CHAPTER 4 4. MULTIMODAL TRANSPORTATION AND SUPPLY CHAIN MANAGEMENT

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1 91 CHAPTER 4 4. MULTIMODAL TRANSPORTATION AND SUPPLY CHAIN MANAGEMENT 4.1. INTRODUCTION Multimodal transportation plays a key role in transporting goods in international supply chain. A supply chain (SC) is a network of facilities and distribution options that performs the functions of procurement of materials, transformation of these materials into intermediate and finished products, and the distribution of these finished products to customers. A supply chain means a flow of goods and services through different sites. Supply chains exist in both service and manufacturing organizations, although the complexity of the chain may vary greatly from industry to industry and firm to firm and information plays an important role in these flows. Supply chain management (SCM) encompasses logistics that studies material and information flows, purchasing, and selling in terms of operative questions such as transportation, ordering and packing, as well as strategic questions such as competition. Thus, supply chain management deals with material and information flows from raw-material production to final product retailing. Supply-chain management is somewhat larger than logistics, and it links logistics more directly with the user s total communications network and with the firm s engineering staff (Yung-Yu TSENG et al, 2005). Under logistics, decisions such as transport mode selection, selection of ports and optimal transportation strategy are to be made.

2 92 Supply Chain Management (SCM) has been a. melting pot of various aspects, with influences from logistics and transportation, operations management and materials and distribution management, marketing, as well as purchasing and information technology (IT). In the current competitive scenario supply chain management assumes a significant importance and calls for serious research attention, as companies are challenged with finding ways to meet ever-rising customer expectations at a manageable cost. To do so, businesses must search out which parts of their supply-chain process are not competitive, understand which customer needs are not being met, establish improvement goals, and rapidly implement necessary improvements. Previously manufacturers were the drivers of the supply chain - managing the pace at which products were manufactured and distributed. Today, customers are calling the shots, and manufacturers are scrambling to meet customer demands for options/styles/ features, quick order fulfillment, and fast delivery. Manufacturing quality a long-time competitive differentiator - is approaching parity across the board, so meeting customer s specific demands for product delivery has emerged as a critical opportunity for competitive advantage. Companies that learn how to improve management of their supply chain will become the new success stories in the global market place (Jinesh Jain, et al., 2010) 4.2. SUPPLY CHAIN MANAGEMENT Supply chain management is the combination of art and science that goes into improving the way your company finds the raw components it needs to make a product or service, manufacture that product or service and deliver it to customers (Koch

3 93 Christopher, 2002). Traditionally, marketing, distribution, planning, manufacturing, and the purchasing organizations along the supply chain operated independently. These organizations have their own objectives and these are often conflicting. Marketing's objective of high customer service and maximum sales dollars conflict with manufacturing and distribution goals. Many manufacturing operations are designed to maximize throughput and lower costs with little consideration for the impact on inventory levels and distribution capabilities. Purchasing contracts are often negotiated with very little information beyond historical buying patterns. The result of these factors is that there is not a single, integrated plan for the organization---there were as many plans as businesses. Clearly, there is a need for a mechanism through which these different functions can be integrated together. Supply chain management is a strategy through which such integration can be achieved. Supply chain management is typically viewed to lie between fully vertically integrated firms, where the entire material flow is owned by a single firm, and those where each channel member operates independently. Therefore coordination between the various players in the chain is key in its effective management. Cooper and Ellram (1993) compare supply chain management to a well-balanced and well-practiced relay team. Such a team is more competitive when each player knows how to be positioned for the hand-off. The relationships are the strongest between players who directly pass the baton, but the entire team needs to make a coordinated effort to win the race. Fig 4.1 shows an example of a very simple supply chain for a single product, where raw material is procured from vendors, transformed into finished goods in a single step, and then

4 94 transported to distribution centers, and ultimately, customers. Realistic supply chains have multiple end products with shared components, facilities and capacities. The flow of materials is not always along an arborescent network, various modes of transportation may be considered, and the bill of materials for the end items may be both deep and large. Transportation management focuses on the transportation services such as trucking, rail freighting, air freighting, inland waterways, marine shipping and pipelines transshipment and warehousing services. Material management considers other activities related to the movement of materials in the manufacturing of commodities in all the stages of production along a supply chain (Ogunsiji A.Sola, 2010). Figure 4.1 Simple supply chain

5 95 The following are five basic components for supply chain management. 1. Plan - This is the strategic portion of supply chain management. A strategy is needed for managing all the resources that go toward meeting customer demand for the product or service. A big piece of planning is developing a set of metrics to monitor the supply chain so that it is efficient, costs less and delivers high quality and value to customers. 2. Source - Choose the suppliers who will deliver the goods and services that needed are to create the product or service. Develop a set of pricing, delivery and payment processes with suppliers and create metrics for monitoring and improving the relationships. And put together processes for managing the inventory of goods and services that received are from suppliers, including receiving shipments, verifying them, transferring them to your manufacturing facilities and authorizing supplier payments. 3. Make - This is the manufacturing step. Schedule the activities necessary for production, testing, packaging and preparation for delivery. As the most metricintensive portion of the supply chain, measure quality levels, production output and worker productivity. 4. Deliver - This is the part that many insiders refer to as "logistics." Coordinate the receipt of orders from customers, develop a network of warehouses, pick carriers to get products to customers and set up an invoicing system to receive payments. 5. Return - The problem part of the supply chain. Create a network for receiving defective and excess products back from customers and supporting customers who have problems with delivered products (

6 COMPONENTS OF SUPPLY CHAIN MANAGEMENT Supply chain management is a set of approaches used to efficiently integrate suppliers, manufacturers, warehouses, and customers so that merchandise is produced and distributed at the right quantities, to the right locations, and at the right time in order to minimize systemwide costs while satisfying service-level requirements. Fig.4.2 shows the components of a Supply Chain. Efficient Supply chains demand rapid flow of information and hence IT plays a big role in SCM. BUSINESS BOUNDARY SUPPLIER PLAN SOURCE MAKE DELIVER CUSTOMER RETURN Figure 4.2 Components of supply chain The use case reference model of the International Supply Chain as proposed by United Nation Centre for Trade Facilitation and Electronic Business (UN/CEFACT) is as shown in Fig.4.3 and the actors & the use can structures in the supply chain are shown in Fig.4.4.

7 97 Figure 4.3 Part of a use case diagram of international supply chain Figure 4.4 Actors and and use case structure Proper implementation of an SCM system, along with accurate and timely data, can streamline operations and lead to business opportunities. The supply chain management are of closed-loop type aiming to possess the characteristics such as realistic

8 98 plans, predictable performance and reliable commitments, synchronized agile supply chain with co-dependency, self correcting based on continuous improvement. The best practices in closed loop SCM include plan driven management, remove silos, design for speed, treat root cause-not the symptoms and measure for accountability and continuous learning. Supply chain management requires parallel control of physical goods, logistics information, payments and ownership rights (Fig.4.5). Figure 4.5 Parallel controls in SCM 4.3. SUPPLY CHAIN DECISIONS Supply chain decisions have been classified based on their temporal (strategic, tactical, and operational) and functional consideration (procurement decisions, manufacturing, distribution, logistics, global decisions) as shown in Fig.4.6 Supply chain decision making is a complex process and some of the important reasons mentioned in the literature for the complexity of the decision making process are: large scale nature of

9 99 the supply chain networks, hierarchical structure of decisions, randomness of various inputs and operations and dynamic nature of interactions among supply chain elements. Decide Location Decide Procument Make Strategic Decisions DECIDE SUPPLY CHAIN Decide Inventory Decide Manufacturing Make Tactical Decisions MAKE SUPPLY CHAIN DECISIONS Decide Distribution Make Operational Decisions Decide Logistics Figure 4.6 Decisions of supply chain management Strategic decisions are made typically over a longer time horizon. These are closely linked to the corporate strategy, and guide supply chain policies from a design perspective. On the other hand, operational decisions are short term, and focus on activities over a day-to-day basis. The effort in these type of decisions is to effectively and efficiently manage the product flow in the "strategically" planned supply chain. There are four major decision areas in supply chain management: location, production, inventory, and transportation (distribution), and there are both

10 100 strategic and operational elements in each of these decision areas. The decisions that are important to this work are transport decision Transportation Decisions The mode choice aspect of these decisions is the more strategic ones. These are closely linked to the inventory decisions, since the best choice of mode is often found by trading-off the cost of using the particular mode of transport with the indirect cost of inventory associated with that mode. While air shipments may be fast, reliable, and warrant lesser safety stocks, they are expensive. Meanwhile shipping by sea or rail may be much cheaper, but they necessitate holding relatively large amounts of inventory to buffer against the inherent uncertainty associated with them. Therefore customer service levels and geographic location play vital roles in such decisions. Since transportation is more than 30 percent of the logistics costs, operating efficiently makes good economic sense. Shipment sizes (consolidated bulk shipments versus Lot-for-Lot), routing and scheduling of equipment are key in effective management of the firm's transport strategy (Ref.: Ram Ganeshan, Terry P. Harrison, an Introduction to Supply Chain Management 1995) Importance of Mathematical Modeling and Optimization Techniques The planning (design) and management of the supply chain calls for mathematical modeling and optimization techniques from operations management area. Mathematical modeling include: Optimization Models (Linear Programming, Integer Linear programming and Dynamic programming), stochastic models (Markov chains, Queueing

11 101 networks, etc.), statistical models, game theory, simulation, machine learning and auctions and mechanism design. The analysis techniques such as sensitivity analysis, Monte Carlo analysis, risk analysis, break even analysis and Bayesian analysis, correlation and regression play an important role. Decision process models built based on these techniques specify various production and operations management decisions that are made throughout the entire chain. Examples include: Material selection: Which material is the best to choose for various products? Location selection: Which supplier is the best to produce and distribute? Inventory planning: Where and how much inventory should be stored? Load planning: How workload handled by each supplier? Capacity planning: How much production capacity do suppliers need to meet demand? Production scheduling: Which suppliers should produce and associated due dates? Distribution planning: When and how much volume of end products or component parts should be transported? Supply Chain Performance Measures Supply chain performance measures can be classified broadly into two categories: qualitative measures (such as customer satisfaction and product quality) and quantitative measures (such as order-to-delivery lead time, supply chain response time, flexibility, resource utilization, delivery performance, etc.). Improving supply chain performance requires a multi-dimensional strategy that addresses how the organization will service

12 102 diverse customer needs. While the performance measurements may be similar, the specific performance goals of each segment may be quite different. Quantitative metrics of supply chain performance can be classified into two broad categories: Non-financial and financial as given in the following table 4.1. Table 4.1 Quantitative measures of SC performance Non-Financial Performance Measures Financial Performance Measures cost of raw material i. Cycle time revenue from goods sold ii. Customer Service Level activity-based costs such as iii. Inventory Levels iv. Resource utilization material handling, manufacturing, assembling, etc. inventory holding costs transportation costs cost of expired perishable goods penalties for incorrectly filled or late orders delivered to customers credits for incorrectly filled or late deliveries from suppliers cost of goods returned by customers credits for goods returned to suppliers There are several fixed and operational costs associated with a supply chain. Ultimately, the aim is to maximize the revenue by keeping the supply chain costs low. Costs arise due to inventories, transportation, facilities, operations, technology, materials, and labor. The financial performance of a supply chain can be evaluated by looking into the following items: cost of raw material, revenue from goods sold, activity-based costs

13 103 such as material handling, manufacturing, assembling, etc., inventory holding costs, transportation costs Resource utilization A supply chain network uses resources of various kinds: manufacturing resources (machines, material handlers, tools, etc.); storage resources (warehouses, automated storage and retrieval systems); logistics resources (trucks, rail transport, air-cargo carriers, etc.); human resources (labor, scientific and technical personnel); and financial (working capital, stocks, etc.). The objective is to utilize these assets or resources efficiently so as to maximize customer service levels, minimize lead times, and optimize inventory levels. Under logistics, the decision that are to be made are: Logistics mode selection: What transport modes and lanes should be used to move products throughout the network? (strategic) Selection of ports: Which ports should be used to bring product into and out of a country? (strategic) Direct delivery: Which products should move directly from manufacturing centers to customers? (strategic/tactical) Optimal transportation strategy: What are the cost and service tradeoffs of alternative transportation strategies? (tactical)

14 CASE STUDY An apparel export company based in Tirupur has been considered for case study. In Tirupur, the companies concentrate mainly on two categories of business: domestic market and export market. The turnover of Tirupur exports amounts to Rs Crores per annum and this is equivalent to 2.5 billion US$. The transportation cost amounts to approximately 10% of the cost. The apparel export company concentrates only on transport of garments and the cotton garments are exported from Tirupur to European countries through various modes of transport. TRANSPORT OF APPARELS The supplier decides the logistics for domestic markets and the customer decides the logistics for exports. The goods are sent from Coimbatore to Bangalore through Erode, Salem and Hosur. For exports, the major transportation route occurs is Tirupur Tuticorin Colombo European countries. The various modes of transport available are road, sea air and railways. If the goods are to be sent from the route Coimbatore Chennai and the destination is Delhi or Bombay then the optimum mode of transportation is rail (Fig.4.7). Figure 4.7 A transport route for apparel export

15 105 Since the Chennai airport is specifically used only for automobile transportation and also there are no frequent flights from Colombo to other European countries, the customers preferably choose only sea as the mode of transportation. VEHICLES OR SHIPS There are 2 types of vessels or ships called feeder vessel and mother vessel. The feeder vessel is the one that carries the goods from land to a big ship called mother vessel. In this case study, the feeder vessel is used to transport garments from Tuticorin to Columbo. CONTAINERS The containers are vessels that carry goods and there are three types of containers: 20 feet container that can hold - 30,000 pieces of T-Shirt, 40 feet container that can hold - 60,000 pieces of T-Shirt, 40 High Q container that can hold - 70,000 pieces of T-Shirt (Fig.4.8) There are three types of agents at Tuticorin port to clear the goods from truck to the ship. They are, Customer House Agents (CHA), Shipping Agents called Forwarders, and Called liners Ship Operators called liners. Leading Liners include: Evergreen, and APL limited. At tuticorin port, the customer house agents are responsible for the clearance of customs and similarly there will be customs broker at Colombo port for similar work. The forwarder will look after the filling of containers and when the goods are transferred to the container there will be a customs clearance at CFS (Container Freight Station).

16 106 Figure 4.8 Container types Effective Filling The containers in which the goods are stored and carried need to be effectively filled in order to optimize the overall cost of the transportation. There are two methods

17 107 of booking containers: Full Container Load (FCL) and Less Container Load (LCL). The FCL and LCL are differentiated, in practice, on whether the 'whole container' or 'not the whole container' is intended for the consignee. The FCL means the load reaches its allowable maximum (or full) weight or measurement. In practice, however, the FCL in the ocean freight does not always mean packing a container to its full payload or full capacity. For example, an exporter books a 20' container that is intended for a consignee at FCL flat rate of US$1,500. If the consignment occupies 500 cu. ft. and weighs 5,000 kgs. only, the case is still FCL and the exporter has to pay US$1,500. If an exporter intends to pack a container to the full capacity or full payload with the consignments of two or more consignees for the same destination, the case is LCL and the carrier will charge the LCL freight rate on each consignment. In the LCL arrangement, the shipper is required to deliver the cargo to the carrier's container freight station for containerization, thus there is no guarantee that the two or more consignments from the same exporter will share the same container. In some cases, the exporter is allowed to pack the container at their premises in the LCL arrangement, and then the carrier uses that same container to pack in more cargo from other shipper(s) to make a full container load at the container freight station. Normal containers do not return with vessel usually, when they are discharged. But because of high rental of special containers, more cycle operations are accomplished which include discharging laden containers, trucks transports to clients and unloading cargoes, empty containers return and being loaded on the previous vessel, higher turnover rate will be, furthermore, less rental. It is an optimization problem with many time

18 108 windows to maximize cycle operations in the required time and meet the unloading time requirements of clients in terms of minimize the operation costs (Tang Limin et al., 2009). DOCUMENTS INVOLVED During clearance, three copies of single document is used, out of the 3 copies one is kept by the customer as invoice, a copy is left with customs for further reference and a similar copy will be sent to the destination port where the end customer will receive the goods. The documents involved include: invoice, packing list and shipping bill. For customs clearance, Invoice and Packing list are needed. There will be two copies of shipping bill: the Exchange Control Copy(ECC) which is for exporter s bank and the other copy termed as export promotion copy is for the exporters. The other documents used are: shipping instructions (Fig.4.9), Invoice, Packing list (Fig.4.10), Cargo, Certificate of Origin, Generalised system of preferences (Fig.4.12) and Bill of Ladding. Certificate of origin(fig.4.11) is obtained from textile committee, Ministry of textiles and this certificate is for goods made in India certification. Generalised system of preference gets its input from Free Trade Agreements (FTA) and Foreign Trade Regulation (FTR) to record imports duty and concession in duty.

19 109 Figure 4.9 Sample of shipping instruction

20 110 Figure 4.10 Sample of packing list

21 111 Figure 4.11 Sample of certificate of origin

22 112 Figure 4.12 Generalised system of preferences certificate of origin

23 113 TIME INVOLVED IN TRANSPORTATION It takes nearly 8 to 12 hours for the truck to travel from Tirupur to Tuticorin and the travel from Tuticorin to Colombo through feeder vessel on sea is approximately 1 day. It takes two days transshipment at Colombo. To travel from Colombo to Europe via Red sea and Mediterranean sea, it takes a minimum of 14 to a maximum of 21 days (Table 4.2). Table 4.2 Time involved in Transportation Travel details Travel Time Tirupur Tuticorin + 1 day clearance 2 days Tuticorin Colombo 1 day Transshipment at Colombo 2 days Colombo to Europe 14 days to 21 days Import clearance at Europe 2 days Island Transport 2 days Thus, it takes nearly 23 to 30 days for transport of goods from Tirupur exporter to European customer via the route shown in Fig Figure 4.13 Route for Mutimodal transportation of Apparels from Tirupur to Netherlands

24 114 COST INVOLVED IN TRANPORTATION Since the volume of the vessel is large for accommodating the containers, transportation cost is less compared to other modes of transport and hence, exporters / customer prefer sea mode of transportation. The transportation cost depends upon two factors namely weight and volume of the goods. Among the weight and volume, whichever is higher is used for calculating the transportation cost. The formula used is Length * Breadth * Height (in cms) / 5000 * Number of carton packages. The various costs involved are: customs charges, handling charges, uploading and downloading charges DISCUSSIONS Even though there are methodologies to solve transportation problem, in reality, to apply these methodologies, softwares for specific countries, especially for developing countries need to be developed. Softwares such as Oracle Logistics Management (OLM). include few of the features of the multimodal transportation problem as a part of the enterprise resource planning packages. But they do not provide the answers for all the logistics decision queries such as logistics mode selection, selection of ports, direct delivery and optimal transportation strategy. Even the existing ERP packages that include the module for logistics planning are very expensive and a middle level small, medium enterprise cannot afford to procure them.

25 115 In Indian environment, the details on the roads, rail paths, air routes and sea routes are not completely digitized. Hence the software that may be available for the western world cannot be directly applied to Indian environment. There is no automation tool that supports decision making in logistics planning. Transport infrastructure are continuously upgraded and the real time information on blockages of transport and new enhancement of transports are not available over the web. While applying mathematical models and optimization techniques for the multimodal transportation problem, it has been found that there is no readymade modeling technique that is available which can be readily used to represent the features of multimodal transportation problem. For example, if a network structure is used to represent the MMTP, then between two nodes, there exist four different modes of transportation, thus leading to a maximum of four edges connecting two nodes representing the cities. In case of more than one flight or one train connecting two cities, this four edges may increase. Thus it becomes very complex to represent the MMTP in a simple network structure. When a representation omits significant effects, then important system behavior remains unexplained. Multimodal transport can be viewed as the chain that interconnects different links or modes of transport air, sea and land into one complete process that ensures an efficient and cost-effective door-to-door movement of goods under the responsibility of a single transport operator, known as Multimodal Transport Operator (MTO), on one transport document. Multimodal Transportation plays an important role in international

26 116 supply chain. Supply chain management involves material and information flows from raw material to final product retailing. Supply chain management involves strategic and operational decisions on location, production, inventory and transportation. Transportation is more than 30% of the logistics cost and hence it becomes necessary to operate efficiently and effectively. Thus, there is a need for transporting goods in an efficient and effective way. Towards this mathematical modeling and optimization techniques are used.