TRANSPORTATION

AND
LOGISTICS SYSTEMS

Dr Vijaya Kumar Manupati

IIM Mumbai
Syllabus
Course Content: Introduction to Logistics, Logistics System Design, Logistics Channels, Concept
of Inventory related to logistics, Transit inventory, Warehousing, Warehousing decision models,
Transportation models, Volume flow, Multimodal logistics, India’s logistics transportation Sector and
its challenges, Total logistics costs, Logistics metrics, Order Management, logistics information
systems, Integration of all activities for effective supply chain performance, Reverse logistics,
Designing logistics network, 3pl and 4pl logistics, Global logistics

Reference Books/ Cases/ Resources

❑ Logistics & Supply Chain Management, (Latest edition), Martin Christopher, Prentice Hall.
❑ Business Logistics: Supply Chain Management (Latest Edition) L Ronald H. Ballou, Prentice Hall.
❑ Introduction to Logistics Systems Management (2nd Edition): Gianpaolo Ghiani, Gilbert Laporte, Roberto Musmanno, Wiley.
❑ Supply Chain and Logistics Management Made Easy: Methods and Applications for Planning, Operation, Integration, Control
and Improvement, and Network Design (Latest Edition): Paul A. Myerson, Pearson FT Press.
❑ Warehouse Management: A Complete Guide to Improving Efficiency and Minimizing Costs in the Modern Warehouse, 2nd
Edition, Gwynne Richards, Kogan Page.
❑ Coyle J.J, Bardi E.W., Langley C.J., The Management of Business logistics, A Supply Chain Perspective, Thomson Asia
Dr. Vijaya Kumar Manupati 3
 delivering goods to various locations by different means

• “Logistics” comes from the French word LOGER which

means art of war pertaining to movement of war supplies.

• The term Logistics was first used by

- - - Henry Jomini and Alfred Thayer Mahan

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❑ Large trading companies could transport their goods
much faster and reduce their operational costs

❑ Current various digital channels understand demands

better and increase productivity

Dr. Vijaya Kumar Manupati 5

Dr. Vijaya Kumar Manupati 6
 Evolution of Logistics

1990s 2010s
Integration Automation

2000s
1960s Value Capture

Fragmentation
1980s
Consolidation
 1960s 1980s 1990s 2000s 2010s
Fragmentation Consolidation Integration Value Capture Automation
D
Demand Forecasting
DD
Sourcing/Purchasing
Requirement planning
Requirement plan Materials
Production planning Management
Manufacturing Inventory

Warehousing
W Warehousing Supply Chain
Logistics Digitalization
Management
Materials Handling Materials Handling
Packaging Packaging
Goods Inventory
Information Technology
Distribution planning
Physical Marketing/Sales
Order Processing
Distribution Strategic Planning
Transportation
Customer Service Finance
Evolution of Logistics

Dr. Vijaya Kumar Manupati 9

Key objectives of Logistics Management

Improves supply chain efficiency

Inventory Management
Fulfill customer requirements
Mitigate product damage
Reduce operational cost
Quick Response
Optimize delivery performance
Efficient flow of Information
Quality assurance/ Reduce Carbon Footprint

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90 % of global
trade happens
Via sea

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Is the world ready
for another such
incident?

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Dr. Vijaya Kumar Manupati 13
Dr. Vijaya Kumar Manupati 14
 CASE

TRANSPORTATION &
DISTRIBUTION

Procter & Gamble to Cut Its

Inventory Locations by 50%
Jan. 17, 2007

Industry analysts note that

Procter & Gamble (P&G) has
seen its profits fall under
double-digits for the past few
years and one move to
improving

Dr. Vijaya Kumar Manupati Source: Logistics

15 today
• Prioritizing based on factors • Cluster
location/age/capacity/efficiency • Warehouse Design • Using days to identify
• Bundling & discount based on • Network OPT goods
ABC & XYZ analysis. • Market Analysis • Collaborating with
• Cabots & automation based on Supplier
Cabots & Intelligent Shelves • Centre of gravity
• Regular Analysis on Layout & method
demands

• ARC
• JIT

• IOT, Robots & Cabot

• Demand Planning • Risk Analysis
• Enhancing Capacity of • Labour Management
Existing Warehouse • Predictive Shipping
• Digital twin for route • Cross Docking
• Automated Order Management
Optimization • Real Time Tracking
• Cost Benefit Analysis
 Strategy
• Process Improvement

• Improved Transit Times

• Information Availability

• Consistency

Dr. Vijaya Kumar Manupati 17

Strategy 1: Square-Root
Rule (Inventory at
multiple locations)
Consolidation strategy: Consolidate
inventories into fewer stocking locations

Square-root rule: the total safety stock

inventories in a future number of facilities can
be approximated by multiplying the total
number of inventory in existing facilities by the
square root of the number of future facilities
divided by the number of existing facilities.

Dr. Vijaya Kumar Manupati 18

Mathematically Illustrative Example:
Consider an organization that currently distributes
40,000 units of product to its customers from a total
of eight facilities located through out the India.
Current distribution centres are located in

X2= 𝑋1 𝑛2/𝑛1 Hyderabad, Chennai, Bangalore, Mumbai, Delhi,

Ahmadabad, Kolkata and Indore. The organization is
evaluating an opportunity to consolidate its
operations into two facilities, one in Vizag and other
in Goa. The total number of inventory in two future
facilities is?
n1 = Number of existing facilities n1 = 8 Existing facilities
n2 = Number of future facilities n2 = 2 future facilities
X1 = Total inventory in existing facilities X1 = 40, 000 total units of product in the 8 existing
facilities.
X2 = Total inventory in future facilities Thus
X2 = total number of units in the 2 future facilities
= (40, 000) 2/8
= 20, 000 Units
The two future facilities would carry a total inventory
Dr. Vijaya Kumar Manupati
of 20, 000 units to satisfy the existing demand.
19
 Impact of Square Root Rule on Logistics Inventories

Number of warehouses(n) 𝒏 Total average Inventory Percentage change

(units)

1 1.0 3885 -
2 1.414 5494 141%
3 1.732 6729 173%
4 2.000 7770 200%
5 2.236 8687 224%
10 3.162 12285 316%
15 3.873 15047 387%
20 4.472 17374 447%
23 4.795 18632 480%
25 5.000 19425 500%
Economic order quantity

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 Assumptions of EOQ

The total ordering cost The total units that are The ordered inventory
The inventory costs are
in an EOQ remains to be consumed are is delivered in one
assumed constant
constant certain attempt

The maximum quantity Transportation costs

No availability of any
for every stock item is There is no fluctuation are independent of
discount on quantity or
computed on a separate of lead time quantity or timing of
cash
basis orders.

Dr. Vijaya Kumar Manupati 22

Example
The material DX is used uniformly throughout the
year. The data about annual requirement, ordering
cost and holding cost of this material is given
below:
• Annual requirement: 2,400 units
• Ordering cost: $10 per order
• Holding cost: $0.30 per unit

Required: Determine the economic order quantity

(EOQ) of material DX using above data.
Dr. Vijaya Kumar Manupati 23
The economic order quantity for material DX is 400 units. Now, we can compute the number of orders to be placed per
year, annual ordering cost, annual holding cost and combined annual ordering and holding cost as follows:

Number of orders per year Combined ordering and holding cost at economic order
quantity (EOQ):
= Annual demand/EOQ = Ordering cost + Holding cost
= 2,400 units/400 units = $60 + $60
= 6 orders per year = $120

Ordering cost

= Number of orders per year × Cost per order

= 6 orders × $10 Notice that both ordering cost and holding cost are $60 at
= $60 economic order quantity. The holding cost and ordering cost at
EOQ tend to be the same.
Holding cost

= Average units × Holding cost per unit

= (400/2) × 0.3
= $60

Dr. Vijaya Kumar Manupati 24

Example
• The John Sports Inc. purchases tennis balls at $20 per dozen from its suppliers. The John
Sports will sell 34,300 dozen of tennis balls evenly throughout the year. The total cost to
handle a purchase order is $10. The insurance, property tax and rent for each dozen tennis
balls in the average inventory is $0.40. The company wants a 5% return on average
inventory investment.

Required:
• Compute the economic order quantity.
• Compute the total annual inventory expenses to sell 34,300 dozen of tennis balls if orders
are placed according to economic order quantity computed in part 1.

Dr. Vijaya Kumar Manupati 25

Total annual inventory expenses to sell 34,300 dozen of tennis balls:

= Annual ordering cost + Annual holding cost

= (Number of orders × Cost per order) + (Average units × Holding cost per unit)
= (*49 orders × $10) + [(700/2) × 1.4] *$0.40 + ($20 × 5/100) = $1.40
= $490 + $490
= $980

*Number of orders to be placed: 34,300/700 = 49 orders

Dr. Vijaya Kumar Manupati 26

Transit Inventory
R = 3600 units (annual demand)
A = $200 (cost of one order or setup)
W = 25% (cost of carrying inventory in
warehouse)
V = $100 (value per unit)
Q = 240 units (this would remain the
same)

Company is choosing between two

transportation modes (rail and motor)

Rail: 8 days in transit time

$3 per hundred pounds

Motor: 6 days transit time

$4 per hundred pounds

Dr. Vijaya Kumar Manupati 27

 1 3600 8
Total inventory cost (rail) = 𝑋 240 𝑋 100 𝑋 25% + 200 𝑋 + 𝑋 240 𝑋 100 𝑋 10%
2 240 24
= 3000 + 3000 + 800
= $ 6800
1 3600 6
Total inventory cost (motor) = 𝑋 240 𝑋 100 𝑋 25% + 200 𝑋 + 𝑋 240 𝑋 100 𝑋 10%
2 240 24
= 3000 + 3000 + 600
= $ 6600 Logistic Cost
25000

If we add the transportation cost to the inventory cost, the total

cost would be 20000
3600
Total cost (rail) = 6800 + 3 𝑋 240 𝑋
240
= 6800 + 10800 15000
= $ 17600
10000
If we add the transportation cost to the inventory cost, the
total cost would be 5000
3600
Total cost (motor) = 6600 + 4 𝑋 240 𝑋
240
= 6600 + 14400 0
= $ 21000 Total inventory cost Transit Cost Total Cost Transportaion Cost
Rail Motor
Dr. Vijaya Kumar Manupati 28
Adjusting the Simple
EOQ for Volume
Transportation rates

Suppose the rate of a shipment of

24,000 pounds was $3 per hundred
pounds and the rate for a 40, 000
pounds shipment was $2 per cwt,
which shipment do you prefer?

Dr. Vijaya Kumar Manupati 29

 Volume Transportation rate

Cost relationships

Increased inventory
carrying cost for inventory Decreased order or setup costs
in the warehouse

Decreased Transportation Decreased in-transit

cost inventory carrying cost

Dr. Vijaya Kumar Manupati 30

 Mathematically
Total annual cost = Inventory carrying cost + order cost + transportation cost + In-Transit Inventory carrying cost
TACb = Total annual cost at basic EOQ
TACv = Total annual cost at volume rate quantity
R = Annual Demand
V= Value per unit; W= Cost of carrying inventory in warehouse.
Qb = Basic EOQ
Qv = Volume rate quantity
tm = time in transit for Less-Than –Volume shipment
tn = time in Transit for volume shipment
H = Less – Than – Volume Rate (high rate)
L = Volume Rate (low rate)

TAC b = ½ Qb V W + A (R/Qb) + HR + (tm/t) Qb V Y

TAC v = ½ Qv V W + A (R/Qv) LR + (tn/t) Qv V Y
Dr. Vijaya Kumar Manupati 31
 Transportation Rate Discount Example
Assume the following variables:

From the previous problem, we know that

R = 3600 units (3600 cwt) (annual sales)

H = $3.00/cwt L = $2.00/cwt tn = 6 days (time A = $200 (cost of placing an order or cost of setup)
(assume each unit with a minimum in transit for
weighs 100 of 40,000 pounds volume
(with each unit movement)
W = 25% (cost of carrying inventory in warehouse)
pounds)
weighing 100
pounds, this V = $100/cwt/unit (value per unit)
would be 400
units, or 400 cwt)
Qb = 240 units (240 cwt, or 240,000 pounds)

tm = 8 days (time in transit for LTL movement)

Y = 10% Qv = 400 units tv = 40 days

t = 24 days (length of a single inventory cycle or
(carrying cost of (length of s single
inventory while in inventory cycle period)
transit) for Qv = 400
units)

Dr. Vijaya Kumar Manupati 32

Solving for TACb and TACv

1 3600 8
TACb = 𝑋 240 𝑋 100 𝑋 25% + 200 𝑋 + 3 𝑋 3600 + 𝑋 240 𝑋 100 𝑋 10%
2 240 24

= 3000 + 3000 + 10, 800 + 800

= $ 17,600

1 3600 6
TACv = 𝑋 400 𝑋 100 𝑋 25% + 200 𝑋 + 2 𝑋 3600 + 𝑋 400 𝑋 100 𝑋 10%
2 500 40

= 5000 + 1440 + 7200 + 600

= $ 14,240
Since TACb exceeds TACv by $ 3360, the most economical solution is to purchase the larger quantity, 400 cwt. Reductions in
Dr. Vijaya Kumar Manupati 33
ordering, transportation, and in-transit inventory carrying costs offset the increased cost of holding the larger quantity.
Adjusting the Simple EOQ for Private Carriage
• Fixed trip charge is comparable to the EOQ =
2𝑅 𝐴+𝑇𝐶
order cost or setup cost. 𝑉𝑊

TAC = ½ Q V W + A (R/Q) + Tc (R/Q) 2∗3600 ∗ 200+100

EOQ =
100∗25%

= 293.94
Tc = Trip charge

Ex: Driver expenses, Fuel charges, Toll charges, etc.

Dr. Vijaya Kumar Manupati 34

Adjusting the Simple EOQ model for Private Carriage

TAC = ½ QVW + R/Q* A + R/Q * Tc

2𝑅 𝐴+𝑇𝑐
EOQ = Tc represents trip charge
𝑉𝑊
From the previous example, we can add a charge of $100 per trip

2 𝑋 3600 𝑋 (200 + 100)

𝐸𝑂𝑄 =
100 𝑋 25%

= 293.94

The EOQ size has been increased to 293.94 units because

Dr. Vijayaof additional
Kumar Manupati fixed charges associated with private trucking
35 costs.
 Adjusting the simple EOQ model for the
establishment and application of In-Excess rates
Let us consider a situation:

CBL railroad has just published a new in-excess rate on items that XYZ
company ships quite often. CBL’s present rate is $4/cwt with 40, 000
pound minimum (400 CWT). The in-excess rate just published is $3/cwt
on shipment weigh in excess of 40, 000 pounds up to 80, 000 pounds.
The XYZ logistics manager presently ships in 400-cwt lots. The
manager wants to know whether XYZ should use the in-excess rate,
and, if so, what quantity the company should ship per shipment.

Dr. Vijaya Kumar Manupati 36

Net savings
function for
incentive
rate
 Data:

R = 3, 200, 000 POUNDS

V = $ 200
W = 25% of value

𝑅 ∗𝑆𝑟 ∗𝑄𝑚 32000 ∗ $1.00 ∗ 400

Q= =
100 ∗ 25
= 506 cwt
𝑉𝑊

XYZ COMPANY SHOULD USE THE IN-EXCESS RATE AND SHOULD SHIP 50, 600 POUNDS IN EACH SHIPMENT

Dr. Vijaya Kumar Manupati 38

THANK YOU

Dr. Vijaya Kumar Manupati 39