Tailored Transportation in a Supply Chain

Tailored transportation is the use of different transportation networks and modes based on cus­tomer and product characteristics. Most firms sell a variety of products and serve many different customer segments. For example, W.W. Grainger sells more than 400,000 MRO supply products to both small contractors and large firms. Products vary in size and value, and customers vary in the quantity purchased, responsiveness required, uncertainty of the orders, and distance from W.W. Grainger branches and DCs. Given these differences, a firm such as W.W. Grainger should not design a common transportation network to meet all needs. A firm can meet customer needs at a lower cost by using tailored transportation to provide the appropriate transportation choice based on customer and product characteristics. In the following sections, we describe various forms of tailored transportation in supply chains.

1. Tailored Transportation by Customer Density and Distance

Firms must consider customer density and distance from warehouse when designing transportation networks. The ideal transportation options based on density and distance are shown in Table 14-10.

When a firm serves a high density of customers close to the DC, it is often best for the firm to own a fleet of trucks that are used with milk runs originating at the DC to supply customers, because this scenario makes good use of the vehicles and provides customer contact. If customer density is high but distance from the warehouse is large, it does not pay to send milk runs from the warehouse because empty trucks will travel a long distance on the return trip. In such a situ­ation, it is better to use a public carrier with large trucks to haul the shipments to a cross-dock center close to the customer area, where the shipments are loaded onto smaller trucks that deliver product to customers using milk runs. In this situation, it may not be ideal for a firm to own its own fleet. As customer density decreases, use of an LTL carrier or a third party doing milk runs is more economical because the third-party carrier can aggregate shipments across many firms. If a firm wants to serve an area with a low density of customers far from the warehouse, even LTL carriers may not be feasible and the use of package carriers may be the best option as long as loads are small. Boise Cascade Office Products, an industrial distributor of office supplies, has designed a transportation network consistent with the suggestion in Table 14-10.

Customer density and distance should also be considered when firms decide on the degree of temporal aggregation (which affects response time) to use when supplying customers. Firms should serve areas with high customer density more frequently because these areas are likely to provide sufficient economies of scale in transportation, making temporal aggregation less valu­able. To lower transportation costs, firms should use a higher degree of temporal aggregation and aim for somewhat lower responsiveness when serving areas with a low customer density.

2. Tailored Transportation by Size of Customer

Firms must consider customer size and location when designing transportation networks. Large customers can be supplied using a TL carrier, whereas smaller customers will require an LTL carrier or milk runs. When using milk runs, a shipper incurs two types of costs:

• Transportation cost based on total route distance
• Delivery cost based on number of deliveries

The transportation cost is the same whether going to a large or small customer. If a delivery is to be made to a large customer, including other small customers on the same truck can save on trans­portation cost. For each small customer, however, the delivery cost per unit is higher than that for large customers. Thus, it is not optimal to deliver to small and large customers with the same fre­quency at the same price. One option firms have is to charge a higher delivery cost for smaller customers. Another option is to tailor milk runs so they visit larger customers with a higher fre­quency than smaller customers. Firms can partition customers into large (L), medium (M), and small (S), based on the demand at each. The optimal frequency of visits can be evaluated based on the transportation and delivery costs (see Section 11.2). If large customers are to be visited on every milk run, medium customers on every other milk run, and low-demand customers on every third milk run, suitable milk runs can be designed by combining large, medium, and small cus­tomers on each run. Assume that medium customers are partitioned into two subsets (M₁, M₂), and small customers are partitioned into three subsets (5₁, S₂, S₃). The firm can sequence the following six milk runs to ensure that each customer is visited with the appropriate frequency: (L, M₁, S₁), (L, M₂, S₂), (L, M₁, S₃), (L, M₂, S₁), (L, M₁, S₂), (L, M₂, S₃). This tailored sequence has the advan­tage that each truck carries about the same load and larger customers are provided more frequent delivery than smaller customers, consistent with their relative costs of delivery.

3. Tailored Transportation by Product Demand and Value

The degree of inventory aggregation and the modes of transportation used in a supply chain net­work should vary with the demand and value of a product, as shown in Table 14-11. The cycle inventory for high-value products with high demand is disaggregated to save on transportation costs because this allows replenishment orders to be transported less expensively. Safety inven­tory for such products can be aggregated to reduce inventories (see Chapter 12), and a fast mode of transportation can be used if the safety inventory is required to meet customer demand. For high-demand products with low value, all inventories should be disaggregated and held close to the customer to reduce transportation costs. For low-demand, high-value products, all invento­ries should be aggregated to save on inventory costs. For low-demand, low-value products, cycle inventories can be held close to the customer and safety inventories aggregated to reduce trans­portation costs while taking some advantage of aggregation. Cycle inventories are replenished using an inexpensive mode of transportation to save costs.

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