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    SCM 16 Transportation Management - Part-2

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    swagat mohapatra
    Transportation management involves choosing transportation modes and networks that minimize total costs, which include transportation costs, inventory carrying costs, and other costs. Firms should consider factors like lot size, delivery time, and delivery variability between options. This is illustrated using an example where a company must choose between air and sea transport of printers to Europe. Accounting for demand uncertainty, air transport is optimal for higher-value printers while sea is better for lower-value printers.

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    SCM 16 Transportation Management - Part-2

    Uploaded by

    swagat mohapatra
    72 views11 pages
    Transportation management involves choosing transportation modes and networks that minimize total costs, which include transportation costs, inventory carrying costs, and other costs. Firms should consider factors like lot size, delivery time, and delivery variability between options. This is illustrated using an example where a company must choose between air and sea transport of printers to Europe. Accounting for demand uncertainty, air transport is optimal for higher-value printers while sea is better for lower-value printers.

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    supply chain management drivers transportation

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    SCM 16 Transportation Management - Part-2 (2)

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    Transportation management involves choosing transportation modes and networks that minimize total costs, which include transportation costs, inventory carrying costs, and other costs. Firms should consider factors like lot size, delivery time, and delivery variability between options. This is illustrated using an example where a company must choose between air and sea transport of printers to Europe. Accounting for demand uncertainty, air transport is optimal for higher-value printers while sea is better for lower-value printers.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    72 views11 pages

    SCM 16 Transportation Management - Part-2

    Uploaded by

    swagat mohapatra
    Transportation management involves choosing transportation modes and networks that minimize total costs, which include transportation costs, inventory carrying costs, and other costs. Firms should consider factors like lot size, delivery time, and delivery variability between options. This is illustrated using an example where a company must choose between air and sea transport of printers to Europe. Accounting for demand uncertainty, air transport is optimal for higher-value printers while sea is better for lower-value printers.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 11

    Transportation Management

    Part-2

    (Source: Supply Chain Management By Janat Shah,


    Pearson; Supply Chain Management, Strategy,
    Planning and Operation, By Sunil Chopra, Peter
    Meindl, D. V. Kalra‐Pearson)
    For academic purpose and private circulation only
    Transportation Management
    Total Cost Approach in Comparing Different Transport
    Modes or Transportation Network Designs:
    Firm can choose the mode of transport resulting in least total cost.

    • Total Cost = Transportation Cost + Cycle Stock Inventory


    carrying cost + Safety Stock Inventory carrying cost + Facilities
    and processing costs + Cost of losses and damages

    (if different mode or design of transport result in different nos. of


    handlings, handlings cost should also be taken into account)
    4-2
    Transportation Management
    Note in reference to total cost equation:

     Lot size: Differences in required shipment sizes translate to


    differences in cycle stock related inventory.

     Delivery time: safety stock (and also pipeline inventory)


    carried in supply chain is a function of lead-time in transport

     Delivery time variability: safety stock carried in a supply chain


    is function of the variability in lead time in transport.

    4-3
    Transportation Management
    Choice of Mode of Transport: Illustration
    A global company has decided to use India as its manufacturing
    base for supply of printers to Europe. Firm wants to decide the
    optimum mode of transport in two scenarios – one with demand
    uncertainty and other with no demand uncertainty. Since the
    distance is long, include pipeline inventory. Company works with
    97.7 % service level. Assume supply is certain. Following is given:

    High End Standard Low end Printers


    Value/unit ( Rs.) 20,000 15,000 10,000
    Inv. Carrying cost/unit/yr (h=20%) 4,000 3000 2000
    Mean Demand/week (units) 100 100 100
    SD of demand /week(Units) 30 30 30

    Option Sea Air


    Lot size (units) 400 100
    Fright/unit (Rs.) 90 360
    Lead time(weeks) 4 1 4-4
    Transportation Management
    Part I) under assumption of stable demand, d = 0 and
    no supply uncertainty L = 0.
    For sea as mode of transport, high end printers:
    • Cycle stock = Q/2 = 400/2 = 200 units
    • Pipeline inventory = Lead Time x Demand Rate = 4 x 100
    = 400 units
    • Total inventory = 600
    • Annual Inventory carrying cost = 600 x 4000 = Rs
    2,400,000
    • Annual Transportation Cost = Annual demand x
    Transport rate per unit = 100 x 52 x 90 = Rs 468,000 4-5
    Transportation Management

    4-6
    Transportation Management
    • Thus it is seen that for high end printers, air is preferred
    mode of transport. For standard and low end printers, sea
    is the preferred mode of transport.
    Part –II) Let the demand uncertainty exists and d =3 0
    With 97.7 % service level, K= 2
    Safety Stock = K x Lead Time Demand
    • For Sea , Lead Time Demand =  L d2 = 30 x 2= 60 and Safety
    stock = 2 x 60 = 120 units
    • For, Air , Lead Time Demand =  L d2 = 30 x 1= 30 and Safety
    stock = 2 x 30 = 60 units 4-7
    Transportation Management

    Thus with demand uncertainty, optimal transport mode is air


    for highend and standard printers. For low-end printers,
    optimal transport is Sea. 4-8
    Pipeline Inventory:
    • Also called in-transit inventory.
    • It consists of materials actually being worked on (work-in-
    process inventory) or being moved from one location to
    another in the chain (on transit inventory).
    • Pipeline inventory of an item between two adjacent
    locations is the product of the process time or transport
    time and usage rate of an item
    • Pipeline inventory may be reduced by using faster rater of
    transporting or by reducing manufacturing lead time.

    4-9
    example :

    LT -Shipment by air = 7 days


    LT- Shipment by sea = 45 days
    Average demand = 100/day
    Pipeline Inventory ( Shipment by air) = 700 units
    Pipeline Inventory ( Shipment by Sea) = 4500 units
    Transportation Management

    Volumetric weight:
    • In case of bulky products, transportation costs are
    captured by volume and not by weight (e.g. water storage
    tank ).
    • Air freight industry uses “volumetric” weight; 1m³ = 200
    kg).
    • Freight rate is charges based on volumetric or physical
    weight, which ever is higher.

    4-11

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