Modelling Mode Choice in Freight Transportation Based on ... · PDF fileModelling Mode Choice...

Modelling Mode Choice in Freight

Transportation Based on Deterministic Logistics

Cost Model

Sevil Köfteci Department of Civil Engineering, Faculty of Engineering, Akdeniz Unversity, Antalya, Turkey

Email: [email protected]

Abstract—Freight transportation is very important sector

for national economies. The well-planned freight

transportation system makes a positive contributions to life

of people. An important part of any numerical analysis of

freight transportation is a ability for forecasting the demand.

Freight transportation demand is far more complex than

passenger transportation demand. It is clear that firm is the

basic decision-making unit in the transportation of freight.

This paper summarizes the results of deterministic logistics

cost analysis based on stated preference technique.

Deterministic logistics cost model is developed at the level of

the individual firm. The dataset used for this study is the

result of 14 interviews with ceramic merchants, which have

been realised in Antalya region, Turkey. In conclusion,

which factors are important for create deterministic

logistics costs model and calculate logistics costs based on

this model were determined in this study.

Index Terms—freight transportation, logistics costs,

deterministic model, demand analysis, stated preference.

I. INTRODUCTION

Interest in modeling and analysis work in freight

transportation has increased greatly over the past few

years for variety reasons. The well-planned freight

transportation system makes a positive contributions to

life of people. An important component of any analysis of

freight transportation is a capability for forecasting the

demand for a certain type of service under given set of

conditions. Logistics is one of the most important

activities in freight transportation. Logistics represents a

collection of activities that ensures the availability of the

right products in the right quantity to the right customer

at the right time [1]. Logistics activities serve as a link

between production and consumption and essentially

provide a bridge between production and market

locations or suppliers separated by distance and time [2].

Different values are added to a product at various stages

of its life cycle. Production and manufacturing adds form

value by converting the raw material or components into

finished parts. Place value is provided through

transportation by moving the product where it is needed.

Time value is provided through storage and inventory

Manuscript received February 1, 2015; revised April 17, 2015.

control ensuring the availability of the product when

needed. Possesion value is added to the product through

marketing and sales [1]. The primary objective of

logistics is to provide appropriate standard customer

service at the minimum possible total logistics cost.

Customer service is measured by the availability of the

required product of acceptable quality within the

specified time [3]. This paper summarizes the results of

deterministic logistics cost analysis based on stated

preference technique. Deterministic logistics cost model

is developed at the level of the individual firm. The

dataset used for this study is the result of 50 interviews

with cement merchants, which were realised in Antalya

region, Turkey. In conclusion, which factors are

important for create deterministic logistics costs model

and calculate logistics costs based on this model were

determined in this study.

II. FREIGHT TRANSPORTATION DEMAND

Freight transportation makes a vital contribution to the

economy and society. Freight transportation helps

production, industry, trade and consumption activities by

ensuring the efficient movement and timely availability

of raw materials and finished goods. Advances in freight

transportation have been a major origin of productivity

growth in the economies of many countries. Forecasting

the developments of future transportation is essential for

freight transportation policy planning. Modelling freight

transportation demand is far more complex than

passenger transportation demand. Modelling studies

related the freight transportation has been carried out

since 1960. The first models about freight demand were

aggregate models dealing with freight transportation.

More recent models, are dissagregate models. Classical

four step freight demand modeling technique is

recognizes that freight demand is derived from economic

activity. It involves comprehensive interrelationships

among economic activity, production and consumption

nodes, distribution or linkages between production and

consumption nodes, mode choice and shipment size

decisions, vehicle trips, and route assignments [4]. Figure

1 illustrates the model components and their key inputs of

classical freight modeling approach [5].

Journal of Traffic and Logistics Engineering Vol. 3, No. 2, December 2015

©2015 Journal of Traffic and Logistics Engineering 180doi: 10.12720/jtle.3.2.180-184

There is a three type of decisions which are

represented as a complex hierarchy of choices in freight

transportation demand analysis studies. These are long

run, intermediate and short run decisions. A firm

ultimately makes a decisions on the purchase of its

transportation services. The long run decisions that a

manager of firm has to make a concerns the location of

the plant.

Figure 1. Model components and data inputs of freight transportation modelling

İntermediate decisions dealing with the production

involving the choice of technology of production and

level of output [6]. The short run decisions involves the

choice of mode, shipment size and point of supply given

the annual use rate of inputs. In terms of production

theory, this is somewhat restrictive, since it allows no

factor substitution between the demand for transportation

and other factors, but it does allow for substitution within

the transportation and logistics cost elements [7].

Therefore, a demand model using the logistics choice

process as its basis must be categorized as a short run

freight demand model. In a short run demand model, the

annual demand for input material is used as only

transportation related choices, such as origin of supplier,

mode of transport. This study then proceeds to develop

the short-run model of freight demand based on logistics

cost elements. The model examined in this paper is

disaggregate, explanatory and considers the firm as the

basic decision making unit.

III. LOGISTICS COST MODEL PARAMETERS

Over the last four decades a substantial researches

about to mode choice on the basis of logistics cost model

for the freight demand analysis was reported in the

literature These costs typically involved in the decision

process are; purchase costs, ordering costs, transportation

costs, in transit-carrying costs, inventory costs, inventory

carrying costs, lost and damage costs, safety (stock-out)

costs. Table I illustrates the mainly cost components used

at these models. In the cells of table, “Y” means “YES”

and “N” means No” Names of authors and their

publications which are include these models are listed

below. Because of the planning and operational decisions

of one cost type typically has an impact on the other cost

type, logistics decisions are usually based on total cost

approach.

1. “Intermodal transportation and inventory cost

model highway-to-rail intermodal user’s manual”

[8].

2. Vieira and F. M. Luiz, “The value of service in

freight transportation” [9].

3. Y. S. Chiang, P. O. Robets, and M. Ben-Akiva,

“Development of a policy sensitive model for

forecasting freight” [10].

4. Y. Sheffi, B. Eskandari, and H. N. Koutsopolous,

“Transportation mode choice based on total

logistics costs” [11].

5. Y. Sheffi, “Carrier/shipper interactions in the

transportation market: An analytical framework”

[12].

6. W. J. Baumol and H. D. Vinod, “An inventory

theoretic model of freight transportation demand”

[13].

7. J. Ozment, “Demand for intermodal

transportation in arkansas” [14].

8. A. Kanafani, “Methodology for mode selectipn

in corridor analysis of freight transportation” [6].

9. G. Chow, “A total logistics cost approach to

measuring collateral benefits of security and

supply chain improvements at international

gateways” 2008, [15].

For example, inventory and transportation decisions

are very closely related. If a slower mode is used for

transportation because it is cheaper, than a higher level of

inventory may be needed. On the other hand, if a faster

mode is used, than a lower inventory level may be

maintened. Therefore a trade-off is need to determine the

optimal inventory level. The primary objectives of

logistics is to provide customer service at the minimum

total cost. Total cost includes the costs incurred to

perform all the logistic functions in order to provide

world-class customer service [3].

The total cost approach has been a core principle in

transportation and logistics decision making activity in

the mid 1950s [15]. In developing the metodology for

mode selection based on logistics cost model, we shall

adopt the perspective of the receiver. The receiver is a

rational economic decision maker who tries to minimize

total logistics costs for the delivered product. A short

explanation of logistics costs parameters are presented

below.

A. Ordering Costs

If the ordering cost is represented by “OC”, the

ordering costs per shipment is represented by “a”, then

calculation of ordering cost as follows:

OC a (1)

B. Transportation Costs

If the transportation cost per shipment is represented

by “TC”, transportation costs per unit product is

represented by “c”, the amount of product carried per

shipment is represented by “u”, then calculation of

transportation cost is as follows:

.TC u c (2)


©2015 Journal of Traffic and Logistics Engineering 181

C. In-Transit Carrying Costs

If the in-transit carrying cost per shipment is

represented by “ITC”, the amount of product carried per

shipment is represented by “u”, value per unit product is

represented by “p”, annual interest rate is represented by

“f”, transportation costs per unit product is represented by

“c”, The amount of product carried per shipment is

represented by “u”, then calculation of in-transit carrying

costs is as follows:

. . .365

fITC u p t (3)

D. Inventory Costs

Avarage inventory level was recognized %50 in this

study. If inventory cost is represented by “IC”, The

annual storage cost is represented by “M”, annual

demand is represented by “T”, the amount of product

carried per shipment is represented by “u”, value per unit

product is represented by “p”, annual interest rate is

represented by “f”, then Calculation of inventory costs as

follows:

365

[( . ) ( . . . )2 365 2

M u f uIC P

TT

u

If the number of annual shipment (T/u) is represented

by “k” and storage cost per unit (M/T) is represented by d,

calculation of “IC” is rearranged as follow:

[( . ) ( . . )]2 2

u f uIC d P

k (4)

E. Safety Stock Costs

If the safety stock cost is represented by “SC”, the

safety stock level is represented by “n”, then calculation

of safety stock costs as follows:

.. .365. . . .

( ) ( ) [( ) ( )]

.365

Mn

P f n d n P f nTSCT T k k

u u

(5)

F. Loss and Damage Costs

Loss and damage cost includes the actual value of the

material lost and damaged for which the shipper is not

compensated by the carrier [16]. If the loss and damage

cost is represented by “LDC”, the amount of lost and

damaged product is represented by “z”, then calculation

of safety stock costs as follows:

.LDC z P (6)

If total logistics cost is represented by “TLC”,

calculation of total logistics costs is as follows:

TLC OC TC ITC IC SC LDC (7)

. . . 1 .[( ) ( . ) ( ) ( )

365 2

( . ) ( . )

u p f t p f nTLC a u c u d

k k

d p f z p

(8)

With a view to examine process involved in selecting

an appropriate freight demand analysis strategy, it is

useful to represent the decision variables defining

alternative short run analysis strategies as the choice of

origin represented by i, shipment size represented by q

and mode of transportation represented by m. The

criteria for an alternative i,m,q to be a optimal logistics

strategy is satisfaction of the following condition [10]:

imq i m qw w i m q A (9)

where A is the set of possible origin, shipment size and

mode combinations. There is as two general approaches

taken in the account in modeling the logistics decision of

firm. The general difference between these approaches is

related to the level of certainty concerning the

information in the logistics cost function. In the first

approach (deterministic cost models), the logistics cost

function parameters are assumed fully observable.

Therefore, the alternative defined by the choice i, m, q is

selected with certainty if

imq i m qw w i m q A

(10)

A model developed upon this assumption will be

reffered to as a deterministic cost model of short-run

freight demand. The model states:

( / ) 1,

0,

r imq i m qP imq A if w w i m q A

otherwise

where wimq, wi’m’q’ are fully observed. The second

approach assumes that the logistics cost function is not

fully observable. According to this approach, logistics

cost function consists of two parts. The first part is f

observable and the second part is unobservable. In this

study, mode choice was modelled based on deterministic

logistics cost model in freight transportation. The

deterministic logistics cost model assumes that the total

logistics cost function is fully observable. The objective

function for the firm’s logistics strategy is to minimize

the total logistics costs.

IV. EMPIRICAL STUDY

Antalya is the biggest tourism center of Turkey,

located south of Turkey. Therefore, the population of city

is increasing continuously and construction activities are

too much accordingly. Ceramic is the basic elements of

the building construction sector. Some of ceramics used

in the construction sector in Antalya province are

transported from Canakkale Ceramic Factory which is

located at Çan (the town of Çanakkale province). There

are two transportation modes used for carrying of

ceramics from Çan to Antalya. One of them is the road

transportation. Other is the intermodal transportation.

Burdur is transfer station for intermodal transportation.

Fig. 2 and Fig. 3 illustrate the transportation corridor

analysed in this study.

Figure 2. Direct road transportation



Figure 3. Intermodal transportation

Since this transportation corridor has a big potential

about both transportation types and demand

characteristics knowledge, the surveys were conducted to

transportation managers of 14 ceramics firms whose

shipments were carried by using this transportation

corridor. After surveys were conducted, data set entered

into an Excell spreadsheet. Fig. 4 illustrates the Excel

spreadsheet included dataset table.

Figure 4. The data set sample used in rhe empirical study

Total logistics costs for each transportation operations

made within one year of each company were calculated

by using total logistics cost model (Eq. 8). Total logistics

costs were calculated separately for the intermodal and

direct road transportation. Fig. 5 illustrates graphically

the components of total logistics costs.

Figure 5. Components of total logistics costs

As can be seen in Fig. 5, it is assumed that total

logistics costs consists of three main parts in the study:

Ordering costs

Transportation related costs which is include

transportation costs, in-transit carrying costs and

loss-damage costs

Inventory related costs which is include inventory

costs and safety stock costs.

One can see Fig. 5 that, percentage of transportation

related costs over the other cost components is dominant.

Nevertheless, inventory related costs is the typically other

important logistics cost parameter. This figure shows that,

variables related transportation related costs are an

important factors creating logistics cost model. Cost

components of inventory related costs and transportation

related costs are shown in Fig. 6 and Fig. 7 respectively.

Figure 6. Components of inventory related costs

Fig. 6 shows the subcomponent shares of the

inventory costs such as inventory costs (71%) and safety

stock costs (29 %). This result is not surprising because

stock level in safety stock cost is lower than inventory

cost.

Figure 7. Components of transportation related costs

Components of transportation related costs reported in

Fig. 7 indicate that the transportation costs are largely

composed of direct road transportation costs. It is

followed by intermodal transportation costs. The other

two cost parameters are less effective on transportation

related costs. This implies that the parameters that the

influence the calculation of transportation costs are very

important factors creating transportation related costs.

Transportation costs consists of two parameters:

transportation costs per unit and the amount of product

carried per shipment. The second parameter is used

almost all cost calculations in total logistics cost model.

Therefore, it is assumed that, this parameter not a

determining factor on the cost calculation. As a result,

transportation costs parameter is determined as the most

important factor defining short run freight demand

Çan Bandırma Sığırcı

Station

Burdur

Station

Antalya

42% 7%

18%

33%

71%

29%



analysis strategy based on deterministic logistics cost

model.

V. CONCLUSION

Freight transportation is very important activity for

national economies. An important part of any quantitative

analysis of freight transportation is a ability for

forecasting the demand for a certain type of condition

under a given set of possibility. This paper summarized

the study on selecting an appropriate freight demand

analysis strategy based on deterministic logistics cost

model. The data set used for this study is the result of 14

interviews about cement sector firms, which have been

realized in the Turkish region of Antalya. The results

confirm that, the logistics cost model is most affected by

transportation cost parameter. Depending on this situation

it can be said that, if the costs of transportation modes

are rearranged, the possibility of firms rely on intermodal

transportation rather than road transportation will

increase. This result is very important authorized persons

dealing with the mode choice activities in freght

transportation.

REFERENCES

[1] R. J. Kasilingam, Logistics and Transportation, Kluwer Academic

Publishers, 1998, pp. 1. [2] İ. Özalp, B. Suvacı, and Z. H. Tonus, “A new approach in logistics

management: Just IN Time-Logistics (JIT-L),” in Proc.

International Conference on Social Sciences, 2010, pp. 4. [3] H. V. Davis and W. H. Drumm, “Logistic costs and customer

service levels,” in Proc. Council of Logistic Management Annual

Conference Proceedings, 1996, pp. 149-159. [4] Holguín-Veras, “On the attitudinal characteristics of motor

carriers toward container availability systems,” International

Journal of Services Technology and Management, vol. 1, no. 2-3, pp. 140-155, 2000.

[5] F. Southworth, “Freight transportation planning: Models and Methods,” Transportation Systems Planning: Methods and

Applications, pp. 4-1, pp. 4-29, 2003.

[6] A. Kanafani, “Methodology for mode selection in corridor analysis of freight transportation,” Research Paper, The University

of California Transportation Center, 1984, pp. 15-29.

[7] J. R. Stock and D. M. Lambert, Strategic Logistics Management, McGraw-Hill International Edition, 2001, pp. 13-26.

[8] Intermodal Transportation and Inventory Cost Model Highway-to-

Rail Intermodal User’s Manual, US Department of Transportation, Federal Railroad Administration, 2005.

[9] Vieira and F. M. Luiz, “The value of service in freight

transportation,” Ph. D. Dissertation, Department of Civil Engineering, Massachusetts Institute of Technology, 1992.

[10] Y. S. Chiang, P. O. Robets, and M. Ben-Akiva, “Development of a

policy sensitive model for forecasting freight,” Center M. I .T. Center for Transportation Studies Final Report, 1977.

[11] Y. Sheffi, B. Eskandari, and H. N. Koutsopolous, “Transportation

mode choice based on total logistics costs,” Journal of Business Logistics, vol. 9, no. 2, pp. 137-154, 1988.

[12] Y. Sheffi, “Carrier/Shipper interactions in the transportation

market: An analytical framework,” Journal of Business Logistics, vol. 7, no. 1, pp. 1-24, 1986.

[13] W. J. Baumol and H. D. Vinod, “An inventory theoretic model of

freight transportatio demand,” Management Science, vol. 116, no. 7, pp. 413-421, 1970.

[14] J. Ozment, “Demand for intermodal transportation in Arkansas,”

Research Paper, 2001 [15] G. Chow, “A total logistics cost approach to measuring collateral

benefits of security and supply chain improvements at

international gateways,” presented at CAAMTBA Conference, 28-29 March 2007, Vancouver, Canada, 2008.

[16] P. Cook, S. Das, A. Aeppli, and C. Martland, “Key factors in road-

rail mode choice in India: Applying the logistics cost approach,” in Proc. Winter Simulation Conferences, 1999, pp. 1281-1283.

Sevil Köfteci was born on 27th August 1974, in Akdeniz University, Antalya, Türkiye.

The list of degrees as shown below:

Ph. D. 2002-2009 Transportation Program in Civil Engineering, Institute of Applied

Sciences, Yildiz Technical University, Istanbul.

M. Sc. 1999-2002 Transportation Program in

Civil Engineering, Institute of Applied Sciences, Akdeniz University, Antalya

B. Sc. 1993-1997 Department of Civil

Engineering, İstanbul Technical University, Istanbul She is an ASST. PROF. DR. in Department of Civil Engineering in

Akdeniz University, Antalya, Türkiye. Her major field of study include

highway and railway pavement.



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