Tutorial - 8

Designing and Planning

Transportation Networks in a Supply
Chain

Eng. Alaa Heiba

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 Modes of Transportation

Mode speed Cost Shipment Size capacity

Air Very vast Very high small Best for urgent, high-value
shipments
Package Carriers Fast High Very small Suitable for small, time-sensitive
packages
Truck (TL / LTL) Moderate Moderate Medium Common for regional and
domestic transport
Rail slow low large Good for heavy bulk over long
distances
Water(Ships) slow Cheapest Very large Dominates international freight
(containers)
Intermodal Moderate Moderate Large Combines modes (e.g., ship + rail
+ truck)
Pipeline Steady low Massive (liquids/gas) Used for oil, gas, chemicals only
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 Question-1

2. What modes of transportation are best suited for large,

low value shipments? Why?

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 Transportation Network
Network Type Description Advantages Disadvantages Real-World Example
Ship directly from Simple High receiving cost, A factory delivers directly to
Direct Shipping
supplier to customer coordination large inventory each retail store
One truck serves
Direct Shipping with Lower inventory High coordination A distributor delivers to 2–3
multiple destinations
Milk Runs costs complexity stores in one trip
in a route
Ship to a central Inbound
Distribution Center Higher inventory and Electronics brand using a
warehouse that consolidation
(DC) with Storage handling costs regional warehouse
stores inventory lowers cost
Ship to a DC that
DC with Cross- Low inventory, Tight timing required, Supermarket chain cross-
only transfers goods
Docking faster flow complex docking daily deliveries
without storing
Ship to a DC, then Efficient small-lot
Even more Clothing retailer delivering to
DC with Milk Runs distribute in milk outbound
coordination needed multiple branches
runs delivery
Mix of strategies
Optimized for
based on
Tailored Network cost and Highest complexity Global brand 4
product/customer
responsiveness
 Question-2

•Number of stores = 6
•Number of suppliers = 3
•Annual demand per store = 600,000 units for each product
•Truck capacity = 30,000 units
•Truck cost = $900 per load + $90 per delivery
•Inventory holding cost = $0.25 per unit per year

The vice president of supply chain is considering whether to use

direct shipping from suppliers to retail stores or setting up milk runs
from suppliers to retail stores. What network do you recommend?

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 Answer

Case 1: Direct Shipping

Each supplier ships directly to each [Link] size = 30,000 Units
Shipments/year per supplier-store pair = 600,000 ÷ 30,000 = 20
Total shipments = 20 × 3 suppliers × 6 stores = 360
Cost per shipment = 900 + 90 = $990
Total transportation cost = 360 × 990 = $356,400
Average inventory per shipment = 30,000 ÷ 2 = 15,000 units
Total inventory across all stores = 15,000 × 3 × 6 = 270,000 units
Inventory holding cost = 270,000 × 0.25 = $67,500
Total Cost (Direct Shipping) = $356,400 + $67,500 = $423,900
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 Answer

case 2: Milk Runs (2 stores per run)

Each truck serves 2 stores in a milk run.
•Batch size per store = 30,000 ÷ 2 = 15,000 units
•Shipments/year per supplier-store pair = 600,000 ÷ 15,000 = 40
•Total shipments = 40 × 3 × 6 = 720
•Cost per shipment (2 stores) = 900 ÷ 2 + 90 = $540
•Total transportation cost = 720 × 540 = $388,800
•Average inventory per store = 15,000 ÷ 2 = 7,500 units
•Total inventory = 7,500 × 3 × 6 = 135,000 units
•Inventory holding cost = 135,000 × 0.25 = $33,750
•Total Cost (Milk Runs) = $388,800 + $33,750 = $422,55

Note: The difference between them is very simple and that proves it. Increasing
the number of stores on a milk run ends up costing even more because it 7
raises transportation costs more than it saves in holding costs
 Question-2
•Alpha is an electronics manufacturer with a plant located in Atlanta.
•It sources all its Printed Circuit Boards (PCBs) from a supplier in San
Diego.
•Annual demand = 60,000 PCBs
•Unit cost = $50 per PCB
•Weight per PCB = 2 lbs
•Orders are currently placed in lots of 5,000 PCBs
•Annual holding cost = 20% of unit cost = $10 per PCB
Mode Transit Time Minimum Quantity Shipping Cost per cwt

Air Freight 1 day No minimum $25

Truck (Ground) 4 days 400+ cwt $10

Ocean Freight 7 days 700+ cwt $5 8

 Question-2

•At its assembly plant, Alpha maintains safety inventory = 50% of

average demand during transit time
•Ocean carrier offers a discount to $4/cwt if the shipment exceeds
1000cwt
What is the most cost-effective transportation mode when
considering:
•Transportation cost
•Cycle inventory holding cost
•Safety stock cost

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 Answer 2

1- discount option
▪ Transportation cost = 1200(4)=$4800
▪ Inventory cost = Q/2( cost )= (5000/2)(10)= $25000
▪ Safety stock = daily demand * transit time * cost *0.5=
(60000/365)(7)(10)(0.5)=
▪ In-transit inventory = daily demand * transit time * cost
▪ Total cost = Transportation cost + Inventory cost + Safety
stock + In-transit inventory

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