Accept or Reject Truck Loads?

Optimizing load selections

Optimizing private fleet load selections

In the freight transportation industry economies of scale can be achieved by aggregating similar loads in geographic areas that are in close proximity to each other. However, since companies don’t know future demand, it can be difficult to gauge whether or not loads should be accepted, particularly where unfamiliar geographies are involved.

Hiral Nisar and Joshua Rosenzweig looked at the problem for their Class of 2014 MIT Supply Chain Management Program master’s thesis Real-Time Order Acceptance in Transportation Under Uncertainty.

The researchers wanted to create and validate a model to determine if historical demand data can be used by retail firms operating private fleets to make effective order acceptance/rejection decisions in real time. The model would help companies eliminate unprofitable orders in a short-haul transportation environment. They developed a Java tool that decides in an instant whether or not to accept loads depending on the order location and time of receipt.

The project was supervised by Dr. Chris Caplice, Executive Director, MIT Center for Transportation & Logistics.

Pathways to a verdict

Key to determining the viability of shipments is whether they meet the firm’s profitability requirements. And this determination has to be made relatively quickly as the orders are received.

The decision-making criteria used by the model reflect these market realities. There are two main criteria: the breakeven number of orders required, and the probability of receiving that many orders during the time remaining in the acceptance period. Carrier availability is also factored into the process.

Figure 1 shows the decision-making tree that companies navigate as they make these evaluations. As can be seen, incoming orders for new regions are reviewed in terms of the expected profitability of deploying trucks in relevant geographies. In the event that there is no service history to draw on, the model determines the likelihood of receiving a breakeven number of orders within the acceptance period. If that number exceeds the predetermined threshold and truck space is available, the model accepts orders until the allocated capacity is fully utilized.

Contrasting options

The researchers validated the probabilistic model by comparing its performance to that of other models.

Optimal Model. The baseline for comparison purposes, this model assumes that the company has complete knowledge of all daily orders before making rejection/acceptance decisions. Capacity utilization is optimized, and profitability is maximized.

Myopic Manager Model. In this option, orders are accepted sequentially until carrying capacity is filled. As is the case with the probabilistic model, decisions are made instantaneously when orders are received. This model reflects the actions of a firm with no intelligent operational decision-making process, and as such, simulates a worst-case scenario.

Logistics Regression Model. This model uses operational variables and data on previous decisions to accept or reject orders instantaneously. The variables used are the distance of incoming orders from the distribution center and order size.

Using simulated demand data as an input, the Java tool determined that the probabilistic model developed by the researchers delivered about 8% less profit than the optimal solution with a flexible fleet size. However, it outperformed all of the other models. The average daily profit for the myopic manager and logistics regression options were about 11% and 34% below the optimum respectively.

Learn from the past

The research shows that demand probabilities determined by historical demand patterns should be considered by companies with private fleets when deciding whether or not to accept orders under capacity constraints.

However, more research is needed to gain a better understanding of how the model performs in real-world applications. For example, the model can be refined with the addition of more detailed data on order frequency, size, and revenue, and the cost of order rejections should be accounted for in future research.

This article was originally published by Supply Chain Management Review.

For further information on the research desctibed contact Dr. Bruce Arntzen, Executive Director, MIT Supply Chain Management Program, at: barntzen@mit.edu.

 

Join Thousands of Students in MIT’s Digital Supply Chain Classroom

320px-thumbnailOn September 30, 2014, supply chain education will take a major step into the digital age with the start of SCx, an on-line educational program developed by the MIT Center for Transportation & Logistics (MIT CTL) for thousands of professionals across the globe.

More than 14,000 individuals have already signed up for the first course, CTL.SC1x Supply Chain and Logistics Fundamentals, of the three-course program.

The SCx curriculum is part of the MITx initiative, the Massachusetts Institute of Technology’s selection of massive open online courses, or MOOCs. SCx is one of the first “XSeries” offerings that award certificates for successful completion of an entire sequence of courses.

The SCx materials will be available on-line at no cost to students or working professionals. Additionally, the same material will be used to complement the in-residence teaching at MIT as well as at MIT’s three Global SCALE Network sister centers in Europe, Asia, and Latin America.

“For some fifteen years we have been teaching the hard and soft skills that supply chain professionals need to succeed, and more than 800 professionals have graduated from our SCALE courses during that time. SCx will teach the same concepts but to thousands – not dozens – of students at a time worldwide,” says Dr. Chris Caplice, Executive Director, MIT CTL.

The three courses in the new program, currently referred to as CTL.SC1x, CTL.SC2x, and CTL.SC3x, will each be between 10 to 12 weeks in length, and designed to be taken in sequence, as follows.

  1. SC1x – Supply Chain and Logistics Fundamentals (fall 2014).

 This first course is a survey of the fundamental analytic tools, approaches, and techniques used in the design and operation of logistics systems and integrated supply chains. The material is taught from a managerial perspective, with an emphasis on where and how specific tools can be used to improve overall performance and reduce the total cost of a supply chain. There is a strong emphasis on the development and use of fundamental models to illustrate the underlying concepts involved in both intra- and inter-company logistics operations. The course makes heavy use of examples.

The main topic areas are:

  • Demand Forecasting, Planning, and Management,
  • Inventory Planning, Management, and Control, and
  • Transportation Planning, Management, and Execution.

CTL.SC2x – Supply Chain Design (spring 2014)

This course will build off of the concepts taught in the SC1x course and apply them to supply chain design. There is a greater focus on more complex and in-depth problems.

The main topic areas are:

  • Network design and transportation planning
  • Advanced inventory management
  • Procurement and purchasing
  • Risk and resilience
  • Supply chain contracts
  • Materials management

CTL.SC3x – Supply Chain Strategy (summer 2015)

The final course in the series extends the supply chain concepts previously covered and demonstrates how they impact and influence business strategy. The objective is to show how supply chain strategy needs to align with overall business strategy and can be an enabler. Peripheral functions that interact with supply chain operations are also touched upon. The students learn how to translate supply chain operational aspects into boardroom-level financial objectives.

The main topics are:

  • Strategy formulation and development
  • Sustainability
  • Change management
  • Supply chain complexity
  • Supply chain finance and costing

Most of the material is taught through videos intermingled with small practice problems to reinforce the teachings. The problems are automated, and provide instant feedback to the students. There are additional practice problems at the basic, intermediate, and advanced levels each week as well. The week is capped off with graded assignments that push the student’s understanding further. Discussion rooms are also provided for interaction between students and faculty.

“We have designed each of the three courses to cover the breadth of supply chain management rather than focus on just one function at a time. This is a more integrated approach, and stresses the connections and interactions between the players and functions within a supply chain,” explains Caplice.

Moreover, the SCx program will help to overcome the critical shortage in supply chain talent that the industry faces, believes Caplice, by providing a global platform for teaching future professionals.

Registration for CTL.SC1x is open until September 30, 2014, although it is possible for individuals to enroll after the course has started.

Get more information and  access the CTL.SC1x registration site here.

 Image: Wikimedia

Commercial Air Cancellations Quarantine Ebola Supplies

Today’s post was written by Dr. Jarrod Goentzel, Director of the MIT Humanitarian Response Lab. It was originally posted on the Humanitarian @ MIT blog.

Ebola supplies are being quarantined by commercial air cancellations to West Africa.

(Photo: European Commission DG ECHO/Flickr/Creative Commons)

Nine pallets of caps, gowns, boots, and masks are sitting at the JFK airport in New York City awaiting the next available flight to West Africa. This might appear to be a routine shipment delay, but it is not. The supplies are needed by doctors in the fight against the deadly Ebola virus, and the holdup highlights a worrying gap in the humanitarian supply chain.

The personal protective equipment (PPE) – shipped by our team of doctors and logisticians in Boston[1] – is destined for the Ministry of Health and Social Welfare in Liberia, which will then distribute supplies to locations at the front lines of the health crisis such as JFK Memorial Hospital in Monrovia. PPE is essential in the fight against the Ebola virus, protecting the brave doctors and nurses who continue to diagnose and treat patients every day at their own peril.

Our “freight forwarder” collected the pallets on August 18 for consolidated air freight service, which normally means airport-to-airport delivery within three to five days using space available on commercial (passenger) airlines or dedicated cargo flights to the destination. By consolidating cargo from various shippers, freight forwarders reduce the cost of air shipment significantly from express services, which is important when shipping multiple pallets.

And here is the rub. In spite of repeated statements from the World Health Organization (WHO) advising against travel bans to and from affected countries, commercial airlines have suspended service. Clearly this constrains the ability for the international humanitarian community to send aid workers. But due to the role passenger flights play in providing air cargo capacity, these travel restrictions are effectively quarantining critical medical supplies outside Ebola-affected regions.

As of August 25, with our pallets still sitting at JFK airport, there are only two options remaining for commercial air service to Liberia: Royal Air Maroc (with service three times per week from Casablanca) and Delta (which is halting service August 31). Most of the flights to Liberia, and their air cargo capacity, were suspended:

  • Arik Air: Banned flights to Liberia and Sierra Leone beginning July 28. Flights to Guinea are continuing, with passengers screened for symptoms.
  • Asky Airlines: Stopped flights to Liberia and Sierra Leone on July 29.
  • British Air: All routes suspended to Sierra Leone and Liberia on August 5.
  • Gambia Bird: Suspended routes to Sierra Leone and Liberia on August 15.
  • Kenya Airways: Suspended commercial flights to Guinea, Liberia, and Sierra Leone on August 19.
  • Brussels Airlines: Cancelled flights to Guinea, Sierra Leone and Liberia beginning August 23.

Humanitarian aid organizations, familiar with responding to disasters where normal air service is disrupted, are chartering flights to cover the gap in air service. However, even humanitarian flights are subject to travel bans, as Senegal recently demonstrated by canceling UN Humanitarian Air Service flights to Ebola-affected countries.

Flying cargo in the space unused by passenger luggage (especially as baggage fees encourage a shift to carry-ons) has long been an efficient option for time-sensitive freight. Travel bans, which at face value seem to prevent the spread of disease, actually constrain the crucial human and material resources required to manage the Ebola outbreak.

Fortunately while writing this blog entry, news broke that Brussels Airlines is resuming flights to Liberia. Let’s hope this is a trend, reconnecting health workers in West Africa with global stocks of critical supplies. Maybe soon our nine pallets will be moving rapidly from airside at JFK airport to patient-side at JFK hospital.

[1] Pallets of critical medical supplies were assembled and shipped by a team from Boston Children’s Hospital (BCH), the University of Massachusetts Medical School (UUMS), and Massachusetts Institute of Technology (MIT). Doctors at BCH and UMMS have been working in Liberia for over seven years developing training programs for physicians and nurses. During this crisis, these doctors are supporting their Liberian colleagues by gathering in-kind donations from medical suppliers and transporting them using crowdsourced funds with logistical support from the MIT Humanitarian Response Lab.

Ground-Level Views of Risk Management

Supply chain disruptions hit on multiple levels

Supply chain disruptions hit on multiple levels

The ways companies respond to emergencies are as varied as the types of incidents that can disrupt operations. But a key feature of effective response efforts that emerged during a recent gathering of supply chain risk experts organized by MIT CTL is aligning the company’s reaction to the scale of the disruption.

A logistics services provider has three levels of response. Level 1 pertains to local crises, but these might still be serious in nature. The devastation caused by a tornado, for example, is usually localized but still extremely traumatic. Level 2 responses cover regional situations that often involve multiple business units and geographies, and Level 3 is a corporate-wide emergency.

Similarly, an automotive company has three response team structures. One structure is at the local level. A second structure consists of a series of security information centers located around the globe and at headquarters. These centers are staffed by 6-8 people whose primary responsibility is to monitor personnel, namely senior executives who are traveling around the world.

The company’s third response structure is supply-chain based. Located near the corporate HQ, this Command Center is a conference room equipped with wireless communication, laptops, whiteboards and flat panel monitors. The center responds to all manner of disruptions and is staffed by cross-functional personnel. Most recently, a steel supplier experienced a roof collapse and then a fatality during reconstruction that closed its facility for six weeks. The supplier served every one of the company’s assembly plants as well as 80 other automotive suppliers. The command center was activated within 24 hours of the incident, and the company’s supply chain team worked to identify which parts were affected, how much inventory was on hand, and what spot buys were necessary to plug gaps in supply.

The three-tier response structure helps companies to react quickly and decisively to disruptions – key to speedy recoveries. A CPG firm’s local/national/global response effort was called into action in April this year following an earthquake in Mexico. Six hours after the earthquake struck, the company had structural engineers at its facilities to verify safety and operational integrity.

Within the local/regional/global disruption response structure, multi-level alarm systems can be activated for handling events of escalating importance.

For example, the automotive company has set up a stepped alarm process in its plants that use exception-based monitoring to trigger alarms and alert response teams. The first alarm kicks in at the factory floor level when inventory falls below a certain threshold. Second and third alarms activate when carriers do not arrive within a 15-minute window and when a supplier is unable to ship parts. If there is no inventory to make a part, another alarm is triggered. If the situation is out of the plant’s control – when adverse weather is disrupting operations, for instance – the alarm system is escalated to the command center to decide how to allocate scarce supplies of the part(s) affected. The command center also gives guidance to suppliers; it might advise a supplier to deliver to an alternate facility that is not experiencing storm conditions.

Another way to streamline the recovery process is to build a response structure that clearly differentiates between staff safety and the demands of restoring the business to normalcy.

A high-tech company has two teams that work independently and in parallel when a disaster strikes: the Emergency Response team and the Business Recovery team. The former deals with safety issues, while the latter team focuses on what is needed to get stricken facilities back up and running. The company has learned that this parallel structure is necessary because it’s difficult for the same team members to handle the emotional issues of employee safety as well as the demands of business recovery.

For more information on MIT CTL’s supply chain risk research contact Deputy Director Jim Rice at jrice@mit.edu.

Photo: NASA

 

Collaboration the Key to Unblocking Megacity Streets?

Can city governments help to improve megacity logistics?

Can city governments help to improve megacity logistics?

Picture a truck delivering product in a traffic-choked megacity and physical obstacles such as a maze of one-way streets come to mind. But hindrances like these are manifestations of a more fundamental problem: constantly changing traffic regulations.

How do companies overcome regulatory speed bumps in sprawling urban areas where government is highly fragmented and the movement of passenger vehicles often takes precedence over freight flows?

One approach that some companies are trying is to develop win-win relationships with city regulators.

The idea that working alongside public sector traffic agencies could help to improve megacity logistics might seem like a stretch. But the approach is yielding results in some places.

Two companies that attended the Last-Mile Delivery Roundtable organized by the MIT Center for Transportation & Logistics explained their experiences. The roundtable took place on May 21, 2014, on the MIT campus.

A Spanish food company makes 37,000 deliveries a month in Madrid, Spain, a city with almost 7 million inhabitants and a population density of nearly 14,000 people per square mile. Some 45% of the deliveries go to the city center on 83 trucks. Hotels/restaurants and food stores account for 68% and 23% of the deliveries respectively. The company’s Madrid distribution center (DC) is located about seven miles outside of the city.

The company deals with traffic-related issues that are familiar to any enterprise that supports last-mile operations in urban centers. For example, deliveries made before 1:00 pm face parking constraints in the center of Madrid.

In an effort to smooth the way for their trucks in city environments, the company partners with municipalities to address freight issues. They even employ a person who is responsible for educating local agencies about the company’s city-related logistics challenges.

Both sides gain from the relationship. The municipalities benefit from having a corporate partner that is aware of traffic congestion problems and tries to help the city to develop solutions. For example, the company has consolidated its deliveries and acquired 17 electric-powered vehicles as part of a program to ease congestion and improve air quality. In return, the company’s parking fees have been reduced, it has access to restricted areas for vehicles with specific loads, and it uses city infrastructure for consolidation operations.

A convenience store chain in Bangkok, Thailand, has developed a similar symbiotic relationship with the City Council of Bangkok and the Thai government.

The company operates thousands of convenience stores in Bangkok – a city of 8 million people – and their network is growing at an annual rate of over 500 stores. Three dry goods DCs and a chilled goods DC serve eastern and western Bangkok, and the company also receives direct store deliveries from suppliers. Almost 1,700 vehicles supply the stores in Bangkok, and some 1, 200 delivery trucks support suburban outlets.

Trucks have to meet stringent size, location, and time-of-day restrictions imposed by the city. Limiting vehicle operation to tight delivery windows reduces the amount of time for consolidating loads in DCs, and makes it more difficult to ensure that fresh food is available during peak demand periods. In general the chain replenishes stores with fresh food three times a day, but in Bangkok can only mange one daily delivery.

The company is working with the City Council and the government to rethink the way buildings and distribution hubs are zoned in Bangkok. Other companies that are active in the city are also involved in this initiative. The aim is to provide more loading and unloading bays for commercial vehicles, and ease parking restrictions. In addition, the convenience store chain is purchasing vehicles that meet Bangkok’s four-wheel, small-truck size limits but can carry 1.5 tons of cargo – 50% more than a standard, four-wheel vehicle. Other measures the company is taking include the use of more sophisticated demand forecasting to optimize both loads and routes.

In megacities the frequency at which traffic regulations change compounds the level of disruption they cause. It can be a frustrating picture from a logistics perspective, but given the growing importance of these markets, it’s surely better to collaborate with city regulators than to fight them.

This post was written by Dr. Edgar Blanco, Research Director, MIT CTL, Founder & Director, MIT Megacity Logistics Lab, eblanco@mit.edu, and published by Connect, the supply chain expertise and technology Blog from TMC, a division of C. H. Robinson. 

Profiting from Cost to Serve

Cost to serve is a key financial measure that helps companies decide how to segment markets and support customers cost-effectively. However, the way this value is calculated varies from company to company, particularly in terms of how certain costs – including those associated with managing supply chains – are taken into account.

A top-down method for calculating the measure developed by the Center for Latin-American Logistics Innovation (CLI) offers a better way to compute cost to serve, especially for emerging markets.

The method is particularly useful in megacity markets (in cities with populations of at least 10 million people), where many variables such as population density and infrastructure constraints influence supply chain costs. Also, megacities are often served by two types of distribution channel. The modern channel includes outlets that are common in developed economies too, such as supermarkets and convenience stores. There is also the traditional channel based on nanostores; mom-and-pop outlets that serve low-income consumers. This dual structure makes it even more difficult to quantify supply chain costs accurately and to implement tailored strategies to reach the final customer.

There are a number of established ways to calculate cost to serve. An example is Activity Based Cost Analysis (ABC). This is a bottom-up method were the starting point is the cost of minor activities that are tallied up until a complete picture of value chain processes and affiliated costs is created. In general, these accepted methods account for supply chain costs by mapping each component activity and separating them into fixed and variable cost types.

However, it can be difficult for companies to apply these established methodologies to real-world operations. For example, the relationship between cost to serve and financial statements is often unclear, and how the measure supports decision-making over time is ambiguous.

CLI’s top-down method addresses these issues. The methodology comprises three phases.

  1. Objective definition

In this initial phase critical factors such as the distribution channels involved, customers, geographic regions, and products are clearly defined. These definitions are arrived at by mapping – on both macro and micro levels – relevant processes. CLI recommends that a multi-disciplinary team oversees these activities in critical areas including finance, logistics, sales, IT, and marketing.

  1. Data gathering.

The second phase involves a number of steps such as reviewing financial statements and identifying supply chain processes. It is the most valuable step since it forces the team to gain a thorough understanding of the company’s financial statements, as well as its performance and opportunities for improving cost effectiveness.

Measurement and results analysis

Having gathered all relevant information on variable and fixed costs, commercial and logistics activities, these values are added according to which client, product, or channel is involved, to arrive at the cost to serve. The results are validated by the multidisciplinary team and/or each discipline involved. The final, and very important step, is to delve into how supply chain costs impact profitability by customer, product, or channel. The team can create strategies for improving supply chain performance as well as customer service, reducing cost to serve according to the life cycle of a client and identifying the type of client (low/high profitability versus low/high cost to serve).

CLI hopes that the new methodology provides a tool that companies can use to translate cost to serve into a decision support mechanism for actual and future operations. Of particular importance is enabling companies to create strategies for developing markets profitability in emerging economies, including megacities.

Looking ahead, the methodology can be refined in a numbers of ways. For example, more accurate ways to determine individual costs could be developed, and the future analyses could make use of scenario planning. CLI also aims to look at customer retention in different market segments.

For more information on the research contact Christopher Mejia, Postdoctoral Associate, CLI, at: cmejia@logyca.org. This article will be published in the summer 2014 issue of the electronic newsletter Supply Chain Frontiers later this month. Subscribe to Frontiers for free here.

 

 

Building a New Consensus on Infrastructure

As the US Congress struggles to find a long-term solution to funding the Highway Trust Fund, a new approach to prioritizing investments in transportation systems could greatly improve the infrastructure planning process.

The companies that rely on road, rail, and port networks to connect them to customers and suppliers worldwide, and the government planners responsible for building these trade arteries, exist in different universes.

They have different financial goals and work to very different timescales. While companies are tied to profit targets and product life cycles, planners develop infrastructure that can take a decade to complete and be in active service for many decades.

Another complication is that the public sector must deal with a diverse base of stakeholders, including public interests that often oppose new projects. There is political pressure too; pallets don’t vote, so consumer demands often trump commercial needs.

The way that new projects are planned also presents problems. Long-range planning is frequently driven by point forecasts based on macro factors to map future demands for infrastructure capacity. This approach is deeply flawed because it projects historic experience without paying due regard to future technological and economic changes.

In 2011 MIT CTL launched a research initiative sponsored by the National Cooperative Highway Research Program called Future Freight Flows (FFF), to develop a methodology that any transportation planning agency in the United States can use to allocate (scarce) funds to freight infrastructure projects. There were two main goals. First, expand the thinking of planners to consider multiple potential outcomes and futures. Second, enable better communication between the stakeholders.

Scenario planning, a decision-making process used for strategic and long-range planning, was at the heart of the initiative. In this method, users envision and prepare for different futures that are depicted in specially created scenarios. The method allows users to prepare for a range of plausible futures rather than trying to predict specific outcomes 20 or 30 years out. Scenario planning is also uniquely suited to bringing disparate parties together, and exposing them to the real-world consequences of planning decisions.

MIT CTL developed a scenario planning tool kit that includes four scenarios, guidebooks for facilitators and participants, and material such as brochures and videos that bring these futuristic worlds to life. In 2011 MIT CTL took the scenario planning program on the road in a series of one-day, interactive workshops in venues across the country.

Some two years later these efforts are yielding results.

For example, Delaware Valley Regional Planning Commission (DVRPC), an organization that took part in the interactive workshops, is using the internet to create greater awareness about the regional freight network. A web-based mapping application called PhillyFreightFinder enables users to gain a deeper understanding of how freight moves through the region’s airports, highways, railways and waterways, and the broader impact on transportation systems. Much of the inspiration for these tools came from the scenario planning workshop.

DVRPC is developing a working group of regional stakeholders, including businesses. The group will provide insights and perspectives on different projects, much like the user groups did in the MIT CTL workshops. And they will vote on their preferred options, and “game-changer” projects that could have a major impact on the region’s economy.

Another workshop participant, Washington State Department of Transportation, is using scenario planning to test the point forecasts it is mandated to use to predict freight growth in Washington’s new State Freight Plan. The scenarios provide a richer picture of the macro-level drivers that impact the volumes and types of traffic that WSDOT has to plan for.

While initiatives like these will not solve the nation’s infrastructure funding problems, they will help to bridge the divide between the public and private sectors.

The end result could be more responsive, cost-effective freight transportation systems that help US companies to sustain and improve their global competitiveness.

This article is based on the Harvard Business Review blog post A Better Approach to Infrastructure Planning by Dr. Chris Caplice, Executive Director, MIT CTL, and MIT CTL Researcher Dr. Shardul Phadis, published July 10, 2014.  

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