Management Consulting/supply chain assignment


Q1) Solve  the following
a) Explain the push/pull view of supply chain.
b) Explain, what is the competitive strategy of supply chain.
c) Discuss the goal of Supply Chain.
d) Describe the major obstacle that must be overcome to successfully manage a supply chain.

a) Identify the major drivers of supply chain performance and discuss the role of each driver in creating strategic fit between the supply chain strategy and the competitive strategy.
b) Evaluate the strengths and weakness of different modes of transportation

Q3) Attempt  the following
a) List the various view of supply chain and discuss one of them.
b) Describe how the company achieves strategic fit between its supply chain strategy and competitive strategy.
c) Discuss the impact of replenishment policies on supply chain on safety inventory.
d) Discuss the role of distribution in the supply chain.
Q4) Write the short note on any five of the following. a) Role of transportation in supply chain
b) Role of sourcing in supply chain.
c) Safety inventory management in Supply chain
d) Coordination in supply chain.
e) Role of Information technology in Supply chain. f) E-Business and supply chain management.

I  will send  the balance  asap.
a) Explain the push/pull view of supply chain.
A push-pull-system in business describes the movement of a product or information between two subjects. On markets the consumers usually "pulls" the goods or information they demand for their needs, while the offerers or suppliers "pushes" them toward the consumers. In logistic chains or supply chains the stages are operating normally both in push- and pull-manner.[5] The interface between push-based stages and pull-based stages are called push-pull boundary or decoupling point.[5]
Push strategy
Another meaning of the push strategy in marketing can be found in the communication between seller and buyer. In dependence of the used medium, the communication can be either interactive or non-interactive. For example, if the seller makes his promotion by television or radio, it's not possible for the buyer to interact with. On the other hand, if the communication is made by phone or internet, the buyer has possibilities to interact with the seller. In the first case information is just "pushed" toward the buyer, while in the second case it is possible for the buyer to demand the needed information according to his requirements.
•   Applied to that portion of the supply chain where demand uncertainty is relatively small
•   Production & distribution decisions are based on long term forecasts
•   Based on past orders received from retailer’s warehouse
•   Inability to meet changing demand patterns
•   Large and variable production batches
•   Unacceptable service levels
•   Excessive inventories due to the need for large safety stocks
•   less expenditure on advertising than pull strategy
Pull strategy
In a "pull" system the consumer requests the product and "pulls" it through the delivery channel. An example of this is the car manufacturing company Ford Australia. Ford Australia only produces cars when they have been ordered by the customers.
•   Applied to that portion of the supply chain where demand uncertainty is high
•   Production and distribution are demand driven
•   No inventory, response to specific orders
•   Point of sale (POS) data comes in handy when shared with supply chain partners
•   Decrease in lead time
•   Difficult to implementSupply chains

With a push-based supply chain, products are pushed through the channel, from the production side up to the retailer. The manufacturer sets production at a level in accord with historical ordering patterns from retailers. It takes longer for a push-based supply chain to respond to changes in demand, which can result in overstocking or bottlenecks and delays, unacceptable service levels and product obsolescence.
In a pull-based supply chain, procurement, production and distribution are demand-driven so that they are coordinated with actual customer orders, rather than forecast demand.
A supply chain is almost always a combination of both push and pull, where the interface between the push-based stages and the pull-based stages is known as the push–pull boundary.[5] An example of this would be Dell's build to order supply chain. Inventory levels of individual components are determined by forecasting general demand, but final assembly is in response to a specific customer request. The push-pull boundary would then be at the beginning of the assembly line.


b) Explain, what is the competitive strategy of supply chain.

Supply chain management and competitive advantage are connected because the effective management of an organization’s supply chain can be leveraged for competitive advantage. The supply chain refers to the whole process involved in the production of a product or service, starting from the procurement of the raw material to the shipping of the final product to the consumers. Competitive advantage describes the process whereby a company can achieve a lower sale price for its products than that of other similar companies through an advantage in the pre-production, production or post-production stage.
The integration of effective supply chain management and competitive advantage is becoming increasingly important due to the effects of globalization. More companies now have subsidiaries and branches in more cities and countries than before. With the increase in the supply chain, effective management practices must be applied if the company wants to gain any competitive advantage over other companies in the same industry. Apart from gaining competitive advantage, it is necessary to streamline the supply chain so as to send the products to the consumers within the mandated shelf life.
One way in which a company can gain competitive advantage through supply chain management is by focusing on the areas of competence and then outsourcing the other areas. For instance, a company that produces athletic sneakers may decide to outsource the sourcing for raw materials and the production of the sneakers to another area where the cost of production would cost less. Such a company might decide to focus on its area of competence, which might be designing new sneaker models, handling logistics, and marketing the finished products.
This type of strategy can lead to competitive advantage through reduced costs that will be transferred to consumers, giving the company a competitive edge over other companies. Other similar companies that produce athletic sneakers may not be able to offer the same reduction in prices due to the fact that it costs them more to produce the same sneakers, which the other company had produced at a fraction of their total cost. Such a price reduction may be due to a number of effective measures along the supply chain including paying workers at lower wages. Also, if the company is able to produce the sneakers in a country where the raw materials are readily available it will cut down on transportation costs, further saving money. The company with the cheaper production costs may be able to sell its sneakers at a reduced price, luring more consumers to buy more of its products.

•   1. Supply Chain Management for Competitive Advantage Michael Hugos CIO Network Services Co. [email_address]
•   2. What is a Supply Chain? “ A supply chain is a network of facilities and distribution options that performs the functions of procurement of materials, transformation of these materials into intermediate and finished products, and the distribution of these finished products to customers.” Ganeshan and Harrison, 1995
•   3. Old Supply Chains vs. New VERTICAL INTEGRATION has given way to “VIRTUAL INTEGRATION” Companies now focus on their core competencies, and partner with other companies to create supply chains for fast moving markets. Raw Materials Transportation Manufacturing Distribution Retail Show Room Slow Moving, Industrial Mass Markets Vertically Integrated Conglomerate Fragmented, Fast Moving Markets Raw Materials Company Manufacturing Company Transportation Company Independent Distributor Independent Retailer
•   4. Supply Chain Structure Producers Distributors Retailers Customers Service Providers Logistics Finance Market Research Product Design Information Technology Supplier Company Customer Ultimate Supplier Supplier Company Customer Ultimate Customer Service Providers Simple Supply Chain Extended Supply Chain Raw Mat’l Producer Manufctr Distributor Retailer Retail Customer Logistics Provider Finance Provider Business Customer Market Research Product Designer Example of an Extended Supply Chain
•   5. Major Supply Chain Drivers RESPONSIVENESS vs. EFFICIENCY “ Increase throughput while simultaneously reducing inventory and operating expense.” - Goldratt, 1984 1. PRODUCTION What, how, and when to produce 2. INVENTORY How much to make and how much to store 3. LOCATION Where best to do what activity 4. TRANSPORTATION How and when to move product 5. INFORMATION The basis for making these decisions
•   6. What is Supply Chain Management? “Supply chain management is the coordination of production, inventory location, transportation, and information among the participants in a supply chain to achieve the best mix of responsiveness and efficiency for the market being served.” Hugos, 2002
•   7. Aligning Supply Chain & Strategy Understand the requirements of your customers Define core competencies and roles your company will play to serve your customers Develop supply chain capabilities to support the roles your company has chosen
•   8. Responsiveness vs. Efficiency - Cost of information drops , other costs rise - Collect & share timely, accurate data 5. Information Few large shipments Slow, cheaper modes Frequent shipments Fast & Flexible mode 4. Transportation - Few central locations serve wide areas Many locations close to customers 3. Location Low inventory levels Fewer items High inventory levels Wide range of items 2. Inventory Little excess capacity Narrow focus Few central plants Excess capacity Flexible manufacturing Many smaller plants 1. Production Efficiency Responsiveness
•   9. What Did Wal-Mart Do? Tactic of expanding around central DCs Look for areas to support a group of stores Using EDI and RFID with suppliers Lower operating costs, greater control “Big Box” store format Combines a warehouse with a store, lowers costs “Everyday low prices” Smoothes out demand swings, better forecasting Creates a supply chain that drives their business model (mass market, low price)
•   10. Markets & Required Performance D E M A N D GROWTH Customer Service DEVELOPING Customer Service Product Development STEADY Customer Service Internal Efficiency MATURE Customer Service Internal Efficiency Demand Flexibility S U P P L Y
•   11. Performance Measures Cycle time for new product development/introduction Outside flexibility Return on sales Cash-to-cash cycle time Quoted lead time & completion rate On time delivery rate Warranty returns & repairs % of sales from new products % of SKUs as new products PRODUCT DEVELOPMENT Activity cycle times Upside flexibility DEMAND FLEXIBILITY Inventory value Inventory turns INTERNAL EFFICIENCY Order & line item fill rate On time delivery rate Return rate Build to Stock CUSTOMER SERVICE Build to Order
•   12. The “Bullwhip Effect” Mo. 24 20 16 12 8 4 0 300 600 To Manufacturer 900 Distributor Orders 1200 Mo. 24 20 16 12 8 4 0 300 600 To Distributor 900 Retailer Orders 1200 Mo. 24 20 16 12 8 4 0 300 600 For Product 900 Customer Demand 1200
•   13. Why The Bullwhip? Demand Forecasting Based on orders received not end user demand Order Batching Companies place periodic orders based on EOQ, etc Product Rationing Allocation of available supply as % of amount ordered Product Pricing Promotional pricing causes distortions in demand Performance Incentives Qtrly and yearly quotas and sales bonuses
•   14. Benefits of Data Sharing Low High Inventory Levels High Service Levels Company ‘A’ Company A may have high levels of customer service But success may be short-lived if its customer is not the end use customer the supply chain ultimately serves.
•   15. Benefits of Data Sharing (cont.) Low High Inventory Levels High Service Levels Bullwhip distortions drive up inventory ‘ X’ & ‘Y’ Supply Chains Company A may be part of Supply Chain X which has to hold more inventory than Supply Chain Y to deliver similar levels of customer service.
•   16. Supply Chain Collaboration Companies perform operations in one or more of these supply chain activities Entire supply chains are more efficient if each company improves their performance Collaborative Planning, Forecasting & Replenishment (CPFR) PLAN Demand Forecasting Product Pricing Inventory Mgmt. SOURCE Procurement Credit & Collections MAKE Product Design Production Scheduling Facility Management DELIVER Order Management Delivery Scheduling
•   17. The Synchronized Supply Chain Market demand sets the drum beat or pace. Manage uncertainty with a buffer of inventory or capacity. Reduce uncertainty and keep buffers low by sharing market data. Data is the rope that ties the supply chain together (Slides excerpted from my book, Essentials of Supply Chain Management , John Wiley & Sons publisher, 2003) Flow of Inventory Raw Mat’l Manfctr Distr Retailer Market Demand Buffer Buffer Buffer Buffer Sales & Forecast Data “ Drum – Buffer – Rope”
•   18. Network Services Company’s Supply Chain Strategy
•   19. Our Supply Chain Goal Create the low cost and highly responsive supply chain that we need in order to be the distributor of choice in the markets we serve Automate all routine processing of common transactions (orders, invoices, product masters, advance ship notices, price books) so as to increase productivity and decrease errors Focus people on more value added activities such as customer service, inventory management, and sales
•   20. Use UPCs to Communicate Eliminate the COST , the ERRORS , and the WASTED TIME by using common item numbers…use UPC #s NP&PC ASN INVOICE PO ASN Member Member Members PO INVOICE PO INVOICE Supplier Supplier Suppliers Customers PO ASN INVOICE PO INVOICE PO PRICE BKS PRICE BKS PRICE BKS
•   21. Use UPCs to Communicate (cont.) Members can still use their item numbers for internal transactions Use UPCs when communicating with Network, Customers, and Suppliers Benefits Eliminate errors in ordering, packing, and invoicing Reductions in time spent finding product and resolving discrepancies Better customer service Reductions in days sales outstanding (DSO)
•   22. Keep it Super Simple (KISS) ASCII Flat Files - every computer system can read & write these files, great format to exchange data Internet & FTP - these two technologies make data transfer easy and cheap Batch Interfaces - batch data transfer every hour, every ½ hour, every 10 minutes approaches real-time at a fraction of the cost of true real-time Relational Databases - provide powerful means to store, retrieve, and display data and are easily interfaced to spreadsheets and web pages
•   23. Network’s Supply Chain System We combine simple technology to create a cost effective and scalable supply chain system: Use of Internet & FTP to transport data Adoption of ASCII flat files as common format (can be upgraded to XML when needed) Batch interfaces to ERP and other systems Data warehouse accessed via LAN and web
•   24. Supply Chain System Components NSC Member Company NSC Member Company NSC Member Company NSC Mt. Prospect Location NetLink NetLink NetLink is a two-way, Internet-based data transfer system that links member company computer systems
•   25. Supply Chain System Components NSC Member Company NSC Member Company NSC Member Company NSC Mt. Prospect Location NetLink NetLink Data Whse Data Whse The data warehouses support web-based systems and coordination among NSC member companies
•   26. Supply Chain System Components NSC Member Company NSC Member Company NSC Member Company NSC Mt. Prospect Location NetLink NetLink Data Whse Data Whse NSC Virtual Private Network The VPN provides data security for our business transactions
•   27. Supply Chain System Components NSC Member Company NSC Member Company NSC Member Company NSC Mt. Prospect Location NetLink NetLink Data Whse Data Whse NSC Virtual Private Network Order Entry Customer Service Product Catalog Sales History Inventory Status Order Status Web-Based E-Commerce Systems Web-based systems currently provide product catalogs, order entry, and sales reporting
•   28. Network Services’ Supply Chain CUSTOMER Order Entry Customer Service Product Catalog Sales History NSC Member Company NSC Member Company NSC Member Company NSC Mt. Prospect Location CUSTOMER CUSTOMER CUSTOMER CUSTOMER NSC Virtual Private Network Web-Based E-Commerce Systems NetLink NetLink Data Whse S U P P L I E R S U P P L I E R S U P P L I E R Data Whse Inventory Status Order Status
•   29. Timely Data Enables Collaboration The data warehouse provides different views of the data to support senior executives, line managers, and staff. It also facilitates sharing of data with supply chain partners. Strategic Market View Tactical Company View Operations View Data Warehouse Reports to Suppliers Reports to Customers
•   30. Business Benefits Data is entered only once Reduction in both cost of order processing and error rates Automatic routing of orders, invoices, and other data between all parties Electronic integration with systems used by customers, members, and suppliers
•   31. Business Results The data visibility enables us to be more responsive to customer, and suppliers needs We now sell supply chain management services along with our products Our position as the electronically connected “middleman” is what makes this all possible Slides excerpted from my books : Essentials of Supply Chain Management , John Wiley & Sons publisher, 2003 Building The Real-Time Enterprise: An Executive Briefing , John Wiley & Sons publisher, 2005

c) Discuss the goal of Supply Chain.
Strategic Goals include:

Rapid Order Fulfillment
Efficient Use of Resources
Optimize Manufacturing Mix (Just in Time)
Streamline Distribution
Vehicle Routing and Logistics Analysis

Procurement must purchase the minimum and most economical Order Quantity of materials or subassemblies to produce the product just in time to meet production requirements, while transportation and distribution handle/ship/transport items in the most logistical manner to fulfill the distribution requirements set by the Sellers or the End Users.

This requires the use of the most cost effective measures and negotiation strategies.

Bottlenecks and waste in this process is often eliminated from the process by techniques such as Six Sigma, a type of statistically applied analysis. This type of analysis can be applied to all three areas. Also, market channel distribution is often analyzed to the contribution level.

The primary objective of supply chain management is to fulfill customer demands through the most efficient use of resources, including distribution capacity, inventory and labor. In theory, a supply chain seeks to match demand with supply and do so with the minimal inventory. Various aspects of optimizing the supply chain include liaising with suppliers to eliminate bottlenecks; sourcing strategically to strike a balance between lowest material cost and transportation, implementing JIT (Just In Time) techniques to optimize manufacturing flow; maintaining the right mix and location of factories and warehouses to serve customer markets, and using location/allocation, vehicle routing analysis, dynamic programming and, of course, traditional logistics optimization to maximize the efficiency of the distribution side

d) Describe the major obstacle that must be overcome to successfully manage a supply chain.

To successfully implement SCM, the key firms within the supply chain must overcome their own functional silos and accept a process approach. The requirements for successful implementation of SCM include:

• Executive support, leadership, and commitment to change.

• An understanding of the degree of change necessary.

• Agreement on the SCM vision and the key processes.

• The necessary commitment of resources and empowerment to achieve the stated goals.

The absence of these four requirements for successful implementation represents an obstacle for those committed to implementing supply chain management.

In many organizations resistance to change is the most serious obstacle. There is comfort in the functional silo approach because of the familiarity with it. Further, executives who have made it to the top of a functional silo are often married to the approach that served them well. Unless the existence of the business is threatened, many will not see the need to change.
a) Identify the major drivers of supply chain performance and discuss the role of each driver in creating strategic fit between the supply chain strategy and the competitive strategy.

Drivers of Supply Chain Performance

Driver 1: Inventory Requirements
•   Inventory "stockage" exists in all supply chains because of a mismatch between supply and demand
•   Inventory plays a significant role in a supply chain's ability to support a firm's competitive strategy
•   A supply chain manager must make routine decisions to
create a more responsive and more efficient supply chain
Driver 2: Transportation
•   Transportation moves the product between different locations in a supply chain
•   Transportation is prominent in a company's competitive strategy
•   The fundamental trade-off for transportation is cost (efficiency) versus speed (responsiveness)

Driver 3: Facilities
•   Facilities include all locations in the supply chain to store, assemble, or fabricate inventory
•   Decisions regarding location, capacity, and flexibility of facilities significantly affect supply chain performance
•   In DoD, depot and field repair facilities are cornerstones of the supply chain
Driver 4: Information
•   Information serves as the connection between the supply chain's various stages
•   Information and information systems are an important part of balancing responsiveness versus efficiency
•   Businesses must trade-off between efficiency and responsiveness when trying to include more supply chain information
***Drivers of Supply ChainThe major drivers of Supply chain performance consists of three logistical drivers & three cross-functional drivers.Logistical drivers:FacilitiesInventoryTransportationCross-functional drivers:InformationSourcingPricingCompany’s supply chain achieve the balance between responsiveness & efficiency that best meets the needs of the company competitive strategy.
***Drivers of Supply Chain PerformanceEfficiencyResponsivenessSupply chain structureInventoryTransportationFacilitiesInformationDriversSourcingPricing
***FACILITYFacility are the actual physical locations in the supply chain network where product are stored, assembled or fabricated. The two major types of facilities are :Production sites(factories)Storage sites(warehouses)Factories can be built to accommodate one of two approaches to manufacturing:Product Focus: A factory that takes a product focus performs the range of different operations required to make a given product line from fabrication of different product parts to assembly of these parts.Functional focus: A functional focus approach concentrates on performing just a few operations such as only making a select group of parts or doing only assembly
•   Warehousing: There are three main approaches to use in warehousing:Stock keeping unit(SKU) storage: In this approach all of a given type of product is stored together.Job lot storage: In this approach all the different products related to the needs of a certain type of customer or related to the needs of a particular job are stored together.Crossdocking: In this approach, product is not actually warehoused in the facility, instead the facility is used to house a process where trucks from suppliers arrive and unload large quantities of different products. These large lots are then broken down into smaller lots. Smaller lots of different products are recombined according to the needs of the day and quickly loaded onto outbound trucks that deliver the product to their final destination.So the fundamental trade-off that managers face when making facilities decision between the cost of the number, location & type of facilities(efficiency) & the level of responsiveness that these facilities provide the company’s customer.
***INVENTORYInventory encompasses all the raw materials, work in process, and finished goods within a supply chain. Changing inventory policies can dramatically alter the supply chain’s efficiency & responsiveness.There are three basic decisions to make regarding the creation and holding of inventory:Cycle Inventory: This is the amount of inventory needed to satisfy demand for the product in the period between purchases of the product.Safety Inventory: inventory that is held as a buffer against uncertainty. If demand forecasting could be done with perfect accuracy, then the only inventory that would be needed would be cycle inventory.Seasonal Inventory: This is inventory that is built up in anticipation of predictable increases in demand that occur at certain times of the year.
***TRANSPORTATIONTransportation entails moving inventory from point to point in the supply chain . Transportation can take the form of many combinations of modes & routes, each with its own performance characteristics. There are six basic modes of transport that a company can choose from:Ship which is very cost efficient but also the slowest mode of transport. It is limited to use between locations that are situated nest to navigable waterways & facilities such as harbor & canals.Rails which is also very cost efficient but can be slow. This mode is also restricted to use between locations that are served by rail lines.Pipelines can be very efficient but are restricted to commodities that are liquid or gases such as water, oil & natural gas.Trucks are a relatively quick & very flexible mode of transport. Trucks can go almost anywhere. The cost of this mode is prone to fluctuations though, as the cost of fuel fluctuates and the condition of road varies.Airplanes are a very fast mode of transport and are very responsive. This mode is also very expensive mode & is somewhat limited by the availability of appropriate airport facilities.Electronic transport is the fastest mode of transport and it is very flexible & cost efficient. However , it can be only be used for movement of certain types of products such as electric energy, data, & products composed of data such as music, pictures & text.
***INFORMATIONInformation serves as the connection between various stages of a supply chain, allowing them to coordinate & maximize total supply chain profitability. It is also crucial to the daily operations of each stage in a supply chain for e.g a production scheduling system.Information is used for the following purpose in a supply chain:Coordinating daily activities related to the functioning of other supply chain drivers: facility, inventory & transportation.Forecasting & planning to anticipate& meet future demands. Available information is used to make tactical forecasts to guide the setting of monthly & quarterly production schedules & time tableEnabling technologies: many technologies exist to share & analyze information in the supply chain. Managers must decide which technologies to use & how to integrate these technologies into their companies like internet, ERP, RFID.
•   ***SOURCINGSourcing is the set of business processes required to purchase goods & services. Managers must first decide which tasks will be outsourced & those that will be performed within the firm.Components of sourcing decisions In-House or outsource: The most significant sourcing decision for a firm is whether to perform a task in-house or outsource it to a third party. This decision should be driven in part by its impact on the total supply chain profitability.Supplier selection: It must be decided on the number of suppliers they will have for a particular activity. The must then identify the criteria along which suppliers will be evaluated & how they will be selected like through direct negotiations or resort to an auction.
***PRICINGPricing determines how much a firm will charge for goods & services that it makes available in the supply chain. Pricing affects the behavior of the buyer of the good or services, thus affecting supply chain performance, for example, if a transportation company varies its charges based on the lead time provided by the customers, it s very likely that customers who value efficiency will order early & customers who value responsiveness will be willing to wait & order just before they need a product transported. This directly affects the supply chain in terms of the level of responsiveness required as well as the demand profile that the supply chain attempts to serve. Pricing is also a lever that can be used to match supply & demand.Components of Pricing Decisions:Fixed Price versus Menu pricing: A firm must decide whether it will charge a fixed price for its supply chain activities or have a menu with prices that vary with some other attribute, such as response time or location of delivery.Every day low pricing versus High-Low pricing
•   ***Obstacles to Achieving Strategic fitIncreasing variety of productsDecreasing product life cyclesIncreasingly demanding customersFragmentation of supply chain ownershipGlobalization

b) Evaluate the strengths and weakness of different modes of transportation
Transportation Modes
Rail Network
Motor Carriers
Water Transport
Air Transport

The relative importance of each mode can be measured in terms of  system mileage, traffic volume, revenue, and the nature of traffic composition.

Rail Network

Historically, railroads have handled the largest number of ton-miles.
Rail-network connects almost all cities and towns.
Railroads dominates intercity freight tonnage.
Capability to transport large shipments economically and offer frequentservices - a Monopolistic position.

Experiences relatively low variable operating costs.
Motor Carriers

The rapid growth of the motor carrier industry results from door-to-door operatingflexibility and speed of intercity movement - able to operate on all types of roadways.

They have relatively small fixed investments in terminal facilities and operate on publicly maintained highways.

Their variable cost per mile is high. Labor requirements are also high.

Best suited to handle small and time-sensitive shipments moving short distances.

They favor manufacturing and distributive trades and high-value products.

Today, they have improved line-haul scheduling that bypasses terminals,computerized billing systems, mechanized terminals, tandem operations that pull twoor three trailers by a single power unit, and utilization of coordinated intermodalsystems.

Specialty carriers (package haulers) focus on specific requirements of a market or product.
Water Transport
The oldest mode of transportation - Ocean, inland waterway system, coastalwaters
The original sailing vessels were replaced by steamboats in the early 1800s and bydiesel power in the 1920s.
Capacity to move extremely large shipments at very low cost and dominant inglobal trade.
Although water carriers must develop and operate their own terminals, the right-of-way is developed and maintained by the govt and results in moderate fixedcosts compared to rail and highway.

Demerits - limited range of operation, slow speed & geographical limitations.

The capability of water to carry large tonnage at low variable cost places thismode of transport in demand when low freight rates are desired and speed of transit is a secondary consideration.

It operates on a 24X7 basis and are limited only by commodity changeover and maintenance.

Unlike other modes, there is no empty "container" or "vehicle" that must bereturned. Best for large and predictable demand

Pipelines have the highest fixed cost and lowest variable cost among transportmodes. High fixed costs result from the right-of-way, construction andrequirements for control stations, and pumping capacity.

Since pipelines are not labor-intensive, the variable operating cost isextremely low once the pipeline has been constructed.

Demerit: Not flexible and are limited with respect to commodities that can betransported - only products in the form of gas, liquid, or slurry can behandled.
Air Transport
The newest but least utilized mode of transport - more of a potential opportunitythan a reality.
Advantage lies in the speed with which a shipment can be transported.
Demerit: high cost but can be traded off for high speed, which allows other elements of logistical design, such as warehousing or inventory, to be reduced or eliminated.
Air transport capability is limited by lift capacity (i.e., load size constraints) andaircraft availability.

The high cost of jet aircraft, coupled with the erratic nature of freight demand,has limited the assignment of dedicated planes to all-freight operations.

Ideal service for firms with a large number of high-value products and time-sensitive service requirements.

The fixed cost of air transport is low compared to rail, water, and pipeline.

Likewise, terminals are normally maintained by local communities. The fixedcosts of airfreight are associated with aircraft purchase and the requirement for specialized handling systems and cargo containers.

Air freight variable cost is extremely high as a result of fuel, maintenance, andthe labor intensity of both in-flight and ground crews.


Use of more than one mode of transportation to move a shipment to itsdestination.

Most common example: rail/truck, also water/rail/truck or water/truck.

Grown considerably with increased use of containers.

Increased global trade has also increased use of intermodal transportation.

More convenient for shippers (one entity provides the complete service).

Key issue involves the exchange of information to facilitate transfer betweendifferent transport modes.

Performance Overview

Air gendegree
Relative Costs of Performance
Price, Mode ¢/ton-mile
Rail 2.28Truck 26.19Water 0.74Pipeline 1.46Air 61.20

Design Options for aTransportation Network

What are the transportation options? Which one to select? On what basis?

Direct shipping network

Direct shipping with milk runs

All shipments via central DC

Shipping via DC using milk runs

Tailored network

Trade-offs in Transportation Design

Transportation and inventory cost trade-off
– Choice of transportation mode – Inventory aggregation

Transportation cost and responsiveness trade-off

Choice of Transportation Mode

A manager must account for inventory costs when selecting amode of transportation.

A mode with higher transportation costs can be justified if itresults in significantly lower inventories.

Inventory Aggregation: Inventory vs.Transportation Cost

As a result of physical aggregation
– Inventory costs decrease – Inbound transportation cost decreases – Outbound transportation cost increases

Inventory aggregation decreases supply chain costs if the product has a high value to weight ratio, highdemand uncertainty, or customer orders are large

Inventory aggregation may increase supply chaincosts if the product has a low value to weight ratio,low demand uncertainty, or customer orders are small

Trade-offs Between TransportationCost and Customer Responsiveness

Temporal aggregation is the process of combining orders acrosstime
Temporal aggregation reduces transportation cost because itresults in larger shipments and reduces variation in shipment sizes
However, temporal aggregation reduces customer responsiveness

Tailored Transportation

The use of different transportation networks andmodes based on customer and product characteristics

Factors affecting tailoring:
– Customer distance and density – Customer size – Product demand and value

Role of IT in Transportation

The complexity of transportation decisions demands touse of IT systems

IT software can assist in:
– Identification of optimal routes by minimizing costs subjectto delivery constraints – Optimal fleet utilization – GPS applications

Risk Management in Transportation
Three main risks to be considered in transportation are:
– Risk that the shipment is delayed – Risk of disruptions – Risk of hazardous material

Risk mitigation strategies:
– Decrease the probability of disruptions – Alternative routings – In case of hazardous materials the use of modifiedcontainers, low-risk transportation models, modification of physical and chemical properties can prove to be effective

Making TransportationDecisions in Practice

Align transportation strategy with competitive strategy

Consider both in-house and outsourced transportation

Design a transportation network that can handle e-commerce

Use technology to improve transportation performance

Design flexibility into the transportation network

Carrier Selection Determinant
Transportation cost
-This include Rates, minimum weight, loading andunloading charges.
Transit time-
is the total time that elapses from the time the consigner makesthe goods available for dispatch until carrier delivers same to the consignee.
Refers the consistency of the transit time a carrier provides.
-Refers to the carrier’s ability to provide the equipment andfacilities that is required for the movement of particular commodity.
Refers to carrier’s physical access or geographical limits.
Concern the arrival of good in the same condition.
structures deal with: Handling, Weight & Distance

Ranking of Carrier selectiondeterminants
1.Transit time reliability or consistency.2.Door-to-Door transportation rate or cost.3.Total door-to door transit time.4.Willingness of carrier to negotiate rate charges.5.Financial stability of the carrier.6.Equipment availability7.Frequency of service.8.Pickup and delivery service.9.Freight loss and damage.10.Shipment expedite.11.Quality of operating personnel.12.Shipment tracing13.Willingness of carrier to negotiate service changes.14.Scheduling flexibility.15.Line haul services.16.Claim Processing.17.Quality of carrier salesmanship.18.Special equipment,

Transport Economics

it directly contributes to variable cost - labor, fuel, and maintenance.

longer movements tend to have a higher cost.

frequent intermediate stops typical of urban miles add additional loading andunloading costs.


load volume.

transportation scale economies exist for most movements. Transport cost per unit of weight decreases as load volume increases - fixed costs of pickup anddelivery as well as administrative costs can be spread over additionalvolume.

Transport Economics

higher density products allow relatively fixed transport costs to bespread across additional weight.

managers increase product density so that more can be loaded in atrailer to better utilize capacity.

Increased packaging density allows more units of product to be loadedinto the fixed cube of the vehicle.


refers to product dimensions and how they affect vehicle (railcar,trailer, or container) space utilization.

Odd sizes and shapes, as well as excessive weight or length, do notstow well and typically waste space.

Although density and stowability are similar, it is possible to have products with the same density that stow very differently. Items withstandard rectangular shapes are much easier to stow than odd-shapeditems.

Transport Economics

Special handling equipment may be required for loading or unloading trucks,railcars, or ships.

Furthermore, the manner in which products are physically grouped together (e.g.,taped, boxed, or palletized) for transport and storage also affects handling cost.

These primarily affect risk of damage and the resulting incidence of claims:
Susceptibility to damage
Property damage to freight
Perish ability
Susceptibility to theft
Susceptibility to spontaneous combustion or explosion
Value per Kg.

Carriers must either have insurance to protect against possible claims or acceptresponsibility for any damage.

Shippers can reduce their risk, and ultimately the transportation cost, by improved protective packaging or by reducing susceptibility to loss or damage

Transport Economics
Market Factors:

Lane volume and balance, influence transportation cost.

A transport lane refers to movements between origin and destination points.

Since transportation vehicles and drivers must return to their origin, either theymust find a load to bring back (' 'back-haul' ') or the vehicle is returned empty("deadhead").

When deadhead movements occur, labor, fuel, and maintenance costs must becharged against the original "front-haul" move. Thus, the ideal situation is for "balanced" moves where volume is equal in both directions.

However, this is rarely the case because of demand imbalances inmanufacturing and consumption locations.

Demand directionality and seasonality result in transport rates that change withdirection and season. Logistics system design must take this factor into accountand add back-haul movement where possible.

Transportation Pricing

StrategiesTransportation Pricing Strategies
Cost-of-Service Strategy:

the carrier establishes a rate based on the cost of providing the service plus a profit margin.

base or minimum transportation charge.

a pricing approach for low-value goods or in highly competitivesituations.

Value-of-Service Strategy:

Charges a rate based on perceived shipper value rather than the cost of actually providing the service.

A shipper is probably willing to pay more to transport it.

Carriers tend to utilize value-of service pricing for high-value goods or when limited competition exists.


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Leo Lingham


management consulting process, management consulting career, management development, human resource planning and development, strategic planning in human resources, marketing, careers in management, product management etc


18 years working managerial experience covering business planning, strategic planning, corporate planning, management service, organization development, marketing, sales management etc


24 years in management consulting which includes business planning, strategic planning, marketing , product management,
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