Transportation risk

management
• Movement of products from one location to another
• Products are rarely produced and consumed in the same
location
• Significant cost component
• Shipper requires the movement of the product
• Carrier moves or transports the product
• Owner of the infrastructure
• Bodies setting transportation policies
• Seven-Eleven Japan and Dell as examples
• UPS (charges on size and destination) vs. FedEx (charges
only on size).
 Modes of Transportation and their
Performance Characteristics

 Air
 Package carriers
 Truck
 Rail
 Water
 Pipeline
 Intermodal
 Modes of Transportation and their
Performance Characteristics

Freight Value Added

Freight Value Freight Tons Ton-Miles to GNP
($ billions) (billions) (millions) (billion $)
Mode in 2002 in 2002 in 2002 in 2009
Air (includes 563 6 13 61.9
truck and air)
Truck 9,075 11,712 1,515 113.1
Rail 392 1,979 1,372 30.8
Water 673 1,668 485 14.3
Pipeline 896 3,529 688 12.0
Multimodal 1,121 229 233
 Modes of Transportation and their
Performance Characteristics: Air transport
 Small-high value or time-sensitive items that have to
travel long distances
 Cost components
 Fixed infrastructure and equipment
 Labor and fuel
 Variable – passenger/cargo
 Key issues
 Location/number of hubs
 Fleet assignment
 Maintenance schedules
 Crew scheduling
 Prices and availability
 Modes of Transportation and their
Performance Characteristics: Package carriers

 Small packages up to about 150 pounds

 Expensive
 Rapid and reliable delivery
 Door-to-door services
 Small and time-sensitive shipments
 Provide other value-added services (track order
status)
 Consolidation of shipments a key factor (use of
large sorting centers)
 E-commerce
 Modes of Transportation and their
Performance Characteristics: Truck
 Significant fraction of the goods moved (door-to-door,
shorter delivery time)
 Ideal for transportation between manufacturing sites and
warehouses or between suppliers and manufacturers
 Truckload (TL)
 Low fixed cost
 Imbalance between flows
 Less than truckload (LTL)
 Small lots
 Hub and spoke system
 May take longer than TL
 Modes of Transportation and their
Performance Characteristics: rail

 Move commodities over large distances

 Large, heavy or high-density products over long
distances
 High fixed costs in equipment and facilities
 Scheduled to maximize utilization
 Transportation time can be long
 Trains ‘built’ not scheduled
 Modes of Transportation and their
Performance Characteristics: water

 Limited to certain geographic areas

 Ocean, inland waterway system, coastal waters
 Very large loads at very low cost
 Slowest
 Dominant in global trade
 Containers
 Demand for new vessels, faster and more specialized
 Ports congestion
 Modes of Transportation and their
Performance Characteristics: pipeline

 High fixed cost

 Primarily for crude petroleum, refined petroleum
products, natural gas
 Best for large and stable flows
 Appropriate for getting crude oil to a port or refinery
 Not appropriate for sending gasoline to a gas station!!
 Pricing structure encourages use for predictable
component of demand
 Modes of Transportation and their
Performance Characteristics: Intermodal

 Use of more than one modes of transportation to move

a shipment
 Grown considerably with increased use of containers
 May be the only option for global trade
 More convenient for shippers – one entity
 Key issue – exchange of information to facilitate transfer
between different modes
 Transportation Infrastructure and Policies

• Governments generally take full responsibility or play a

significant role in building and managing infrastructure
elements
• Without a monopoly, deregulation and market forces
help to create an effective industry structure
• Pricing should reflect the marginal impact on the cost
to society
Transportation Infrastructure and Policies
 Design Options for a Transportation Network

 When designing a transportation network

• Should transportation be direct or through an
intermediate site?
• Should the intermediate site stock product or only
serve as a cross-docking location?
• Should each delivery route supply a single destination
or multiple destinations (milk run)?
Design Options for a Transportation Network

• Decisions on quantity and

mode of transportation
• Elimination of intermediate
warehouses
• Use of LTL, TL or package
carriers, different costs
inccured in inventory,
transportation

Direct Shipment Network to a Single Destination

 Design Options for a Transportation Network

Direct Shipping with Milk Runs

• Lower transportation cost by consolidating shipments to multiple locations on a
single truck (truck utilization)
• Small, regular deliveries, geographic proximity
• Toyota as an example (US vs. Japan)
Design Options for a Transportation Network

1. Geographic region to be
served
2. DC serves as inventory
facility and transfer
location
3. Ideal when suppliers are
located far from buyer
locations
4. Economies of scale for
inbound transportation

All Shipments via Intermediate Distribution Center with Storage

 Design Options for a Transportation Network
All Shipments via Intermediate Transit Point with Cross-Docking

 Suppliers send their shipments to an intermediate transit point

 They are cross-docked and sent to buyer locations without
storing them
 Ideal for products with large, predictable demand where DC’s set
up for inbound and outbound economies of scale
Design Options for a Transportation Network

Shipping via DC Using Milk Runs

 Tailored Transportation
 The use of different transportation networks and modes
based on customer and product characteristics
 Factors affecting tailoring
 Customer density and distance
 Customer size
 Product demand and value
 Tailored Transportation

Short Distance Medium Distance Long Distance

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

Product Type High Value Low Value

High demand Disaggregate cycle inventory. Disaggregate all inventories
Aggregate safety inventory. and use inexpensive mode of
Inexpensive mode of transportation for
transportation for replenishment.
replenishing cycle inventory
and fast mode when using
safety inventory.
Low demand Aggregate all inventories. If Aggregate only safety
needed, use fast mode of inventory. Use inexpensive
transportation for filling mode of transportation for
customer orders. replenishing cycle inventory.
 Pros and cons of different transportation
networks
Network Structure Pros Cons
Direct shipping No intermediate warehouse High inventories (due to large
Simple to coordinate lot size)
Significant receiving expense
Direct shipping with Lower transportation costs for small Increased coordination
milk runs lots and lower inventories complexity
All shipments via Lower inbound transportation cost Increased inventory cost
central DC with through consolidation Increased handling at DC
inventory storage
All shipments via Low inventory requirement Increased coordination
central DC with cross- Lower transportation cost through complexity
dock consolidation
Shipping via DC using Lower outbound transportation cost Further increase in
milk runs for small lots coordination complexity
Tailored network Transportation choice best matches Highest coordination
needs of individual product and complexity
storage
Trade-offs in Transportation Design

 Transportation and inventory cost trade-off

 Choice of transportation mode
 Inventory aggregation
 Transportation cost and responsiveness trade-
off
Trade-offs in Transportation Design
Choice of transportation mode
• Dell as an example
• Faster modes of transportation are preferred for products
with high value-to-weight ratio for which reducing
inventories is important

Inventory aggregation
• Useful for large value-to-weight ratio, high demand
uncertainty products (new products in PC industry)
• Useful when customer orders are large enough to achieve
economies of scale
Responsiveness
• Temporal aggregation
 Role of IT in Transportation

 The complexity of transportation decisions demands use of

IT systems
 IT software can assist in:
 Identification of optimal routes by minimizing costs subject
to 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 modified
containers, low-risk transportation models, modification of
physical and chemical properties can prove to be effective
 Risk Management in Transportation
• About 90% of the world trade volume is carried by maritime transport and the
majority of supply chains involve seaports in the trade flow (Lam and Su 2015).

• In the multimodal transportation supply chain, alternative transportation modes

can be used in the case of the failure of a transportation mode. Indeed, many
authors have emphasized that redundancy needs to be considered in the design of
supply chains in order to prevent supply chain disruptions (Qiang, Nagurney et al.
2009).

• Just in time systems are more vulnerable to transportation disruptions

• A disruption in transportation services could quickly cripple the entire supply chain
since inventories are very low throughout the chain.

• Transportation risk management contingency plans would provide for alternative

modes of transportation. Thus, if a trucking company failed, alternative modes
such as air or rail backups would be in place to guard against supply disruption
(Giunipero and Eltantawy 2004).
Risk Management in Transportation

Adapted from: (Palšaitis and Petraška 2012)

 Risk Management in Transportation

Overall impact/consequences of transportation accidents:

• Fatalities & injuries (acute and long-term)
• Cleanup & disposal costs
• Property & product damage
• Loss due to business interruption
• Environmental degradation & ecosystem damage
• Traffic & community disruption
• Public anxiety
• Diminished agency/company value and image
Risk Management in Transportation

Adapted from: (Palšaitis and Petraška 2012)

 Risk Management in Transportation

• The greatest impact occurs when transportation is disrupted between the tier 1
supplier and warehouse.
• In the traditional structure the retailer, warehouse and tier 1 supplier
experience the greatest inventory fluctuations and the highest goods in transit
to their facilities.
• These impacts are less severe for the VMI structure, although unfulfilled orders
are approximately the same.
Adapted from (Wilson 2007)
Risk Management in Transportation: delays

Seaport operations are highly important for industries which rely heavily
on imports and exports.

A reliable evaluation of port risks is essential to govern the normal

running of seaborne transportation and thus the industrial economies.

The occurrence of a breakdown in the trade facilitators, such as ports,

will disrupt the smooth flow of supply chains for the industries.

The estimation of the economic loss for an industry when a port gets
disrupted is a challenging task as the relationship between the port and
industry clusters is complex (Lam and Su 2015).
Risk Management in Transportation: delays

(Zhang and Lam 2016)

Risk Management in Transportation: hazardous material

An environmental health and safety risk to the public occurs

when a hazardous chemical or gas is released from its
packaging during transportation.

For this reason, a Transportation Risk Analysis (TRA) is

conducted for highly hazardous products and raw materials.

The TRA evaluation addresses:

• package integrity
• product security
• emergency response preparedness (Lutostansky, Miller
et al., 2016)
Risk mitigation strategies in transportation
• reducing the total distance the product is transported
(for example, the number of trips per year)
• selection of the mode of transport (rail, road, barge)
• selection of the route of transport (for example, to
maximize the distance travelled in areas with low
accident frequency statistics)
• selection of the carrier (assessed for performance
attributes)
• training of people involved in the transportation
process (drivers, loaders, etc.)
• maintenance and inspection of the transport
equipment
• systems increasing the stability of the vehicle
(Lutostansky, Miller et al., 2016)
 Risk mitigation strategies in transportation
When defining a supply chain and risk management strategy
regarding logistics outsourcing, certain trade-offs have to be
considered by shippers (König and Spinler, 2016):

1. known supplier vs. lowest bidder: known LSP can provide a

higher level of security, but also at higher cost than the arm’s
length relationship;
2. managing risks vs. delivering value: additional costs for LSP and
shipper on a daily basis to mitigate risks;
3. collaboration vs. secrecy: collaboration with LSP improves the
resilience, but also increases the risks of lost information; and
4. redundancy vs. efficiency: redundancy (e.g. stock buffers or
multi-carrier approach) increases the resilience, but at higher
costs.
References
Sunil Chopra, Peter Meindl, Supply Chain Management. Strategy, planning and operations (3rd Edition). (2006),

König, A. and S. Spinler (2016). "The effect of logistics outsourcing on the supply chain vulnerability of shippers:
Development of a conceptual risk management framework." International Journal of Logistics Management 27(1):
122-141.

Lam, J. S. L. and S. Su (2015). "Disruption risks and mitigation strategies: an analysis of Asian ports." Maritime Policy
and Management 42(5): 415-435.

Qiang, Q., A. Nagurney, et al. (2009). Modeling of supply chain risk under disruptions with performance
measurement and robustness analysis. Managing Supply Chain Risk and Vulnerability: Tools and Methods for Supply
Chain Decision Makers, Springer London: 91-111.

Giunipero, L. C. and R. A. Eltantawy (2004). "Securing the upstream supply chain: a risk management approach."
International Journal of Physical Distribution & Logistics Management 34(9): 698-713.

Zhang, Y. and J. S. L. Lam (2016). "Estimating economic losses of industry clusters due to port disruptions."
Transportation Research Part A: Policy and Practice 91: 17-33.

Lutostansky, E., G. Miller, et al. (2016). "Transportation risk management: One company's approach." Process Safety
Progress.

Palšaitis, R. and A. Petraška (2012). "Heavyweight and oversized cargo transportation risk management." Transport
and Telecommunication 13(1): 51-56.

Wilson, M. C. (2007). "The impact of transportation disruptions on supply chain performance." Transportation
Research Part E: Logistics and Transportation Review 43(4): 295-320.