SCM

MOD-3 Designing and planning transportation networks

 Role of transportation in a supply chain: Transportation refers to the movement of product from one location to another as it makes its way from the beginning of the supply chain to the customer Transportation is an important supply chain driver because products are very rarely produced and consumed in the Same location Transportation is a significant component of the costs incurred by most supply chains

 Transportation activity represented more than 10% of GDP of USA in 2002 & employs 16% of total occupational employment The role of transportation is even more significant in global supply chain. Dell supplies its worldwide requirement from just few plants and Wal-mart sells products manufactured all over the world in USA The total international merchandise trade to and from the USA increased at annual rate of 9.3% between 1990 and 2001

 The growth in international merchandise trade was more than three times the growth of the US economy over the same period Between 1970 and 2001 US international merchandise trade grew by over 20 times where US economy grew about 10 times. With rapid growth in international trade, good multimodal freight transportation systems to move the resulting cargo have become even more significant

 Any supply chains success is closely linked to the appropriate use of transportation IKEA a Scandinavian home furnishings company has designed modular design for its furniture which can be transported cost effectively all over the world The large size of shipping allows inexpensive transportation of home furnishings all the way to retail store resulting high quality furnishings are made available globally at low prices

 Seven-Eleven Japan replenishes its stores located at many geographical locations with varying requirements, several times a day to match the customers needs. Products from different suppliers are aggregated on trucks according to required temperature to help achieve very frequent deliveries at a reasonable cost

 Supply chains also use responsive transportation to centralize inventories and operate with fewer facilities Ex. Amazon.com relies on package carriers and postal system to deliver customer orders from centralised warehouses. Dell manufactures in few locations in US and uses responsive transportation provided by package carriers to provide customers with highly customized products at reasonable price.

 A shipper is the party that requires the movement of the product between two points of supply chain The carrier is the party that moves or transports the product. Ex. Dell uses UPS to ship its computers from factory to the customer, Dell is the shipper and UPS is the carrier. Two other parties have a significant impact on transportation: owners and operators of transportation infrastructure such as roads, ports, canals, and airports; and bodies that set transportation policy worldwide.

 To understand the transportation in a supply chain all four parties are to be considered. A carrier makes investment decisions regarding transportation equipment (trucks, locomotive, plane etc) some times infrastructure (rail), and makes decisions to maximize return from these assets A shipper in contrast uses transportation to minimize total cost (transportation, inventory, information, sourcing and facility) while providing an appropriate level of responsiveness to the customer

 We can think of a transportation network as a collection of nodes and links Transportation originates and ends at nodes and travels on links For most modes of transportation, infrastructure such as roads, waterways and airports is required at the nodes and links, and is owned and managed as public good throughout the world

 It is important that infrastructure be managed in such a way that monies are available for maintenance and investment in further capacity as needed Transportation policy sets direction for the amount of national resources that go into improving transportation infrastructure Transportation policy also aims to prevent monopoly power, promote fair competition, and balance environmental, energy, and social concerns in transportation

 Modes of transportation and their performance characteristics : Supply chain uses a combination of following modes of transportation
Air Package carriers Truck Rail Water Pipeline intermodal

 It is important to highlight couple of important trends in US economy Between 1970 and 2002 US real GDP (measured in year 2000 dollars) grew by 176% Over the same period US freight transportation measured in ton-miles grew by only 73% In 1970 it took 2.1 ton-miles of freight transportation to produce $1 goods GDP In 2002 it took only 1.1 ton-miles to produce $1 GDP This reflects the down sizing of products with new technology and improved efficiency of freight transportation system

 The effectiveness of any mode of transport is affected by equipment investments and operating decision by carrier and available infrastructure and available infrastructure policies The carriers primary objective is to ensure good utilization of its assets while providing customers with an acceptable level of service Carrier decisions are affected by equipment cost, fixed operating cost, variable operating cost, the responsiveness the carrier seeks to provide its target segment, and the prices that the market will bear

 Ex. FedEx designed a hub-and-spoke airline network for transporting packages to provide fast, reliable delivery times. UPS in contrast uses a combination of aircrafts, rail and trucks to provide cheaper transportation with some what longer delivery times The difference is FedEx charges based on the size of the packet, and UPS charges based on size and destination

 Air: airlines have a high fixed cost in infrastructure and equipment Labour and fuel costs are largely trip related and independent of the number of passengers or amount of cargo carried on a flight An airline goal is to maximize the daily flying time of a plane and revenue generated per trip Given the large fixed costs and relatively low variable costs, revenue management is done by varying seat prices and allocation of seats to different price classes Presently airlines practice revenue management for passengers and much less for cargo

 Air carriers offer a very fast and fairly expensive mode of transportation Small high-value items or time-sensitive emergency shipments that have to travel a long distance are best suited for air transport Air carriers normally move shipments under 500 pounds including high-value but light weight high-tech products

 Given the growth in high technology, the weight of freight carried by air has diminished over the last two decades even as the value of freight has increased somewhat Key issues that air carriers face include identifying the location and number of hubs, assigning planes to routes, setting up maintenance schedules for planes, scheduling crews, and managing prices and availability at different prices

 Package carriers: package carriers are transportation companies such as FedEx, UPS and the US Postal Service, which carry small packages ranging from letters to shipments weighing about 150 pounds Package carriers use air, truck, and rail to transport time-critical smaller packages. Package carriers are expensive and cannot compete on price for large shipments They offer shippers rapid and reliable delivery

 Shippers use package carriers for small and time sensitive shipments. Package carriers also provide other valueadded services that allow shippers to speed inventory flow and track order status With increase in JIT deliveries and focus on inventory reduction, demand for package carriers has grown

 Package carriers are preferred mode of transport for e-business such as Amazon.com, Dell etc., to send small packages to customers Package carriers seek out smaller and more time-sensitive shipments than air cargo especially where tracking and other value added services are important Companies use air-cargo carriers for larger shipments and package carriers for smaller and time-sensitive shipments

 Given small size of packages and several delivery points, consolidation of shipments is a key factor in increasing utilization and decreasing cost for package carriers Package carriers have trucks that make local deliveries and pick up packages Packages are then taken to large sorting centers from which they are sent by full truck load, rail, or air to sorting centers closest to the delivery point

 From the delivery point sorting center, the package is sent to customers on small trucks making short runs (milk runs) Key issues in this industry include the location and capacity of transfer points as well as information capability to facilitate and track package flow For final delivery to a customer, an important consideration is the scheduling and routing of the delivery trucks

 Trucks: in 2002, trucks moved 64% of US commercial freight by value and 58% by weight Truck industry has two major segments-TL (full truck load) or LTL (less than half truck load) Truck is more expensive than rail but door to door shipment and shorter delivery time is possible It has advantage of no transfer between pick up and delivery

 TL have relatively low fixed costs and owning a few trucks is sufficient to enter business TL had only 17% market share among 40 firms in US in the year 1996 The goal of TL carrier is to schedule shipment to meet service requirements while minimizing both trucks idle and empty travel time TL pricing displays economies of scale with respect to the distance traveled Pricing also displays economies of scale with respect to size of the trailers used

 TL shipping is suitable for transportation between manufacturing facilities and warehouses or between suppliers and manufacturers LTL operations are priced to encourage shipments in small lots, usually less than half a truck as it tends to be cheaper for larger shipments LTL shipments take longer because of other loads that need to be picked up and dropped off LTL shipping is suited for shipments that are too large to be mailed but constitute less than half a TL

 A key to reducing LTL costs is the degree of consolidation that carriers can achieve for the loads carried LTL carriers use consolidation centers to which trucks bring in many small loads originating from a geographic area and leave with many small loads destined for the same geographic area which improve the truck usage Larger firms enjoy an advantage in the LTL industry given the importance of consolidation and fixed cost of setting up of consolidation centers

 Strong regional players have developed in the LTL industry because of the advantage offered by a high density of pickup and delivery points in a geographic area Key issues for the LTL industry include location of consolidation centers, assigning of loads of trucks and scheduling and routing of pickup and delivery. The goal is to minimize costs through consolidation without hurting delivery time and reliability

 Rail: in 2002, rail carried about 4% of US shipments by value, 12% by weight, and over 25% of total ton-miles These figures reflect the use of rail to move commodities over large distances Rail carriers incur a high fixed cost in terms rails, locomotives, cars, and yards There is also a significant trip related labor and fuel cost that is independent of the number of cars but does vary with the distance traveled and the time taken

 Any idle time, once a train is powered is very expensive because labor and fuel costs are incurred even though trains are not moving Idle time occurs when trains exchange cars for different destinations It also occurs because of track congestion Labor and fuel together account for over 60% of railroad expense It is necessary for railroads to keep locomotives and crew well utilized

 The price structure and heavy load capability makes rail an ideal mode for carrying large, heavy or high-density products over long distances Transportation time by rail can however be long Rail is thus suitable for very heavy, low value shipments that are not time sensitive. Ex. coal Small time sensitive, short distance or short lead time shipments rarely go by rail

 Major operational issues at railroads include vehicle and staff scheduling, track and terminal delays and poor on-time performance Railroad performance is hurt by transition delays Travel time is small fraction of total time for rail shipment Delays get exaggerated because trains are not scheduled but built as and when cars are constituted Cars wait for train to build, adding uncertainty to delivery time Railroad performance can be improved by scheduling some trains instead of building them

 Water: water transport is ideally suited for carrying very large loads at low cost. It is slowest among all modes of transport, delay occur in ports and terminals Water transport is not recommended for short hauls, though used in Japan and parts of Europe for daily short-haul trips of a few-miles Trend in maritime trade world wide has been growth in containerization. Delays at ports, customs, security and the management of containers used are major issues in global shipping

 Pipeline: pipeline is primarily used for transport of crude petroleum, refined petroleum products and natural gas Significant initial fixed cost is incurred in setting up the pipeline and related infrastructure that does not vary significantly with diameter of the pipeline Pipeline operations are optimized at about 80 to 90% pipeline capacity Pipelines are best suited when relatively stable and large flows are required

 Pipeline may be effective way of getting crude oil to a port or a refinery Pipeline pricing usually consists of a fixed component related to shippers peak usage and a second charge relating to actual quantity transported This pricing structure encourages the shipper to use the pipeline for predictable component of demand with other modes often being used to cover fluctuations

 Intermodal: intermodal transportation is the use of more than one mode of transport to move a shipment to its destination A variety of combinations are possible with most common being truck/rail Intermodal traffic has gown considerably with increased use of containers for shipping and rise in global trade Containers are easy to transfer from one mode to another and their use facilitates intermodal transportation Containerized freight often uses truck/ water/ rail combination particularly for global freight

 For global trade, intermodal is often the only option because factories and markets may not be next to ports. As the quantity shipped using containers has grown, the truck/ water/ rail intermodal combination has also grown On land rail/ truck intermodal system offers benefit of lower cost than TL and delivery times better than rail

 It is convenient for shipper as they deal with one entity representing all carriers who together provide the intermodal service Key issues involve exchange of information to facilitate shipment transfers between different modes because these transfers often involve considerable delay, hurting delivery time performance

 Transportation infrastructure and policies: Roads, seaports, airports, rail and

canals are some of the major infrastructure elements that exist along nodes and links of a transportation network In almost all countries government has played a significant role in building and managing these infrastructure elements Improved infrastructure has played a significant role in the development of transportation and the resulting growth of trade

 Economists such as Vickrey have argued for public ownership of these assets but the setting quasi-market prices to improve overall efficiency Quasi-market prices need to take into account the discrepancy between the incentives of an individual using the transportation infrastructure and public as a whole that owns infrastructure. This discrepancy is illustrated in figure.

Price of trip marginal cost of time + operation Average cost of time + operation B A

P1 P0

Demand curve Q1 Q0 Vehicle flow rate

 The user bases his decision to use a highway on the cost and benefit of doing so The figure assumes that different people have different value for making the trip and this value is uniformly distributed over an interval The number of users whose value from a trip, exceeds a particular cost is thus defined by the demand curve The costs incurred by a motorist include the cost of time spent on the highway and the cost of operating and maintaining the vehicle

 It is known that time spent increases nonlinearly with congestion on highway Thus the average cost to each motorist increases with traffic flow as shown in fig. Given peoples valuation of the trip, the number of motorists using the road is determined by the intersection of the demand curve with the average cost curve at point A This results in an average cost to motorists of P0 and a traffic flow Q0

 From the perspective of public, it is more appropriate to consider how each additional motorist impacts the total cost Observe that an additional motorist increases the average cost by small amount but increases the total cost across all motorists by a larger amount This is represented in fig. by the marginal cost curve, which measures the marginal increase in total cost as a result of additional traffic flow Observe marginal cost curve is higher than the average cost curve

 In other words, the marginal impact of a motorist on the total cost is much higher than his share of impact From marginal cost perspective, motorists should be charged a toll P1-P0 so that the cost they bear is the true cost they are imposing on the highway system This toll lowers the vehicle flow rate to Q1. In other words, the absence of a congestion toll results in an overuse of the transportation infrastructure and a resulting congestion cost on all users

 The problem illustrated is given by Vickrey Each member of a group going out to dinner is likely to order expensive item if the plan is to share the bill equally at the end instead of having each person pay his true charge Thus it is fair to say that the overall bill is higher if it is shared equally compared to each person paying based on consumption

 This is true with transportation infrastructure if pricing is not linked to congestion Quasi market prices for transportation infrastructure thus result in higher prices in peak locations and time, and lower prices other wise Such pricing is not commonly observed for transportation infrastructure except for roads in Singapore and city centers in few European countries

 Overall it is important to keep in mind that transportation infrastructure faces congestion-related problems It may be most effective to charge a congestion toll and use the money generated to improve the effectiveness of transportation infrastructure

 Design options for transportation network: The design of transportation network affects the performance of a supply chain by establishing the infrastructure with in which operational transportation decisions regarding scheduling and routing are made Direct shipment network: with direct shipment network, the buyer structures his transportation network so that all shipments come directly from each supplier to each buyer location as shown in figure

Direct shipment network

Suppliers Buyer Locations

 With direct shipment network, the routing is specified and supply manager only need to decide on the quantity to ship and the mode of transportation to use The major advantage is elimination of intermediate warehouses and its simplicity of operation and coordination The shipment decision is completely local and does not affect other shipping decisions The transportation time from supplier to buyer location is short because each shipment goes direct

 The direct shipment network is justified if demand at buyer locations is large enough that optimal replenishment lot sizes are close to a TL from each supplier to each location With small buyer locations, a direct shipment network tends to have high cost If TL is used for transportation, the high fixed cost of each truck results in large lots moving from suppliers to each buyer location resulting in high inventory in supply chain

 If a LTL is used the transportation cost and delivery time increase, though inventories are lower If package carriers are used transportation costs are very high With direct deliveries from each supplier, receiving costs are high because each supplier must make a separate delivery

 Direct shipping with milk runs: A milk run is a route on which a truck either delivers product from a single supplier to multiple retailers or goes from multiple suppliers to a single buyer location as shown in figure In direct shipping with milk runs, a supplier delivers directly to the multiple buyer locations on a truck or a truck picks up deliveries destined for the same buyer location from many suppliers

Suppliers

Buyer locations

Suppliers

Buyer Locations

 Direct shipping provides the benefit of eliminating intermediate warehouses, whereas milk runs lower transportation costs by consolidating shipments to multiple locations on a single truck Ex. Replenishment lot size for each buyer location may be small and require LTL shipping if sent directly. Milk runs allows deliveries to multiple locations to be consolidated on a single truck, resulting in better utilisation of truck and somewhat lower costs

 All shipments via central DC: under this option, The buyer divides locations by geographic region and a DC is built for each region Suppliers send their shipments to DC (distribution center) and DC forwards the appropriate shipments to each buyer location as shown in figure

 Suppliers

Buyer Locations

 DC is an extra layer between suppliers and buyer locations and can play two different roles viz store inventory and serve as transfer location DCs can help reduce supply chain costs when suppliers are located far from buyer locations and transportation costs are high DCs allow economies of scale in inbound transportation to a point close to the final destination, as each supplier sends large shipment to the DC that contain products for all locations served by DC Ex. W W Grainger has its supplier to send goods to one of its nine DCs, which in turn replenish their 400 branches

 If transportation economies require very large shipments on the inbound side, DCs hold inventory and send product to buyer locations in smaller replenishment lots Ex. When Wal-mart sources from overseas supplier, the product is held in inventory at the DC, because inbound side is much larger than sum of lot sizes served by DC If replenishment lots for the buyer locations served by a DC are large enough to achieve economies of scale on inbound transportation, DC need not hold inventory

 DC can cross-dock product arriving from many suppliers on inbound trucks by breaking each inbound shipment into smaller shipments that are then loaded onto trucks going to each buyer location When a DC cross-docks product, each inbound truck contains product from a supplier for several buyer locations, whereas each outbound truck contains product for a buyer location from several suppliers

 A major benefit of cross-docking is that little inventory needs to be held and product flows faster in the supply chain Cross-docking also saves on handling cost because product does not have to be moved into and out of storage Successful cross-docking require a significant degree of coordination and synchronisation between incoming and outgoing shipments Cross-docking is appropriate for products with large, predictable demands and requires that DCs be set up such that economies of scale in transportation are achieved on both inbound and outbound sides

 Shipping via DC using milk runs: Milk runs can be used from a DC if lot sizes to be delivered to each buyer location are small (see fig in next slide) Milk runs reduce outbound transportation costs by consolidating small shipments The use of cross-docking with milk runs requires significant degree of coordination and suitable routing and scheduling of milk runs

Suppliers

Buyer Locations

 Tailored network: the tailored network is a suitable combination of previous options that reduces the cost and improves responsiveness of the supply chain Here transportation uses a combination of cross-docking, milk runs and TL and LTL carriers along with package carriers in some cases The goal is to use the appropriate option in each situation High demand products to high demand retail outlets are consolidated to and from the DC

 The complexity of managing this transportation network is high because different shipping procedures are used for each product and retail outlet Operating a tailored network requires significant investment in information infrastructure to facilitate coordination Such networks allows for the selective use of shipment method to minimize the transportation as well as inventory costs

Pros and cons of different transportation

Network structure
Direct shipping

Pros
No intermediate warehouse. Simple to coordinate

Cons
High inventories (due to large lot size). Significant receiving expense
Increased coordination complexity

Direct shipping with milk Lower transportation costs for runs small lots. Lower inventories

All shipments via central DC with inventory storage

All shipments via central DC with crossdock Shipping via DC using milk runs Tailored network

Lower outbound transportation cost through consolidation

Very low inventory requirement. Lower transportation cost through consolidation Lower outbound transportation cost for small lots Transportation choice best matches needs of individual product and store

Increased inventory cost

Increase coordination complexity Further increase in coordination complexity Highest coordination complexity

 Trade-offs in transportation design: All transportation decisions made by

supplier in a supply chain network must take into account their impact on inventory costs, facility and processing cost, the cost of coordinating operations and level of responsiveness provided to customers The cost of coordinating operations is generally hard to quantify

 Shippers should evaluate different transportation options in terms of various costs and revenues, and rank them according to coordination complexity
For making appropriate decision, manager should consider following:
Transportation and inventory cost trade-off Transportation cost and customer responsiveness trade-off

 Transportation and inventory cost trade-off: The trade-off between transportation and inventory costs is significant when designing a supply chain network Two fundamental supply chain decisions involving this trade-off are:
Choice of transportation mode Inventory aggregation

 Choice of transportation mode: Selecting transportation mode is both a planning and an operational decision in a supply chain The decision regarding carriers with which a company contracts is a planning decision the choice of transportation mode for a particular shipment is an operational decision For both decisions, a shipper must balance transportation and inventory costs

 The mode of transportation that results in lowest transportation cost does not necessarily lower total cost for supply chain Cheaper modes of transport typically have longer lead times and larger minimum shipment quantities, both of which result in higher levels of inventory in the supply chain Modes that allow for shipping in small quantities lower inventory levels but tend to be more expensive Impact of using different modes of transport is shown in next slide.

Ranking of transportation modes in terms of supply chain performance

Each transportation mode is ranked along various dimensions with 1 being lowest and 6 being highest Size Lot Safety In-transit Transpo transpor inventor inventor cost rtation tation y y time (preference) Rail 5 5 5 2 5 TL 4 4 4 3 3

LTL Package Air Water

3 1 2 6

3 1 2 6

3 1 2 6

4 6 5 1

4 1 2 6

 Faster modes of transportation are preferred for products with a high value-to-weight ratio, for which reducing inventories are important Cheaper modes of transport are preferred for products with a small value-to-weight ratio, for which reducing transportation is important. The choice of transportation should take into account cycle, safety, and in-transit recovery costs besides the cost of transportation

 Inventory aggregation: firms can significantly reduce the safety inventory by physically aggregating inventories in one location Most e-business use this technique to gain advantage over firms with facilities in many locations Transportation cost, generally increases when inventory is aggregated If inventories are highly disaggregated, some aggregation can lower transportation cost Beyond a point aggregation of inventories raises total transportation costs.

 As the degree of inventory aggregation increases, total transportation cost goes up Thus firms planning inventory aggregation must consider trade off among transportation, inventory and facility costs when making decisions Inventory aggregation is a good idea when inventory and facility costs form a large fraction of supply chains total costs

 Inventory aggregation is useful for products with a large value-to-weight ratio and for products with high demand uncertainty When products have a low value-toweight ratio and customer orders are small, inventory aggregation may hurt a supply chains performance because of high transportation costs

 Trade off between transportation cost and customer responsiveness: The transportation cost a supply chain incurs is closely linked to the degree of responsiveness the supply chain aims to provide If a firm has high responsiveness and ships all orders within a day of receipt from the customer, it will have small outbound shipment resulting in high transportation cost If it decreases its responsiveness and aggregates orders over a longer time horizon before shipping them out, it will be able exploit economies of scale and incur low transportation cost because of larger shipments

 Temporal aggregation: is the process of combining orders across time. Temporal aggregation decreases a firms responsiveness because of shipping delay but also decreases transportation costs because of economies of scale that result from larger shipments Thus firm must consider the trade-off between responsiveness and transportation cost when designing its transportation network

 In general a limited amount of temporal aggregation can be very effective in reducing transportation cost in a supply chain In choosing response time firms must trade-off the decrease in transportation cost upon temporal aggregation with the loss of revenue because poorer responsiveness Temporal consolidation also improves transportation performance because it results in more stable shipments

 Tailored transportation:
Tailored transportation is the use of different transportation networks and modes based on customer and product characteristics Most firms sells a variety of product and serve many different customer segments Products vary in size and value and customer vary, in the quantity purchased, responsiveness required, uncertainty of orders, and distance from branch outlets and DCs.

 Given these differences, a firm should not design a common transportation network to meet all its needs A firm can meet customer needs at a lower cost by using tailored transportation to provide the appropriate transportation choice based on customer and product characteristics

 Tailored transportation by customer density and distance: Firms must consider customer density and distance from warehouse when designing transportation networks The ideal transportation option based on density and distances are shown in next slide

Transportation options based on customer density and distance

Short distance Medium distance Long distance

High density Private fleet Cross-dock Cross-dock with milk runs with milk runs with milk runs
Medium density Third party LTL carrier with milk runs LTL or package carrier LTL or package carrier Package carrier

Low density Third party milk runs or LTL carrier

 When a firm serves a very high density of customer close to DC, it is often best for the firm to own a fleet of trucks that are used with milk runs originating at the DC to supply customers, because this scenario makes very good use of the vehicles If customer density is high but distance from the warehouse is large, it does not pay to send milk runs from the warehouse because truck will travel a long distance empty on the return trip

 In such a situation it is better to use a public carrier with large trucks to haul the shipments to a cross-dock center close to the customer area, where the shipments are loaded onto smaller trucks to deliver product to customer using milk runs. In this situation, it may not be ideal for firm to own its own fleet As customer density decreases, use of an LTL carrier or third party doing milk runs is more economical because third party carrier can aggregate shipments across many firms

 If a firm wants serve an area with a very low density of customers far from the warehouse, even LTL carriers may not be feasible and use of package carriers may be the best option Customer density and distance should be considered when firms decide on the degree of temporal aggregation to use when supplying customers

 Firms should serve areas with high customer density more frequently because these areas are likely to provide sufficient economies of scale in transportation, making temporal aggregation less valuable To lower transportation costs, firms should use a higher degree of temporal aggregation when serving areas with low customer density

 Tailored transportation by size of customer: Firms must consider size and location when designing transportation networks Very large customers can be supplied using a TL carrier, where as smaller customer will require LTL carrier or milk runs, a shipper incurs two types of cost:
Transportation cost based on total route distance Delivery cost based on number of deliveries

 The transportation cost is same whether going to a large or a small customer If a delivery is to be made to large customer, including other small customers on the same truck can save on transportation cost For each small customer, the delivery cost per unit is higher than for large customers

 Thus it is not optimal to deliver to small and large customers with the same frequency at the same price One option firms have is to charge a higher delivery cost for smaller customers Another option is to tailor milk runs so that they visit large customers with higher frequency than smaller customers Firms can partition customers into large (L), medium (M) and small (S), based on the demand at each The optimal frequency to visits can be evaluated based on the transportation and delivery costs

 If large customers are visited every milk run, medium customers every other milk run and low-demand customers every three milk runs, suitable milk runs can be designed by combining large, medium and small customers on each run Medium customers would be partitioned into two subsets (M1, M2) and small (S1,S2,S3).

 The firm can sequence the following six runs to ensure that each customer is visited with appropriate frequency (L,M1,S1), (L,M2,S2), (L,M1,S3), (L, M2,S1), (L,M1,S2), (L,M2,S3) This tailored sequence has the advantage that each truck carries about the same load and larger customers are provided more frequent delivery than smaller customer consistent with their relative costs of delivery

 Tailored transportation by product demand and value: The degree of inventory aggregation and the modes of transportation used in a supply chain network should vary with demand and value as shown in the next slide The cycle inventory for high value products with high demand is disaggregated to save on transportation costs because this allows replenishment orders to be transported less expensively

Product type High demand

High value 1. Disaggregate cycle inventory. 2. Aggregate safety inventory. 3. Inexpensive mode of transportation for replenishing cycle inventory and fast mode when using safety inventory 1. Aggregate all inventories. If needed, use fast mode of transportation for filling customer orders

Low value 1. Disaggregate all inventories and use inexpensive mode of transportation for replenishment 1. Aggregate only safety inventory. Use inexpensive mode of transportation for replenishing inventory

Low demand

 Safety inventory for high value products can be aggregated to reduce inventories and a fast mode of transportation can be used if the safety inventory is required to meet customer demand For high demand products with low value, all inventories should be disaggregated and held close to the customer to reduce costs. For low demand, high value products, all inventories should be aggregated to save on inventory costs

 For low demand, low value products, cycle inventories can be held close to the customer and safety inventories aggregated to reduce transportation costs while taking some advantage of aggregation Cycle inventories are replenished using an inexpensive mode of transportation to save costs