Chapter 13 discussion questions

Rail and water transportation modes are best suited for large, low-value shipments. The price structure of the business make rail and water the modes of choice if low-value, large, heavy, or high-density items need to be transported. Air, package carriers, and trucks would not have the infrastructure required to accommodate large items; roads and bridges would be damaged and the storage capacity of the carriers is insufficient. 

2. Why is it important to account for congestion when pricing the use of transportation infrastructure?

Infrastructure often requires government ownership and is not something that can be increased in capacity in the short term. If congestion is not factored in to the price structure for infrastructure, then demand for the resources will exceed capacity and major delays will occur. Pricing may be used to force users to internalize the marginal impact of their choices, thus alleviating some of the demand during peak periods.  


3. Wal-Mart designs its networks so that a DC supports several large retail stores. Explain how the company can use such a network to reduce transportation costs while replenishing inventories more frequently.
 


A distribution center that supports several large retail stores can reduce supply chain costs in four ways: 1) Inbound shipments to the DC achieve economies of scale because each supplier sends a large shipment; 2) The outbound transportation costs for a DC can be low because it serves retail locations nearby; and very large inbound shipments that match retail demand can be cross-docked at the DC, which saves both 3) storage and 4) material-handling costs.

A DC also can replenish retail inventories more frequently; the DC breaks bulk from manufacturers on one side of the warehouse and sends it to retail locations on the outbound side. Since retail demands are aggregated at the DC level, the amount of inventory actually stored at the DC is very low and as Little��s Law indicates, the time between replenishments is low also. 


4. Compare the transportation costs for an e-business such as Amazon.com and a retailer such as Home Depot when selling home-improvement materials.
 


The primary difference between these retailers is that Home Depot does not incur any outbound transportation cost for residential customers while Amazon faces such charges. Home Depot has substantial inbound transportation charges but is able to offload the outbound transportation cost to the vast majority of their customers. Amazon must use high cost package carriers for much of its product line although they are able to avoid inbound transportation costs for items that are drop shipped. For items that are held in one of their warehouses, Amazon must pay both inbound and outbound. 


5. What transportation challenges does Peapod face? Compare transportation costs at online grocers and supermarket chains.
 


Peapod faces the burden of expensive outbound transportation costs and must account for congestion in the delivery area. Unlike traditional grocers who don��t deliver their products, Peapod must deliver items in their fleet of climate-controlled trucks. These trucks must be scheduled with pricing incentives offered for peak and off-peak delivery times. Customers are keenly aware of the transportation component of their purchases and Peapod can use pricing incentives to spur their customers towards higher order amounts.

Both Peapod and traditional grocers must pay the inbound transportation costs of their wares; there would appear to be no great advantage gained by either approach unless one vendor has such substantial market share as to gain price concessions that they other can��t negotiate. 


6. Do you expect aggregation of inventory at one location to be more effective when a company such as Dell sells computers or when a company such as Amazon.com sells books? Explain by considering transportation and inventory costs.
 


Inventory aggregation is a good idea when inventory and facility costs form a large fraction of a supply chain��s total costs. Inventory aggregation is useful for products with a large value to weight ratio and for products with high demand uncertainty. Both factors allow aggregation to work to Dell��s advantage, while Amazon reaps less of a reward.

Dell benefits from aggregation because personal computers have an extremely high value to weight ratio; the demand for new items is uncertain, and Moore��s Law makes holding excessive inventory an extremely unattractive proposition.

Amazon benefits from aggregation when inventory costs are examined, but is hurt by increased transportation costs. Most items that Amazon sells have low value to weight ratios and Amazon must ship them via package carrier, which is expensive. Amazon saves money on storage costs since they choose to stock more popular titles and allow other entities to hold items with more variable demand. 


7. Discuss key drivers that may be used to tailor transportation. How does tailoring help?
 


Tailored transportation is the term for use of different transportation networks and modes based on customer and product characteristics. Tailoring transportation allows firms to achieve cost and responsiveness targets that are appropriate for the supply chain. The key drivers are density and distance, customer size, and product demand and value. These drivers can be viewed as guide for ownership of  


Transportation options based on customer density and distance are summarized in the table and present cost and responsiveness tradeoffs for the supply chain.

	Short distance	Medium distance	Long distance
High density	Private fleet with milk runs	Cross-dock with milk runs	Cross-dock with milk runs
Medium density	Third-party milk runs	LTL carrier	LTL or package carrier
Low density	Third-party milk runs or LTL carrier	LTL or package carrier	Package carrier

 


Customer size and location dictate whether a supplier should use a TL or LTL carrier or milk runs. Very large customers can be supplied using a TL carrier, whereas smaller customers can use LTL carriers or milk runs. The authors discuss a customer-partitioning procedure for combining smaller customers�� shipments with larger customers in order to achieve responsiveness and cost targets. 


Product demand and value determine whether aggregation strategies will benefit the supply chain. The best combinations are shown in the table:

Product Type	High Value	Low Value
High demand	Disaggregate cycle inventory but aggregate safety inventory. Use an inexpensive mode of transportation for replenishing cycle inventory and a fast mode when replenishing safety inventory.	Disaggregate all inventories and use inexpensive mode of transportation for replenishment.
Low demand	Aggregate all inventories. If needed, use fast mode of transportation for filling customer orders.	Aggregate only safety inventory. Use inexpensive mode of transportation for replenishing cycle inventory.