Freight Logistics and Strategies:

Fundamentals of Freight DecisionsAlan Erera

Associate Professor, Industrial and Systems EngineeringFaculty Director, MS in Supply Chain Engineering Program

Planning for the Future of Freight MovementSoutheast Diesel Collaborative

September 16, 2013

Supply Chain Engineering at Georgia Tech ISyE

• 25 faculty in logistics/manufacturing • Graduate programs

– MS in Supply Chain Engineering• 50 grads/yr

• Exec MS in International Logistics (EMIL)– 20 grads/yr

• Ph.D. in IE: Supply Chain Engineering– 5-10 grads/yr

My role

• MS in Supply Chain Engineering– Faculty Director

• Research program– Co-director, Center for Global

Transportation – Optimizing design and control of

logistics systems– Research program funded by

• NSF, DHS, USDOT• Industry partners (trucking, freight

railroads, manufacturers)

What to remember

• Shippers focus on total logistics costs when making freight transport decisions

• Providers (carriers) configure freight systems to deliver excellent customer service at lowest possible cost

• Supply chains continuously evolve, but fundamentals change little

Supply chain 101

• People demand products– Food, clothing, staples (must have),

everything else (nice to have)• Supply chain networks

– Procure/produce products– Get them to people

• “Logistics” systems– Connect suppliers to customers cost-

effectively, using freight transportation networks and logistics facilities

• Inbound logistics (procurement)

Supply chain 101

auto assembly

Tier 1 supplier

• Inbound logistics (procurement)

Supply chain 101

auto assembly

Tier 1 supplier

• Inbound logistics (procurement)

Supply chain 101

auto assembly

Tier 1 supplier

• Inbound logistics (procurement)

Supply chain 101

auto assembly

Tier 2 supplier

• Outbound logistics (distribution)

Supply chain 101

medical supplies

primary DC

• Outbound logistics (distribution)

Supply chain 101

medical supplies

primary DC

regional DCs

• Outbound logistics (distribution)

Supply chain 101

medical supplies

primary DC

regional DCs

customer facilities

Fundamental 1: Transportation Cost EOS and Batching

• Cost economies of scale (EOS)– Average transportation cost per

unit decreases as units increase

items

Truckload Shipment Price on Lane (o, d)

full

trailer 1

trailer 2

Fundamental 1: Transportation Cost EOS and Batching

• Cost economies of scale (EOS)– Average transportation cost per

unit decreases as units increase

items

LTL Shipment Price on Lane (o, d)

Fundamental 2: Balancing Freight and Inventory Costs

• Selecting shipment quantity– Small shipments sent frequently lead

to high freight bill spending– Larger batched shipments take

advantage of cost scale economies and reduce freight spend, but

– Larger shipment quantities create larger cycle inventories• Working capital increase (cost)• Storage capacity increase (cost)• Other inventory carrying costs:

obsolescence/perishability, insurance, …

Fundamental 2: Balancing Freight and Inventory Costs

t

I(t)

safety stock

cycle stock

Fundamental 2: Balancing Freight and Inventory Costs

t

safety stock

Reduce inventory costs 50% by shipping twice as frequently

cycle stock

Fundamental 2: Balancing Freight and Inventory Costs

• Another implication– Although freight cost scale

economies often create incentives for sending full trailer (container, …) shipments, cycle inventory costs sometimes make it worthwhile to send partially-loaded equipment

Fundamental 3: Pipeline Inventory and Mode Selection

• Pipeline inventory– Items on order, that have not yet

arrived, often in transit– Although not stored in a facility, still

creates working capital and inventory cost!!

• For shippers of very high value goods or with high storage costs, inventory costs dominate freight costs– Hard to shift to slower modes

Fundamental 3: Pipeline Inventory and Mode Selection

t

Time items spend in inventories

in plant cycle stockin-transitin DC cycle stock

Items

Fundamental 3: Pipeline Inventory and Mode Selection

t

Items

Reducing pipeline inventory may substantially reduce cost

in plant cycle stockin-transitin DC cycle stock

Fundamental 3: Pipeline Inventory and Mode Selection

t

in plant cycle stockin-transitin DC cycle stock

Items

Low cost goods with high storage costs may better off in pipeline!

Fundamental 4: Safety Stock and Mode Selection

• Safety stock inventory– Buffer inventory held in a supply

chain to hedge against uncertainty• Customer demand uncertainty• Procurement quality and reliability

uncertainty• Freight transit time uncertainty

• Shippers with high costs of inventory will strongly prefer freight modes with little transit time variability

Fundamental 5: More Ton-Miles is Often Cheaper

• Batching over geography (usually called consolidation) can be as important as batching over time– for shippers– and, for consolidation carriers like

LTL, package express, …• Freight ton-miles may increase,

but total equipment miles and total costs may decrease– More time, and extra handling

Fundamental 5: More Ton-Miles is Often Cheaper

• Inbound cross-docking for retail

crossdock

suppliers

destination DC

direct LTL

Fundamental 5: More Ton-Miles is Often Cheaper

• Inbound cross-docking for retail

crossdock

suppliers

destination DC

consolidated TL

Fundamental 5: More Ton-Miles is Often Cheaper

• LTL cross-docking terminal network

Fundamental 5: More Ton-Miles is Often Cheaper

• LTL cross-docking terminal network

Fundamental 5: More Ton-Miles is Often Cheaper

• 40’ to 53’ domestic container transload

destination DCPOLA/LB

ATL ramp40’ service

from Asia

Fundamental 5: More Ton-Miles is Often Cheaper

• Pack three 40’ into two 53’ domestic containers

crossdock

destination DCPOLA/LB

ATL ramp53’ domestic service

from Asia

Fundamental 5: More Ton-Miles is Often Cheaper

• “Consolidation” onto freight intermodal trains of truckload shipments

originMOD ramp

IND ramp destination

53’ domestic service

Fundamental 5: More Ton-Miles is Often Cheaper

• Non-stop sleeper team truckload

originMOD ramp

IND ramp destination

Fundamental 6: Trailers and Containers Must Move Empty

• Geographic imbalance between freight origins and destinations– Certain areas net producers of freight

traffic (by mode, carrier, …)– Other areas net consumers– Imbalance!

• Freight transport mobile resources are reusable– Always travel in cycles: (A, B, C, … ,

A)

California

Midwest

Southwest

15

106

Weekly flow (10s)

56

8

Fundamental 6: Trailers and Containers Must Move Empty

California

Midwest

Southwest

Weekly flow (10s)

6 net arrivals

8 net arrivals

14 net departures

Fundamental 6: Trailers and Containers Must Move Empty

Fundamental 6: Trailers and Containers Must Move Empty

Empty Plan Weekly flow (10s of 53’ tractor-trailers)

California

Midwest

Southwest

6 empty supply

8 empty supply

8

6

14 net departures

Fundamental 7: Freight Demand, Supply, and Pricing

• Backhaul lanes– Light volume origin-destination

pair lanes that help move equipment back toward high volume lanes

– Freight pricing can be significantly lower• Carrier gets paid for otherwise

empty move

Fundamental 7: Freight Demand, Supply, and Pricing

California

Midwest

Southwest

6 empty supply

8 empty supply

8

6

14 net departures

6

8

No backhaul from Southwest to California, due to network effect

Not all imbalanced lanes are backhaul lanes!

Fundamental 8: Last-mile Freight Efficiency is Hardest

• Last-mile– Consolidation modes– Pickup from shipper into first terminal– Delivery to consignee from last terminal

• Examples– Container drayage into seaport/IM

terminal– Package express pickup/delivery routes– LTL pickup/delivery routes– Distribution delivery routes into stores

Fundamental 8: Last-mile Freight Efficiency is Hardest

• Challenges to efficiency– Small shipment sizes– Multiple stop vehicle tours– Tour duration constraints,

deadlines– Customer delivery constraints,

time windows– Urban logistics: congestion,

parking, regulation

Parting Thoughts: Trends for Supply Chains

1. Global manufacturing here to stay2. Consumers continue to demand better

cheaper products, faster 3. Retailing is more and more a supply

chain business4. Ubiquitous sensors, connected

devices, data, automation will continue to drive efficiency gains

5. Alternate fuel technologies will expand steadily into fleets as total costs to own/operate decrease

What to remember

• Shippers focus on total logistics costs when making freight transport decisions

• Providers (carriers) configure freight systems to deliver excellent customer service at lowest possible cost

• Supply chains continuously evolve, but fundamentals change little