LSCM U4 NOTES MAR2022_23 - Copy.pdf

ǁ• PVPSIT •ǁ Logistics and Supply Chain Mgt. (LSCM) – U4
ǁ• Dept. of ME •ǁ chkishore@pvpsiddhartha.ac.in >>> 7382219990
UNIT- IV: Sourcing and Transporting: sourcing decisions and
transportation in supply chain - infrastructure suppliers of transport services
- transportation economics.
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❖ Sourcing and Transporting: Sourcing is an upstream part of the supply chain: It's
the process of strategically choosing the right services and goods that a company needs
to run their business. Sourcing is also the act of buying goods, including seller selection,
contract negotiation and measuring the long-term performance of suppliers.
Transportation in a supply chain refers to the movement of products from one location
to another, which begins at the start of the supply chain as materials make their way to
the warehouse and continues all the way to the end user with the customer's order delivered
at the doorstep.
Strategic sourcing is a holistic approach to developing channels of supply that considers all
activities within the procurement cycle to secure the best possible total cost, rather than just
the lowest purchase price for those goods.
Strategic sourcing allows businesses to consolidate their purchasing power to achieve the
lowest possible total cost of ownership and minimise risk to the supply chain.
❖ Importance of sourcing:
➢ Adopting sourcing can bring significant benefits to businesses in the manufacturing
industry, the most noticeable being cost savings. Sourcing suppliers with this method and
continuing to analyse the evolving market means that businesses can ensure they are always
achieving high cost savings.
➢ This sourcing method also allows companies to align their component sourcing with their
business goals, which increases efficiency and minimises risk within the supply chain. The
process of analysing suppliers on more than just their initial product cost also means that
these business goals can be matched with the best possible suppliers in order to achieve
them, creating high value at low cost.
➢ At the heart of strategic sourcing is the opportunity to build long-term relationships with
suppliers. Because suppliers are selected based on their capability and their compatibility
with the business’s needs and goals. This dependability leads to more benefits than just
getting the right components at the time they are expected; and the supplier to continue the
pattern of reliability so they can ensure future business.
❖ Functions of Sourcing :
➢ Acquiring raw materials
➢ Decisions on outsourcing or in-house performance
➢ Supplier selection
➢ Contract negotiation—request for quote (RFQ), request for proposal (RFP) and
request for bid (RFB)
➢ Product design & Product quality
➢ Manufacturer collaboration
➢ Procurement
➢ Understanding cost of goods sold (COGS)
➢ Inventory controls/turnover
➢ Financial impacts

❖ The process / steps/ components of Sourcing decision:
➢ Profile the product category in as much detail as possible, including the spending patterns
and departments involved.
➢ Analyse the market, identifying potential new suppliers, both local and global.
➢ Develop a sourcing strategy based on the goals of the business, deciding where to buy
whilst minimising risk and cost.
➢ Select the sourcing process by defining your request for proposal criteria for soliciting bids.
➢ Negotiate with and select suppliers after reducing to only the valid bids.
➢ Work with the new suppliers to integrate them into the existing processes, using the
communication plan to integrate improvements to specifications or processes.
➢ Benchmark the current state of the category by tracking performance metrics and the
effectiveness of the sourcing plan. This leads back to step one as the marketplace evolves.
❖ Sourcing-related metrics:
Sourcing decisions directly impact the costs of goods sold and accounts payable. The
performance of thesource also impacts quality, inventories, and inbound transportation
costs. A manager should track thefollowing sourcing-related metrics that influence supply
chain performance:
➢ Days payable outstanding – measures the number of days between when a supplier
performed asupply chain tasks and when it was paid.
➢ Average purchase price – measures the average price at which a good or service was
purchasedduring the year
➢ Range of purchase price – measures the fluctuation in purchase price during a specified
period
➢ Average purchase quantity – measures the average amount or purchased per order
➢ Supply quality – measures the quality of product supplied
➢ Supply lead time – measures the average time between when an order is placed and when
theproduct arrives
➢ Fraction of on-time deliveries – measures the fraction of deliveries from the supplier that
wereon time
➢ Supplier reliability – measures the variability of the supplier’s lead time as well as the
deliveredquantity relative to plan
❖ Impact of sourcing decisions on supply chain:
Effective sourcing ensures quality and cost-effective manufacturing and also maintains
control of inventory levels and overhead costs. Sourcing is an important aspect of your supply
chain management (SCM) strategic planning—done right it improves efficiencies and lowers
risk in your supply chain.
➢ Sourcing is an upstream part of the supply chain: It’s the process of strategically
choosing the right services and goods that a company needs to run their business.
Sourcing is also the act of buying goods, including seller selection, contract negotiation
and measuring the long-term performance of your suppliers
➢ Sourcing greatly impacts an organization’s operations, so establishing long-term
relationships will help companies gain a competitive advantage. Because after all,
suppliers impact a company’s operations on many levels: finances, inventory levels,
quality of goods and timely arrival. A stable sourcing process ensures your inventory
levels will meet market supply and demand.

❖ Transportation in a supply chain: Transportation in a supply chain refers to the
movement of products from one location to another, which begins at the start of the
supply chain as materials make their way to the warehouse and continues all the way to the
end user with the customer's order delivered at the doorstep.
❖ The role of transportation in supply chain management:
➢ Transportation methods ensure deliveries to and from your facility flow smoothly and
arrive at their designated destinations on time.
➢ Because of the importance of transportation to business’s success, it’s vital to include this
factor in supply chain management strategy. In fact, it is so important that transportation
is considered one of the three primary components of supply chain management.
➢ Effective transportation management is often the competitive differentiation for a
company and should be included in any supply chain management strategy.
➢ Transportation in a supply chain refers to the movement of products from one location to
another, which begins at the start of the supply chain as materials make their way to the
warehouse and continues all the way to the end user with the customer’s order delivered
at the doorstep.
➢ Because of the importance of transportation, warehouse managers should examine
transportation within their supply chains.
➢ Ultimately, this is the only way to achieve lower total costs for a model where
transportation can account for as much as 60 percent of total operational costs, a
significant portion of a company's supply chain costs.
❖ Supply chain transportation risks to consider:
➢ Modern supply chain transportation managers deal with more risks than ever before, so
mitigating these risks is key to keep a supply chain moving with minimal delays. Recent
risks facing the transportation industry include driver shortages, cyberattacks and a
deteriorating infrastructure, to name a few.
➢ According to the American Trucking Association,with fewer drivers, greater demand will
be placed on the drivers still on the road, which could increase the risks of fatigue-caused
accidents.
➢ It is essential for companies to stay up to speed with technological advances in order to
remain competitive. With an explosion of vehicle technology in recent years (including
automation and internet-connected sensors), the industry is more exposed to a new wave
of risks, such as cyberattacks by hackers, so it’s important drivers use the latest in security
tactics and software.
➢ Another growing risk in the transportation field is the continued decline of America’s
roadways and transportation infrastructure. From crumbling bridges and roadways to
increased traffic congestion on the rails and in the air, delays can occur anywhere. As a
result, vehicles are more likely to consume additional fuel and incur damage, thus
requiring more frequent maintenance and repairs.
➢ Supply chain’s success depends on a strategic use of appropriate transportation. An
example would be to adopt a responsive transportation system, which uses cross
docking—exchanging a product between trucks so that each truck delivers products from
different suppliers to the designated destinations. In the end, cross docking helps lower
overall costs.
➢ To help manage these and other risks and to increase performance and reliability,
companies need to enhance visibility and transparency across the transportation supply
chain and use a well-executed transportation management system. Learn more about the
modern supply chain and how transportation factors into supply chain management.

❖ Infrastructure suppliers of transport services:
➢ A supplier, also known as a shipper or consignor, is a person or a company,
responsible for producing and organising the transport of goods from one point to
another. The party who bears the responsibility of transportation and coverage of the
freight costs is determined based on the Incoterms agreed between the supplier and
buyer. Unless it is differently stated in the transport contract before the shipment.
➢ Infrastructure of transport: The physical components on transport infrastructure
include bridges, tunnels, pavements, rail tracks, culverts, wharfs, aprons and pipes.
These elements are located on the ground or above or below ground level – but always
associated with or attached to the ground.
➢ Transport infrastructure is global and is critical for the economic and social well-
being of a modern society, by providing for personal mobility, accessibility to services
and the movement of goods and facilitating economic activity and social interaction.
➢ The infrastructure includes ports, harbours and airports, road, rail and pipeline
networks, the depots and facilities associated with these networks and the public and
private transport services that operate on them.
➢ Brief History of Transportation Systems:
1) In the late 18th century, overland transportation was primarily by horse, and water and
river transportation was primarily by sailing vessel.
2) As a result of the distances between cities and the cost to maintain roads, many
highways in the late 18th century and early 19th century were actually privately
maintained turnpikes (Toll roads)
3) Early 19th century was the impetus for the building of canals to move goods rapidly to
market.
4) The rapid expansion railroad transportation in the 1830s to 1860s ended the canal
boom and provided a timely, scheduled year-round mode of transportation.
5) In the 1860s, railroads expanded rapidly to serve industries and the growing cities.
6) From 1880s state governments determined who could provide transportation services
and the price they could charge for their services.
7) Later Freight railroads also began to capture a significant portion of the business.
8) After 1970s Air cargo deregulation, creation of regulatory environment favorable to
the business economics of the railroad and trucking industries takesplace.
9) In the 1990s, the increase in foreign trade and intermodal ocean container shipping led
to a resurgence of freight railroads.
❖ Influence of Transportation on supply chain decisions:
➢ Transportation refers to the movement of product from one location to another as it
makes its way from the beginning of supply chain to the customer.
➢ Transportation is an important supply chain driver because products are rarely
produced and consumed in the same location.
➢ Transportation plays a central role in seamless supply chain operations, moving inbound
materials from supply sites to manufacturing facilities, repositioning inventory among
different plants and distribution centers, and delivering finished products to customers.
➢ Effective transportation management keeps your inventory lean, thereby making the
flow of stock through your warehouses much more smooth and efficient.
➢ Enhancing the flow of goods in and out of your warehouse can help you reduce costs on
storage and transportation while reducing overall lead time.

➢ The transport of people or
goods from one place to another
depends on many factors:
distance, physiography, routes
and means, market, climate,
products, time, cost and
duration.
➢ Transportation decision aids
supply chain management by
providing the necessary data to
make informed decisions about
shipping routes, carriers, and
modes. This information can help to optimise the supply chain and reduce costs.
➢ Improves supply chain: Effective transport improves a supply chain by decreasing (if
not avoiding) the waste of materials and time. Regulates operation costs:
Transportation in a supply chain can be used to control costs in a business operation.
Freight and fuel costs take up most of the logistics budget.
➢ Transportation plays a key role in supply chain design, strategy development, and
total cost management. Motor carrier cost is highly variable. All modes of
transportation provide the same basic service. A bill of lading is nonnegotiable.
➢ Transportation plays a major role in increasing gross domestic product (GDP).
❖ key types/ modes of transportation:
AIR:
➢ Air freighting is commonly used by companies who work with short lead times, or advanced
service levels.
➢ Air transportation is best suited for small, high- value items or time sensitive emergency
shipments that have to travel a long distance.
➢ Air carriers normally move shipments that have high value but light weight .

➢ Advantages:
o It is the fastest mode of transport.
o It is useful in transporting goods to the area, which are not accessible by any other means.
o Reduces lead time.
o Improved service levels
➢ Disadvantages:
o It is relatively more expensive mode of transport.
o It is not suitable for transporting heavy and bulky goods.
o It is not suitable for short distance travel.
WATER:
Water transport uses ships and large commercial vessels that carry billions of tons of cargo.
• Water transport is used primarily for the movement of large bulk commodity shipments and
it is the cheapest mode for carrying such load.
• Water transport is particularly effective for significantly large quantities of goods that are
nonperishable in nature and for cities or states that have water access.
• Inland Water ways: Refer to using inland water bodies like rivers, canals, backwaters,
creeks and etc.
• Ocean Waterways: Navigation along the coastal places and foreign countries take places
with the help of ships.
• Advantages:
# It is a relatively economical mode of transport for bulky and heavy goods.
# The cost of maintaining and constructing routes is very low, some are naturally made.
# It promotes international trade.
• Disadvantages:
# The depth and navigability of rivers and canals vary which affect different transport vessels.
# It is a slow mode of transport and therefore not suitable for transport of perishable goods.
# It is adversely affected by weather conditions.
# Sea transport requires large investment on ships and their maintenance.
SURFACE:
➢ ROAD TRANSPORTATION:
• Road transport offers a complete freedom to road users to transfer the vehicle from one lane
to the other and from one road to another according to the need and convenience.
• The flexibility of changes in location, direction, speed, and timings of travel is not available
to other modes of transport.
• Advantages:
# It is a relatively cheaper mode of transport as compared to other modes.
# It is a flexible mode of transport as loading and unloading is possible at any destination. It
provides door-to-door service.
# It helps to carry goods from one place to another, in places which are not connected by other
means of transport like hilly areas.
• Disadvantages:
# Due to limited carrying capacity road transport is not economical for long distance
transportation of goods.
# Transportation of heavy goods or goods in bulk by road involves high cost.

➢ RAIL:
• Rail transport uses freight trains for the delivery of merchandise. Freight trains are usually
powered by diesel, electricity and steam.
• Rail is suited for bulk shipment of products like fertilizer, cement, food grains and coal etc.
from the production plant to the warehouses.
• Advantages:
# It is relatively faster than road transport.
# It is suitable for carrying heavy goods in large quantities over long distances
# Cost effective.
• Limitations:
# It is relatively expensive for carrying goods over short distances.
# It is not available in remote parts of the country.
# It provides service according to fixed time schedule and is not flexible for loading or
unloading of goods at any place.
➢ PIPELINE:
• Pipeline is used primarily for the transport of crude petroleum, refined petroleum products and
natural gas.
• It include a significant initial fixed cost in setting up the pipeline and related infrastructure.
• Pipelines are not flexible and this scope is limited with respect to commodities.
• Unable to transport a variety of materials
• Advantages:
# Supply through pipelines is very reliable.
# Reduction in cost of transportation
# In case of underground pipelines, the land still be used for agricultural use
• Disadvantages:
# Illegal pilferage and wastage due to leak is a problem in pipelines
# In case of chemicals and petroleum pipelines any leak can cause a accident.
# Like other big linear structures patrolling and maintenance of pipelines is a huge task.
PACKAGE CARRIER
➢ Package carriers are transportation companies which carry small packages. Examples: FedEx,
UPS, DHL. etc.
➢ Package carrier use air, truck and rail to transport the goods. Packages carriers also provide
other value added services that allow shippers to inventory flow and track order status,
shipper can proactively inform the customer about their packages.
➢ Package carrier is suited for e- business.
INTERMODAL TRANSPORTATION:
➢ Intermodal Transportation is use of more than one mode of transport for the movement of
shipment from origin to its destination.
➢ Intermodal operation is used two or more mode of transport to take the advantage of inherent
economies of each and thus provide the integrated service at lower cost.
➢ For example: truck/water/rail.

❖ Factors Influencing Transportation in Supply Chain Management:
➢ Geography: Attributes related to distance are fundamental as distance is a function of energy
and effort. This is impacted by the physiography, such as the landscape and the hydrography
requiring detours and mitigation (e.g. bridges and tunnels). This conveys a level of accessibility
to the transport market (supply and demand), implying differences in transport costs according
to the location and position within the transport system.
➢ Type of product: The characteristics of what being transported impacts costs. For passengers,
amenities have to be provided, such as waiting areas and levels of comfort at terminals and
inside conveyances. Product differentiation takes the form of classes, such as economy and
business, related to pricing levels as a function of comfort and amenities. For freight, product
differentiation is substantial as different goods require different forms of storage and stowage
during transport. This is particularly the case with fragile and perishable goods, which result in
higher transportation costs.
➢ Economies of scale: Shipment size can result in different costs as the larger the shipment, the
less cost per unit transported. Regional services by narrow-body planes have a higher cost
structure per passenger-km than long-distance services by wide-body planes. Economies of scale
are particularly prevalent in maritime shipping, resulting in substantial cost reductions when
deploying larger ships. For movements such as commuting, this cost commonly takes the form
of longer travel times in one direction.
➢ Imbalances: Traffic flows are commonly imbalanced, implying that costs in one direction are
higher than in the other. In a commercial system, full transportation costs must be assumed for
return (backhaul) trips, so higher flows in one direction subsidize the lower flows in the other.
➢ Infrastructure: Each transport infrastructure conveys a capacity and operational conditions,
which are related to its cost structure. More extensive infrastructure (e.g. wider roads, pavement)
can be more expensive to build but result in lower transportation costs when prone to less
congestion and higher operating speeds. A similar trend applies to terminals.

➢ Mode: Each transportation mode has a distinct capacity and operating conditions, which involve
a specific cost structure. While trucking offers flexibility and accessibility, it comes with a
higher cost structure than rail. The same applies to traveling individually (e.g. by car) compared
to traveling collectively (e.g. by public transit). Wages, fuel, and insurance, which are the main
cost components, vary by type of vehicle.
➢ Regulations: Specific operational conditions (e.g. speed limits, workforce certification, permits)
and safety considerations (construction, operations) are associated with a transportation cost
structure. Regulations may also relate to barriers to entry and competitive behavior (e.g. anti-
trust regulations not allowing a merger or an acquisition to proceed).
❖ Transportation economics:
Transportation Economics deals with the application of demand and cost principles to
transportation.
➢ Cost Factors: The primary factors influencing transportation costs pricing are distance,
weight, and density (Figure: a, b, c).
# Distance: As distance traveled
increases, variable expenses such
as labor, fuel, and maintenance
increase.
Transport cost α Distance
# Weight: The transport cost per
unit decreases as the load weight
increases. This is as a result of
economies of scale as a result of
spreading the fixed costs over
more weight. That is why it is
always best to combine small
loads into larger ones where
possible, up to the capacity of the
vehicle carrying the load.
# Density: This is the combination of weight and cubic volume. Vehicles have both weight and
cubic capacity and tend to cube out before weighting out. So, shipping higher-density products
enables the cost to be spread over more weight versus a lighter load such as paper cups, where
you are shipping a lot of air for your money. As a result, higherdensity products are charged less
per hundredweight or CWT (that is, per hundred pounds; one of the common forms of
transportation pricing, which is discussed shortly).
# Stowability: Similar to density and is also a factor. It refers more to the ease of storage, such
as when shipping items are easily stacked or nested.
# Other factors: Can includes factors such as the amount of handling necessary (smaller
volumes typically require more handling), type of handling (full pallets can be handled with
more automated equipment versus individual cases, which are handled manually in most cases),
liability (can be a function of the value or nature of the product), perishability, and market
factors such as market (origin and destination) volume and balance, which refers to amount of
freight flowing both ways. Finally, an empty return or backhaul can be costly to the carrier and

thus may affect rates into an area that has very little freight coming out. (For example, because
there is very little manufacturing in Florida, rates into the state may be high because carriers
have a hard time finding freight for the return trip.)
➢ Shipping Patterns:
There are a variety of shipping patterns, as shown in Figure. A shipment may go direct from
the origin point to destination or make one or more stops in between. This will depend on the
primary cost factors mentioned above (for example, truckloads (TL) versus less-than-truckload
(LTL).
truckloads (TL) less-than-truckload (LTL) upper and lower control limits (UCL and LCL)
➢ Cost Elements:
Four major elements, the principles, are the same for all modes:
• Line haul: Carriers have basic costs to move product from point to point that include fuel,
labor, and depreciation. The costs are pretty much the same per mile whether the container is
full or empty, so the line haul cost is total of these costs divided by the distance traveled.
• Reconsignment: This involves changing the consignee while the shipment is in transit and
is used commonly in industries where goods are shipped before they are sold.
• Diversion: The changing of the destination of a shipment while in transit, which is often
used in conjunction with reconsignment.
• Pooling: This allows a shipper to use a less-costly container or truckload rate by
consolidating smaller shipments going to one destination and one consignee into one
pool car or truck.
• Stopping in transit: This allows the shipper to use a full container or truckload rate and
drop off portions of the load at various intermediate destinations. The shipper is invoiced
for a stop-off charge for each stop, which is usually a lot less than shipping the load at less
than car or truck load rates.
• Transit privilege: This allows for the shipper to unload a car or trailer, process the
shipment, and then reload and ship the processed product to its final destination using a
through rate (that is, a single transportation rate on an interline haul made up of two or more
separately established rates).
• Pickup and delivery: These costs depend on the time spent picking up and dropping off
cargo and not distance. There is a charge for each pickup, so it is useful to consolidate
multiple shipments to avoid multiple separate trips.
• Terminal handling: These costs depend on how many times the shipment must be
handled. In the case of full truckloads (TL), there is no terminal handling because they go
directly to the customer.
Types of Shipping Patterns

❖ Effects of Deregulation on Pricing:
Since deregulation, transportation rates or prices are negotiated like other commodities. Some
changes as a result of deregulation by mode are as follows:
➢ Motor and water carriers: Rate and tariff-filing regulations were eliminated except for
household and noncontiguous trade for domestic water transportation.
➢ Air carriers: As mentioned earlier, economic regulation of air carriers was eliminated in
1977. However, safety regulation remains in force.
➢ Rail carriers: This is still the most regulated of the transportation modes. There has
been, however, complete deregulation over certain types of traffic: piggyback and fresh
fruits.
➢ Freight forwarders and brokers: Both are required to register with the Surface
Transportation Board (STB).
➢ Pricing Specifics:
Full container or truck load rates may be expressed in a flat dollar or mileage rate, and
less than containers or truckloads may be a discount off of the class rate from the tariff.
In general, prices (known as rates) are expressed in either dollars (whole or per mile) or
cents per hundredweight (CWT) and are contained in tariffs, which can be in hard copy
or electronic form.
➢ Freight Classifications: The classification of an item must first be determined. The
classification isbased on the cost elements of an item mentioned earlier: density,
stowability, ease of handling, and liability.
➢ Rate Determination: After the class is identified, the rate must be determined and is
based on the origin and destination. There is usually a minimum charge and various rates
at weight breaks as the shipments increase in size.
➢ Bill of Lading: A bill of lading (B/L) is a contract between the carrier and the shipper
issued by a carrier, which details a shipment of merchandise and gives title of that
shipment to a specified party (that is, a receipt) with specified timing.
➢ Freight Bills: Freight bills are the carrier’s invoice for charges for a given shipment. The
credit terms are specified by the carrier and can vary extensively.
➢ Freight Claims: A freight claim is a document filed with the carrier to recover monetary
losses due to losses, damage, delay, or overcharges by the carrier.
OOOOO # *** # OOOOO
LSCM Questions_ UNIT4:
1. Explain the process / steps/ components of Sourcing decision. (CO4)
2. Define sourcing in logistics management. Explain importance of sourcing. (CO4)
3. How does transportation influence supply chain decisions? (CO4)
4. What are the various key types of transportation in SCM? (CO4)
5. What is Transportation Economics? What are the factors that influence the transportation
cost (CO4)
6. What are various Effects of Deregulation on pricing of transportation? (CO4)
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