Design Options for a Supply Chain Transportation Network

The design of a transportation network affects the performance of a supply chain by establishing the infrastructure within which operational transportation decisions regarding scheduling and routing are made. A well-designed transportation network allows a supply chain to achieve the desired degree of responsiveness at a low cost. Three basic questions need to be considered when designing a transportation network between two stages of a supply chain:

1. Should transportation be direct or through an intermediate site?
2. Should the intermediate site stock product or only serve as a cross-docking location?
3. Should each delivery route supply a single destination or multiple destinations (milk run, discussed later)?

Based on the answers to these questions, the supply chain ends up with a variety of trans­portation networks. We discuss these options and their strengths and weaknesses in the context of a buyer with multiple locations sourcing from several suppliers.

1. Direct Shipment Network to Single Destination

With the direct shipment network to a single destination option, the buyer structures the transpor­tation network so that all shipments come directly from each supplier to each buyer location, as shown in Figure 14-2. With a direct shipment network, the routing of each shipment is specified, and the supply chain manager needs to decide only the quantity to ship and the mode of transpor­tation to use. This decision involves a trade-off between transportation and inventory costs, as discussed later in the chapter.

The major advantage of a direct shipment transportation network is the elimination of intermediate warehouses and its simplicity of operation and coordination. The shipment decision is completely local, and the decision made for one shipment does not influence others. The trans­portation time from supplier to buyer location is short because each shipment goes direct.

A direct shipment network to single destination is justified only if demand at buyer loca­tions is large enough that optimal replenishment lot sizes are close to a truckload from each sup­plier to each location. Home Depot started with a direct shipment network, given that most of the stores it opened until about 2002 were large stores. The stores ordered in quantities that were large enough that ordering was managed locally within the store and delivery to the store arrived directly from the supplier. The direct shipment network to single destination, however, proved to be problematic as Home Depot started to open smaller stores that did not have large enough orders to justify a direct shipment.

2. Direct Shipping with Milk Runs

A milk run is a route on which a truck either delivers product from a single supplier to multiple retailers or goes from multiple suppliers to a single buyer location, as shown in Figure 14-3. In direct shipping with milk runs, a supplier delivers directly to multiple buyer locations on a truck or a truck picks up deliveries destined for the same buyer location from many suppliers. When using this option, a supply chain manager has to decide on the routing of each milk run.

Direct shipping provides the benefit of eliminating intermediate warehouses, whereas milk runs lower transportation cost by consolidating shipments to multiple locations on a single truck. Milk runs make sense when the quantity destined for each location is too small to fill a truck but multiple locations are close enough to each other such that their combined quantity fills the truck. Companies such as Frito-Lay that make direct store deliveries use milk runs to lower their transportation cost. If frequent small deliveries are needed on a regular basis and either a set of suppliers or a set of retailers is in geographic proximity, the use of milk runs can significantly reduce transportation costs. For example, Toyota uses milk runs from suppliers to support its just-in-time (JIT) manufacturing system in both Japan and the United States. In Japan, Toyota has many assembly plants located close together and thus uses milk runs from a single supplier to many plants. In the United States, however, Toyota uses milk runs from many suppliers to each assembly plant, given the large distance between assembly plants.

3. All Shipments via intermediate Distribution Center with Storage

Under this option, product is shipped from suppliers to a central distribution center, where it is stored until needed by buyers when it is shipped to each buyer location, as shown in Figure 14-4. Storing product at an intermediate location is justified if transportation economies require large shipments on the inbound side or shipments on the outbound side cannot be coordinated. In such a situation, product comes in large quantities into a DC, where it is held in inventory and sent to buyer locations in smaller replenishment lots when needed.

The presence of a DC allows a supply chain to achieve economies of scale for inbound transportation to a point close to the final destination, because each supplier sends a large ship­ment to the DC that contains product for all locations the DC serves. Because DCs serve loca­tions nearby, the outbound transportation cost is not very large. For example, W.W. Grainger has its suppliers ship products to one of nine DCs (typically in large quantities), with each DC, in turn, replenishing stores in its vicinity with the smaller quantities they need. It would be expen­sive for suppliers to try to serve each store directly. Similarly, when Home Depot sources from an overseas supplier, the product is held in inventory at the DC because the lot size on the inbound side is much larger than the sum of the lot sizes for the stores served by the DC.

4. All Shipments via intermediate Transit Point with Cross-Docking

Under this option, suppliers send their shipments to an intermediate transit point (which could be a DC), where they are cross-docked and sent to buyer locations without storing them. The prod­uct flow is similar to that shown in Figure 14-4 except that there is no storage at the intermediate facility. When a DC cross-docks product, each inbound truck contains product from suppliers for several buyer locations, whereas each outbound truck contains product for one buyer location from several suppliers. Major benefits of cross-docking are that little inventory needs to be held and product flows faster in the supply chain. Cross-docking also saves on handling cost because product does not have to be moved into and out of storage. Cross-docking is appropriate when economies of scale in transportation can be achieved on both the inbound and outbound sides and both inbound and outbound shipments can be coordinated.

Walmart has used cross-docking successfully to decrease inventories in the supply chain without incurring excessive transportation costs. Walmart builds many large stores in a geo­graphic area supported by a DC. As a result, the total lot size to all stores from each supplier fills trucks on the inbound side to achieve economies of scale. On the outbound side, the sum of the lot sizes from all suppliers to each retail store fills up the truck to achieve economies of scale.

Another good example of the use of a transit point with cross-docking comes from Pea- pod in the Chicago area. Peapod has a DC in Lake Zurich from which it delivers to its custom­ers using milk runs. This approach proved effective for customers in the northern and western suburbs of Chicago. Peapod, however, wanted to increase its reach to the city of Chicago and the city of Milwaukee. Both are far enough from the Lake Zurich DC that a milk run wasted about two hours in transit, making no productive deliveries. These markets were also small enough that they did not justify a local DC. Peapod’s response has been to set up a cross­docking facility (which tends to be cheaper than a DC because no storage is involved) at each location. Peapod then sends out all deliveries to the local cross-docking facility in a larger truck and uses smaller trucks for local deliveries. The use of cross-docking at a transit point has allowed Peapod to increase the reach of the Lake Zurich DC without significantly increasing transportation expense.

5. Shipping via DC Using Milk Runs

As shown in Figure 14-5, milk runs can be used from a DC if lot sizes to be delivered to each buyer location are small. Milk runs reduce outbound transportation costs by consolidating small shipments. For example, Seven-Eleven Japan cross-docks deliveries from its fresh-food suppli­ers at its DCs and sends out milk runs to the retail outlets because the total shipment to a store from all suppliers does not fill a truck. The use of cross-docking and milk runs allows Seven- Eleven Japan to lower its transportation cost while sending small replenishment lots to each store. The use of cross-docking with milk runs requires a significant degree of coordination and suitable routing and scheduling.

The online grocer Peapod uses milk runs from DCs when making customer deliveries to help reduce transportation costs for small shipments to be delivered to homes. OshKosh B’Gosh, a manufacturer of children’s wear, has used this idea to virtually eliminate LTL shipments from its DC in Tennessee to retail stores.

6. Tailored Network

The tailored network option is a suitable combination of previous options that reduces the cost and improves the responsiveness of the supply chain. Here, transportation uses a combination of cross-docking, milk runs, and TL and LTL carriers, along with package carriers in some cases. The goal is to use the appropriate option in each situation. High-demand products may be shipped directly to high-demand retail outlets, whereas low-demand products or shipments to low- demand retail outlets are consolidated to and from the DC. The complexity of managing this transportation network is high because different shipping procedures are used for each product and retail outlet. Operating a tailored network requires significant investment in information infrastructure to facilitate the coordination. Such a network, however, allows for the selective use of a shipment method to minimize the transportation as well as inventory costs.

Table 14-2 summarizes the pros and cons of the various transportation network options discussed. We illustrate some of these choices in Example 14-1.

EXAMPLE 14-1 Selecting a Transportation Network

A retail chain has eight stores in a region supplied from four supply sources. Trucks have a capacity of 40,000 units and cost $1,000 per load plus $100 per delivery. Thus, a truck making two deliveries charges $1,200. The cost of holding one unit in inventory at retail for a year is $0.20.

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 if annual sales for each product at each retail store are 960,000 units? What network do you recommend if sales for each product at each retail store are 120,000 units?

Analysis:

We provide a detailed analysis when annual sales of each product at each retail store are 960,000 units. Our analysis assumes that all trucks travel full. A more sophisticated analysis can be per­formed for which the optimal load on each truck is calculated and used in the analysis. This analysis is also available in the spreadsheet Chapter14-examples on worksheet Example14-1.

We first analyze the direct shipping network and assume that full truckloads will be shipped from suppliers to retail stores. In this case, we have the following:

Batch size shipped from each supplier to each store = 40,000 units

Number of shipments/year from each supplier to each store = 960,000/40,000 = 24

Annual trucking cost for direct network = 24 X 1,100 X 4 X 8 = $844,800

Average inventory at each store for each product = 40,000/2 = 20,000 units

Annual inventory cost for direct network = 20,000 X 0.2 X 4 X 8 = $128,000

Total annual cost of direct network = $844,800 + $128,000 = $972,800

Now, we analyze the network in which suppliers run milk runs to retail stores. Milk runs increase the transportation cost but decrease the level of inventory each store has to hold. We provide a detailed analysis for the instance of suppliers running milk runs to two stores on each truck. In this case, we have the following:

Batch size shipped from each supplier to each store = 40,000/2 = 20,000 units

Number of shipments/year from each supplier to each store = 960,000/20,000 = 48

Transportation cost per shipment per store (two stores/truck) = 1,000/2 + 100 = $600

Annual trucking cost for milk run network = 48 X 600 X 4 X 8 = $921,600

Average inventory at each store for each product = 20,000/2 = 10,000 units

Annual inventory cost for milk run network = 10,000 X 0.2 X 4 X 8 = $64,000

Total annual cost of milk run network = $921,600 + $64,000 = $985,600

This analysis shows that when demand per product per store is 960,000 units, the direct network is cheaper than running milk runs with two stores per route. Increasing the number of stores on a milk run ends up costing even more because it raises transportation costs more than it saves in holding costs.

When demand per product per store is 120,000, we first provide the detailed costs for the direct shipping network as follows (assuming all trucks travel full):

Batch size shipped from each supplier to each store = 40,000 units

Number of shipments/year from each supplier to each store = 120,000/40,000 = 3

Annual trucking cost for direct network = 3 X 1,100 X 4 X 8 = $105,600

Average inventory at each store for each product = 40,000/2 = 20,000 units

Annual inventory cost for direct network = 20,000 X 0.2 X 4 X 8 = $128,000

Total annual cost of direct network = $105,600 + $128,000 = $233,600

For the direct network, it turns out that to minimize total annual costs, it is better not to fill each truck but to send only 36,332 units per truck. The optimal loading increases transportation costs a bit but decreases total costs to $232,524 per year.

Now, we analyze the network in which suppliers use milk runs to retail stores. We provide a detailed analysis for the instance of suppliers running milk runs to four stores on each truck and each truck travels full. In this case, we have the following:

Batch size shipped from each supplier to each store = 40,000/4 = 10,000 units

Number of shipments/year from each supplier to each store = 120,000/10,000 = 12

Transportation cost per shipment per store (four stores/truck) = 1,000/4 + 100 = $350

Annual trucking cost for milk run network = 12 X 350 X 4 X 8 = $134,400

Average inventory at each store for each product = 10,000/2 = 5,000 units

Annual inventory cost for milk run network = 5,000 X 0.2 X 4 X 8 = $32,000

Total annual cost of milk run network = $134,400 + $32,000 = $166,400

This analysis shows that when demand per product per store is 120,000 units, the milk run network with four stores per route is cheaper than the direct network (even when truck loads are optimized). The direct network ends up costing more because of increased inventory holding costs even though transportation is cheaper. Observe that milk runs become more attractive as the amount flowing through the system decreases. In the next section, we discuss a variety of trade-offs that supply chain managers need to consider when designing and operating a transpor­tation network.

Source: Chopra Sunil, Meindl Peter (2014), Supply Chain Management: Strategy, Planning, and Operation, Pearson; 6th edition.