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Essay: Optimizing transportation cost at the distribution side of the supply chain

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  • Published: 11 September 2015*
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The road transport mode serves as one of the key factors in the developmental process of any economy. While historically, the railways have played a dominant role in the overall transport system of many countries, the road transport mode has, over a period of time, come to occupy a pivotal role by virtue of certain inherent advantages. Most recent estimates give the road mode a share of nearly 63 per cent in freight movement compared to its share of just about 10 per cent in the early fifties. According to these estimates, this percentage share is likely to stabilize around 85 per cent.
Transportation in Retail is of two types:
Primary Transportation (Vendors to Distribution Centre) and Secondary Transportation (Distribution Centre to Retail Stores). The focus is primarily on the distribution side i.e., the secondary transportation which comprises of Fruits & Vegetables and FMCG goods to the Stores.
Fig-1: Flow chart of Transport in FMCG Sector
The aim of the assignment is to optimize the transportation cost at the distribution side of the supply chain which helps in substantial and sustained reduction of transportation costs through enhanced planning and continuous optimization ‘ on a strategic level, tactical level and an operational level. The approaches to reduce transportation cost range from long-term optimization of transportation and network structures to short-term optimization of transportation capacities. Typically in a retail store, the following tasks are depending on distribution center and transportation:
Maintaining and managing the inventory: At the store, the store staff manages the inventory. To enable them to work efficiently, complete procedure for the handling of merchandise at store level needs to be documented. Responsibilities with respect to merchandise at the store level involve receiving and in-warding the goods. Once the merchandise is received at the store, the quantity and other details like colors, style and size have to be checked with the document accompanying the goods, to detect any discrepancies. In the case of most large retailer, using a hand held scanner, the merchandise is scanned and the system updated for the stocks received. Merchandise may be received at the store from a Central Warehouse, a Regional Distribution Center, from a supplier or from another store
Managing Receipts:
1) Receiving the Merchandise
The truck with the merchandise comes to the store two times a day. The wet merchandise arrives in the morning and the dry merchandise usually arrives in the afternoon time. The truck comes with a trip sheet with seal numbers provided by regional distribution centre. The store staff has to check whether the door lock seal in the truck is tampered or not and also the number is matching with the trip sheet. While the truck leaves, the store staff has to seal the door lock with the number provided in the sheet. For example, the trucks coming from the distribution centre and connect two stores, have three seal numbers. The first seal number is for DC to first store, the second seal number for first store to second store. Then the third seal number is for the second store to DC. The truck comes along with helpers to unload the merchandise and keep it in stores. Usually the truck waits in the store till all the merchandise is unloaded, verified and signed.
2) Checking the Merchandise
In this process the correct merchandise and the quantities are checked. The merchandise from the DC comes with a HU (Handling Unit) number. The verification is done either using HHT (Hand Held Terminal) or manually through the invoice document. By using the HHT, the merchandise is scanned and the ERP system is automatically updated with the physical quantities. The other method of validation is invoice method in which the merchandise is directly checked with the invoice which comes along with the truck. Micro counting is also done by opening the box if in case mixed merchandise is packed in it. Weight checking is also done for wet merchandise. After these validations, the ERP system is updated manually. Once all the merchandise is validated, the documents are signed and sealed on behalf of the store along with the truck driver. After this the truck moves to its next destination.
A warehouse as the name implies is a ‘house for wares’. It’s utilized for the temporary storage of the goods before they are dispatched further. Distribution center is a special type of warehouse which been designed to fasten the flow of goods and avoid unnecessary storing goods. Objectives of Warehouse:
‘ Smoothing ‘ Regular Flow of Goods
‘ Safe Custody of Goods
‘ Consolidation
‘ Break Bulk
‘ Cross Docking
‘ Value Added Services
‘ Managing Seasonal Supplies or Consumption
‘ Supply and Product Mixing
Logistics is the management of the flow of goods between the point of origin and the point of consumption in order to meet some requirements for example, of customers or corporations. The logistics of physical items usually involves the integration of information flow, material handling, production, packaging, inventory, transportation, warehousing, and often security.
Retail Logistics
It is often taken for granted that products will be available to buy in the shops. The cornucopia of goods that is available in a Supermarket or a department store sometimes means that we forget how the products were supplied.
Physical distribution and materials management have been replaced by logistics management. Elements of logistics are remarkably expensive, if not controlled effectively. Holding stock or inventory in warehouses just in case it is needed is a highly costly activity. The stock itself is expensive and might not sell or could become obsolete. Warehouses and distribution centers generally are expensive to build, operate and maintain. Vehicles to transport goods between warehouses and shops are expensive, in terms of both capital and running costs. There is thus a cost imperative to making sure that logistics is carried out effectively and efficiently, through the most appropriate allocation of resources along the supply chain. At the same time, there can be service benefits. By appropriate integration of demand and supply, mainly through the widespread use of information technology and systems, retailers can provide a better service to consumers.
The goal of the case study is to reduce transportation cost by optimizing the distribution network. This is done by studying the store requirements, store routes, vehicle capacity, warehouse operations and store sales data. A major retail store is approximately 3000’4000 square feet and caters to a catchment area of 2’3 km across the city. Truck routing and scheduling form an important criteria to minimize transportation cost and increase truck utilization.
Distance matrix
In mathematics, computer science and graph theory, and a distance matrix is a matrix (two-dimensional array) containing the distances, taken pairwise, of a set of points. This matrix will have a size of N??N where N is the number of points, nodes or vertices (often in a graph is created for the distribution network in the secondary transportation. Based on the distance matrix, clustering of stores and route optimization is done. Round trip distance and turnaround time for the optimized routes are studied.
Square feet analysis
Sales per square foot analysis is done to find out the important stores in terms of space utilization in stores .Sales per square foot is simply the average revenue a retail business creates for every square foot of sales space. Sales per square foot is used by businesses and analysts alike to measure the efficiency of a store’s management in creating revenues with the amount of sales space available to them
Retention time
Average retention time of the truck in each store is calculated from the trip sheets. Recommendations are given so that truck turnaround time will be minimum and number of trips can be increased per truck. This in turn increases the truck utilization and contribution margin.
Truck Volumetric Analysis
The various trucks operated in the retail distribution fleet are studied to identify the list of vehicles with its model, weight capacity and average number of handling unit (HU) that can be loaded in the truck. Batch plan is prepared based on the vehicle capacity and load.
Vehicle Routing Problem
The Vehicle Routing Problem (VRP) is a combinational optimization and integer programming problem seeking service to a number of stores with a fleet of vehicles.
1. Vehicle Routing Problem with Pickup and Delivery (VRPPD): A number of goods need to be moved from certain pickup locations to other delivery locations. The goal is to find optimal routes for a fleet of vehicles to visit the pickup and drop-off locations.
2. Vehicle Routing Problem with LIFO: Similar to the VRPPD, except an additional restriction is placed on the loading of the vehicles: at any delivery location, the item being delivered must be the item most recently picked up. This scheme reduces the loading and unloading times at delivery locations because there is no need to temporarily unload items other than the ones that should be dropped off.
3. Vehicle Routing Problem with Time Windows (VRPTW): The delivery locations have time windows within which the deliveries (or visits) must be made. In computational complexity theory, this problem is known to be NP-hard.
4. Capacitated Vehicle Routing Problem (with or without Time Windows): CVRP or CVRPTW. The vehicles have limited carrying capacity of the goods that must be delivered.
5. Vehicle Routing Problem with Multiple Trips (VRPMT): The vehicles can do more than one route.
Route Optimization Analysis
The basis for route optimization is the use of models to describe the transport network that needs to be planned. When building a model, the scope of the overall network needs to be defined, ensuring that all the data is included. The model has a number of components such as products, vehicles, and personnel.
Products: The product moves from one geographic location to another, often described as the origin and the destination. The product will be defined by its weight and its volume, which are important factors.
Vehicles: A transportation network within the model can be divided into a number of sectors which is represented by a vehicle, which moves between an origin and a destination location.
Each vehicle may have different attributes such as volume or weight capacity, loading times, cost per mile, and vehicle limitations, i.e. speed of the vehicle.
Personnel: The personnel assigned to the model have characteristics that are governed by the type of work they perform.
VrpCalc – Vehicle Routing Software:
In order to plan, optimize and schedule goods delivery to stores with respect to weight of cargo for each store, vehicle capacity and time requirements, this program is helpful. Program can handle several identical vehicles for serving required number of stores. It plans route for each vehicle with respect to vehicle capacity, weight, speed and time requirements for visiting chosen locations and tries to optimize total ton kilometre for all vehicles.
‘ Distance Matrix ‘ The distance from distribution centre to all stores and also the distance between stores to store is calculated through Google maps. Based on these distances, a 47 x 47 matrix is created. VrpCalc works from this distance matrix.
‘ To plan routes, user chooses points in which stores are located and number of vehicles to serve them.
Retention Time Analysis
‘ Retention time in stores is the time duration between the arrival time of truck to the store and exit time from store. It includes unloading time of the stock from vehicle. Retention time should be as low as possible.
Truck Utilization Analysis
‘ Truck utilization is defined as the percentage of truck capacity that is filled with goods. Based on the store load, batch plan is made. It comprises of vehicle plan, route plan and load plan is as explained in previous sections. Batch plan contains the details of sequence of store delivery and total number of crates in the respective truck. Batch plan for distribution centre is studied and route optimization is validated. Batch plan primarily focuses to meet on-time delivery as the goods carried are perishable. Truck utilization is calculated from the truck capacity and load allocated to it. And the truck utilization for each truck is calculated and the average truck utilization for the particular route is found.
Correlation Analysis
Correlation analysis measures the relationship between two items. The resulting value is called correlation coefficient. Correlation coefficient(r) is a measure that determines the degree to which two variables are associated. Here correlation analysis has been done to find the relationship between store area, store retention time and average number of crates demanded for each store.
Vendor Analysis
The logistics cost include the total of warehousing/distribution cost, outbound transportation cost, inbound transportation cost, inventory carrying cost and costs involved in reverse logistics/ returns cost. The total logistics cost should be around 4% of COGS (Cost of Goods Sold). The transportation charges is obtained by fixed cost, total variable cost, loading and unloading charges, toll charges and deductions due to penalty applicable because of transit delays and noncompliance. The total variable cost is determined by the total distance travelled by the vehicle.
Criteria for selection for 3PL
S.No Selection Criteria Relevance in logistics outsourcing
1 Cost of service It refers to the total cost of logistics outsourcing, which should be minimum.
2 Financial
Performance A sound financial performance of the provider ensures continuity of service and regular upgrading of the equipment’s and services, which are used in logistics operations.
3 Operational
Performance A good operational performance of the provider is reflected by measures such as delivery performance, performance-monitoring capability, statistical data reporting to the user, fault diagnosis capability, detailed accounting information system, security, responsiveness, confidentiality of sensitive data, etc.
4 Reputation of the company The reputation of a provider refers to the opinion of the people about how good they are in satisfying the needs of the customer
5 Long-term Relationships It includes shared risks and rewards, ensure cooperation between the user and the provider.
With the above shown analysis and experiments following recommendations are proposed.
Recommendation 1 ‘ Increasing the store space utilization: In stores, certain products like cold drinks, baby sanitary products, staples etc. are stocked inside the store saleable area rather than the back office. This is an indication of improper planning of storing goods. This arrangement reduces the total saleable area of the store which in turn affects the overall sales per square foot of the store. Reason behind this issue is due to lack of space and improper arrangements of goods in the back office of the store.
Per square foot sales is the average revenue created for every sales per square foot. It is the measure of efficiency in store management in creating revenues. Rearranging and storing all the goods in the back office, lot of space can be saved in the store. We can utilize the area available within the store for goods having high profit margin, which gives higher gains to the overall profitability of the store. This space can further be utilized for promotional activities of products in demand or seasonal products or visual merchandizing and also storing fast moving items so as to increase the overall sales. This would further increase the sales per square-foot of the store which increases the efficiency of the store management.
Recommendation 2 ‘ Increasing the number of unloaders per truck: There are certain stores whose daily requirements are high. The crate volume handled in such stores is more than that of other stores. Therefore the retention time of the truck is usually longer. The trucks scheduled to such stores cannot be clustered with other stores to avoid late delivery. In order to club more stores in a route so that it will be in one schedule, the retention time has to be as low as possible. The retention time can be lowered by employing additional unloaders/helpers along with the existing personnel. Usually two unloading personnel are accompanied with the truck.
Recommendation 3’ Avoiding the investment cost in buying new truck: On-time delivery can also be achieved by deploying new trucks. But as mentioned in Recommendation 2, retention time per truck can be considerably reduced by employing additional unloading personnel. More stores can be clubbed in one route if retention time is reduced. Therefore the necessity of buying new trucks can be avoided.
Recommendation 4 ‘ Incorporating a Fleet maintenance team: We need a separate fleet maintenance team to take care of the fleets so that vehicles don’t breakdown.
Recommendation 5 ‘ Re-survey of the routes for revising distance sheet: Stores have to revise the distance sheet by doing a new route study. The distance shown in Google Maps differs from the distance sheet followed by the stores. Location of distribution centre and the stores are identified in Google Maps. The possible available routes between the distribution centres to stores are identified and analysed. All distances are calculated in the unit of kilometres. Shortest distance with least running time shown by Google Maps is taken for analysis. The two way distance between the distribution centre and store is calculated. The total distance is calculated by adding all the two way distance and is compared with the calculations by store.
‘ World-Class Warehousing and Material Handling ‘ Edward Frazelle
‘ www.google.com
‘ http://www.economywatch.com/business-and-economy/indian-retail-industry-size.html
‘ http://shobb.narod.ru/vrpcalc.html
‘ http://en.wikipedia.org/wiki/Vehicle_routing_problem

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