442 Chapter 14 • Transportation in a Supply Chain

CASE STUDY
Designing the Distribution Network for Michael’s Hardware
Ellen Lin, vice president of supply chain at Michael’s Distribution Alternatives for Arizona
Hardware, was looking at the financial results from the
past quarter and thought that the company could signifi- Ellen’s staff had three distribution alternatives for the
cantly improve its distribution costs, especially given the stores in Arizona:
recent expansion into Arizona. Transportation costs had 1. Use direct shipping with small trucks (capacity of
been very high, and Ellen believed that moving away 10,000 units) as was currently being done in Illi-
from LTL shipping to Arizona would help lower trans- nois. Each small truck charged $2,050 for a ship-
portation costs without significantly raising inventories. ment of up to 10,000 units from a supplier to a
Michael’s had 32 stores each in Illinois and Arizona store in Arizona. This was a significantly lower
and sourced its products from eight suppliers located in transportation cost than was currently being
the Midwest. The company began in Illinois and its stores charged by the LTL carrier. This alternative, how-
in the state enjoyed strong sales. Each Illinois store sold, ever, would increase inventory costs in Arizona
on average, 50,000 units a year of product from each sup- given the larger batch sizes.
plier (for annual sales of 400,000 units per store). The Ari- 2. Run milk runs using small trucks (capacity of 10,000
zona operation was started about five years ago and still units) from each supplier to multiple stores in Ari-
had plenty of room to grow. Each Arizona store sold zona. The small truck carrier charged $2,000 per
10,000 units a year from each supplier (for annual sales of shipment and $50 per delivery. Thus, a milk run from
80,000 units per store). Given the large sales at its Illinois a supplier to four stores would cost $2,200. Milk
stores, Michael’s followed a direct-ship model and runs would incur higher transportation costs than
shipped small truckloads (with a capacity of 10,000 units) direct shipping but would keep inventory costs lower.
from each supplier to each of its Illinois stores. Each small 3. Use a third-party cross-docking facility in Arizona
truck cost $450 per delivery from a supplier to an Illinois that charged $0.10 per unit for this cross-docking
store and could carry up to 10,000 units. In Arizona, how- service. This would allow all suppliers to ship
ever, the company wanted to keep inventories low and product (destined for all 32 Arizona stores) using a
used LTL shipping that required a minimum shipment of large truck to the cross-dock facility, where it
only 500 units per store but cost $0.50 per unit. Holding would be cross-docked and sent to stores in smaller
costs for Michael’s were $1 per unit per year. trucks (each smaller truck would now contain
Ellen asked her staff to propose different distribu- product from all eight suppliers). Large trucks
tion alternatives for both Illinois and Arizona. (capacity of 40,000 units) charge $4,150 from each
supplier to the cross-dock facility. Small trucks
Distribution Alternatives for Illinois (capacity of 10,000 units) charge $250 from the
Ellen’s staff proposed two alternative distribution strate- cross-dock facility to each retail store in Arizona.
gies for the stores in Illinois: Ellen wondered how best to structure the distribu-
1. Use direct shipping with even larger trucks that had a tion network and whether the savings would be worth the
capacity of 40,000 units. These trucks charged only effort. If she used milk runs in either region, she also had
$1,150 per delivery to an Illinois store. Using larger to decide on how many stores to include in each milk run.
trucks would lower transportation costs but increase Study Questions
inventories because of the larger batch sizes.
2. Run milk runs from each supplier to multiple stores 1. What is the annual distribution cost of the current distribu-
in Illinois to lower inventory cost even if the cost of tion network? Include transportation and inventory costs.
2. How should Ellen structure distribution from suppliers to
transportation increased. Large trucks (capacity of
the stores in Illinois? What annual savings can she expect?
40,000 units) would charge $1,000 per shipment
3. How should Ellen structure distribution from suppliers to
and a charge of $150 per delivery. Small trucks the stores in Arizona? What annual savings can she expect?
(capacity of 10,000 units) would charge $400 per 4. What changes in the distribution network (if any) would
shipment and a charge of $50 per delivery. you suggest as both markets grow?
 Chapter 14 • Transportation in a Supply Chain 443

CASE STUDY
Designing a Sustainable Distribution Network for Euro-Grain
Ed Hendrix, vice president of supply chain at 4Farmers, a
TABLE 14-12 Emission factors for modalities
large mixed-feed company in the Netherlands, Europe,
was reading a new scientific report from CED (an inde- CO2-eq NOx-eq SO2-eq
pendent research and advisory company specializing in Modality (T/km,g) (T/km,g) (T/km,g)
environmental impacts) that analyzed the environmental Truck 50.4 0.4200 0.0016
effects of the importing of raw materials. 4Farmers is a Inland ship 11.1 0.3500 0.22
modern international company producing feed and fod-
der for pigs, cows, poultry, and so on, importing grain Sea ship 9.6 0.3000 0.19
from all over Europe. As 4Farmers considers sustainable Trains 28.34 0.4720 0.036
entrepreneurship to be very important, this document
made Ed wonder about the environmental and economic
consequences of the import of grain as feedstock for pigs.
Walmart reacted to Amazon’s efforts by announcing
tests for same-day delivery in a few cities: train station in Rotterdam (1160 km). By road, it is
4Farmers has a high market share in specific feed- possible to reach the sea harbor Gdansk (330 km),
stock for sustainable pork, called Euro-Grain. Euro-Grain the train station/inland harbor of Wroclaw (345 km),
was developed in the Netherlands, but supply volume from or even drive to 4Farmers directly (1197 km). From
this country is not sufficient. Some other countries within the sea harbor Gdansk, a sea ship can travel to the
Europe are also capable of producing grain that satisfies the sea harbor/rail station of Rotterdam (1064 km). An
Euro-Grain criteria, among them Poland. Ed believes that inland ship can travel from the inland harbor of
his company could significantly improve both distribution Wroclaw to the inland harbor of Oss (950 km). The
costs and environmental impact from transportation by inland harbor of Oss can also be reached by inland
investigating the possibility of using various modes of ship from the port of Rotterdam (84 km). Finally, as
transportation. 4Farmers can only be reached by truck, it takes
26 km to drive from the inland harbor of Oss to
4Farmers, and 100 km from the sea harbor/rail
Modes of Transportation station in Rotterdam.
The supply chain uses a combination of the following • Distribution costs are $1 per km/ton for a truck
modes of transportation: truck, inland ship, sea ship, and with a capacity of 40 tons.
rail. As grain is not very perishable, speed is not really • A sea ship from the port of Gdansk to the port of
an issue. Prices vary with destination and depend heav- Rotterdam costs $23.5/ton per trip with a capacity
ily on the capacity of the tranportation mode. A variety of 3,000 tons.
of intermodel combinations are possible, using a truck/ • An inland ship from the harbor of Wroclaw to the
water/rail combination with containers. harbor of Oss costs $13.75/ton per trip with a
capacity of 1,000 tons.
• An inland ship from Rotterdam to Oss costs $3.75/
Distribution Alternatives for Warsaw
ton per trip with a capacity of 1,000 tons.
Ed asked his staff to propose different distribution alter- • Rail tariffs for a capacity of 800 tons from Warsaw
natives for Poland: Nina Kramer on environmental to Rotterdam: $25.4/ton.
issues and Leo Spoor on the costs, needs, and possibili-
Nina came up with the following information.
ties for the various transport modes.
The environmental impact of transportation can be
Leo figured out the following information:
represented by the following airborne emission cate-
• Monthly, demand of 4Farmers for Euro-Grain is gories: CO2 equivalents to represent greenhouse gas
about 3,500 tons of grain. (GHG) emissions, NOx equivalents to represent nitri-
• From the farm near Warsaw, grain can be transported fication, and SO 2 equivalents to represent acidifica-
by rail to the train station in Wroclaw (320 km) or the tion. Table 14-12 gives the emission-equivalents per
444 Chapter 14 • Transportation in a Supply Chain

modality (per ton/km). Ed wondered which intermodal 2. Which intermodal configuration is the least expensive on a
configuration would have the best sustainable perfor- monthly basis?
mance for this supply chain. 3. Which intermodal configuration has the lowest GHG
emissions (carbon foot print) on a monthly basis?
Questions 4. Which intermodal configuration would you suggest to be
the most sustainable? Base your decision making on costs
1. Which intermodal configurations are possible for trans- and the three environmental issues of greenhouse gas,
porting the grain from Poland to 4Farmers? nitrification, and acidification.

CASE STUDY
Selecting Transportation Modes for China Imports
Jackie Chen, vice president of China Imports, was look- times cheaper than air freight. Ocean shipping, however,
ing to design a framework to select transportation modes took longer and was less reliable. The average lead time
for various products imported from China to the United using ocean shipping was nine weeks, with a standard
States. His basic options were to either use air freight or deviation of three weeks.
ocean shipping in 20-foot containers. Air freight was
faster and more reliable, but ocean shipping was much Product Characteristics
cheaper. He decided to evaluate the shipping decision
Weekly demand for smartphones averaged 1,000 and
for two very different product categories—consumer
had a standard deviation of 400. Each smartphone cost
electronics, such as smartphones, and decorative hard-
$300 and weighed 0.1 kg. The typical life cycle for a
ware, such as door handles and hinges.
smartphone was about one year; it was critical to not lose
China Imports provided a variety of products to its
demand early in the life cycle because of a lack of prod-
customers from a warehouse near the port of Long
uct availability. Weekly demand for decorative hardware
Beach, California. The company incurred a holding cost
averaged 5,000, with a standard deviation of 1,000. Each
of 25 percent on all inventory held and aimed to provide
unit of decorative hardware cost $20 and weighed 1 kg.
a 98 percent cycle service level on its products. The high
Decorative hardware tended to have a long life cycle—
level of service aligned with the high quality of products
the company was still selling door handles and hinges
that the company imported.
that were introduced more than a decade earlier.
Transportation Options from China
Study Questions
Air freight and ocean shipping were the two options
available to move product from China to the United 1. What is the annual cost of using air freight to import
States. Air freight charged $10 per kilogram shipped and smartphones? What is the annual cost of using ocean ship-
ping to import smartphones?
required a minimum shipment of 50 kg. Besides being
2. What is the annual cost of using air freight to import deco-
fast, air freight was also quite reliable. The average lead rative hardware? What is the annual cost of using ocean
time on air freight was one week, with a standard devia- shipping to import decorative hardware?
tion of lead time of 0.2 weeks. Ocean shipping was much 3. What other factors should be considered in the choice of
cheaper and cost $1,200 per 20-foot container. Given transportation mode? What mode would you recommend
that each container could hold up to 15,000 kg, the ship- for each product? Suggest a general framework that Jackie
ping cost per kilo by ocean was more than a hundred can use across all product categories.