Supply Chain Management: Inventory & Transportation

Intellectual Property of Applied management Consulting Group. For information please contact: Dr. Raghu Ramaya (508) 887-8700 raghur@appliedmcg.com

In a typical manufacturing system, there is a set of spatially distributed plants that produce the end products and a set of spatially distributed suppliers that feed the plants with the requested parts (materials). These parts need to be shipped from the suppliers to the plants. The logistic operation cost for shipping products between suppliers and plants includes not only the transportation cost, but also inventory cost and handling cost. Generally, these costs conflict with each other. For example, consider a given product. When the shipping frequency for the product increases, the transportation and handling costs increase while the inventory cost decreases. The total cost might be further reduced if we use the appropriate transportation mode/method. Therefore, we need to develop an efficient plan to manage the inventory control and shipment of the parts so that the total of inventory, transportation, and handling costs are minimized subject to business constraints. Four major decisions need to be made towards reaching this goal determine the optimal shipment frequency and size select the appropriate transportation mode/method generate the best routing and scheduling, and design the effective loading plan. Shipment Frequency/Size--determine the optimal frequency and size of the shipment of the parts to coordinate with the production schedule. Frequency is one of the key issues that affect the logistics cost. The higher shipping frequency leads to lower inventory carrying cost and higher transportation cost and handling cost, while the lower shipping frequency leads to the higher inventory carrying cost and higher transportation and handling cost. To reduce the logistics cost, it is necessary to find the optimal shipment frequency and its corresponding size. Transportation Mode/Method--select the appropriate transportation mode/method to balance the inventory cost and transportation/handling cost.

which leads to a lower transportation cost. However, rail takes more time, require larger shipment size and need more handling, which leads to a higher inventory cost and handling cost. An appropriate transportation modes need to be selected based on the products price and physical shape (weight/volume).

Transportation Method Once the transportation mode has been selected, we need further determine the type of transportation method it should use. For example, if truck is selected, the truck can run directly between a supplier and a plant, or it can pick up from several suppliers and drop off at several plants. Typical transportation method includes: direct, milkrun, crossdock, and LTL (less than truck load). There are tradeoffs between each transportation method. Direct run leads to a higher transportation cost and lower pipeline inventory cost and handling cost than Milkrun. Milkrun leads to lower plant inventory cost due to the possibility of higher shipment frequency.

Routing and Scheduling--select the best size and route of the vehicles so that the total transportation costs are minimized subject to business constraints. If a vehicle picks up at several suppliers and drops off at several plants, or it runs through a crossdock, the routing and scheduling of the vehicles becomes an important issue. It is necessary to minimize transportation costs while balancing the delivery load for a product and satisfying the following constraints:

dock capacity vehicle volume/weight capacity drivers workday rules like upper bound on time/distance traveled, earliest start time

Transportation Mode Typical transportation modes to ship products between suppliers and plants are truck, rail, water, and air. Each transportation mode has its advantage and disadvantage for transportation cost, inventory cost, and handling cost. For example, if we compare the modes of truck and rail, the transportation rate for rail is lower than for truck,

Loading Plan: generate an efficient loading plan for the vehicles to reach higher vehicle utilization rate and smooth the pick-ups and drop-offs. Since different products have different shapes and volumes, the way to load the products has a significant effect on the utilization of the vehicles. Besides this, we also need to consider the balance of the load on a vehicle to reduce of the unstableness and increase the safety on the road. For a route with multiple pick-ups and dropoffs, the handling cost is highly affected by the way of the products loaded.