Factors Influencing Distribution Network Decisions

The factors influencing network design can be classified under the following broad heads

-- strategic, technological, macroeconomic, political, infrastructure, competitive and

operational.

Strategic Factors

Companies tend to follow one of the two major strategic variables in their overall strategy

–cost or responsiveness. Firms following the cost strategy would focus on cost

leadership trough various means –low cost plant operations, procurement efficiencies,

smaller vendor base etc; they would not invest in multiple facilities because of cost

reasons and would distribute mostly through the direct distribution route even if the

facilities are far from the demand points. On the other hand firms focusing on

responsiveness would try to compete on the basis of innovative products, product variety

and shorter lead times to the customers. They would establish a distribution network

which reaches out to the customer through various levels of intermediaries. Some firms

can choose to use both the strategies based on the customer/product segment that is

targeted by them.

For example shoe manufacturer Nike has production facilities located globally and in

many parts of Asia. The facilities in China and Indonesia focus on the cost aspects

through high economies of scale and produce the mass market lower priced shoes. The

facilities in Taiwan and Korea on the other hand focus on responsiveness and produce

the higher priced and design intensive, high variety of shoes. Hence it is important for a

firm to think in terms of its overall business strategy even while thinking of supply chain

design. The following classification looks at the strategic role for various facilities of a

firm in the Supply Chain:

Offshore facility: This is primarily a low cost facility, which focuses on exports and

is a competitive tool for manufacturers who are looking at benefiting from the

lower cost structure in these geographical regions away from their home market.

To support this strategy the labour cost should be low and the raw material

should be available at a relatively low cost locally. On of the reasons the

manufacturing outsourcing to the off shore facilities is prevalent in the Asian

region successfully.

Source facility: This is further up in the value chain than the off shore facility. The

major difference being that these facilities produce for the global market. Though

the focus is still on the cost the complete production is exported due to reasons

of low cost, well developed infrastructure, skilled manpower and high quality. An

example of these facilities is the Nike plant network in Korea and Taiwan. In

Nike’s case both these facilities started of as off shore facilities and over a period

of time have become involved in new product development and manufacture

products for sale globally.

Server facility: These facilities are focused on serving local or regional demand of

the places where they are located. The primary reason for setting up a server

facility is to overcome the tariff barriers like high taxes, local content requirement

and other regulations by the government. An example of this was the decision by

Suzuki to partner with the Indian government to set up Maruti Udyog. This facility

was set up as a server facility in the country as the import tariffs were very high

and the logistics costs of importing from other countries into India made is

unviable.

Contributor facility: A server facility can migrate to become a server facility over a

period of time by assuming greater responsibility of product development,

process improvements, product modification/customization. A server facility that

is well managed can potentially become a contributor facility. The Maruti plant in

India started of as the server facility, but over a period of time it has assumed a

role of contributor facility in the Suzuki network.

Outpost facility: These are facilities established to obtain access to local

knowledge and skill that may be available within the existing network. This might

also play the role of a server facility but the primary purpose is to be a source of

knowledge for the entire network.

Lead facilities: Facilities that create new products, process improvements and

technologies for the entire network. These are facilities with access to trained

and skilled manpower and technical resources.

Technological Factors

The production technology available and deployed has a significant impact on the supply

chain network. If the technology supports large production scenario, then the economies

of scale dictate the setting up of few large production facilities. This is the case of the

chip manufacturing where the installed capacity and the technology support large scale

manufacturing. Firms in this industry have set up few facilities which cater to the global

requirement from one or two facilities. On the other hand if the facilities have a low fixed

cost then many regional facilities can be set up to cater to the regional/local demand.

This is the case with the bottling plant of Pepsi which has many facilities in each country

of operation. If the production technology is inflexible then the firm has t set up many

local facilities to cater to the demand of each region and on the other hand a flexible

production technology would help in consolidating the manufacturing thus helping in

aggregating inventories and lower costs in production.

Macro economic factors

These are factors which are not internal to the firm but significantly influence the network

structure. These include taxes, tariffs, import and export regulations, exchange rates and

such. For instance with the introduction of a unified VAT (value added tax) structure in

India, the existing decentralized distribution structure is slated to undergo a change and

might be replaced by a more centralized structure because of the uniformities in tax

structure across states.

Political Factors

While deciding on the network structure companies have to take decisions on the

location of facilities in various regions in the world. One of the influencers of this decision

is the political system prevailing in the country. If the company feels that there is a

adequate legal system for protecting its rights then it is a positive influencer. This

decision is difficult to quantify and companies have to make a subjective evaluation

based on the information and research available to them.

Infrastructure factors

The available infrastructure in terms of roads, ports, rail movement, air cargo, broad

band etc; significantly impacts the supply chain in terms of the transaction cost and the

responsiveness that it can deliver. Most firms would consider this as one of the important

criteria for locating facilities. An example of this is China, which has got significant

foreign investment in the manufacturing sector in places like Shanghai, Guangzhou

though these are high cost locations, because of the excellent infrastructure developed

by the local government. This factor is also important because it can over ride the

disadvantages of the other factors mentioned above.

Competitive Factors

The competitor action also influences the decision on distribution network planning.

Firms might choose to locate at different places farther from each other or closer to each

other depending on factors like availability of raw material, manpower resources and

infrastructure facilities. An example of this is companies locating retail outlets in a single

place (mall) to take advantage of the customer buying behavior and expectation of

locating all products in a single place, thus saving on the total transportation cost.

Another example of this is the emergence of hubs because of the local advantages. For

instance Chennai has emerged as a manufacturing hub for automotive and auto

component manufacturers because of the presence of large number of vendors and

suppliers catering to this industry – MRF, TVS group companies, Sundaram Clayton,

Ashok Leyland, Ford Motors etc; Future competitors might choose to locate a facility in

this region because of the advantages of a well established supply base.

Delivery Lead time and Local Facilities

Companies that are competing based on the customer responsiveness need to locate

their facility closer to the customer. For instance companies that are in retailing locate

their facility based on the geographic reach that can be achieved from the facility.

Alternately companies that are delivering directly to customers might use a faster mode

of transportation to reduce the facility cost but this might increase the overall

transportation cost. The decision to locate a facility or substitute by faster mode of

transportation depends on the customer buying behaviour. For instance the customer

might be willing to travel for a longer distance to reach a facility which is selling home

PCs at a lower cost but might be unwilling to do so while buying medical products. The

overall network strategy should consider this to deploy the optimal mix of facilities and

transportation modes.

Logistics and Facility Cost

Total logistics cost is computed as the sum of the inventory, transportation and facilities

cost. Firms wishing to reduce the total logistics cost must focus on reducing the

individual components by choosing an appropriate mix of the number of facilities and the

location of the facilities. It has been observed that inventory and facilities costs increase

as the number of facilities increase and the transportation cost decreases up to a point

as the number of facilities increase after which the facilities are stretched too thin and

the overall transportation costs increase. There might also be cases where the weight to

volume ratio might be significantly impacted due to the characteristics of the raw material

and finished product. For example iron ore is processed to make steel the output is a

small fraction of the input material used. Locating the facility close to the source of the

raw material is a good strategy to economize on the overall transportation cost.

4. Network Design & Optimization Approach and Techniques

In the rapidly changing business environment companies need to assess the viability of

their existing distribution networks and new firms entering the market need to consider

many factors while establishing a network structure. The important issues that need to

be decided upon as detailed above are: facility role, facility location, capacity allocation,

allocating demand and supply.

Answers to such issues are complex and data-intensive. The complexity is due to factors

detailed earlier –political, macro economic, competitive etc; The data-intensiveness is

due to the large amount of data required to take decisions on the network structure. The

typical information requirements include possible service alternatives, costs, technology

applications. The process requires a structured approach and methodology for effective

analysis. This process has been segmented into three phases – Problem definition and

Planning, Data Collection and analysis and recommendations and implementation. The

generalized structure for this is given below and shows a phased approach to network

design.

CHAPTER - 4

Feasibility Assessment

Project Planning

Assumptions and Data Collection

Analysis

Development of recommendations

Implementation

PHASE 1

PHASE 2

PHASE 3

Phase 1: Problem definition and Planning

This phase provides the foundation for the network planning and design process. The

feasibility assessment process essentially evaluates the prevailing conditions and

identifies the need for the changed situation and the justification for the same through

situational analysis, supporting logic development and cost/benefit estimation.

The situational analysis involves in-depth understanding and appraisal of the internal

processes, market assessment, and competitive evaluation to arrive at potential

improvement areas.

The internal review is required for developing a clear understanding of the logistics

processes. The internal review focuses on historical performance, data, strategies,

operations and tactical processes and practices. Each element of the logistics process

should be carefully examined with respect to the stated objectives and the capabilities to

meet those objectives. An example of the internal review processes that are studied in

Materials Management as below.

Material Management Processes

What is the current material flow through plants and distribution centers?

What processes are performed at each manufacturing location and distribution

centre?

Material Management Decisions

How manufacturing and distribution are centre capacity allocation decisions

made?

How are production planning and scheduling decisions mad?

Material Management Measurable

What are the manufacturing and distribution centre capacity limitations?

What are the key measures of materials management performance?

The external assessment focuses on external relationships with customers, suppliers

and consumers. The assessment should consider processes and competitors

capabilities. An example of the external assessment for suppliers would focus on issues

like:

What value added services are suppliers providing?

What are the major bottlenecks with current suppliers

What are the opportunities to outsource activities?

How can processes be changed to reduce bottlenecks?

Supporting Logic Development

The purpose of the supporting logic development is to integrate the findings from internal

and external review and assessment. This process critically reviews the potential

opportunities and investigation of whether additional investigation is required. This

process also evaluates practices with a factual analysis to remove biases. This process

should enable the generation of some alternatives for further evaluation and

consideration.

Cost/Benefit Estimation

The final feasibility assessment task is the estimation of the potential benefits of

performing a logistics analysis and implementation. The benefits can be looked at as

service improvements, cost reduction and cost prevention. Service improvements

include results that enhance availability, quality or capability. Cost reduction benefits

accrue from one time reduction in certain areas or elimination of non value adding tasks.

Cost prevention involves improvements in operations and processes.

Project Planning

This is the second Phase 1 activity and involves setting up the statement of objectives

and the statement of constraints for network design.

The statement of objectives involves measurable and targets under various heads based

on the areas identified during situational analysis. This states the objectives in

quantifiable terms, for example

Inventory availability of 95%

Delivery of 98% of orders within 48 hours of order receipt

Specific definition of the objectives helps to direct distribution network design efforts to

achieve customer service performance levels.

The statement of constraints lists the available constraints. These constraints could be

due to the cost needed to reverse existing channel structure in terms of location of

facilities, product mix at facilities or other capacity related changes.

Phase 2: Data Collection and Analysis

Once the feasibility assessment and project plan are completed, Phase 2 focuses on

data collection and analysis. The focus of this phase is to define the analytical

approaches and techniques and collect data.

The first step is determination of appropriate analysis approaches and techniques. The

most common approaches available are analytical, simulation and optimization. The

analytical approach uses standard numerical methods such as those available through

spreadsheets to evaluate alternatives. A simulation approach is use when there is lot of

uncertainty involved. This makes extensive use of software tools that can model flows,

activity levels and performance characteristics.

For example supply chain dynamic simulation can be used to illustrate the trade-off

between inventory allocation strategy and supply chain performance. Optimization uses

linear programming to evaluate alternatives and select the best one. This is smaller in

scope than the simulation based solutions.

The focus of the analysis is to define the analysis question, completing the analyses of

alternatives and doing a sensitivity analysis.

The first task defines the specific analysis questions concerning alternatives and the

range of acceptability of alternatives. An example of this is given below, where the key

question is distribution site location. Suppose that the network planning effort is on

identifying the network of distribution facilities to serve the Indian market. Assume that

the current network uses four distribution centers – Chennai, Delhi, Mumbai and Kolkata.

The table below summarizes the volumes, costs and service characteristics of the

existing system.

Distribution

Centre

Location

Shipment

volume(‘000

tones)

Inbound

Transportation

cost(lakh Rs)

Outbound

Transportation

cost (lakh Rs)

Inventory

carrying

cost(lakh

Rs)

Total

cost(lakh

Rs)

Chennai 693 317 264 476 1057

Delhi 135 62 62 92 216

Mumbai 455 208 284 303 795

Kolkata 10 5 5 6 16

TOTAL 1293 592 615 877 2777

Likely questions for the analysis include 1) what is the performance impact of removing

Kolkata distribution centre 2) What is the performance impact of merging Chennai and

Kolkata distribution centre. These questions represent a small fraction of the likely

alternatives that can be considered.

The next step is to evaluate the available alternatives. The analysis must be completed

to take into account all the performance characteristics of the alternative network design

strategies. After this the alternatives can be subject to further sensitivity analysis. Here

uncontrollable factors such as demand, interest cost, and competitive actions are varied

to assess each alternatives ability to meet the set objectives. In the case of the above

example if one of the alternative is to start another distribution centre to meet the

customer service level requirements the sensitivity analysis investigates the

appropriateness of this solution for different volumes and costs. For example would five

distribution centers be a good option even if the volume increased or decreased by 10%.

Phase III: Recommendations and Implementation

Alternatives and sensitivity analysis are reviewed to determine the best alternative and

evaluate costs and benefits. This done by comparing present cost and service levels

with the developed alternatives and projecting the same into the future. The ideal cost-

benefit compares the alternatives for a base period and then projects the comparative

operations across some planning horizon. For the example of the distribution centers

detailed above let us assume that the management is evaluating three alternatives 1)

Expanding existing facilities 2) expanding existing facilities and adding two more 3)

expanding existing facilities and adding three more. The cost vs service results of the

three alternatives are represented graphically below. These graphs show dramatically

different performance characteristics for the three alternatives. Alternative 1 shows a low

cost initially but the service level is low and declines further as volumes grow in the

distant markets. Alternative 2 is the lowest cost option and service level increases as the

volume increases. Alternative 3 offers substantially better service though the initial costs

are very high.

Total Cost Performance

6

8

10

12

14

16

18

20

22

0 1 2 3 4 5 6 7 8 9 10

Years into the future

Tota

l Log

istic

s C

ost

Alternative 1

Alternative 2

Alternative 3

Service level Performance

75

80

85

90

95

0 1 2 3 4 5 6 7 8 9 10

Years into the future

Volu

me

deliv

ered

with

in 5

day

s of

ord

er

Alternative 1

Alternative 2

Alternative 3

Alternative 1 is the lowest cost alternative for the first year, Alternative 2 is better from

year 5 to year 8. Evaluating the above options the company has the option of enhancing

the competitive position by offering better than competitor service by using alternative 3,

though at a higher cost. After year 8 the alternative 3 is the most attractive in terms of

cost.

If prior to the planning process management believed that additional facilities would be

required to maintain desired service levels and the total cost would increase

substantially with increased warehouse facilities. But with the above analysis, the

decision making becomes clearer and the most effective long term plan can be identified

to maintain competitive position.

Decision Analysis Methods and Techniques

One of the most widely used optimization techniques are the mathematical programming

methods. Linear Programming is one of the common techniques and it helps to select

the optimal network design from a number of available options while operating in defined

constraints.

The application of LP is in cases where two or more locations are competing for limited

resources, and the operating conditions should be capable of linear approximation. But it

should be remembered that a solution which is mathematically possible might not be

feasible logistically.

One of the most widely used forms of LP for network problems is Network Optimization.

Network optimization treats the distribution network as consisting of nodes to identify

production plants, warehouses and markets and transportation links. Costs are incurred

for handling goods at the nodes and the movement happens in arcs. The network model

objective is to minimize the total production, warehousing, inventory and transportation

costs subject to supply, demand and capacity constraints.

Mixed integer programming is another optimization technique successfully applied to

distribution network problems. This technique allows lot of flexibility in which enables it to

incorporate multiple variables. The main advantage of a mixed integer programming is

that fixed as well as variable costs can be included in the analysis. In other words mixed

integer programming allows solutions to reflect the real life situation of increasing costs

with increase in the number and size of the warehouses and the spread of the

distribution network.

Another network analysis method is Static Simulation, which has a wide applicability and

attempts to replicate a situation. It can be defined as the process of designing a model of

a real system and conducting experiments with this model for the purpose of either

understanding system behaviour or evaluating various strategies within the limits

imposed by defined criteria for the system.

The figure below illustrates a typical network and the major cost components. The

network includes plants, distribution centers, and markets. The major cost components

are raw material, sourcing, manufacturing, inbound transportation and outbound

transportation and inventory carrying cost.

Plant 1 Plant 2 Plant 3

DC DC DC DC

Markets

Static simulation evaluates product flow as if it all occurred at a single point of time

during the period under consideration. In this sense the primary difference between

static and dynamic simulation is the manner in which time related events are treated.

Dynamic simulation evaluates performance across time, static simulation does not

consider the changes happening between and across time periods.

The above discussion focuses on the factors to be considered while making supply

chain network decisions and also provides a useful framework for analysis and usage of

mathematical techniques for making network decisions. Apart from the above, some

issues that managers consider while making network planning decisions:

Expense Components

Plant handling+

Inbound Freight+

Handling at the DC+

Inventory Carrying +

Primary Outbound Transportation+

Information handling+

Secondary transportation

TOTAL COST

1) The total lifespan of the facilities is longer than the decision period: The decision to

locate a facility and the ownership structure is a long term decision which can not be

reversed easily. For instance a food distributor recently moved his regional warehouse

away from the city to a less expensive location to reduce the facility cost. But with the

introduction of VAT the location became a burden in terms of the extra tax due to

additional handling and also it was difficult to dispose it, since it was away from the city.

Hence managers must consider the fact that any facility –manufacturing, warehouse –

that they put up will stay there for a long period of time. To mitigate the risk it might be a

good option to go in for an outsourcing arrangement with a service provider so that the

ownership and fixed costs are avoided.

2) Focus on infrastructure availability: For any facility to be functioning efficiently the

available infrastructure at the location plays a great role. Well developed infrastructure

like broad band connectivity, well maintained connected highways, availability of rail

linkages and wagons, access to ports are important. The overall cost for the facility is

also determined by how low the transaction cost is and the service level is determined

by turnaround times.

3) Taxes, tariffs and incentives: With the pace of economic activity especially in the

manufacturing going up due to the MNCs looking at India as a major hub, many

incentives like lower surcharge, tax holidays, access to low cost facilities is being

provided by the local governments. These have to be well understood and taken into

account while planning to locate a facility. Essentially these reduce the risk of locating a

facility and lower the fixed cost of setting up operations.

4) Ownership structure of the distribution network: The distribution network as has been

seen earlier has a number of players and the manufacturer has to exert control over

various aspects of the network. If the manufacturer owns the various stages of the

distribution network like facilities, warehouses and transportation then he can optimize

theses for greater benefit of the entire supply chain. But if there are multiple players

owning different set of resources as is normally the case then each would try to optimize

his own resources and not necessarily the entire network. Trying to optimize the entire

network requires great effort and coordination.

TRANSPORTATION

This section deals with the various issues related to physical movement of goods, the

transportation modes, the economics of the transportation activity, the transportation

planning process and techniques and the trends in transportation like usage of IT tools.

1. Role of Transportation in the Supply Chain

2. Transportation Principles and Participants

3. Transportation Modes, Performance Characteristics and Selection

4. Transportation performance, costs and value measures

5. Transportation Routing Decisions

6. Transit Operations Software

7. Advanced Fleet Management System

8. Intermodal Freight Technology

9. Transportation Security Initiatives And Role Of Technology

5. Role of Transportation in the Supply Chain

Transportation is one of the critical elements of the supply chain, along with inventory

and warehousing. As an activity it is concerned with the movement of goods from a

source to a destination. It has significant cost implications in terms of the mode

employed and the weight/volume of goods and the distance covered. It is also a major

economic activity which provides direct and indirect employment to millions of people.

Transportation accounts for around 6% of the total GDP in the country. It is also a large

fraction of the total cost of the goods sold through the distribution channels.

Category Proportion of total logistics cost

TRANSPORTATION 45%

INVENTORY & WAREHOUSING 25%

PACKING & LOSSES 30%

Total logistics cost (Rs.billion) 2,800

Total GDP (Rs.billion) 22,000

Total logistics cost as% GDP 13%

Year 2002

It is the key to the success for many businesses especially where responsiveness and

product availability are key factors. For example Walmart, the biggest retailer in USA

uses transportation as a strategic and tactical tool to lower costs. There is frequent

replenishment to the stores from the central hub or from the suppliers to keep the

inventory costs low. To lower the costs of transportation, Wal-Mart consolidates

inventory at its central hub and thus ensures higher truck utilization for every trip.

CHAPTER - 5

To ensure faster turnaround for the trucks, Walmart has pioneered the usage of cross-

docking where in incoming material from various sources are segregated, sorted and

moved on to another truck for outbound deliveries to the same customer. This eliminates

the need for storing and multiple handling thus saving cost and time. This example

illustrates both the innovative usage of transportation and also the inter-relationship

between transportation and inventory management.

Transportation is a crucial link between the various stages of the supply chain. With the

growth of global trade the transportation infrastructure and the IT tools are contributing

towards improving the transportation efficiencies for lower supply chain costs. Consider

the case of India, which uses maritime transportation for more than 95% of the exports

and imports. The port infrastructure in terms of container handling, road and rail linkages

influence the performance of the supply chain. The PC manufacturer Dell uses an

extensive transportation network for movement of products from suppliers to the

assembly plants located all over the world and then dispatches from each plant to the

individual customers.

From the above discussion it can be concluded that:

Transportation contributes to the overall economic activity and provides

opportunity for growth under competitive conditions. The more efficient the

transportation the lower the transaction costs for the companies operating in the

economy

It supports greater reach and availability for the products in the market place

The wider the product distribution and reach greater the role for transportation

and more the number of opportunities for companies to exploit the economies of

scale

Transportation is a significant cost influencer and has more than 25% of the

share in the total logistics costs. This can influence the price of the end products.

The transportation activity should not be considered in isolation, but in

conjunction with the other supply chain activities and it is more than physical

delivery. There is a need to deploy and support the transportation planning

process with IT tools and techniques.

Next we look at factors which affect the transportation decisions in a Supply Chain. The

factors can be looked at from the view point of a transporter or a shipper (company using

/contracting the transporter). For the shipper the factors influencing decisions of

transportation are:

Transportation Cost: This is calculated as the total cost paid to the transporters

for inbound and outbound transportation. Inbound transportation refers to the

cost incurred for the movement of raw material and other inputs for

manufacturing and outbound transportation refers to the movement of finished

products to the customer. The transportation costs vary based on the transporter

offered price for movement of goods. These costs can be considered to be purely

variable costs if the shipper does not own the transportation resources.

Inventory cost: These costs are towards holding inventory in various stages of

the supply chain. For transportation decisions these are considered as fixed for

short term transportation and variable when considering the design of the total

distribution network.

Facility cost: These are the costs for maintaining the various facilities –factories,

warehouses etc; and these are considered as fixed for making transportation

decisions.

Processing cost: These are the costs associated with loading, unloading and

handling of goods. These are considered as variable costs for transportation

decisions. For some transportation modes like through container, these can be

quite significant.

A shipper should consider all the above costs while making transportation decisions,

since these impact the overall cost of the supply chain and the product and the

service level offered to the customer. Within these there is scope for making trade-

offs where necessary based on the overall supply chain strategy – focus on cost or

responsiveness.

For a transporter the factors that are considered while making decisions are:

Vehicle related costs: These are the costs towards the purchase or lease of a

vehicle. These costs are considered fixed for the short term and taking into

account whether the vehicle is operating or not and for the medium or long

term these costs are considered as variable. For strategic and long term

purpose the vehicle related costs depend on the number of vehicles owned.

Fixed operating expenses: These are the costs associated with maintaining

transportation assets like insurance, taxes, labour etc; If the vehicle operators

are paid irrespective of the trips made then they would fall within this

category.

Operations related expenses: This is the cost incurred towards labour, fuel,

which are independent of the quantity transported. These depend on the

duration of the trip and independent of the quantity carried.

Quantity related costs: Under this category are the costs in loading, unloading

and handling. A small portion of the fuel cost also depends on the quantity

carried.

Overhead costs: These costs are incurred for planning, coordination,

scheduling and any investment in IT tools and applications.

A transporter should consider all the above costs while making a choice of the markets it

wishes to serve. If he operates in a market where responsiveness is crucial then there

will be cost implications in terms of the size of the fleet and the operating expenses. But

if he focuses on serving price sensitive markets then ability to exploit economies of scale

in terms of backhaul etc; would be crucial.

6. Transportation Principles and Participants

The two fundamental economic principles for transportation decisions are – economy of scale and economy of distance.

The principle of Economy of Scale states that as the size of the shipment increases the

per unit cost of weight transported decreases. For example shipments that use the entire

carrying capacity of a truck have a lower cost per weight (kg or tonne) than those

shipments which use a smaller portion of the total truck capacity. It is also observed that

larger capacity transportation vehicle (rail, ship) has a lower per unit cost per weight than

smaller capacity vehicle. The transportation economies of scale operate in such a way

that the fixed cost of moving a shipment is spread over a larger weight. These fixed

costs as detailed earlier are: loading, unloading, documentation, coordination etc; Such

costs are considered fixed because they do not vary based on the shipment volume.

This means that the fixed costs of moving a shipment of 1000 tonnes and 100 tonnes is

the same.

The principle of Economy of Distance states that the transportation cost per unit weight

decreases as the transportation distance increases. This means that the cost to move a

shipment for 1000 kms will cost less than to move two shipments of the same weight

each moving 500 kms. This is also referred to as the tapering principle. The working is

similar to that of economy of scale, in that the fixed costs are spread over longer

distance, resulting in lower per km cost.

The above two principles need to be considered while making transportation decisions.

The goal should be to maximize the shipment size and the ship for longer distance by

offering the desired service level to the customer.

CHAPTER - 6

Transportation Participants

Transportation decisions are taken by all the members in the supply chain and the

participants in the decision making can be classified as – shipper, transporter,

destination or consignee, agents and brokers, the government, internet and the public at

large.

Some of these participants influence an overwhelming influence on the transportation

network, and all the players are significantly influenced by the decisions taken in public

domain by the government and the local authorities. For our discussion the government

should be interpreted as comprising both the central authority and also at the regional or

local level for specific laws regulating transportation movement.

The figure below illustrates the inter-relationship between each of the players. It is also

useful to look at the individual participant’s role and perspective of each party in the

supply chain.

Public

Government

Agents/Brokers/

Transporters

Shipper Consignee/Receiver

Internet

Shipper and Consignee: The transaction between the shipper and consignee covers

movement of goods from a source to the destination, the pick and delivery schedules,

guarantees of safe delivery, and related documentation.

Agents/Brokers/Transporters: The transporter actually performs the task of loading,

transporting and unloading at the premises. He is guided by the principles of economies

of scale and transportation distance. He seeks to maximize his delivery by coordinating

the pickup from multiple shippers so that his costs of transportation are covered and he

maximizes his return. The agents/brokers perform the task of matching the shipper to

the transporter.

Government: The government has an interest in the smooth and efficient performance of

the transportation industry since it has a direct impact on the economic and social well

being. In some cases like railways it is sole transporter. The government also looks at

regulating this sector through multiple laws on the carriage of different types of goods

and also through entry and exit timings into the residential zones of the cities or towns.

Internet: The internet is emerging as the backbone of the industry primarily through

exchange of information. The earliest usage has been in matching freight to the

available shipment in the market. This has changed the role of the various intermediaries

in the market. The other role is as a B2B market place for procurement of fuel,

insurance, spares, consumables etc; The other major use of the internet is to enable the

tracking and tracing of shipments from the source to the destination. All these topics

would be dealt in greater detail in the later portion.

Public: The public has a stake in the way the transportation system functions and they

indirectly create demand for transportation when they buy goods. Any increase in cost of

transportation increases the overall product price. Also the concerns are there in

environmental regulations and impact on safety.

7. Transportation Modes, Performance Characteristics and Selection

There are essentially seven modes of transportation that are used by shippers to reach

out to the customers in the supply chain.

Roadways

Railways

Waterways

Airways

Pipelines

Ropeways

Multimodal

These can be further classified and looked as below:

MODES OF TRANSPORTATION

Roadways Railways Airways Pipelines Ropeways Intermodal

Regular freight

Package carrier

Waterways

Domestic water transport

Foreign Water transport

Coastal Inland

CHAPTER - 7

Airways

Airways carry both freight and cargo. Airways have a high fixed cost compared to other

modes of transport because of the infrastructure and equipment. The fuel costs and

manpower costs are variable and depend on the number of trips made. The goal of

airlines as is the case with other modes is to maximize the flying time and of a plane and

the revenue generated per trip.

Airways offer the benefit of faster delivery times but are the most expensive mode of

transportation. They are ideally suited for emergency shipment and for movement of

high value and low volume/weight goods. For example Dell uses airways exclusively for

deliveries from plants located in Asia. Even the pharmaceutical industry in India uses

this mode of transportation for exports. The general rule for selecting this mode of

transportation is the time sensitivity of the product. For instance high fashion clothing,

fresh cut flowers air might be the only feasible mode of transportation. Some of the

major air transportation companies are UPS, DHL, and FedEx.

Crucial success factor for the air transport is the well developed airport facilities and

infrastructure like ground handling, connectivity, storage facilities.

Road Transportation

Road transportation is the pre-dominant mode of transportation of goods in the country

and accounts for more than 75% of the total freight cost. The trucking industry can be

classified based on the size of the vehicle in operation and the capacity as LTL(less than

truck load) or TL(truck load). The TL operators charge based on the full carrying capacity

of the truck irrespective of the load actually carried. The LT operators charge based on

the weight carried and the distance traveled. The major advantage of road transportation

also called as trucking, is the ability to offer door to door pick up and delivery.

Though this is a more expensive operation than railways it is due to this reason that it is

the most popular apart from the fact that it is easily contracted. The fixed costs are

relatively lower for TL operations. The idle time and the travel distance between

successive shipments add to the costs of operation. The major objective is to minimize

the idle time and get return loads from the destination point reached. Some companies

producing in large batches and shipping frequently find this option very feasible as they

get assured service by the TL operators. The LTL operations are priced to be cheaper

for smaller shipment sizes as TL tends to be cheaper for larger sizes. The LTL operators

can not assure the same level of service as a TL operator because of the need to pick

up multiple shipments, consolidate and then transport.

This mode of transportation relies exclusively on the highway network in the country.

Hence let us briefly touch upon some issues relating to road transportation specific to

India. The roads in India can be classified as national highways, state highways and

district roads and village roads. The responsibilities for maintenance and up gradation is

also split along these lines between the Central and State governments. The

government has set up a body NHAI for developing, maintaining and upgrading the road

network.

The growth in road traffic has been phenomenal because of the increased economic

activity especially manufacturing. According to a recent study the average growth of road

transportation on a yearly basis is around 8%. But the road network has not kept pace

with the increased usage of this mode. The result has been frequent congestions,

accidents, and higher turnaround times near check posts. It is a fact that the average

travel distance of a truck in India is around 250-300 km per day whereas in developed

countries it is between 650-700 kms. This is adversely impacting the supply chain costs

and indirectly increases the costs of the goods and services.

The government has recognized this fact and the Golden Quadrilateral project initiated

to connect the major economic centers of the country is a proof of the action being

taken. This sector has also been opened for foreign participation through joint

investment and many major firms have ventured into this development sector.

Given the size of the industry and the network covered it is envisaged that this mode of

transportation would continue to be the backbone of the transportation network in the

country. Some of the major operators in India who provide road transportation services

are TCI, GATI, SER, ABT, JGT etc;

Railway Transport

This is a mode of transportation operated only by the Government in India. But in other

countries there are many private players like in North America the major operators are

Canadian National, CSX Transportation. This mode is used for transportation of high

density or high weight cargo over very long distances in cases where the cargo is not

time sensitive. For instance this is the dominant mode for transportation of coal from

mines to the thermal power plants and for the transportation of food grains from and to

the FCI warehouses. The rail transport has a very high fixed cost because of the

locomotives, wagons (cars) and the yards. The trip related expenses like fuel and labour

is independent of the number of wagons but varies according to the distance traveled or

time taken. The focus of the rail transportation operators is to reduce the idle time or wait

time for the train. The costing of the rail transportation is economical only when large

shipments are transported over very large distances.

The major issues at rail roads are vehicle and staff scheduling, track maintenance and

repair, availability of empty wagons.

In India demand for rail transportation is growing exponentially but the growth has been

less than the road transport because of inadequate investment and expansion of the

network. The present capacity is mostly devoted to carrying essential commodities like

coal, food grains, and petroleum thus leaving the spare capacity for carrying industrial

produce. Due to this the load is shifting to the road transportation sector.

Water transport

Historically water transport is the earliest form of transportation. It can be classified as

1) Domestic water transport: This is the transport of goods within the geographical

boundaries of the country. These can be further classified as

a) Coastal domestic water transport: This involves transport of products through

inland waterways as well as within domestic ports.

b) Inland domestic water transport: This uses the rivers, canals and lakes of the

country for transportation of goods

2) Foreign Water transport: This is the movement of goods over water across the

domestic waterways onto international waterways and boundaries.

Water transport constitutes over 95% of the total volumes handled for exports and

imports through the ports of India.

This mode of transport is ideally suited for shipment of very large shipments at low cost.

It is however the slowest mode of transport because of the slower in transit time, wait

time and ports and loading and unloading time from ships. This is not a feasible option

for short distances though the domestic water transport is able to operate efficiently

through this mode. In global trade this is the dominant mode of shipment. The range of

products handled is also diverse –cars, food grains, fertilizers, cement, agricultural

produce etc; considering the distances and the volume involved this is the most cost

effective transportation mode.

In the Indian context the major issues faced for the growth of this mode of transportation

are:

1) Inadequate dredging facilities preventing usage of large capacity vessels

2) Port equipment and operational constraints

3) Lack of sufficient container handling facilities

4) Usage of IT tools for planning and coordination is low

Pipeline Transport

Pipeline is primarily used for transportation of crude petroleum, refined petroleum

products and natural gas. This mode of transport has a high fixed cost for setting up and

operationalizing the pipeline. These are effective way of transporting liquids and gases

when relatively large flows are required. This mode is used along with other modes to

cover for any fluctuating demand, for instance crude is also transported through ships

and also through pipelines. In the Indian context, a pipeline is being planned from Iran to

India passing through Pakistan for transporting natural gas.

Ropeways

This is not a well developed model and has not found many applications. This is

sometimes used to connect remote points for transport of essential commodities. For

instance it is being used in Pinjore to transport iron ore from the mine to the shipment

point. It has also some applications for short distances within the premises of

manufacturing plants.

Intermodal transportation

The above discussion focused on the various modes, their performance characteristics

and advantages. The shipper could choose to operate on an exclusive basis with some

mode or use an appropriate mix of various modes to lower costs and increase

responsiveness. This is called as intermodal transportation network. This essentially

combines two or more modes to take advantage of the inherent economies of each and

thus provide an integrated service at lower cost.

This mode of transportation has become common with the adoption of containerization

for shipping. These are the boxes used to intermodal storage and movement between

motor freight, railroads and water transportation. These are typically 8 feet wide, 8 feet

high, or 20 or 40 feet long. Container transport often uses truck/water/rail combination

particularly for global freight.

Key issue to the use of intermodal transportation is the exchange of information to

facilitate shipment transfers between different modes because these transfers often

involve considerable delays.

In India rail and truck combination is popular and is termed as Piggybacking or TOFC

(trailer on flatcar). It is a combination of convenience and flexibility of trucking with long

haul economy of rail.

The table below summarizes the fixed and variable costs for different modes of

transportation.

Rail High fixed cost in equipment, terminals, tracks, wagons etc and low

variable cost

Road Low fixed cost and medium variable cost (fuel, maintenance etc)

Water Medium fixed cost (ships and equipment) and low variable cost

Pipeline Highest fixed cost (construction, pumping equipment) and lowest

variable cost

Air Low fixed cost (aircraft, cargo handling) and high variable cost ( fuel

labour, maintenance)

Transportation Mode Selection

The transportation mode selection process tries to achieve two goals –minimize costs

and maximize the service level. The general principles for mode of transportation are:

1. Match the shipment characteristic with the appropriate mode of transportation.

There should be documented proof of performance for a transportation mode.

2. Evaluate on the basis of cost

3. Developing selection criteria is the final step and the modes should be evaluated

on the basis of these.

The table below ranks the different modes with respect to speed, availability,

dependability, capability and frequency. Note that each has been ranked on a scale of 1

to 5 with 1 being the best option and 5 being the least desirable option.

Speed refers to the elapsed movement time. Availability refers to the ability of a mode to

service any given pair of locations. Dependability refers to potential variance from

expected delivery schedules. Capability refers to the ability of a mode to handle any

transportation requirement. Frequency refers to the quantity of scheduled movements.

This essentially summarizes the above discussion on the various modes and also

enables comparison.

Operating characteristics

Rail Truck Water Pipeline Air

Speed 3 2 4 5 1

Availability 2 1 4 5 3

Dependability 3 2 4 1 5

Capability 2 3 1 5 4

Frequency 4 2 5 1 3

8 . Transportation Performance, Costs And Value Measures

It is necessary to understand the underlying economics of transportation in terms of

factors and characteristics that drive costs and hence the performance. This deals with

four issues, namely 1) the factors that drive costs 2) the cost structures 3) carrier pricing strategy 4) transportation rates

Factors driving costs

The six critical factors that drive transportation costs are – distance, volume, density,

storability, handling, and liability. Though all these impact the costs, some of these might

be specific to the product characteristics.

Distance

Distance is a major influencer of transportation cost since it directly contributes to

variable expenses such as fuel, labour and maintenance. The above graph

demonstrates the relationship between distance and transportation cost. Form the graph

above it can be seen that the cost curve does not start at the origin but at a higher point,

due to the fixed expenses which must be incurred for operating the transportation

irrespective of the distance. Also it can be seen that the cost curve is increasing at a

decreasing rate, which is called the tapering effect, as discussed earlier.

Distance

Cost

CHAPTER - 8

Volume

The second factor is the load volume. This inter-relationship is shown in the graph

above. As the weight of the shipment increases the cost per unit weight decreases. This

relationship exists because the fixed costs of vehicle operation like loading, unloading,

documentation, manpower get allocate over larger volumes thus bringing down the per

unit cost. The implication for shippers is that the response time would be highest when

the weight equal to the carrying capacity of the vehicle is transported. Hence small loads

should be consolidated into large loads to maximize economies of scale.

Density

Weight of the Shipment (tonnes)

Cost per Tonne

Product density

Cost per Tonne

Density is a combination of weight and volume. Weight and volume are important since

transportation cost for any movement is usually quoted in Rs. per unit weight. In terms of

weight and volume, vehicles are constrained more by cubic capacity than by weight.

Since actual vehicle, labour and fuel expenses are not influenced by weight, higher-

density products allow relatively fixed transportation expenses to be spread across more

weight. As a result higher density products are typically assessed at lower transportation

costs per unit weight. The graph above illustrates the relationship of declining cost as the

product density increases.

Stowability

Stowability refers to how the product dimensions can be positioned. Odd size packaging

of different sizes and shapes as well as having excessive weight or length may be

difficult to load or position in the vehicle. This is similar to the density of the product, but

it is possible to have odd shape and dense products. This impacts the cost in the same

way as density. For example while steel coils may have an odd shape, they are dense

and easier to stow than steel rods and piping.

Handling

Special handling equipment may be required to load and unload from trucks, trailers or

ships. In addition to special handling equipment, the manner in which products are

grouped in boxes, pallets or containers affects the transportation.

Liability

This includes product characteristics that can result in damage and claims. Transporters

must either have insurance to protect against possible claims or accept responsibility for

the damages. This can be addressed by improving the packaging and using sufficient

material handling equipment for handling.

Cost Structures

Transportation costs are classified into three categories: fixed, variable, joint and

common costs.

Variable costs: These represent the minimum costs that a transporter must charge to

pay the running expenses of the vehicle. Hence transportation costs must at least cover

the variable costs incurred. The variable costs are incurred for movement of shipments

from point to point and are measured as cost per kilometer or per unit of weight. The

typical components in this include –fuel, labour and maintenance.

Fixed costs: These are expenses that do not change in the short run and must be

serviced even when the vehicles are not operating. These include costs that are not

directly influenced by shipment volumes or distance traveled. These include information

systems, permits, licenses, parking fee etc; The transporter has to look at spreading

these fixed costs over shipment volumes to be profitable.

Joint costs: These are costs incurred to provide a particular service and are

unavoidable. For instance when a transporter goods from Point A to Point X there is a

implicit assumption that he would get shipment volumes to start from Point X to Point A

or elsewhere. These costs are either charged to the shipper who contracted the vehicle

from Point A or a broker or agent must be approached to assist in the backhaul load for

the vehicle. These costs are implied in the freight rates charged by transporters to the

shippers and can be reduced by jointly planning for backhaul shipments.

Common costs: These costs are also not apparent but are sometimes charged by the

transporter to the shipper. These might include the toll and other movement related

expenses. These are allocated to shippers depending on the level of activity like the

number of shipments.

Carrier pricing Strategies

Transporters normally use various strategies for pricing the movement of goods, hence

no single strategy is right. But based on the observation in the market the following are

the broad strategies that are relevant.

Cost-of-service

This is a cost plus approach where the transporter adds a margin on his base costs. For

example if the cost of transportation is Rs.5000/- and the profit margin desired in 10%,

the transporter would charge Rs.5500/- This is the commonly used approach in

transporting low value goods, commodities or in highly competitive markets.

Value-of-service

This strategy costs the transportation based on the value as perceived by the shipper.

For instance if the shipper thinks that transporting 500 kg of high fashion goods is more

critical than transporting 500 kg of soap, since fashion products are worth more, then he

would be willing to pay more for the transportation service. Hence transporters use value

of service strategy for transporting high value goods. This strategy is used by the

express courier and cargo industry for packages and documents.

Combination Pricing

This strategy establishes the cost at an intermediate level between the cost-of-service

and the value-of-service. This must be understood by the shippers for negotiation.

Rate contracts

This strategy is used by shippers for negotiating low transportation rates. Under this the

shipper assures of specific volumes in a period of time in return for committed rates for

that period with a clause for escalation in this period in case of increase in inputs like

fuel. This strategy is used by companies to standardize the costing for transportation.

Transportation rates

In transportation terminology the price paid to move a unit weight of a product between

locations is termed as rate. The rate per unit weight (for the discussion let us consider

this as tonne) is usually based on the shipment origin and destination points, although

the actual rate charged might differ based on the other marginal factors subject to a

minimum. The rates are published by the players in the market and now also available

over the internet as a paid service by companies like infreight.com which track and

publish the rates.

An example of a typical rate sheet is shown below. There are different rates available

also by the good transported for the same weight and the origin-destination points. For

instance different rates would be applicable for transporting packaged dry goods like –

auto parts, FMCG products and different rates for fruits and vegetables.

Rate from Chennai to rest of India for Vegetables and Fruits

Weight(tonne) Bangalore Trivandrum Hyderabad Vijaywada

1

2

5

9

12

14

An alternative to the unit weight rate is the per kilometer charge, which is common to TL

shipments. As discussed earlier TL shipments are designed to reduce multiple handling

and transfer costs. Since the entire vehicle is used in a TL movement and there is no

requirement to transfer the shipment at different points, a per kilometer charge offers a

more appropriate pricing strategy.

In addition to the variable shipment charge applied on either per unit weight or per

kilometer, the other charges that are common are: minimum charge and surcharge. The

minimum charge represents the rate the shipper must pay to make the shipment

irrespective of the weight. For example if the rate is Rs 500 per tonne and the shipper

wishes to transport 1 tonne then the rate applicable is only Rs 500 which might not cover

the fixed cost of the transporter, hence a minimum charge of Rs 1500 might be

specified. The surcharge represents an additional charge designed to cover specific

carrier costs to protect the transporter from changes not anticipated when publishing the

rates.

Some transporters also perform ancillary or value added services. The value added

services provided by a transporter are:

COD – Collect payment on delivery

Inside delivery—deliver product inside a building

Marking or tagging – mark or tag a product as it is transported

Notify before delivery – make appointments before delivery

Reconsignment of delivery—redirect shipments to a new destination while in transit

Redelivery –attempt a second delivery

Residential delivery – deliver at a residence with out a truck dock

Sorting and segregation – sort commodity prior to delivery

Storage – store commodity prior to deliver

9. Transportation Routing Decisions

Transportation analysis focuses on the routing and scheduling of vehicles and seeks to

optimize vehicle and driver utilization while meeting customer service requirements.

Transportation decisions can be classified as either strategic or tactical. Strategic

transportation decisions are concerned with decisions like which modes to use, which

routes to serve and the service level to be offered and the costs. Whereas tactical level

transportation decisions are concerned with daily or weekly routing schedules and

allocation of vehicles based on the current demand.

The overall objective of transportation analysis and planning is to minimize the

combination of vehicles, kilometers and people required to deliver products. The

analysis addresses issues like –

How should deliveries be grouped to form routes?

What is the best delivery sequence for serving customers?

Which routes should be assigned to which customers?

Normally these decisions are taken at the warehouse or the central distribution centre

which also stocks and delivers the goods.

The decisions of routing and scheduling involve the usage of mathematical techniques

and have been well researched for their applicability. These techniques can be broadly

classified under three broad headings – heuristic approached, exact approaches,

interactive approaches and combination approaches.

Heuristic approaches use rule-of thumb clustering or savings techniques to develop

routes by sequentially adding or deleting the intermediate delivery points. Exact or

optimal approaches use mathematical (linear) programming to identify the best routes.

This makes extensive usage of computers and software programming. The problem with

using this approach are the large number of constraints and variables that are needed to

represent even the basic routing or scheduling problem and the impact of this on the

computational time and resources.

CHAPTER - 9

Many companies which are into distribution intensive businesses like home delivery

outlets, retail stores and consumer product companies have implemented basic routing

software. The primary reason for implementing these software are cost savings. Some of

the benefits that can accrue through implementation of routing software are: increased

utilization and fleet size reduction, increased productivity, reduction of personnel,

decreased fuel expenses and increased customer service.

Interactive approaches utilize a combination of simulation, cost calculator or graphics

capability to support an interactive decision process. The decision maker identifies the

alternatives for evaluation. The interactive decision support system then determines

plots and calculates the performance characteristics in terms of the time and costs. The

drawback of this approach is the dependence on the skill of the operator as the size and

the complexity of the problem increases.

Combination of the above approaches has proven very effective. Two criteria are

important when evaluating alternative solution approaches—generalization and

accuracy. Generalization is the ability to efficiently incorporate extensions for special

situations like pick up and deliveries time restrictions, vehicle capacities, legal driving

time etc; Accuracy refers to the ability to closely approximate performance

characteristics and come up with an optimal solution.

The above transportation analysis techniques require three types of data: network, pick

up or delivery demand and operating characteristics. The network defines all the

possible routes and is the backbone of any transportation system analysis. The network

can be defined using street maps of the delivery zone. Each intersection is a node and

the streets become links. The network contains the links and the nodes, the road

distance, the transit time and any other constraints such as limitation on weights or

timing.

This type of street level network is very difficult to develop and maintain. The other

approaches involve plotting the customer points on a grid and then computing the

possible links using the straight line distance. Latitude or Longitude co-ordinates are

often used. An example of this type a grid level system is illustrated below.

The manager of a Distribution centre has orders from 6 customers that are to be

delivered. The location of the DC, each customer on the grid and the order size from the

customer is shown in the table below. The manager feels that the delivery costs are

strongly linked to the distance traveled by the truck and also the distance between

points. The manager has two trucks each capable of carrying 200 units. The goal of the

manager is to assign customers to the trucks and identify a route for each truck with the

goal of minimizing the total distance traveled.

X coordinate Y coordinate Order size

DC 0 0

Customer 1 0 12 48

Customer 2 6 5 36

Customer 3 7 15 43

Customer 4 9 12 92

Customer 5 15 3 57

Customer 6 20 0 16

The DC manager must first assign customers to each vehicle and then decide on the

vehicles route. After this phase the sequencing of the routes and the route improvement

procedures can be used to decide on the route for each vehicle. One way of doing this is

to use a computational method called savings matrix method. This is a simple to

implement and can be used to assign customers to vehicles even when delivery timings

and other constraints exist. The steps in the savings matrix method are:

Identify the distance matrix

Identify the savings matrix

Assign customers to vehicles or routes

Sequence customers within routes

Transportation Administration

The transportation administration process is concerned with: 1) Operations and Fleet

Management 2) Freight consolidation 3) Rate negotiation 4) Freight control

Operations Management

From an operational perspective the key activities within this are vehicle scheduling, load

planning, routing and carrier management. Vehicle scheduling is the major responsibility

of the transportation department. This is important both while using private carrier or

contracted carrier. This function also avoids bottlenecks that can result from vehicles

waiting to be loaded or unloaded. Proper scheduling requires load planning, equipment

utilization and driver scheduling. Additionally vehicle maintenance must be planned,

coordinated and monitored. Some of the ways in which the vehicle utilization can be

improved is through pre-scheduling dock positions and slots.

Load planning directly impact transportation efficiency. In the case of road

transportation, the capacity is limited on weight or volume. Hence load planning must

consider the characteristics of the product being shipped, size of the individual package

and delivery sequence of multiple shipments if they are to be delivered using a single

vehicle. The load planning in turn drives the downstream activities for instance

warehousing picking and assembly.

The earlier discussion on selection of a route focused on matching individual customer

requirements to vehicles and allotting vehicles to routes to save on cost and time. The

operational level of routing involves monitoring adherence to the route while meeting key

customer requirements. This will have to also take of individual customer requirements

like timing of delivery, location and special instructions.

Carrier Management involves continuous carrier performance measurement and

evaluation. The normal procedure for this is to ask the consignee to record the time and

condition of the goods delivered. But with the integration of IT systems this process is

getting more streamlined for better control over the carriers. The carrier management

process has three inter-related set of activities –carrier selection, integration and

evaluation. Most organizations are moving towards reducing the carrier base ie; they are

looking to work with a small number of identified carriers. This concentration of carriers

seeks to build a business relationship that standardized operational procedures and

administrative processes.

The use of ISP (integrated service providers) is a trend which reflects the above thinking

by organizations. The ISP seeks to perform many value added functions apart from

consolidation of freight across a wide variety of shippers. Carrier evaluation involves

judging the performance of a carrier on a set of criteria. While developing these criteria it

is important to consider them from the view point of the consignee rather than the

shipper. The typical criteria used are- cost, transit time, reliability, capability, accessibility

and security.

Freight consolidation

Earlier sections dealt with the concepts of economies of scale and economies of

distance. These two concepts highlight the importance of consolidating freight to reduce

the overall transportation cost. The traditional approach to freight consolidation was to

combine LTL or parcel loads moving to a general location. The objective was to

outbound consolidation to have savings in moving single consolidated shipments versus

multiple single shipments. But the overall trend in the supply chain members is to reduce

inventory carrying cost. This is being achieved by more frequent ordering of smaller

quantities.

This has an impact in terms of higher transportation cost and leads to more handling. To

plan for freight consolidation it is important to have reliable information concerning both

current and planned inventories. It is also desirable to be able to reserve or promise

scheduled production to complete planned consolidation. From a strategic view point

freight consolidation should be planned much before rather than on receipt of the

material at the plant or the warehouse.

The freight consolidation is achieved through consolidating orders for a market area by

consolidating small shipments going to different customers within a geographical area.

This procedure does not interrupt the natural flow of freight by changing the time of the

shipments. This is difficult to achieve in practice due to the daily fluctuation in the

inbound and outbound volumes. Freight consolidation can also be achieved through

scheduled delivery which consists of shipments to specific markets on selected days of

the week. The scheduled delivery plan is communicated to customers in such a way that

the benefits of freight consolidation are mutually beneficial. The shipping firm commits to

the customer that all the orders received prior to a specified cut- off date/time will be

guaranteed for delivery on the scheduled day.

The overall objective of a scheduled delivery is to offer a solution that the customer can

depend upon while also achieving consolidation benefits. Another way in which freight

consolidation can happen is through pooled delivery where in the transporter, shippers

and warehouses participate in a plan to pool all their shipments for a delivery area to

achieve the consolidation of shipments. The consolidation company takes the lead in the

process and also performs value added services such as sorting, sequencing or

segregation of inbound freight to accommodate customer requirements.

All the above methods of freight consolidation can be considered to be reactive in the

sense that the freight consolidation is initiated only upon facing a problem of sequencing

or routing. Shippers could also follow a proactive freight consolidation by pre-order

planning. This is a process wherein consolidation of order quantities is and timings are

done to facilitate consolidation.

Rate negotiation

It is the responsibility of the transportation function managers to achieve the lowest rate

consistent with the service requirements. The prevailing price for each transportation

alternative is found by reference to tariffs. The key to effective negotiation is to seek win-

win situations for the shipper and transporter. For example if a 1 day delivery is required

the transportation department must first select the mode and then negotiate the rate to

meet this delivery commitment. The focus in this process must be to get fair and

equitable rates.

Freight Control

Other important responsibilities of transportation management are tracing and

expediting. Tracing is a procedure to locate lost or late shipments. Shipments committed

across a transportation network are bound to be misplaced or delayed from time to time.

Most large transporters maintain online tracing to aid shippers to locate a shipment. The

tracing action must be initiated by the shipper but once initiated it is the transporters

responsibility to provide the information. Expediting involves the shipper notifying a

carrier that it needs to have specific shipment move through the carriers system as

quickly as possible and with no delays. Problems with enabling tracing and expediting

have been significantly reduced through the use of information technologies such as bar

coding, online freight information systems, satellite and internet based communication.

All these technologies provide real time and accurate information through direct access

to the transporters IT systems.

Trends in Transportation and usage of IT Applications

There are multiple expectations from the supply chain due the changing demand supply

dynamics and various competitive pressures. The changing Logistics and Supply Chain

scenario can be looked at as evolving due to these forces:

Transportation and Distribution

a. Increasing service level expectations of the customer in terms of shorter delivery

time windows. There is also an increased demand and move towards visibility of

the material and information across the supply chain

b. The customer order mix is moving towards a smaller more frequent mix, as the

cost pressure to reduce inventory is increasing. This means more frequent and

timely deliveries.

c. The distribution centers have historically evolved based on concentration of

demand pockets. This trend is now being reversed and the consolidation of

multiple local warehouses to Regional Warehouses and companies are moving

towards a lower tiered network.

Planning level mix

1. The planning extends to beyond the boundaries of the traditional organization

and includes the supplier arms also. This is true of the connectivity with the

transport service providers and the warehouse service providers

2. Technology is being extensively used to provide real time answers to the

complex situations of order delivery and inventory stocking decisions.

E- commerce

a. Technology is shifting the power to the buyers of products and services, which

has traditionally been tilted towards the suppliers. This is impacting the nature of

the current channels of distribution and simultaneously new channels are

evolving.

For instance for ordering PCs, e-ticketing, procurement of MRO items etc; The case for

e-commerce is observed in the $21 billion US toys industry. This industry has been

traditionally dominated by the large manufacturers who had well defined distribution

channels for each product category. But the online retailers such as FAO Schwartz, e-

toys and amazom.com are changing the fundamental way in which toys are bought. The

convenience factor for parents to buy online and have it home delivered has shaken the

older traditional retailers who were operating in a brick and mortar scenario.

Based on the above discussion it can be concluded that technology is affecting the way

the supply chain is organized and since transportation is an important component of the

supply chain there are various applications which are coming into play for increasing the

efficiency of transportation – location based systems, smart containers, transportation

management systems and automatic planning and routing systems. A brief discussion of

some of the trends in transportation and the specific applications being considered and

currently deployed follows.

Intelligent Transportation Management Systems (ITMS)

ITMS are identified as the means to achieve sustainable and environmental friendly

transportation for the 21st Century. Advanced information and communication

technologies are required for ITMS. These include Data Storage & Processing

Equipment, Wireline & Wireless Communication Systems, Global Positioning Systems

(GPS), Sensors, Smart Cards etc. In addition to the above technologies, institutional

and market factors play an important role in successful ITMS deployment. ITMS

application functionality includes collection and processing of real-time data,

generating and utilizing information for various purposes such as controlling and

managing traffic, handling fleet operations (public transport and private carriers),

emergency management and assisting users in their travel related decisions.

The benefits of ITMS include Reduction of traffic congestion, Enhanced safety,

Mitigation of environmental impacts of transportation systems, enhanced energy

performance, and improved productivity. Many users are appreciating the benefits of

ITMS and deploying them in their regions. The major ITMS applications are centered

on – communication systems, automatic vehicle location systems, transit operations

software and geographic information systems.

COMMUNICATIONS SYSTEMS

Effective and efficient operation of transit systems relies on a communications

infrastructure and vehicle-based communications technologies. Communications

systems are used to transmit voice and data (both raw and processed) between transit

vehicles and operations (e.g., dispatch) centers, and to transmit commands between

operators and technologies (e.g., signal priority commands to traffic signal systems).

Transit communications systems are comprised mostly of wireless technologies and

applications. The two-way voice radio system used for fleet management and vehicle

dispatching remains at the heart of most transit operations. However, other

communication technologies are becoming common; for example, short-range data

links for traffic signal priority. Mobile voice and data communication systems for bus

transit include the use of analog, digital, and cellular digital packet data (CDPD).

AUTOMATIC VEHICLE LOCATION (AVL) SYSTEMS

AVL systems are computer-based vehicle tracking systems that function by measuring

the real-time position of each vehicle and relaying the information back to a central

location. They are used most frequently to identify the location coordinates of vehicles

in order to better satisfy demand. They also serve to provide location coordinates to

respond to emergency situations. The location technologies found on AVL systems are

usually one of the following, but can also be used in combination:

Global Positioning System (GPS);

Signpost and Odometer interpolation, both active and passive;

Ground-Based Radio, such as Loran C; and

Dead Reckoning

The benefits of AVL include:

Improved dispatch and operational efficiency;

Improved overall reliability of service;

Quicker responses to disruptions in service, such as vehicle failure or unexpected

congestion;

Quicker response to threats of criminal activity (via silent alarm activation by the ·

driver); and

Extensive information provided at a lower cost for future planning purposes.

10. Transit Operations Software

Data collected from vehicle-based fleet management systems is relayed to centralized

computer systems and is made useful by transit operations software. This software

helps the operator monitor the fleet’s performance in meeting demand, identify

incidents, manage response, and restore service more effectively. Para transit

operations software and reporting systems integrate applications such as passenger

registration, automatic geocoding, mapping, real-time and batch trip scheduling,

dispatching and brokering for multiple carriers. These systems often use a GIS

platform that assists in optimizing route planning, and can be combined with an AVL

system. Mobile data terminals (MDTs) can be installed in vehicles to display dispatch

messages (e.g., passenger pickup and drop-off addresses and instructions), record

and temporarily store certain types of information about each passenger pickup and

drop-off, and collect statistical and performance data on services provided. Software

programs can include billing, and accounting and reporting.

Computer-Aided Dispatch (CAD) systems are currently the most visible software

application in fixed-route bus operations. Transit agencies use this software for bus

service and operations planning. CAD fixed route software falls into four primary

categories:

o Transfer connection protection software

o Expert systems for service restoration

o Itinerary planning systems; and

o Service planning applications

CHAPTER - 10

The benefits of transit operations software are:

o Permits optimum use of existing resources

o Assists in evaluation of operational efficiency

o Speeds response to emergency situations

o Improves schedule reliability and Operating efficiency

o Reduces per trip cost

o Increases customer service to disabled, elderly, and aids ADA compliance

o Ability to reschedule and re-route transit vehicles

GEOGRAPHIC INFORMATION SYSTEMS

Geographic Information Systems (GIS) provides a current, spatial, visual

representation of transit operations. It is a special type of computerized database

management system in which geographic databases are related to one via a common

set of location coordinates. This allows information to be developed and displayed to

assist operators, dispatchers, and street supervisors to make on-the spot decisions,

and to assist planners in service assessment, restructuring and development. GIS is

most often used for:

o Transportation planning and modeling;

o Demographic analysis;

o Route planning, analysis and restructuring;

o Bus dispatch and scheduling;

o Bus stop and facility inventory;

o Ridership analysis;

o AVL and monitoring;

o Paratransit scheduling and routing; and

o Accident reporting and analysis.

11. Advanced Fleet Management System

The prime functions of AFMS is to assist in monitoring, control and management of

vehicle operations as listed below:

o To monitor whether the vehicles are adhering to its scheduled route and

timetable through out the route and identify if there are any deviations.

o To monitor whether the vehicles are halting at all the scheduled stops

especially for KM- Scheme Operators, which is resulting in loss of revenue.

o Automatic generation, collection, storage and retrieval and analysis of

information related to fleet and thus eliminating human errors.

o Generation of exception reports like deviation from schedule route, timing,

o Missing stops, Punctuality factor etc. based on captured vehicle data.

o Provide billing software to generate automatically billing details for the

vehicles.

o Dispatching of emergency vehicles to Breakdown vehicles or vehicles in

distress, whenever it is sought.

o Help in working out realistic schedules according to traffic conditions based

on speed of vehicles during different hours of the day and at different

segments

o Provision for Real Time Information System – both within the vehicles as well

at major Terminuses.

In addition to the above primary functions, AFMS also provides following

Secondary functions:

o Vehicles management

o Monitoring drivers & performance evaluation

o Monitoring traffic potential

o Conducting traffic analysis

o Financial accounting

o Personnel information maintenance

CHAPTER - 11

o Stores management

o Budget management

Benefits to User

AFMS system would be generating exception reports for any vehicle skipping any stop,

improper stopping at stops, over speeding, deviations from schedules etc. All this would

translate into very efficient and effective service and the user would be able to avail

trouble free, hassle free transportation. Finally but not the least, there is customized

messaging facility available with the driver to alert the Central Control Station with the

help of one touch “hot keys”. The two ways messaging facility can be utilized for

emergency conditions like robbery, accidents, breakdown, tyre puncture, riots, traffic

jams. In case of traffic jams, transporter can divert other vehicles on alternate routes and

users will benefit from reduced disruption in transportation on account of the dynamic

routing facility of the AFMS software.

Benefits to Fleet Owner

o Complete Control over the fleet on the road anywhere and every where all

the time.

o Facilitate faster exchange of critical information between various departments

o Substantial reduction of paperwork

o Better use of human resources

o Ability to access valid information in minimal time

o Streamlines the related workflow in government machinery

o Centralized database

o Higher efficiency and effectiveness

o Greater coordination

o Instant system-wide alerts

o Messaging feature in case of breakdown/medical emergency provides the

driver facility to alert the fleet controllers to provide instant help by mobilizing

appropriate resources

12. Intermodal Freight Technology

In recent years, increasing volumes of freight, growing passenger travel, and an

increasing emphasis on security have strained the efficiency of freight transportation in

many locations, particularly at gateways and along major transportation corridors.

Although efforts have been made to improve the efficiency and reliability of the

intermodal freight network, congestion remains a problem. Congestion degrades the

reliability and performance of carriers, shippers, and terminal operators—a serious

problem for businesses. Predictable travel times are important in an economy where

just-in-time delivery and tightly scheduled production and distribution processes are the

norm.

The lack of information sharing is also a concern. It leads to operational inefficiencies

and heightens concerns about safety and security. Information about the ownership and

location of containers and their contents, as freight moves from origin to destination, is

crucial to enhancing the security and productivity of the transportation network.

Over the past decade, the volume of intermodal containers moving through ports

worldwide doubled. Similarly, the volume of intermodal freight moving by air, rail, and

trucks grew just as dramatically. In 2001, an estimated 19 million containers were moved

through U.S. water and land ports. Few of these containers are tracked as they are

transported to their final destinations. The use of Intelligent Transportation Systems

(ITS) and other technologies will play a key role in providing this much needed

information and balancing freight transportation productivity with security concerns.

In an ITS project, electronic seals were affixed to containers to track cargo from its point

of origin to its point of destination between gateways in Canada and the Pacific

Northwest. The E-seal is an electronic device that is about the size of a pack of playing

cards and weighs a little more than a pound. It uses a radio frequency that emits a signal

as it passes reader devices, displaying information about container tampering.

CHAPTER - 12

The use of this ITS technology in dedicated truck lanes on both sides of the border in the

Pacific Northwest can dramatically reduce truck delays by 800,000 hours per year. This

reduction in delay can save an estimated $150 million annually in truck operating costs,

including fuel, driver wages, and maintenance.

The Asset Cargo Tracking project was designed to 1) improve visibility and productivity

via the monitoring of transport assets and cargo during movement between freight

terminals and customers and 2) provide asset and cargo information in a standard

format to a variety of users. The prototype electronic tracking system collects data on

cargo location, status, and timestamped information via sensors affixed to transport

assets. The tracking system can reduce costs through improved efficiencies in chassis

and container utilization and enhanced recognition of potential security and routing

issues. These benefits are estimated to save $225 million annually.

A simulation model, called Border Wizard, was developed to identify infrastructure and

operational needs at border crossings. It lets users identify and test possible

infrastructure, operating, and staffing improvements by simulating cross-border

movement of automobiles, buses, trucks, and pedestrians. Developed cooperatively with

the General Services Administration (GSA), U.S. Customs, and other federal inspection

agencies, Border Wizard has been deployed at 57 U.S. ports of entry. Border Wizard will

eventually be linked to traffic simulation tools to provide corridor planning capability in

the border region. The GSA has mandated its use as a budgetary tool, and U.S.

Department of Transportation is now evaluating Border Wizard as a transportation-

planning tool. Canada is installing Border Wizard at the Detroit-Windsor crossing, and

Mexico has expressed interest in using the model.

Growth in trade, changes in business practices, and concerns about security have also

underscored the need for government and industry partnerships to standardize

information exchange and implement best practices throughout the global supply chain

network

Future Directions

Evaluate the costs and benefits of leveraging ITS technology in the intermodal freight

arena

Explore opportunities to deploy freight ITS technology best practices as identified in

the operational tests through industry and government champions, along with

expanded freight stakeholder networks

Conduct research, testing, and evaluation of new and emerging technologies to

facilitate the intermodal movements of goods

Work with inspection agencies to improve freight mobility and security at gateways

Work cooperatively with international partners and lead in the development of freight

data standards to facilitate the movement of freight

13. Transportation Security Initiatives And Role Of Technology

Post September 11 attack, there has been major concerns regarding safe movement of

cargo across borders. To combat this threat many technology applications are being

pursued and deployed at major transit points. Some of the common technology

applications with respect to transportation movement are described below.

Radiation Detection Pagers

Radiation detection pagers are small, self contained gamma-ray radiation detectors

that alert its carrier to the proximity of radioactive materials. Such devices were

specifically developed to be used by government agencies and emergency

responders and are approximately the size of common message communication

pagers. Radiation pagers can be hundreds of times more sensitive than

commercially available Geiger-Muller tube type detectors which are of similar size.

An example of the international usefulness of these pagers, on March 21, 2000, a

radiation pager detected radioactive material in a shipment that was transiting

Uzbekistan in route to Pakistan. Future developments would be to install radiation

detection devices on quay cranes, gantry cranes, and other container handling

devices.

X-Ray Inspection Systems

X-ray based inspection systems are the most common form of non-invasive

inspection technology in use today. X-rays detect differences in material densities

in order to produce an image of the vehicle or container contents. Contraband

detection actually occurs by the system operator who visually, sometimes with the

help of sophisticated software, inspects the x-ray images for anomalies. When

cargo and contraband are of similar densities, contraband detection is very difficult.

For example, “the density of a plantain appears exactly the same as that of cocaine

molded and painted to look like a plantain when both are put through an X-ray”.

The density differences are projected across the entire width of the container; if a

container is very cluttered, then again detection of contraband may be very difficult

as the X –Ray image will also be cluttered and visually complex.

CHAPTER - 13

Additionally due to the projection methods, contraband could be hidden in the

shadow of a very dense piece of cargo. However, the use of multiple x-ray beams

can erase most of the shadow effects. Due to the nature of x-ray methods, specific

materials cannot be identified; more advanced technologies like gamma-ray

systems can detect specific materials like drugs and explosives. X-ray systems

generally take a few minutes to scan a standard 40-foot container while some more

advanced systems can take only a few seconds . However, total inspection cycle

times may range from 7-15 minutes or longer due to image analysis (this could

result in scanning less than 100 containers per day!).

Gamma-Ray Inspection systems

Gamma-ray inspection systems are an alternative to standard x-ray inspection

systems. These systems directly use gamma-rays or use pulsed fast neutrons to

generate gamma-rays to produce images of the container’s contents, 3-D

mappings of content location, as well as other important information. For example,

some systems can also determine certain types of material inside the container

based on atomic characteristics; a few of these detectable materials are carbon,

nitrogen, oxygen, silicon, chlorine, aluminum, and iron.

Claiming many benefits over x-ray technology, these gamma-ray systems may be

a key step towards for efficient, 100% container inspection. Gamma-ray systems

can scan standard 40-foot containers in a few seconds and generate a total

inspection time of less than a minute. The average inspection throughput of

gamma-ray systems is more than 10 times greater than the fastest x-ray system In

a trial at the Port of Miami in 1998, a single gamma-ray inspection unit resulted in

the inspection of over 1,300 TEU’s in a single shift.

Gamma-ray systems can be produced as fixed-site, semi-fixed-site, or mobile

units. The semi-fixed-site units can be moved and set-up up in 1-2 days while the

mobile units can be driven to any spatially accommodating location in the port and

can be made operational by three people in approximately 10- 15 minutes. Fixed-

site systems may be of a pass-through form where the inspection unit is stationary

and trains, trucks, or containers pass through the inspection unit. Current vehicle

pass-through speeds are approximately 4- 5 miles-per-hour with future plans of

more than 10 miles-per-hour. The systems can scan almost all types of cargo

handled in the port including standard containers, bulk cargo containers, truck

trailers, and rail cars.

Gamma-ray systems can cost from 3-20 times less than x-ray systems in terms of

initial capital investment, 4-5 times less in terms of installation and when

considering other benefits, gamma-ray systems can yield a cost per inspection that

is 50 times less than that of conventional x-ray systems. Mobile gamma-ray

inspection units were heavily utilized at the Port of Vancouver, Canada in 1999 and

2000 and were responsible for the discovery of $700,000 worth of stolen

automobiles ready for illegal exportation. In the previously mentioned 1998 trial at

the Port of Miami, during the first 90-days of use, gamma-ray inspection units were

responsible for the recovery of six vehicles worth over $200,000.

References:

1. Sunil Chopra and P Meindl, Supply Chain Management: Strategy, Planning and

Operations, 2nd Ed., Pearson Education, Singapore

2. E H Frazelle, Supply Chain Strategy, Tata McGraw Hill, New Delhi.

3. D Bowersox, D Closs, and M B Cooper, Supply Chain Logistics Management,

McGraw Hill Int., New York.

PRACTICE AREA

Objective Type Question

1. The transportation mode selection process tries to achieve two goals –.(b)a. Minimize costs and maximize the transit volume

b. Minimize costs and maximize the service level

c. Minimize costs and maximize the load carried

d. Maximize costs and minimize the inventory costs

2. All the below factors drive transportation costs , EXCEPT (a)a. Handling of returns

b. Distance traveled

c. Density of products

d. Volume of products

3. Fuel expenses incurred in Transportation represent (b)a. Fixed costs

b. Variable costs

c. Joint costs

d. Common costs

4. Which statement is TRUE for Air Transportation (b)a. It has a low transit time and low cost

b. It offers faster delivery lead time and high cost

c. It can carry a wider variety of material than other modes

d. It is most suitable for voluminous products

5. All the below factors influence shipper decisions EXCEPT (d)a. Transportation cost

b. Inventory Cost

c. Facility Cost

d. Trip related cost

6. For road transportation, loading time per consignment is an example of a

performance metric (c)a. Dispatching efficiency

b. Space utilization

c. Loading efficiency

d. Handling equipment efficiency

7. An important component of effective fleet management is (b)a. Lower inventory costs

b. Maintenance of transit time

c. Shorter distances

d. Long hauls

8. All of the following are critical success factors in Road Transportation, EXCEPT

(c)a. Dependable placement

b. Error free delivery

c. Number of trucks

d. Accurate documentation

9. Which of the following is true of Marine transportation (b)a. It is the fastest mode of transportation

b. Suited for shipment of very large shipments at low cost.

c. Utilization is an important measure

d. Routing is a critical measure of efficiency

10. Dispatching efficiency of a road transport vehicle is measured by (b)a. Loading volume per person

b. Turn around time per vehicle

c. Loading value per person

11. A typical use of a GIS system:

a. Load planning

b. Route planning and analysis

c. Vehicle selection

d. Manpower productivity reporting

12. If the cost of transportation is Rs.5000 and the profit margin desired is 10%, the

transporter would charge Rs.5500. This is an example of which of the following

pricing strategies:

a. Rate contract

b. Combination pricing

c. Cost of service

d. Value of service

13. Higher density products are assessed at a lower transportation cost per unit

weight. True / False

14. CSI refers to :

a. Co-operative system integration

b. Common system interface

c. Container security initiative

d. Container security information

15. The overall objective of transportation analysis is to maximize the combination of

vehicles, kilometers and people required to deliver products. True / False

16. The principle of economy of scale states that as ____________ increases the

____________ transported decreases

a. Cost per unit; distance

b. Quantity of shipment; cost per unit

c. Transit time; quantity of shipment

d. none of the above

17. _________ is primarily used for transportation of natural gas. This mode of

transportation has a high ________ for setting up.

a. Marine transport; lead time

b. Air transport ; fixed cost

c. Pipeline; fixed cost

d. Rail transport; transit time

18. Companies competing on customer responsiveness need to focus on?

a. Inventory costs

b. Delivery lead time

c. Transportation costs

d. None of the above

19. One of the disadvantages of a direct delivery model is:

a. High inventory cost

b. High warehousing cost

c. High transportation cost

d. Low product variety

20. A facility focused on serving local or regional demand is commonly termed as:

a. Offshore facility

b. Source facility

c. Server facility

d. Contributor facility

21. A “node” refers to:

a. a form of transportation

b. a type of packaging irregularity

c. a special storage area in a warehouse

d. points to and from which shipments are made

22. Consignees are:

a. preferred suppliers

b. receivers of freight

c. shippers of freight

d. extremely large LTL carriers

23. Which of the following is not likely to move by air transportation?

a. wearing apparel

b. fruits and vegetables

c. cut flowers

d. auto parts

e. all are likely to move by air

24. Freight forwarders:

a. are the same as shippers’ cooperatives

b. consolidate the shipments of several carriers

c. represent the consignees’ interests

d. consolidate the shipments of several shippers

25. Many third-party logistics providers were spun off from carriers or management

consulting firms. True / False

26. The major factors influencing locational decisions are ____________ and

____________.

a. markets; resource availability

b. labor; transport services

c. markets; labor

d. transport services; resource availability

e. none of the above

27. With respect to facility location decisions, firms are seeking the most

____________ at the least ____________ in the least elapsed amount of time.

a. customers; cost

b. value; effort

c. value; cost

d. sites; distance

28. Which of the following is not a general factor influencing facility location?

a. transportation considerations

b. natural resources

c. customer considerations

d. trade patterns

e. all are general factors

29. The existence of transportation competition, whether intermodal or intramodal,

tends to:

a. have cost, but not service, benefits to a user

b. have service, but not cost, benefits to a user

c. have both cost and service benefits to users

d. have neither cost nor service benefits to users

30. The center-of-gravity approach to location analysis minimizes:

a. labor costs

b. warehousing costs

c. taxes

d. distance to existing facilities

31. The transportation mode selection process tries to achieve two goals –. (b)a. Minimize costs and maximize the transit volume

b. Minimize costs and maximize the service level

c. Minimize costs and maximize the load carried

d. Maximize costs and minimize the inventory costs

32. All the below factors drive transportation costs , EXCEPT (a)a. Handling of returns

b. Distance traveled

c. Density of products

d. Volume of products

33. Fuel expenses incurred in Transportation represent (b)a. Fixed costs

b. Variable costs

c. Joint costs

d. Common costs





35. All the below factors influence shipper decisions EXCEPT (d)a. Transportation cost

b. Inventory Cost

c. Facility Cost

d. Trip related cost

36. For road transportation, loading time per consignment is an example of a

performance metric (c)a. Dispatching efficiency

b. Space utilization

c. Loading efficiency

d. Handling equipment efficiency

37. An important component of effective fleet management is (b)a. Lower inventory costs

b. Maintenance of transit time

c. Shorter distances

d. Long hauls

38. All of the following are critical success factors in Road Transportation EXCEPT

(c)a. Dependable placement

b. Error free delivery

c. Number of trucks

d. Accurate documentation

39. Which of the following is true of Marine transportation (b)a. It is the fastest mode of transportation

b. Suited for shipment of very large shipments at low cost.

c. Utilization is an important measure

d. Routing is a critical measure of efficiency

40. Dispatching efficiency of a road transport vehicle is measured by (b)a. Loading volume per person

b. Turn around time per vehicle

c. Loading value per person

d. Space optimization

41. FOB refers to (c)a. Offer delivery after unloading

b. To make the goods available at the premises

c. Offer delivery on board

d. To place the goods alongside the ship on the quay

42. Port operations include all of the following EXCEPT (c)a. Cargo Handling

b. Security

c. Surveying

d. Traffic

43. Major benefit of Containerization (c)a. Reduced manpower costs

b. Reduced inventory costs

c. Reduced Shipping cost


44. Ex-factory sale refers to (a)a. To make goods available at premises

b. To load on the carrier and obtain clear transport documents

c. To place the goods alongside the ship on the quay

d. To pay cost and freight necessary to destination

45. The major emphasis of rail transportation is to (c)a. Economize distances traveled

b. Increase capacity utilization

c. Reduce idle time

d. Increase turn around time

46. Factors influencing freight cost (b)a. Transit time and Product Type

b. Distance and Product Density

c. Distance and Inventory value

d. Product Shape and Transit time

47. With the ____________ ,the cost of operations is distributed over a larger

volume resulting in lower per unit cost (c)a. Economies of Distance

b. Higher Product density

c. Economies of scale

d. Lower inventory

48. _________ refers to moving goods in boxes or trailers that are easy to transfer

between two transportation modes (b)a. Consolidation

b. Containerization

c. De-stuffing

d. Multi-modality





50. All the below goods are compatible for transportation through air cargo EXCEPT

(d)a. Perishables

b. High value goods

c. Project goods

d. Low value goods

51. Which of the following is TRUE of a Point-to-Point transportation system (c)a. Less routes more frequency

b. More routes more frequency

c. More routes less frequency

d. Less routes less frequency

52. Which is the correct sequence as per the operations of a hub and spoke system

(b)

a. Pickup; Sort; Consolidate; Deliver

b. Pickup; Consolidate; Sort; Deliver

c. Consolidate; Pickup; Sort; Deliver


53. The advantages of a Direct delivery model(directly from manufacturer to

customer) are (b)a. Reduction in Transportation cost

b. Inventory consolidation

c. Reduction in delivery lead time

d. Ease in handling product returns

54. Cross docking strategy (c)a. Increases the warehousing cost

b. Does not affect the warehousing cost

c. Decreases the warehousing cost

d. Increases the lead time to the customer

55. All of the following are examples of ‘value added’ services by a Freight forwarder

EXCEPT (b)a. EDI connectivity

b. Preparation of a documents

c. Specific rate contracts

d. Negotiated rate contracts

56. In a hub and spoke network, the role of the ‘hub’ (c)a. Delivery points

b. Central sorting facilities

c. Ordering points

d. Storage points

57. All of the following are critical success factors for Air Cargo Transportation

EXCEPT (c)a. Customs procedures

b. Ground handling

c. Location

d. Traffic handled at terminals

58. The ‘critical’ role of integrators in a Logistics chain (b)a. Provide information support

b. Provide tailor made solutions

c. Reduce documentation requirement


59. CSI refers to (a)a. Container Security Initiative

b. Container Services Infrastructure

c. Containerized Safety Information

d. Container Safety Initiative

60. The major emphasis of CSI (c)a. Increase containerized movement of goods

b. Better container handling facilities

c. Identify containers that pose risk to security

d. Reduce turn around time for containers

Paragraph Type Question

1. Explain the roles and importance of transportation in SCM.

2. What are the primary considerations in selecting the mode of transportation?

3. Compare distribution network models. Explain three important factors that

influence network decisions.

4. Explain the role of technology in transportation.

5. Describe the role of logistics in the distribution channel of a firm

6. Discuss the role of information technology in logistics and channel management

7. Discuss the role of containerization at the micro and macro level

8. What is meant by Unholy Equilibrium of Transportation Sector in India

9. Describe intermodal transportation with an example.

10. What are the important dimensions of customer service level that are relevant in

making decisions on Distribution network planning?

11. What are the major advantages and disadvantages of a “Direct delivery model

from manufacturer to customer”?

12. What types of distribution networks are suited for a specialty chemicals company

and an apparel retailing company? Justify.

13. Discuss the role of Information Technology in transportation and distribution and

the common applications used.

14. Discuss and detail the factors that drive transportation costs

15. Discuss and detail the multi-channel distribution model

16. Discuss and detail “Channel Mapping” strategy

17. Discuss the factors which influence the Distribution network decisions

18. Discuss the factors and decision making involved in Transportation

Administration.

Model Case Study

1) Dilkhush Products Ltd.

Dilkhush Products Ltd is a typical FMCG company with an annual turnover of nearly 700

crores. It has six factories, 30 depots and 3500 distributors spread over the entire

country. It product profile comprise of ten categories such as branded coconut oil, jam,

cooking oil and special flavors.

At one time, Dilkush was faced with considerable difficulties in terms of forecasting. At

the depot or the godown level, variations on some SKUs were in the range of as much

as 100%. There were also complexities in distribution on account of the large number

(3,500) of distributors across the country. This would invariably lead to a pile up of

inventories at certain places and stock-outs in others. Visibility of stocks at the distributor

level was low, because after invoicing, it was impossible to determine the level of stock

that distributors were holding. The only source for this was the secondary sales figure.

These figures were collated manually once a month, and their accuracy was always

questionable (in the FMCG industry, secondary sales calculation is the bigger challenge;

primary sales are always easier to collate). Because planning cycles were fixed,

decisions could not be taken online. Processes were highly individual or employee-

dependent, and in the absence of an integrated approach, there was little or no

communication.

The planning cycle was only 15-20 days - hardly enough to allow corrective action. Apart

from the annual budget, the firm operated on a fixed 3-month cycle. Thus, once the

output at the end of these 3 months was decided, nothing could be done in the interim.

The result was that if the output for the first month were in excess, the next 2 months’

stock would simply pile up. Invisibly therefore, there were skews towards the ends of

quarters. The firm had fixed dispatch plans for the quarter – these were followed even if

sales were low. There were coordination difficulties between the sales and

manufacturing department, as managers were not using the same data. Typically, sales

staff would complain they lost sales because of stock-outs, while the back room would

say that there were excess supply lines somewhere in the system, about which they

were unaware. The planning cycles for sales and manufacturing did not match. There

was no system for distribution planning – one would wait for the sales person or

distributor to call up and place the order. Some means of replenishment order

generation was tried – however, they were on stand-alone systems and did not succeed.

There were several ‘islands’ of information, inconsistencies in the MIS and no data

visibility across the system. The firm had to do a lot of cleaning up before new

technology could be brought in.

Mr. Kelkar, the Sales and Distribution manager recently attended a seminar on ‘Supply

Chain Management’ organized by an Institute of Management. He realized them that

Integrated SCM approach is the only way to get out of all the present ills of the company.

He also saw a huge opportunity for cost savings with such an approach. However he

was confused as to how to proced since any wrong move or faulty implementation will

have serious consequences to the company.

Answer all the Questions:

1. Summarize Dilkhush’s present problems in Sales and Distribution.

2. Identify the potential areas for cost savings with an integrated SCM.

3. Identify specific action plans for implementing integrated SCM including the role

of IT.

4. Indicate appropriate performance metrics to measure the various aspects of

Supply Chain performance in FMCG business such as DilKHUSH Products Ltd.

2) Earthbound Farm

Earthbound Farm grew from humble beginnings to become North America’s largest

grower and shipper of organic produce. Getting its highly perishable products from West

Coast farms to stores across the country presents a daunting logistics challenge.

Salad-in-a-bag is one of those great ideas that makes so much sense you wonder why

no one thought of it before. Make the salad inside beautiful, delicious and organic and

you have a combination that perfectly meets the needs of millions of time-starved,

health-conscious Americans.

The company behind the bagged-salad concept is Earthbound Farm and behind the

company are its two unlikely founders, Drew and Myra Goodman. The Goodmans both

grew up in Manhattan and were city kids through and through, with no knowledge of

farming. While attending school in California, however, they fell in love with the Carmel

Valley and with each other. After completing college in the early 1980s, the couple

decided to take a year off and work with their hands before graduate school. They soon

fell in love with organic farming as well. Their small, two-and-a-half acre garden

produced enough greens to sell locally to specialty markets and restaurants. Then, one

day in 1986, faced with a bumper crop of baby lettuce and the loss of a large restaurant

customer, the couple bought some plastic bags, filled them with a mix of baby lettuce

leaves, and sold the hand-labeled bags to a natural foods market in San Francisco. The

rest is history.

Today Earthbound Farms distributes its fresh, organic lettuce mixes, as well as other

organic produce, to all 50 states, Canada and Mexico. Its certified organic produce is

grown on more than 24,000 acres—land that it owns and that it farms in partnership with

other growers, primarily in California, Arizona and Mexico. Revenue for fiscal year 2003

topped $350m, with a 75 percent year-over-year growth rate, which shows no signs of

slowing down. Other companies have followed Earthbound Farms’ example, making

bagged lettuce a staple in most grocery stores, but the company continues to dominate

the market in organic salads with more than a 70 percent market share. It processes 22

million salad servings each week at state-of-the art facilities in San Juan Bautista, Calif.,

and Yuma, Ariz.

As the company’s product and geographic range expanded, so did its logistical

challenges. The tender baby greens that form the basis of its core products must be

picked, washed, packaged and shipped within a matter of days in order to ensure that

they arrive at a customer’s location while still fresh. Maintaining the proper temperature

is critical as well as ensuring that the bags do not get crushed along the way.

“Product quality is really key to us,” says Anneke Leigh, director of information

technology business applications and development at the company. “All of our facilities

are completely refrigerated. It is not just that they have to be cold as opposed to hot, but

a consistent temperature must be maintained across the entire life of the product.”

The way that Earthbound Farm processes its greens is proprietary and it is not willing to

share many details. The company developed most of the production-line technology

itself, designing machines that gently clean, spin and mix the greens with a minimum of

damage to the leaves. “Each mix has its own recipe or formula,” says Leigh. A bag of

Mixed Baby Greens, for example, contains eight different varieties, mixed for just the

right combination of taste, texture and color. “The production schedule will call for so

many pounds of all these different leaves,” says Leigh. “They are brought into a mixer,

which gently turns and mixes the salad in the right portions. Then the mixture goes down

the production line and gets put into bags.” The bags are put into boxes and are stored

in a refrigerated warehouse or loaded directly onto a customer’s truck. Some product

also is sent directly to the forward distribution centers that Earthbound Farm opened this

year in Cranbury, N.J., Indianapolis (at a customer’s location) and Atlanta. These

centers “allow us to better serve our East Coast and Midwest customers,” says Leigh. “If

a store is out of spinach we can do a same-day turnaround rather than a five-day trip

across the country.”

With only a 15-day to 21-day shelf life for its products, velocity and visibility are key

success factors for Earthbound Farm. “We need to know precisely where our product is

at all times and how long it has been since that product was picked,” says Leigh. “We

need to make sure we are following FIFO [first in, first out] and FEFO [first expire, first

out] processes for getting product out of the warehouse.”

Not surprisingly, these capabilities were at the top of Earthbound Farm’s shopping list

when it went looking for an IT system. “We looked at many solutions peripherally and at

several of them in depth to make sure that they met our needs for inventory tracking and

rapid turns,” says Leigh. “We also needed a system that would fit into our existing

environment, which is Microsoft PeopleServer, and that we could support in house. Also,

we needed a system that was flexible enough to change and grow with us. All of that

brought us around to High Jump, which scored very high on flexibility.”

One of the initial configurations that was important to Earthbound Farm was the ability to

sequence products for direct shipment off the production line, with no putaway. “Doing

direct ship can take as much as a day out of our cycle time, which is the same as adding

a day to the life of the product,” says Leigh. “We try to have as much product as possible

in and out the same day, but we do rack a fair amount.” Using logic based on such

factors as frequency of demand and relationship to other products, the system

determines the best location for the product and directs the worker to that location. “The

quickest moving pallets are placed in forward locations in the warehouse,” says Leigh.

“We want to minimize travel time for picking those items.”

The picking process begins when an order is dropped into the system. Items are

prioritized for the most efficient picking and directions are sent to the picker’s scanner.

Importantly, the software also applies constraints based on expiration dates to ensure

that products with the earliest dates are picked first. “Before putaway, each pallet is

assigned a pallet tag with the lot number and aging dates, as well as the stock number,”

says Leigh. “So when a picker gets an order for 10 cases of spring mix, for example, the

system already has determined where the oldest cases in the warehouse are located

and that is where it directs the picker. The picker doesn’t have to do any thinking at all.

He simply goes to the location, picks and scans the pallet. Now, if he chooses the wrong

pallet, the system alerts him to that, so we have validation all the way through, which

eliminates errors.”

Automating and optimizing the picking process has shaved precious minutes off order

picking time, adds Leigh. “Initially, we cut our order pick time by 10 to 15 minutes, but I

think we have significantly improved on that number, now that our employees are

completely comfortable with the system. Even 10 to 15 minutes is significant when you

project it over 200-plus orders per day,” she says.

Another configuration crucial to Earthbound Farm are rules about which products can

and cannot be packed together on the same pallet, even when they are part of a single

order. “Our customers don’t just order bagged salads from us,” says Leigh. “They order

from our entire product line, which includes other produce, such as broccoli, cauliflower,

onions, potatoes, apples and citrus. These have to be stacked in specific ways on the

pallet so that one product doesn’t harm another. For example, citrus puts out a gas that

can be harmful to other products so we don’t put those on the same pallet. We want to

maintain the highest quality during transportation and the software allowed us to put in

the logic necessary to correctly palletize our products to meet our particular

transportation needs.”

The software also optimizes the loading and scheduling of trucks. With the truck

scheduling software, a trucker can get an appointment over the internet, by e-mail or by

phone. Then the system coordinates the scheduling of orders for picking, or directs the

sequencing of orders that are loaded straight from production, so that driver wait time is

kept to a minimum. “Before, Earthbound Farm had trucks just showing up and waiting to

get loaded,” says Heim. “Now, they get the truck there when they want to pick for that

order. And then, because the system is so efficient, whether live-loading off the end of

the production line or directing the worker to pick an order, they can complete the task

very quickly and get drivers on their way.”

This is especially important at this time, he adds, given the hours-of-service

requirements for drivers and fuel surcharges. “It is really important to keep those trucks

moving and workers productive,” he says.

“This software solution gives us a really clear view, not only of how long product sits in

our warehouse, but also of how fast we turn an order and how quickly we get that truck

back on the road,” says Leigh.

Earthbound Farm has never had to recall product, but it is, of necessity, concerned

about its ability to do so quickly should the need ever occur. “Like any food company,

there are tracking and quality requirements from the Food and Drug Administration that

we have to meet, but our internal standards are higher than anything the government

requires,” says Leigh. A part of those standards are regular recall practices, she notes.

Since implementing the software, the time it takes for Earthbound Farm’s quality group

to track a given product back to its source during these practices has dropped below 15

minutes, compared with a couple of hours before. “The system does this for us very,

very quickly,” she says.

This ability will be further enhanced as Earthbound Farm begins to implement the

software for receiving raw materials as well as for tracking goods through production and

distribution. That activity was set to start around the end of September. “We will be

getting the information into the software at raw receiving,” so the tracking will start from

there, says Leigh. Raw lettuce arrives in bins and totes, having been cooled on the way

from the field. After receiving, it is moved into another cold room for a very short time,

before it moves to the production line for cleaning, mixing and bagging. “Now we will

know when each lot is in raw receiving, when it is in the cold room and when it goes into

production. So we will know, down to the minute, how long that particular product has

been in our facility,” she says.

After a couple of months, the company plans to move the receiving activity to the field.

“Then we will know how long it has been since each lot was picked,” Leigh says.

Questions:

1. Highlight the complexities in the current supply chain of Earthbound Farms and

the sources of these.

2. Evaluate the strategic responses to the current supply chain demands initiated by

Earthbound Farms

3. Identify the key success factors for the Earthbound’s distribution model and

suggestions going forward.

3) Supply Chain of Pizza World Ltd.

Pizza World limited is a leading Fast Food chain. The mission of the company is to be the

leader in off premise Pizza convenience to the consumers. The supply chain of Pizza

World is given below. In the below figure we can see there are various types of material,

information and finance flow and also it has an integration with various suppliers. The

distribution center and the number of franchises in Chennai (21 Franchises) spread its

prominence in all the locations to attract customers.

Supplier –Supplier relationship

It is based on the network of the various suppliers who are located in close proximity to

the CPD so that there is no delay as such in procurement of the items. Suppliers located

far away are treated as secondary suppliers. Information to suppliers is given through

phone, fax etc.

Supplier – CPD relationship

When CPD wants to procure any material from market, then the supplier-Chennai Pizza

Distribution (CPD) relationship comes into picture according to the requirements of its

franchisees. Quality problems do not arise, as there is regular quality inspection.

Distribution Center – Franchises Relationship

A parent-child relationship exists between CPD and franchise as each and every

franchisee operation is monitored and in turn CPD advises them to take necessary steps

for every facility. The entire supply chain is regulated by the CPD since it has well-

trained people.

Supplier DistributionCenter

Customer

Corporate Office

Finance/Information Flow

Material/Information Flow

Micro View

Every customer order is entered into the computer. If the ordered item is in the menu,

the customer is served immediately. A special dish, which is not in the menu, takes 15-

20 minutes. If customer is not satisfied with the service, he will either be given a

replacement pizza or refund.

If the item ordered is there in daily menu then there is an inventory level of about 2-3 at a

time depending upon the demand of the same at that particular place where it is

forecasted from the past sales. The information flow is two ways between the customers

invoicing and the order management section. Orders of the customer at a particular

moment flow from customer invoicing to order management section. In the reverse

direction, information flow gives information whether the same is procured or not and

what time it will be delivered to customer.

On completion of the order, the personnel at the order management section enter the

data into the database of the computer of PW franchise. There is a continuous

monitoring of inventory done by this person so that there is no shortage in the daily

requirements as he has access of the present stock of the inventory at the material

receiving section, which is actually the store of the franchisee. The data is delivered to

planning and control section, which monitors the work at the manufacture section as well

as the material distribution section. This section has both the records, accordingly orders

the manufacturing section when to slog and when to stop production for a particular

item.

Figure 1: Supply Chain at the franchise End

There is a two-way information flow between order management and distribution section.

Here the person knows what is to be delivered, how much quantity and the customer to

whom he is supposed to deliver. As he knows the information, he informs the person at

the distribution center where the item is kept at a particular place after being

manufactured. This is delivered at the delivery counter where the order management

person receives the same and delivers to the customer.

A two-way information flow between material ordering section and planning and control

section ensures that inventory level is maintained periodically. If there is a shortfall in

inventory at a particular time, then the person gets in touch with material order section

and delivers an invoice to the same which is to be procured from the distribution center.

The material ordering section is in touch with material receiving section and they keep

track whether the material that has been ordered has reached the stores in time or not.

The ordered material is informed to the supplier paying section so that the payment is

done to the distribution center without any delay. The material ordered is maintained in

the inventory database by the distribution center and the bill is sent to the supplier

paying section for the record of the franchise.

SupplierPaying

MaterialOrdering

Planning &Control

OrderManagement

Pizza

Receive Convert Distribute Deliver

CustomerInvoicing

Bill

The material ordered to the distribution center is delivered to the franchise, where a

thorough check takes place for the quality of the material that is to be delivered as well

as the quantity, which has been ordered

Pizza World’s Distribution CenterQuality check for raw materials is done here on behalf of franchises for saving time. Raw

materials are converted into another form for better taste in the pizza. The supplier

paying section has two-way relationship with the material ordering section. If the

franchise requires any item to be ordered, they places an order to the material ordering

section in the order management section of the distribution center.

Figure 2: Chennai Pizza Distribution (CPD) supply chain

The Information Flow between the Distribution Center and Planning and Control section

is two ways. The planning and control section contacts primary stores as well as

secondary stores to know the present positions of inventory levels. Normally, distribution

center forecasts requirements using the previous data, so there would not be any

shortfall. Thus, planning and control section has record of stock levels at primary and

SupplierPaying

MaterialOrdering

Planning &Control

OrderManagement

Convert Deliver

CustomerInvoicing

Bill

Bill

PrimaryStores

Material InSecondary

Stores

Material Out

secondary stores. The requisite amount of material from stock is sent to delivery

counter. Material is loaded into PW’s private fleet of vans that load the same material

and send them to respective franchises. The order management is in touch with the

delivery counter and the customer invoicing people at the distribution center. The

customer invoicing section prepares the receipt and sends it to the respective

franchisee. In case there is any requirement in the distribution center they are in

constantly touch with the planning and control section and also with the order

management section. Here the flow of information in all the departments is both ways.

Questions

1. Comment on the order management mechanism at the distribution center and

the franchise end.

2. What are the drawbacks in the present model of supply chain?

3. How can the distribution network be structured to ensure good customer service

with optimum utilization of resources?

*****

Distribution and Transportation - Final

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