Integral Logistics Management — Operations Management and Supply Chain Management Within and Across Companies

3.1.5 Design Options for Global Transportation Networks

Intended learning outcomes: Differentiate between direct transport and indirect transport. Present features such as size or weight of the delivery, possibility of using an existing transport network, and need for merged transport. Explain design options for global transportation networks. Describe some company cases.



Production as well as distribution networks for physical products must generally be designed in careful consideration of the possibilities for transporting the goods. For each means of transport, e.g. lorry, railway wagon, ship or aircraft, the infrastructure must be available in terms of the corresponding mode of transport, i.e., road, rail, water, or air; this means a network of transport channels with the necessary interchanges, i.e., loading yards, railway stations, harbors, or airports.

Depending on costs and availability of a company’s own means of transport, independent carriers may be used in the transportation network. A third-party logistics (3PL) provider offers product delivery services. It may provide added supply chain expertise ([APIC16]). Such logistics services comprise classical services such as transport, reloading, and storage, but also secondary packaging, the insertion of an information sheet, simpler assembly or repair work, and the acceptance of returned products.[note 301]

In a first approach, it is possible to distinguish two fundamental types of transport networks.

In the case of direct transport, the transport between two sites takes place without changing the primary means of transport, i.e., the means of transport into which the load unit was directly loaded. In cases where a lorry drives independently onto a train (known as a “rolling motorway”) or a ferry in the form of a secondary means of transport, this still counts as direct transport, i.e., there is no change in the mode of transport. 

In the case of indirect transport, the transport between two sites uses more than one primary means of transport. Therefore it is possible to exploit the individual strengths of different means of transport for the individual transport segments, and thereby increase their utilization levels. At the same time, however, the cost and time for reloading the load units from one means of transport to another (possibly also involving a change in mode of transport) at transshipment centers — i.e., distribution centers, the purpose of which is solely to reload goods — must be factored in.

The following features for designing transportation networks have proved to be important:

  • Size or weight of the delivery in kilograms or cubic meters: How do the suitable means of transport match up to this?
  • Possibility of using an existing transport network: Can the delivery specify a means of transport that is already carrying deliveries between the point of dispatch and the recipient, and that is not yet at full capacity? This calculation could include means of transport that have a known timetable

Observation of activity in the field shows that these two characteristics correlate highly with each other: Large dimensions/high weight or a high possibility of using an existing transport network tend mainly to be served best by direct transport. In the opposite case, indirect transport is more advantageous. Both apply irrespective of the value density. For example, foam packaging and gravel are better transported directly, owing to their volume and weight, respectively. Diamonds, on the other hand, are better suited to indirect transport owing to their low volume and weight, by plane if greater distances are involved.

Two further characteristics for the design of transport networks that correlate with each other, but not with the previous pair, are:

  • Need for merged transport: To what extent will delivery be made together with products or service objects from another manufacturer or service provider? In the case of returns, to what extent must several products or parts of them be sent back to a number of manufacturers at the same time? To what extent must several service objects or parts of them be transferred to multiple service providers at the same time?
  • Customer tolerance time, as defined in Section 1.1.3.

If the need for merged transport is on the high side, or if there is greater customer tolerance time, different forms of indirect transport are advantageous.

As with production, distribution, or service networks, the two groups of features often stand in opposition to one another. Examples are

  • The transportation of very high-value goods (e.g., money, precious gems, or precious metals), or express transportation (e.g., for spare parts): low size or weight of delivery (in favor of decentralized service), however, low customer tolerance time (in favor of centralized service)
  • Regular deliveries to points of sale by a large whole­saler, on-line orders that are delivered to pickup sites, or regular transport of groups of people to events at specific locations: high size or weight of delivery (in favor of centralized service), however, high need for merged transport (in favor of decentralized service)

Again, a company must make a strategic decision, which some­times differs for each product family. The portfolio in Figure 3.1.5.1 shows, in addition to the two classical designs (direct or indirect transport), two possible mixed designs for the transport between two locations L1 and L2. The four possible designs lie in four sectors in a two-dimensional space, spanned by the dimensions that correspond to the two (conflicting) groups of features.

Fig. 3.1.5.1        Features of and design options for transportation networks.

The sector T1 describes the design option direct transport between two locations. It is bene­ficial if a (full) truckload lot — i.e., a single delivery of minimum size or minimum weight that is sufficient for the rate for a full load by the selected means of transport — is to be transported between two locations (e.g., the manufacturer’s warehouse and a pickup site). This can result in lower transportation costs. The means of transport can be provided from the dispatcher’s own fleet, or by (full-)truckload (TL or FTL) carriers — i.e., transportation compa­nies that bill for the full utilization of the means of transport.

Last mile delivery represents a challenge. In this case the distributor supplies products itself to a range of customers on a route, instead of using a package delivery company. As the delivery vehicles used on at least part of the route are equivalent to “LTL carriers” (less than truck­load), the transportation costs are correspondingly higher. Providing the distance between the distributor’s depot and the customer is short and the routing and scheduling are effective, this is countered by a very short delivery lead time that generally cannot be matched by a package carrier company. Examples here are delivery of daily provisions and the supply of medicines to pharmacies. When the service is provided at the location of the object (e.g., maintenance and repair of installed appliances), the service provider must resolve a similar problem in terms of optimum route planning.

The opposite sector T4 describes the transportation between two locations by a package carrier via a special distribution center: Third-party logistics (3PL) providers in particular may possess distribution centers that offer a service infrastructure that extends beyond traditional transportation services; for example, for in-transit merge, or merging products from several manufacturers. Instead of receiving multiple deliveries, customers need only receive one shipment, which reduces their costs for transportation, handling goods in and putting the orders together themselves. However, this is offset by the longer duration owing to the special distribution center, where additional costs are also incurred for the work involved in combining the products. An example of this is the delivery of computers that are merged from components from a range of manufacturers (e.g., processor from brand x and screen from brand y).

The intermediate sector T2 describes the transportation between two sites by a package carrierThis option is selected if the size or weight of the delivery is too small or low to justify ordering transport specifically for this delivery. The package carrier helps in collecting additional shippers and therefore spreading the burden of costs for the full transport over a broader customer base. Such package carriers can also access their own network of transshipment centers, about which the customer need have no knowledge. Depending on the type of goods and specific transportation requirements, there may also be specialized carriers such as those that carry very high-value goods (e.g., money, precious gems, or precious metals), or those that specialize in express transportation where the customers’ tolerance time is short (e.g., for spare parts).

The intermediate sector T3 describes the transportation between two locations via transshipment centers. This option may be selected if an order comprises several products from different manufacturers and must be delivered without interim storage, or if an order is to be supplied by a given transportation that is approaching the destination location anyway. Cross-docking principles, which are designed for fast transfer through a transship­ment center, are therefore vital from the customer’s viewpoint. This design possibility leads to better utilization of LTL carriers along the whole route. However, it is even possible to use TL carriers. The pros are offset by a normally longer lead time owing to the diversion via the transshipment center and complex planning for load building and cross-docking operations. Examples here include regular deliveries to individual points of sale by a large wholesaler, or online orders that are delivered to pickup sites, or regular transport of groups of people to events at specific locations.

The four design options for the transport network in Figure 3.1.5.1 can, in principle, be selected for each of the four design options of production networks in Figure 3.1.1.2 to transport between two operations. The same holds for distribution networks in Figure 3.1.2.1 to deliver from a warehouse or directly from the production line to a customer or the customer’s unloading point or a pickup site. The same holds both for product returns and when the transport is not carried out to the end-customer, i.e., the consumer, but “only” to the depot at the next echelon of the distribution network structure, e.g., from the manufacturer to the wholesaler’s distribution center, or from a central distribution center to a retailer’s warehouse — see also Section 3.1.3. And the same also holds for service networks in Figure 3.1.4.1 for the transfer of the service object or its parts to multiple manufacturers or service providers, or for delivery of the object or parts back to the location after provision of the service, as well as for the transport of the service provider and its infrastructure closer to the object.

Company Cases: In the prior example, Hilti prefers option T3 for transport between the plant and the warehouses in the local market. This is due to the possibility for using an existing transport network, as the weight of the delivery is high. If the delivery volume of one production plant for one market is high enough, and accordingly the need for merged transport of products from different production plants is low, the direct transport between production plant and local market (option T1) also takes place. Direct transport by Hilti’s well-known red station wagons is used for transport from the local warehouse to the construction site (option T1).

De facto, the available transport network design options validate the selected design of the distribution and production network. Should the transport network from the last production or storage location to the customer fail to enable an efficient design for which the delivery lead time can be kept shorter than or equal to the customer’s tolerance time, a competing solution could clearly better serve the customer’s needs. If the provider still wishes to serve the customer, there is a need to redesign the distribution network, and possibly even the production network. Holcim, for example, deliberately cedes a customer to competitors as soon as it has no chance to meet the customer’s tolerance time with its actual production, distribution, and transport network. However, as the example of the plant in Ste. Genevieve (Missouri) shows, long-term investments in transportation infra­structure can change this situation. With the Panama Canal extension, Holcim considers whether or not to distribute cement to the West Coast of the USA as well from this plant. Likewise, with the availability of the new Gotthard railroad base tunnel, Holcim considers to distributing cement to North­ern Italy from its plants in northern Switzerland instead of producing locally, as soon as an existing quarry will be exploited, and instead of looking for a new quarry in northern Italy.

Not every activitiy along the supply chain can be clearly identified as part of production, distribution, or service. Certain activities, such as secondary packaging, adding information leaflets, or affixing a local sticker to electrical appliances, can be carried out both in the factory and in a suitable distribution center. Services such as clean­ing or battery charging can be handled by a pickup site. Other services, such as preproduction of catering products, can be performed at a produc­tion site with immediate distribution. Thus, a distribution network or also a service network can potentially develop into a production net­work. As for many other companies, this is also true in the case of Holcim, where the local “terminals” are not only elements of the distribution or service network structure, but can also be used to assemble specific or higher-level finished products (e.g., concrete) for local customers.




Course section 3.1: Subsections and their intended learning outcomes

  • 3.1 Design Options for Integrated Production, Distribution, Service, and Transportation Networks

    Intended learning outcomes: Explain design options for global production networks, distribution networks, service networks, and transportation networks. Describe the network structure for decentralized distribution, and design options for retail networks. Disclose the integration of the portfolios.

  • 3.1.1 Design Options for Global Production Networks

    Intended learning outcomes: Differentiate between centralized production and decentralized production. Present features such as demand volatility, supply chain vulnerability, economies of scale, demand for consistent process quality, customer proximity, market specificity of products, value density. Explain design options for global production networks. Describe some company cases.

  • 3.1.2 Design Options for Global Distribution Networks

    Intended learning outcomes: Differentiate between centralized distribution and decentralized distribution. Present features such as demand variety, need for efficient returns, degree of customer involvement in picking up. Explain design options for global distribution networks. Describe some company cases.

  • 3.1.3 Network Structure for Decentralized Distribution, and Design Options for Retail Networks

    Intended learning outcomes: Disclose the distribution network structure and describe decision variables in its design. Present features such as available time for shopping, and simultaneously, capacity of an available means of transport of the customer, as well as the required geographical catchment area. For decentralized distribution, explain: portfolio for designing retail networks retail networks.

  • 3.1.4 Design Options for Global Service Networks

    Intended learning outcomes: Differentiate between centralized service and decentralized service. Present features such as the mobility cost ratio of the service, the degree of customer involvement in bringing and picking up the service object, as well as the need for repeated transfer of the service object. Explain design options for global service networks for services in direct contact with the object. Describe some company cases.

  • 3.1.5 Design Options for Global Transportation Networks

    Intended learning outcomes: Differentiate between direct transport and indirect transport. Present features such as size or weight of the delivery, possibility of using an existing transport network, and need for merged transport. Explain design options for global transportation networks. Describe some company cases.

  • 3.1.6 Interrelation Between and Integration of the Portfolios of Design Options

    Intended learning outcomes: Describe the interrelation between and integration of the production, transport, distribution and retail network.