9780357132302_Langley11e_ch11_LEAP-N.pptx

Supply chain management

1. Supply Chain Management, 11e Chapter 11 : Transportation—Managing the Flow of the Supply Chain ©2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

2. Discussion Outline The role of transportation in SCM Modes of transportation Transportation planning and strategy Transportation execution and control Transportation technology

3. The Role of Transportation in SCM Transportation Spend Transportation accounts for nearly $1.04 trillion of the $1.6 trillion spent on U.S. business logistics costs in 2018. That’s 63% of the total!

4. The Role of Transportation in Supply Chain Management (SCM) Transportation provides the critical links between organizations in a supply chain network, permitting goods to flow between their facilities. Transportation also influences supply chain design, strategy development, and total cost management.

5. The Role of Transportation in SCM Role Inhibitors Offshore manufacturing Changing customer requirements Transportation capacity constraints Transportation rate variation Growing governmental requirements

6. The Role of Transportation in SCM Transportation Challenges In 2018 Major transportation challenges Qualified driver availability – 56% Rising customer expectations – 48% managerial talent retention – 48% Service capacity availability – 45% Technology deployment cost – 42% Operating cost volatility – 34% By 2030 The single most important challenge Rising customer expectations – 23% Technology deployment cost – 16% Qualified driver availability – 13% Operating cost volatility – 13% Capacity availability – 10%

7. Modes of Transportation

8. Modes of Transportation Five Basic and Intermodal The five basic modes of transportation and intermodal transportation each has different economic and technical structures, and each can provide different qualities of link service. Freight Shipments within the US (2019) Mode of Transportation Value of Goods Tons (Millions) Ton-Miles (Billions) Truck 69.3% 65.7% 39.6% Rail 4.6% 10.4% 27.9% Water 2.6% 4.2% 6.9% Air 3.0% <1% <1% Pipeline 7.4% 16.4% 17.5% Multiple modes 12.3% 2.7% 7.8% Other/Unknown <1% <1% <1% Source Table 11.1: U.S. Department of Transportation Bureau of Transportation Statistics, 2019 Pocket Guide to Transportation (2019):19.

9. Modes of Transportation (1 of 2) Motor Carriers Motor carriage is the most widely used mode of transportation in the US domestic supply chain, and is useful for shipping goods to an adjacent countries like Canada and Mexico. Much of the freight moved by the trucking industry is regional in nature, moving within a 500-mile radius of the origin. Multiple equipment types and sizes allow motor carriers to transport a wide variety of commodities and shipment sizes. Trucking is a high-variable-cost, low-fixed-cost business.

10. Modes of Transportation (2 of 2) Motor Carriers The trucking industry is highly competitive, comprising of 543,061 interstate carriers and intrastate hazardous materials carriers that range in size from single-truck, owner-operator service providers to conglomerate like UPS. Key challenges: Labor, costs, and competition Motor Carrier Industry For-Hire (54%) Truckload (TL) – Less-than-Truckload (LTL) – Small Package Private (36%) For-Hire/Private Hybrid (9%) Others (1%)

11. Modes of Transportation (1 of 2) Railroads Railroads is a high ton-mile mode of transportation, moving nearly 1.8 billion tons of freight with average shipment length of 554 miles annually. Railroad transportation is primarily used for the long-distance movement of low-value goods. Railroads also handle some high-value goods, primarily automobiles and intermodal containers. Railroads cost structure consists of high fixed costs in proportion to variable costs due to a large investment in terminals, equipment, and trackage. Rail equipment can be organized into loads and transported in one of the three primary ways: mixed trains, unit trains, and intermodal trains.

12. Modes of Transportation (2 of 2) Railroads There are 600 railroads in the US, but the industry is dominated by seven Class I railroads. No single rail carrier services the entire country. Carriers use interline agreements to provide coast-to-coast rail service. Key challenges: Captive shippers’ demand for rate relief, external factors e.g. fluctuating economic conditions & severe weather events, and capacity. 600 Freight Rail Carriers 7 Class-I Linehaul Freight Carriers (BNSF, Canadian National, Canadian Pacific, CSX, Kansas City Southern, Norfolk Southern, Union Pacific) 593 Shortline Carriers

13. Modes of Transportation (1 of 2) Air Carriers Air cargo transportation is specialized mode in terms of tonnage with U.S. spending at $76.5 billion in 2018. Air transportation is used to ship small quantities of high-value, low-weight goods. The air carrier cost structure consists of high variable costs in proportion to fixed costs.

14. Modes of Transportation (2 of 2) Air Carriers Key challenges: Decreased demand for products previously moved in large volume via air, mode-shifting of freight from air to ocean, new rail connections in Asia, near-shoring and on-shoring strategies. Air Carriers Combination Carriers Air Cargo Carriers Integrated carriers (e.g. FedEx and UPS) provide door-to-door service, scheduled pickup and delivery windows, and expedited service through their hub-and-spoke networks. Nonintegrated carriers provide on-demand, air-only service from airport to airport.

15. Modes of Transportation (1 of 2) Water Carriers Globally, water carriers dominate all other modes, garnering approximately half of the international freight revenue and handling nearly all tonnage. The international ocean fleet includes approximately 53,000 merchant ships: 16,958 general cargo ships, 14,929 tankers, 11,379 bulk cargo ships, and 5,152 containerships. Domestic water carriers compete with railroads for long-distance movement of low-value, high-density, bulk cargoes. The fleet of U.S. flagged fleet moves 6.9 percent of the nation’s freight value. Water transportation is a high variable cost business.

16. Modes of Transportation (2 of 2) Water Carriers Key challenges: Significant overcapacity in the container shipping sector, congestion at major ports and transfer points for containers, schedule reliability of liner service lagging behind other modes. Water Carriers. Widely used specialized ships include: containerships, bulk carriers, tankers, general cargo ships, roll-on/roll-off (RO-RO) vessels. Private For-Hire Liner services Charter services

17. Modes of Transportation (1 of 2) Pipelines The United States has the largest network of energy pipelines of any nation in the world. Pipelines is the most economical form of transport with the lowest cost per ton of any mode. Pipelines handled 5.6 percent of U.S. freight tonnage, the vast majority of products moved are liquids and gases. Pipeline costs are predominantly fixed as pipeline operators must build their own right-of-way. The oil system is made up of three primary types of pipelines: gathering lines, trunk lines, and refined product pipelines. The major difference of natural gas pipeline network from that of oil is the direct delivery of natural gas to homes & businesses via local distribution lines.

18. Modes of Transportation (2 of 2) Pipelines Key challenges: Network capacity, Health and environmental safety Pipeline Carriers For-Hire For-hire carriers of liquid products can move different products through their system at the same time. Private Private carriers include petroleum & natural gas companies that use pipelines to move product to and from their facilities. Companies, like a power plant or a chemical plant, may operate a small pipeline system to move fuel or feed-stocks.

19. Modes of Transportation (1 of 2) Intermodal Intermodal transportation service refers to uses of two or more carriers of different modes in the origin-to-destination movement of freight. Primary Benefits Greater accessibility Overall cost efficiency without sacrificing service quality or accessibility Global trade facilitation Importance & Volume Growth Number of containers flowing through North American ports reached 65 million TEUs in 2017 U.S. rail system moved 14.5 million containers in 2018 Growth Drivers Development of standardized containers Better information systems New generations of ocean vessels, railcars, and truck trailers

20. Modes of Transportation (2 of 2) Intermodal The freight services provided by intermodal transportation can be viewed in terms of product-handling characteristics or the type of service used. Product-Handling Characteristics Containerized freight is loaded into or onto storage equipment at the origin and delivered to the destination in or on that same piece of equipment with no additional handling. Transload freight involves goods that are handled and transferred between transportation equipment and mode multiple times. Type of Service Used Pick up Linehaul Delivery

21. Transportation Planning & Strategy

22. Transportation Planning and Strategy Framework of Transportation Management Planning Activities Source Figure 11.3: Brian J. Gibson, Ph.D. Used with permission.

23. Transportation Planning and Strategy Functional Control of Transportation In most organizations, responsibility for transportation decisions falls to one or more of the following departments: logistics, procurement, and marketing. Inbound Inbound transportation typically controlled by the purchasing department Outbound Outbound transportation typically controlled by marketing or logistics Often, this decision-making structure leads to missed opportunities to generate transportation efficiencies and service improvements.

24. Transportation Planning and Strategy (1 of 2) Terms of Sale: Freight Control & Payment Terms Terms of sale clarify the delivery and payment terms agreed upon by a seller and buyer. Wise selection of these terms is critical as the decision determines where the buyer’s responsibilities begin and where the seller’s responsibilities end. FOB TERM AND FREIGHT PAYMENT RESPONSIBILITY WHO OWNS GOODS IN TRANSIT? WHO HANDLES FREIGHT CLAIMS? WHO SELECTS AND PAYS CARRIER? WHO ULTIMATELY BEARS FREIGHT COSTS? BEST USED WHEN _____ HAS GREATER INFLUENCE WITH CARRIER FOB Origin, Freight Collect Buyer   Buyer   Buyer   Buyer   Buyer FOB Origin, Freight Prepaid   Buyer   Buyer   Seller   Seller   Seller Source Table 11.4: Adapted from DSI Freight Shipping, FOB Definition.: Shipping Terms of Sale. (Updated January 21, 2013). Retrieved July 2, 2019 from https://www.dsi-tms.com/hs-fs/hub/1987/file-18496826-pdf/docs/fob_definition.pdf

25. Transportation Planning and Strategy (2 of 2) Terms of Sale: Freight Control & Payment Terms FOB Origin, Freight Prepaid & Charged Back   Buyer   Buyer   Seller Buyer. The seller adds freight costs to goods invoice.   Seller FOB Destination, Freight Prepaid   Seller   Seller   Seller   Seller   Seller FOB Destination, Freight Collect   Seller   Seller   Buyer   Buyer   Buyer FOB Destination, Freight Collect & Allowed   Seller   Seller   Buyer Seller. The buyer deducts freight cost from goods payment.   Buyer Source Table 11.4: Adapted from DSI Freight Shipping, FOB Definition.: Shipping Terms of Sale. (Updated January 21, 2013). Retrieved July 2, 2019 from https://www.dsi-tms.com/hs-fs/hub/1987/file-18496826-pdf/docs/fob_definition.pdf

26. Transportation Planning and Strategy Terms of Sale: Incoterms 2010 Source Figure 11.4: Johnatas Montezuma, Incoterms 2010. Retrieved July 9, 2019 from https://internationalcommercialterms.guru/

27. Transportation Planning and Strategy Decision to Outsource Transportation The organization with FOB freight control and procurement responsibility must analyze and choose between using a private fleet (the “make” option) and using external service providers to move freight (the “buy” option). Private Fleet Account for nearly half of all U.S. freight transportation spending & more than half of miles traveled. A well-run private fleet can operate at costs competitive with for-hire carriers while providing greater scheduling flexibility and control over transit time. Intangible benefits: Promotional impact and prestige of having highly visible company trucks on the road External Service Providers For-hire carriers. Using for-hire carriers avoids large capital cost of starting a private fleet, time needed to build transportation expertise, and challenges inherent in operating a private fleet. 3PLs. Provide a wide array of transportation services: (1) dedicated contract carriage, (2) traffic management, (3) specialized international freight 3PLs, notably International Freight Forwarders (IFF), Non Vessel-owning Common Carriers (NVOCC), and Customs Brokers

28. Transportation Planning and Strategy (1 of 2) Modal Selection: Capabilities, Product Characteristics & Pricing   MODE   STRENGTHS   LIMITATIONS   PRIMARY ROLE PRIMARY PRODUCT CHARACTERISTICS EXAMPLE PRODUCTS Truck Accessible Fast and versatile Customer service Limited capacity High cost Move smaller shipments in local, regional, and national markets High value Finished goods Low volume Food Clothing Electronics Furniture Rail High capacity Low cost Accessibility Inconsistent service Damage rates Move large shipments of domestic freight long distances Low value Raw materials High volume Coal/coke Lumber/paper Grain Chemicals Source Table 11.5: Brian J. Gibson, Ph.D. Used with permission.

29. Transportation Planning and Strategy (2 of 2) Modal Selection: Capabilities, Product Characteristics & Pricing   Air Speed Freight protection Flexibility Accessibility High cost Low capacity Move urgent shipments of domestic freight and smaller shipments of international freight High value Finished goods Low volume Time sensitive Computers Periodicals Pharmaceuticals E-commerce deliveries Water High capacity Low cost International capabilities Slow Accessibility Move large domestic shipments via rivers and canals Move large shipments of international freight via oceans Low value Raw materials Bulk commodities Containerized finished goods Crude oil Ores/minerals Farm products Clothing Electronics Toys Pipeline In-transit storage Efficiency Low cost Slow Limited network Move large volumes of domestic freight long distances Low value Liquid commodities Not time sensitive Crude oil Petroleum Gasoline Natural gas Source Table 11.5: Brian J. Gibson, Ph.D. Used with permission.

30. Transportation Planning and Strategy Modal Selection: Performance Ratings of Modes Mode of Transportation CRITERIA TRUCK AIR RAIL WATER PIPELINE Accessibility* 1 3 2 4 5 Transit time* 2 1 3 4 5 Reliability* 2 3 4 5 1 Security* 3 2 4 5 1 Cost** 4 5 3 2 1 Accessibility* 1 3 2 4 5 Source Figure 11.6: Edward J. Bardi, Ph.D. Used with permission. *1 = Best to 5 = Worst **1 = Lowest cost to 5 = Highest cost

31. Transportation Planning and Strategy (1 of 2) Carrier Selection Modal Selection vs. Carrier Selection Number of options available Modal selection: more options Carrier selection: fewer options Frequency of the decision Modal selection: more long range Carrier selection: more active & frequent Carrier Selection Factors Geographic coverage Transit time average and reliability Freight rates Equipment availability and capacity Product protection

32. Transportation Planning and Strategy (2 of 2) Carrier Selection Core carrier strategy. Carrier selection strategy commonly focuses on concentrating the transportation buy with a limited number of quality carriers, while striving to a carrier-friendly “shipper of choice.” Advantages Helps the organization leverage its purchasing dollars for lower overall rates. Allows the company to focus its attention on other supply chain issues. Promotes strong relationships with the carriers that produce mutual understanding of requirements, coordination of processes, and service improvement. Give a company priority access to the carriers’ limited capacity.

33. Transportation Planning and Strategy Rate Negotiations BUYERS Key negotiation issues: Equipment availability, freight rates, and service levels CARRIERS Key negotiation issues: Volume commitments, shipment frequencies, origin–destination combinations, freight characteristics, and related cost issues NEGOTIATION APPROACHES Adversarial Approach Seeks to minimize transportation cost regardless of the impact on carrier financial performance or long-term viability. Collaborative Approach Focuses on developing contracts with carriers for a tailored set of transportation services at rates that fairly compensate the carriers.

34. Transportation Execution & Control

35. Transportation Execution and Control Shipment Preparation Freight Documentation Maintain In-Transit Visibility Transportation Metrics Monitor Service Quality

36. Transportation Execution and Control Freight Documentation Source Figure 11.5: Brian J. Gibson, Ph.D. Used with permission.

37. Transportation Execution and Control Common Transportation Metrics METRIC FORMULA TYPICAL TARGET On-time Delivery Total on-time deliveries / Total deliveries > 95% Transit Time Average Sum of transit times / Total deliveries Low variation around goal Damage Rate Total units damaged / Total units shipped < 1% Shortage Rate Total units lost or stolen / Total units shipped < 1% Billing accuracy Total accurate freight bills / Total freight bills > 99% Perfect Delivery Index On-Time % × Damage-Free % × Billing Accuracy % > 95% Source Table 11.7: Brian J. Gibson, Ph.D. Used with permission.

38. Transportation Execution and Control Performance Scorecard PERFORMANCE CRITERIA WEIGHT FACTOR PERFORMANCE EVALUATION PERFORMANCE EVALUATION POTENTIAL SCORE CRITERIA SCORE On-time delivery 8 >98% = 5 96.01−98% = 4 94.01−96% = 3 92.01−94% = 2 < 92% = 0 40   Loss and damage rate 5 <0.5% = 5 0.5−1% = 4 1–1.5% = 3 1.5−2% = 2 >2% = 0 25   Billing accuracy 3 >99% = 5 97−99% = 3 95−96% = 1 <95% = 0 15   Equipment condition 2 Safe & clean = 5 Poor condition = 0 10   Customer service 2 Superior = 5 Good = 4 Average = 3 Fair = 2 Unacceptable = 0 10 Total Score 100 Source Table 11.8: Brian J. Gibson, Ph.D. Used with permission.

39. Transportation Technology

40. Transportation Technology Buyers and Carriers Transportation buyers and managers leverage a variety of tools and technologies to support supply chain success. The carrier community relies on technology to coordinate the flow of customer freight. Buyers Individual applications e.g. load planning optimization, freight rating, and load tendering Integrated supply chain tools e.g. global trade management software, and transportation management systems (TMS) Carriers Routing and load planning tools promoting optimization of pickup, linehaul, and delivery Dispatching software facilitating management of drivers, in-transit visibility, & regulatory compliance. Brokerage solutions helping to match loads with available capacity and transaction financial manage Tracking and communication technology supporting visibility and control of freight Others e.g. pricing strategy, documentation

41. Transportation Technology Transportation Management System (TMS) Order ready to ship Enter order info into cerasis rater Integrate for order info automation Hold freight services auction & choose the best carrier Generate a bill of lading Electronically request a shipment pickup Automatically notify all parties Electronically exchange shipping documents Robust reporting and analytics Shipments will be automatically allocated to carriers

42. Summary Four Transportation is the largest logistics cost in most supply chains that directly impacts fulfillment speed and service quality. Fulfillment of supply chain demand can be accomplished through five modal options or the intermodal use of these options. Most commercial freight moves under contractual rates that are negotiated directly between freight buyers and transportation companies. Organizations must continue to manage freight after it has been tendered to carriers by maintaining in-transit visibility of shipments and monitoring carrier performance. Transportation management systems and related tools are widely used to support effective planning, execution, and analysis of transportation processes.